Digital Realty Trust, Inc.

Good day and welcome to the Digital Realty second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jordan Sedler. Please go ahead.

Thank you, Operator, and welcome everyone to Digital Realty's second quarter 2024 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 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 contain non-GAAP financial information. Reconciliations to net income are included in the supplemental package first 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, we continue to execute within a very favorable demand environment with $164 million of new leasing executed in the quarter. Again, marking one of the top quarters in our history. which together with last quarter's record leasing drove a record first half of the year. Second, our operating momentum continued through the second quarter as a record level of commencements translated into meaningful improvement in both total and same capital occupancy, while cash-free leasing spreads remained firmly positive and continued growth and cross-connects drove interconnection revenue to a new record in the quarter. And third, Through capital recycling and demand-driven equity issuance in the quarter, we reduced our leverage to 5.3 times at quarter end, below our long-term target level, helping to position digital realty for the opportunity that we continue to see in front of us. With that, I'd like to turn the call over to our president and CEO, Andy Pappas.

Thanks, Jordan, and thanks to everyone for joining our call.

The momentum we experienced in the first quarter continued in the second quarter. The first half of 2024, our new leasing was up over 100% from the activity we saw in the first half of 2023, with a strong and steady contribution from our zero to one megawatt plus interconnection segment. Demand for data center capacity remains as strong as we've ever seen, especially for larger capacity blocks in our core market. We are well positioned to take advantage of this favorable demand environment, given our track record of execution across six continents, a robust land bank and shell capacity that could support three plus gigawatts of incremental development, reduce leverage, and our growing and diverse array of capital partners. During the second quarter, we remain focused on our key priorities, We signed $164 million of new leasing in the second quarter, which excluded another $16 million of bookings within one of our newest hyperscale private capital ventures. While bookings in the greater than a megawatt category were once again the primary driver, there was no contribution from our largest hyperscale market, Northern Virginia, as Dallas led the way in the second quarter. Importantly, we posted one of our strongest quarters ever in the 0 to 1 megawatt plus interconnection segment with record new logos and new record bookings in each of the 0 to 1 megawatt and interconnection categories. This leasing strength is a positive reflection of the value that our 5,000 and growing base of customers realize from our full spectrum product strategy. We also delivered strong operating results with 13% data center revenue growth year-over-year performer for the capital recycling activity completed over the last year. In addition, we have enjoyed healthy growth in recurring fee income associated with our new hyperscale ventures. In the first half, fee income was up 26% over the first half of 2023, primarily reflecting the formation of almost $10 billion of institutional private capital ventures over the last year. And we would expect this line item to continue to gather momentum. With the record commencements in the second quarter and the healthy backlog of favorably priced leases ready to commence in the second half, we are well positioned for accelerating top line and bottom line growth for the remainder of 2024 and into 2025. Subsequent to quarter end, we also strengthened our value proposition in Europe through our entrance into the Slough sub-market of London with the acquisition of a densely connected enterprise data center campus, which we expect to be highly complimentary to our existing co-location capabilities in the city and the Docklands. The new campus supports an existing community of more than 150 customers utilizing over 2,000 cross-connects. Consistent with our key priorities, we continue to innovate and integrate as we unveiled our HD column 2.0 offering in the second quarter, with advanced high-density deployment support for liquid-to-chip cooling across 170 of our data centers globally. In addition, just last week, we announced the deployment of a new Microsoft Azure ExpressRoute Cloud on-ramp at our Dallas campus, along with the launch of the new Azure ExpressRoute Metro service in the Amsterdam and Zurich markets. We also bolstered our balance sheet and significantly diversified our capital sources, availing digital realty of more than $10 billion of private capital over the past year through our new hyperscale ventures and non-core dispositions. During the quarter, we expanded our existing Chicago hyperscale venture with a sale of a 75% interest in CH2, the remaining stabilized data center on our Elk Grove campus. We also sold an additional 24.9% interest in a data center in Frankfurt to Digital Quarry, increasing their total position in the campus to just under 50%. These two transactions together raised over half a billion dollars. Finally, we raised approximately $2 billion of equity since our last earnings call, including the $1.7 billion fallout offering in early May and proceeds raised under our ATMs. These transactions, together with the others of the past year, have positioned our balance sheet to capitalize on this unique environment and construct the capacity that our customers demand. Artificial intelligence innovation is reshaping the global data center landscape. As new applications are developed and proliferate across industries and around the world, AI is driving the incremental wave of demand for robust computing infrastructure. According to Gartner, global spending on public cloud services is projected to grow over 20% to reach $675 billion in 2024. It is forecast to grow another 22% in 2025, with AI-related workloads driving a significant portion of this growth. Digital transformation, cloud, and AI are fueling demand for data center capacity worldwide. Traditional data centers were already being pushed to their limits by demand for cloud and digital transformation, whereas demand for AI-oriented data center infrastructure is being accommodated in upgraded suites in our existing facilities and in newly built facilities. These AI workloads are taking place on specialized hardware with massive parallel processing capabilities, and lightning-fast data transfer speeds. Fortunately, Digital Realty's modular data center design can accommodate these evolving requirements. The growth in demand is global. We're seeing strong demand across our North American metros first, but it is spreading beyond with interest in locations like London, Amsterdam, and Paris in EMEA, and Singapore and Tokyo in APAC. Our global footprint is well-suited to capture this growing demand whether it be for major cloud service providers adding to an availability zone, a major enterprise digitizing their business processes, or an AI model being trained or put into production. However, this exponential growth in data center demand is not without its challenges. The environmental impact of these energy-intensive facilities is growing alongside the scaling of user requirements. According to the IEA, Data centers consumed almost 2% of global electricity in 2022, a figure that could double by 2026, absent significant efficiency improvements. I will touch on Digital Realty's latest sustainability highlights in a moment. As we look to the future, the interplay between AI advancements and data center evolution will continue to shape the global technology landscape. IDC predicts that by 2027, Worldwide spending on digital transformation will reach nearly $4 trillion, driven by AI, further accelerating the demand for data center infrastructure. We believe that the providers who can officially scale their capacity while addressing sustainability concerns will be best positioned to benefit from these three key drivers, digital transformation, cloud, and AI, in the years to come. Customers and partners are recognizing the value that digital realty can bring to their applications around the world. During the second quarter, we added 148 new logos, marking a new quarterly record. A growing number of these new logos are being sourced by our partners, who have efficiently expanded our sales team to reach into enterprises around the world. The wins this quarter include a global 2000 advanced engineering and research enterprise developing a private AI sandbox on platform digital to enable experimentation and development by federal agencies and brought to us by one of our large connectivity partners, Lumen Technologies. Another partner brought a new logo that is an AI-enabled SaaS provider repatriating all public cloud to save costs and enable growth. That same partner was also assisting two large financial institutions to increase their capacity on platform digital in APAC and North America. And yet another example of our growing partnerships, an AI SaaS provider and recognized leader in natural language speech synthesis is growing their commitment to platform digital with an expansion of current AI workloads where proximity is the driving requirement. The Global 2000 manufacturer is re-architecting their network on platform digital with a regional hub to improve efficiency, lower their network costs, and implement controls while eliminating the capital costs of maintaining their own facilities. And two leading financial services firms are both leveraging platform digital to extend their respective virtual desktop infrastructure environments to improve performance and user experience across their North American and EMEA employee base. Before turning it over to Matt, I'd like to touch on our ESG progress during the second quarter. We continue to make meaningful progress on ESG performance. We were recognized by Time and Statista as one of the world's most sustainable companies of 2024. We also released our annual ESG report in June, highlighting our ongoing efforts to develop and operate responsibly. As described in our ESG report, we further increased our renewable energy supplies with 152 data centers now matched with 100% renewable energy. We improved water efficiency and expanded the use of recycled water, which accounted for 43% of our total water consumption last year. We also launched a new supplier engagement program to drive sustainability and decarbonization through our supply chain. 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 Brashear.

Thank you, Andy. Let me jump right into our second quarter results. We signed 164 million new leases in the second quarter, with two-thirds of that falling into the greater-than-megawatt category, the majority of which landed in the Americas. with healthy contributions from both EMEA and APAC. Not to be overlooked, however, was the $40 million of zero-to-one megawatt leasing and a standout $14 million of interconnection bookings, our fourth consecutive quarter exceeding $50 million in our zero-to-one megawatt plus interconnection segment. Turning to our backlog, we commenced a record $176 million of new leases this quarter, which was largely balanced by the strong second quarter leasing. As such, the 527 million backlog of signed and not yet commenced leases moderated by only 2% from last quarter's peak and remains robust at more than 9% of our total revenue guidance for full year 2024. Looking ahead, we have over 175 million scheduled to commence through the remainder of this year, with over 230 million already scheduled to commence next year. During the second quarter, we signed 215 million of renewal leases at a 4% increase on a cash basis, driving year-to-date renewal spreads to 8.2%. Releasing spreads were once again positive across products and regions. Last quarter, we noted that the underlying renewal spread, after stripping out two outliers, was 3.4%. Our cash renewal spreads in the 0-1 megawatt segment were up 3.8% in the second quarter, while the greater than a megawatt segment was up 3.9%. As a reminder, the 0 to 1 megawatt segment is the primary driver of our overall releasing spreads, given the heavier weighting of lease expirations in this category, which are typically shorter-term leases with inflationary or better escalators. 0 to 1 megawatt deals renew reliably and predictably, making them track closer to market over time. thereby reducing the outsized movements that can come with larger or longer-term lease renewals. On the greater than a megawatt side, renewals reflected the strong pricing environment, with leases renewed at $159 per kilowatt compared to the $133 per kilowatt achieved on greater than a megawatt renewals last quarter. The key difference between the quarters was the rate on the expiring leases, This quarter, leases in this segment expired at 153 per kW, while last quarter's leases expired at an average of 112 per kilowatt. For the quarter, churn remained low and well-controlled at 1.6%, and our largest termination was immediately backfilled at an improved rate. In terms of earnings growth, we reported second quarter core FFO of $1.65 per share. reflecting continued healthy organic operating results, partly balanced by the impact of the meaningful deleveraging and capital raising activity executed over the course of the last year. Revenue growth in the quarter was tempered by the decline in utility expense reimbursements, a comparison that is likely to persist throughout this year, given the decline in electricity rates in EMEA year over year, along with the impact of substantial capital recycling activity. Despite the deleveraging headwinds, rental revenue plus interconnection revenues were up 5% on a combined basis year over year. Adjusted EBITDA also increased 5% year over year through the first half and remains well on track to meet our 2024 guidance. Proforma for the capital recycling completed since last July. Rental plus interconnection revenue and adjusted EBITDA grew by 13%, and 14% year-over-year, respectively, in the second quarter. Stabilized same-capital operating performance saw continued growth in the second quarter, with year-over-year cash NOI up 2%, as 3.6% growth in data center revenue was offset by a catch-up in rental property operating costs, which were flat last quarter. Year-to-date, same-capital cash NOI has increased by 3.5%, As we have previously highlighted, same-capital NOI growth is expected to be impacted by nearly 200 basis points of power margin headwinds year-over-year, given the elevated utility prices in EMEA in 2023. Moving on to our investment activity, we spent $532 million on consolidated development in the second quarter, plus another $90 million for our share of unconsolidated JV spending. We delivered 72 megawatts of new capacity across the globe for our customers in the quarter, while we backfilled the pipeline with 71 megawatts of new starts. Blended average yield on our overall development pipeline moderated 20 basis points sequentially to 10.4% as a result of a market mix shift of completions and starts in North America during the quarter. In the first half of the year, we spent a bit over a billion dollars in development capex, tracking closely towards our full-year guidance, as the second half should see a ramp from newly commenced projects along with a typical seasonal uplift. Turning to the balance sheet, we continue to strengthen our balance sheet in the second quarter with the closing of the two transactions in April that we disclosed during last quarter's earnings report and was referenced earlier by Andy. Together, these two transactions raised just over $500 million of gross proceeds Additionally, since our last earnings report, we sold 14.7 million shares, including a 12.1 million share follow-on offering in early May and incremental ATM issuance, raising 2 billion of net proceeds, while using cash on hand to pay off a 600 million euro bond that matured in April and a 250 million sterling bond that matured last Friday. At the end of the second quarter, we had more than $4 billion of total liquidity, and our net debt to EBITDA ratio fell to 5.3 times, which is below our long-term target. Moving on to our debt profile, our weighted average debt maturity is over four years, and our weighted average interest rate is 2.9%. Approximately 84% of our debt is non-US dollar denominated, reflecting the growth of our global platform and our FX hedging strategies. Approximately 86% of our net debt is fixed rate, and 96% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, after paying off the Euro notes in April and Sterling notes last week, we have zero remaining debt maturities through year-end. Beyond that, our maturities remain well-laddered through 2032. Let me conclude with our guidance. We are maintaining our core FFO guidance range for the full year of 2024 of $6.60 and $6.75 per share, reflecting the continued strength in our core business, partly balanced by the front-half weighted capital recycling and funding activity, which helped to reduce our reported leverage by a full turn to better position the company to fund development in 2024 and beyond. We're also maintaining our total revenue and adjusted EBITDA guidance ranges for 2024, as well as the operating, investing, and financing expectations that we've previously provided. Looking forward to the balance of 2024, core FFO per share remains poised to increase in the second half as the backlog commences and the impact of prior deleveraging moderates. This concludes our prepared remarks, and now we'll be pleased to take your questions. Operator, would you please begin the Q&A session?

Thank you. We will now open the call for questions. In the interest of time and to allow a large number of people to ask questions, callers will be limited to one question. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you'd like to withdraw your question, please press star then two. Your first question comes from Richard Coe with JP Morgan. Please go ahead.

Hi, I wanted to ask about the long-term pipeline you're seeing for the over one megawatt category. I think there's some concerns that right now we might be in a kind of pull forward or kind of elevated cycle. and just wanted to get your sense of how far out this pipeline of deals that you're looking at in the current environment could last. Thank you.

Thanks, Richard.

So I would say in the greater than megawatt category, we're seeing a continuation of the trend we've been playing out for the last several quarters. The biggest customers are desiring one contiguous capacity block that are very large, Two, they want it right now or as soon as possible. And three, the desire of fungible markets, i.e. markets where they can service certainly Gen AI workloads, training and ultimately inference, but also if they miss the measure, they can support their cloud computing needs as well. So we have not seen the pedal ease in terms of the demand for those attributes in the market.

The next question comes from Irvin Lu with Evercore ISI. Please go ahead. Please go ahead, Irvin.

Oh, sorry. I was muted. So I wanted to double-click on renewal rates. So I guess a couple items stood out. One in the Americas, the $146 per kilowatt monthly rate. for the greater than one megawatt segment. That marked a sequential decline. Similarly, you know, we've seen rates on new leases decline sequentially as well. So can you help us understand what's driving the sequential declines versus a quarter ago? Was this step down mostly a function of markets and mix, or were there other sort of industry dynamics that we should be thinking about?

Thanks, Ernie. So I think the one thing

or the one market you were pointing to was just the North America greater than Megawatt. Now it's just a mix of competition of deals. This quarter in particular, Dallas market really led the way. It's had outside strength. And this is actually a quarter where we didn't actually have any signings into our Northern Virginia market, which was not a lack of demand for that market. We still have some. great options for customers available in large capacity blocks in two parts of that market. But we just didn't have anything this particular quarter. So if you look more broadly, I think almost all the other regions in both segments had an uptick in rates. And that's always not apples to apples, because the mix in the region could be different metros, like that one example I just gave you.

But that would be the only outlier is the one that is discussed.

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

Thanks, and good afternoon. I'm curious if you could talk about some of the ideas that you shared in the past around working on ways to participate in private capital recycling, whether it's trying to establish mechanisms to be able to react to when some of your private capital partners are going to hit their, you know, kind of maturity dates of those investments, what to do with those, as well as maybe other opportunities in the category where there's, you know, private investments in other data center assets.

Thanks, Michael. Maybe I'll take off and Greg can expand upon this.

So, This topic is not new. I think we've embarked on this journey at least 18, or at least a year and a half ago, and made great progress, called, accumulating more than $10 billion of, called, hyperscale private ventures with numerous parties. We've seen that a few places, which we called out in the prepared remarks. We've seen our fee revenue having a step up of a recurring revenue basis in the P&L. Two, you've seen that in the balance sheet. Those private capital initiatives have obviously certainly moved our balance sheet from a defensive posture to an offensive posture and allow us to now pull forward some of these great projects in our land bank that's more than three gigawatts of runway of growth for our customers. And maybe I'll have Greg just give you a slightest preview of what's next in that evolution when it comes to our private strategic and private capital initiatives.

Yeah, thanks, Andy. Thanks for the question, Michael. I think the first thing I would say is consistent with what Andy said we laid out a year ago, January, we're going to continue to bolster and diversify these private capital sources, and that's just what we're doing. As he said, we did a lot of transactions over the last 18 months. We're continuing to evolve that strategy, and when we have something to report, we will. I think it's important to note the importance of that capital because if you take a look at the demand profile for the business right now, the hyperscale business in and of itself between now and 2030 is expected to grow almost three times, and that includes AI hyperscale and non-AI hyperscale. So, look, we think that the strategy that Andy laid out and that we embarked upon was the right strategy, but we're not done yet. As we said, it's continuing to evolve, and when we have something to report on that front, we'll tell you.

The next question comes from John Etkin with RBC.

Please go ahead.

Yeah, good afternoon. I'm wondering about kind of the speed at which you can kind of deliver on your new starts that you've commenced recently, supply chain, access to energy, access to heavy equipment, and so forth. Any kind of color there?

Thanks, John. So, I mean, we are –

You almost think it was like a continuous conveyor belt of trying to deliver timely product for the customer's needs. That's certainly playing out in our enterprise collocation markets and now probably more than ever on the larger capacity blocks. This quarter, the book to sign a commencement was elongated to about 20-ish months. That was based on one particular customer. that we serviced and they had a very vocational sense of need and a radius restriction. And the only thing we had in that radius was literally at land state. Luckily it was on a campus where we owned the land and we were ready to get moving on. So that obviously elongated the call delivery timeline for that particular signing. We excluded that. We were basically called sign commencing like four and a half type months. So we're continuously Obviously, delivering capacity and adding new capacity, whether it's from land to shelves to active suites, and making sure we're maintaining our production slots and vendor relationships from that time of delivery in our 15-plus metros around the world.

The next question comes from John Peterson with Jefferies.

Please go ahead.

Oh, great. Thank you. I was hoping you could talk about some of the larger you know, greater than one megawatt lease expirations that are coming up in the coming quarters. You know, how many of those have fixed renewal options and how much can be marked to market rents? If I can sneak in a follow-up question. I think there's $168 million impairment in the income statement. Just curious what that is really into.

Sure. Thanks, Jonathan.

So in terms of lease expirations, so what I'd say is you know, less than half of our greater than a megawatt leases have options we call fixed increases on them. But I would call that significantly less than that are typically renewed pursuant to those options. And that's generally for a few reasons. One, our customers must provide us notice of renewal within the proper period. That doesn't always happen. Two, renewals must come in essence, without any changes. So if there's any additional space, term, anything changes, that opens up the contract, I think, as we've talked about in the past. And third, some of those customers also end up churning. So that all gives us an ability to be able to bring those contracts to market for the majority of what ends up rolling within a given period. On your second point on impairment, yes, we did have We have a parent associated with a few of our non-core assets, which are part of our disposition plans, and those are all located in the secondary market. And I'd also put that in context to the fact that we've generated close to, I think, over $1.3 billion of gains from the capital recycling efforts that we've done over the last year.

Your next question comes from Ari Klein with BMO Capital Markets.

Please go ahead.

Thank you. I guess just a comment on the pipeline coming off two very strong quarters of leasing and with the development pipeline 66% leased, including 80% of the Americas. How should we expect CapEx to trend from here? And then what's your appetite to add new domestic markets, given what seems like broadening of demand?

Thanks, Ari.

Why don't I first let Colin just speak to the pipeline overall and kind of talk about a little bit of the development side of that as well as new markets.

Thanks, Ari. I appreciate the question. As you highlighted, strong reports over one megawatt. Pipeline overall for one megawatt trends to trending positively below one megawatt, which we deem as important as heading in the right direction as well. Record pipeline driven from digital transformation, cloud, and AI. We saw that trending positively in our results, both directly and indirectly. Indirect executions just picked up via last quarter, and we're now 23% of our pipeline being indirect, which we think is a positive sign to the value proposition there. One of the things that Andy highlighted is the key value of metros with the demand cycle. We're seeing enterprises and hyperscalers alike see real value in proximity, and the metro employee that we have, across the globe being particularly important. Finally, the ability both for enterprises and hyperscalers to grow in scale and capacity is of keen value really across the spectrum of low and above a megawatt.

Then, Ari, on the second part of your question, I would say we remain very focused on our core markets, north of 50 of them, around the world, nearly 30 countries on six continents. Those markets we continuously see robust and diverse customer demands talking cloud commute from numerous CSPs, enterprise hybrid IT and service providers, and markets where we see really long-term barriers. And speaking to our actions on those, a sizable piece of our activation in shells, moving from our three-plus-pig wetland bank into shells and ultimately to be delivered in suites, is all in those saving core markets.

The next question comes from David Barden with Bank of America. Please go ahead.

Hey, guys. Thanks.

So I guess, too, if I could, Andy, I guess last quarter you talked about how 50% of these record bookings were roughly 50% were AI-related. It obviously stepped down sequentially. But to your point about the lengthening of the delivery period, it seems like there's still some very large customers in what was the new leasing number this quarter. Could you kind of revisit on an apples and apples basis how 2Q unfolded versus 1Q from an AI versus non-AI type of new leasing pattern and And how do we think about this? You know, is there going to be a seasonality to this sort of thing? That would be kind of my first question. And then the second question is, I was just going back, you know, to 2019. You guys generated $6.65 of core FFO, which is kind of what you're guiding to for 2024. And I know that you've – laid out a hope that there would be growth, more meaningful growth in the forward-looking periods. Also, you said that your balance sheet is now less in a defensive and more in an offensive position. And historically, when you've been offensive, it's meant dilution to secure future growth opportunities. So I was wondering if you could kind of, Andy, revisit you know, the bull case for growth to take all these great things that are happening at the top line and turn them into bottom line growth. Thank you.

Thanks, Dave.

So, I would say the closest apples to apples from a 50% contribution last quarter to this quarter is probably closer to a quarter of our size. We would say we really pin on AI use cases. But I would caveat that in a few ways. that's in a quarter that's not our record quarter, but I think the top four quarter overall signings, great contribution of both zero to one and plus one megawatt, as well as a near record in interconnection signings. And that means we're still winning with the traditional demand drivers, digital transformation, cloud computing, and the like, that that demand is not nearly exhausted, so we'll play it out. I would also say that There was certainly a deal that I didn't count in the category of AI that is certainly pushing the envelope on power density and post-ink drying, already thinking about evolving that capacity block or sign with them in towards what will ultimately be supporting AI down the road is my guess, which I think speaks to the modularity of design and how we're able to scale infrastructure to the demands of our customers. as they need it. The second part of your question, first off, I don't want to confuse the word offense with M&A. I think we've not done any real M&A or external growth for several years now. You can maybe say the resolution of the six-tier relationship, but that was, I think... making lemonade out of lemons more than anything. And when I use the word offenses, I mean that's converting this three-plus-gigawatt land bank, which we've assembled over years, i.e., we didn't just go buy that yesterday, and turning that into a great product for our customers to land and expand and great returns on our investment. And you've been seeing that play out now with our ROIs and development schedule crescendoing into the double digits. You've seen that in the pricing power. You're seeing our value proposition really resonate in all of our customer segments across our core markets. And lastly, our eye is on the prize of accelerating bottom line. That's where we reoriented our strategy 18 months ago about our value proposition, integrating, innovating, bolstering, diversifying our capital sources. And all those things were about called making sure we're driving per share FFO, per share growth. This is accelerating and it's going to be continuously compounding for years to come. So there's been no divergence in that conviction of what comes next for the rest of 2024 and what we've said about 2025 next year.

The next question comes from Eric Luchow with Wells Fargo.

Please go ahead.

I appreciate it. Thanks for taking the question. So, Andy, could you maybe comment on what type of market rent growth you're seeing right now in some of your key metros on an apples-to-apples basis relative to last year, whether that's continued to evolve as this year has progressed? And then, as you look out into the future, do you see an opportunity for market rent growth to continue to outstrip your development costs. And we can see the 10% to 12% development yields you have in your pipeline move even higher. Thank you.

Thanks, Eric.

I mean, I would couch that market rent growth is continuing to move in our favor. You've seen two elements happening. The most precious capacity blocks in the key markets like in Northern Virginia, continue to set new records in terms of rates. And you've also seen a catch-up phenomenon where other markets in North America or outside of the U.S. are catching up a fair bit in terms of their trajectory of growth. Listen, I look at this, you've got these waves of demand, big cloud computing, digital transformation, hybrid IT, And now AI that are just getting going in some of these, they're large and dynamic, and it's happening in a supply constraint backdrop from numerous avenues of supply constraint. And those elements are ultimately resulting in the increases in rate that we've been able to execute on for several quarters, and I believe there will be quarters to come. And I also believe they will likely outstrip the whatever inflationary costs we see in terms of bill costs. And at least maintain these ROIs, if not continue to notch them up slightly higher.

The next question comes from Jim Snyder with Goldman Sachs.

Please go ahead.

Good afternoon, and thanks for taking my question. On the topic of power constraints and supply environment you see relative to transmission, with a time horizon of, let's say, 12 to 18 months, do you think the outlook for power availability is getting more constrained, less constrained, or staying about the same relative to new projects you have either under development or contemplating?

Jim, I think that there's a few phenomenons happening.

some of these constraints popped up now years in the rearview mirror, and we're obviously inching our way close to destinations of resolutions, be it in Northern Virginia, which I think 2026 is supposedly a bogey, or in Santa Clara, and there's other non-U.S. markets as well. At the same time as we approach the power constraints, there's obviously a good of potential that the delivery dates may not deliver on time. These are multifaceted projects that require easement, substations, construction projects. At the same time, the demand can stand still while the power was constrained. The second phenomenon I think we're seeing is this is becoming a more pervasive topic. It was very focused on one called Center of the Universe Market with Northern Virginia, and we're hearing more and more about other markets. And lastly, I wouldn't pin it just on power. Yes, the power's got broader generation issues in an economy that we're trying to green. It's got transmission issues that navigate municipalities and substation deliveries and transmission lines coming through the backyards of folks that rather not have them not there. But there are also other elements of sustainability concerns, moratoriums in certain parts of the world. And so I think that this is a multifaceted supply constraint, which I would also mention that even if it does get fixed, has a propensity that history could repeat itself here. So I think this is going to make our value proposition of with what we deliver to our customers, even more compelling and valuable at the end of the day.

Your next question comes from Hothra, Missouri.

Please go ahead.

Afternoon or evening. Thanks for taking the question. I guess just, you know, bigger picture, you've talked about leasing spreads in greater than one megawatt improving over time, given the differential of what's expiring versus, I guess, market. But you also referenced market rent growth improving quite a bit. So with that and just some recent comments from hyperscalers just talking about the risk of oversupply or just too much capex, can you sort of just frame the near-term opportunities that in the greater than one megawatt from a, you know, maybe bookings, but more so pricing standpoint versus the puts and takes over time just from a demand supply? I'm just wondering, is there a risk that You see the spreads theoretically improve, but there's a lot of supply coming down the pike.

I'll take the second part of your question, Linus.

Matt, to comment on our outlook on leasing sprints and really kind of talk about the stair step in our expiration schedule, which does become even more attractive in the coming years. I think, Vikram, I think the heart of your second question is the broader AI theme question you're hearing more on. in mainstream media of is AI overdone? Is this a bubble? What could come next? I think some of that is not necessarily 100% to remain to what we're seeing. And the reason I say that is in our business, when it comes to AI, we are signing long-term contracts, I'm talking 15 years, with some of the largest, most established technology companies ever to And I mentioned before, we're doing that. We're not chasing this out to unproven territories. We're focused on core markets with robust and diverse customer demand, where traditional use cases, be it cloud commuting from numerous CSPs, enterprise, hybrid IT, and service-oriented demand are continuing to grow over time, even if the AI has peaks and valleys. And we're doing it in markets that we believe are real long-term supply constraints. And lastly... All this is happening probably in the most supply-constrained moment in the last 20 years of data centers. So I'm not sure or convinced that even if AI takes a breather on its long-term innovation trajectory, I think that volatility, we are somewhat insulated in our sector from that volatility based on how we're pursuing it. But Matt, why don't you hit on the Eucalyptus Expiration?

Sure. So what I call it is if you look at the greater than a megawatt leases that are expiring, call it the next 18 months, the average rate on that's in the 140 to 145 area. But then it steps down pretty gradually to as low as 111 by the time you get to 2029. And so I think you're going to see a continued positive trajectory on our releasing spreads. not only in the greater than a Maywall category, but I think also across all categories. So I think you'd also recall within our zero to one, you know, spreads have been positive. I think throughout our history, those are typically more regular steady inflationary type increases or better. So I think this puts us in a good position considering where market rates are, where some of the supply constraints are to where we'll see market rates now continue to remain positive and grow and continue to accrue benefits to our releasing spreads as we go through time.

The next question comes from Frank Luther with Raymond James.

Please go ahead.

Great. Thank you. So, in talking before, you mentioned you prioritizing retail colo over hyperscale. How should we think about that practically and kind of track that? Part of the reason the sub-megawatt bookings have remained a little bit elevated. How should we think about that trend going forward?

Colin, why don't you – that's a great question because we're obviously spending a lot of time on the bigger deals right now. But, Colin, why don't you give a walkthrough on the highlights of the quarter?

Sure. Thanks for the question. I'm not sure I'd use the word prioritize. We definitely want to emphasize a full platform. to have an offering set. So as highlighted in Andy's opening remarks, performance in Q2 is particularly strong on the zero to one fourth consecutive quarter over 50 million, which I think was a, which is also the third highest ever from zero to one. We think this consistency is really driven from our ability to serve the full spectrum of requirements for our enterprises and service providers across the global 5,000 focus of customer set. New logos are also Pretty strong as well. Most solid ever in terms of 148 with 40% of that coming from the indirect side. Channel also, which I highlighted earlier, was a particular strong point with over 20% booking contribution from the indirect side overall. So we view this segment as continuing our value proposition out to our client set. And a lot of the drivers Andy talked about around digital transformation, cloud, and AI are also playing out in the zero to one segment. segment across enterprises and service providers. And Andy highlighted a couple of key wins on opening remarks, namely Fortune 500 clients, Fortune 5000 clients, excuse me, offering their virtual desktop requirements and the global manufacturing win we have on the enterprise side. I also want to highlight the particular highlight of the Microsoft Express route launch into Dallas, which we feel like is a really strong representation of our platform.

The next question comes from Michael Elias with TD Cowen.

Please go ahead.

Great. Thanks for taking the questions, guys. Andy, in the past, you've talked about CapEx being an accordion that you expand and contract to the end of solving for consistent bottom line growth. So as I'm thinking about it, given the leasing success that you've had over the last two quarters, and also as part of that, like the market opportunity in both hyperscale and enterprise, is now the time to be expanding that accordion and really hitting the gas on CapEx? And if so, I just want to be clear, what is the explicit FFO for share growth that you guys are solving for as part of that algorithm? Thank you.

Thanks, Michael. So just to clarify, I would say CapEx is the core. I think it's how we fund it, which I think is the same concept you're outlining in your question. The CapEx intensity is being pulled forward. You talked about this. of green lighting, more shell capacity, ultimately suites, and a highly leased, pre-leased development pipeline at very attractive returns. So we're seeing the capex intensity increase. We're intersecting at great rates, great returns for our business, supporting great customers in numerous markets. And we've now positioned ourselves at a balance sheet position of greater strength. not only just from our leverage standpoint, but from our liquidity and our diverse sources of capital. And what we're trying to do is essentially use the levers of using our public capital and our private capital to get back to mid-single digits, call it four-dollar growth next year, and then there's further acceleration on top of that, and do that in a consistent year method of compounding that growth for numerous years to come. So it's really those levers of using public and private capital to drive that bottom line to new levels and on a consistent framework.

Your next question comes from David Greener with Green Street.

Please go ahead.

Thanks. I appreciate the industry statistics you guys included in your investor presentation, and I wanted to asked specifically about the declining global vacancy you highlighted, which is around 6%. But when I look at your stabilized portfolio, the vacancy level is about three times higher than that. So I guess first, why is it so much higher? And then second, given the record demand we're seeing across the industry, how long do you think it's going to take before digital's portfolio resembles more like the industry is?

David? I think the...

You've got to remember that our portfolio is not all just called hyperscale. And the hyperscale portion of business can literally be 100% leased in many buildings or markets, right? And my gut is that chart, which I think Davis and our hawk, which they're doing the best they can, is very much about more of a hyperscale lens. I was actually pretty pleased on the occupancy front. We're up 100 basis points in the same sort of occupancy quarter over quarter, and we have a big same-store pool. It's not nothing. We're also actively taking it one step backwards sometimes and occupancy to take two, three, four steps forward. When vacancy suites come back on the scale and we convert those to colo and be able to support our customers' colo growth as well. So this is the year we said that With occupancy, we're going to be moving the needle, and we have been moving the needle. We've got more to do in that arena. So I think you're going to see it move up. And if you look at – you can also look to get a number of apples to apples. If you look at the occupancy we show by markets, there are certain markets with way less than 6.9% vacancy that are just very much heavily weighted towards our hyperscale business. They just have us. much smaller coal, like Northern Virginia, if you parse through it, especially on a megawatt basis, I wish I had that type of vacancy to sell right now, and we just don't.

The next question comes from Nick Nguyen with Deutsche Bank. Please go ahead.

Hey, guys. Thanks for getting me on. Two follow-ups. First, on the colo side, so you cited the record new logo is 148 this quarter. I'm just wondering, from a macro perspective, any change in terms of macro impacts across different customer sizes within that sub-one megawatt base? And then secondly, you talked about leverage getting back under five and a half turns, the prospect of improving bottom line growth next year. How do you think about the dividend and the potential for forward growth in the dividend relative to some potential incremental investment in the business. Thanks.

Matt, why don't you hit the dividend question first and call on, and I can hit a little bit on what we're seeing in the enterprise demand piece of the puzzle.

Yeah, sure. So thanks, Matt. So in terms of the dividend, Yeah, look, I think it's back to kind of what we've said historically. I think we've got a unique opportunity here to take advantage of what we see as tremendous growth opportunity throughout our global portfolio. And one of the easiest and cheapest forms of capital within that is internally generated funds. And so we continue to look to try to maximize our cash flow as part of our funding strategy on that front. And on top of that, I think as we've also mentioned throughout this call, we're keenly focused on growing the bottom line and accelerating that growth in out of years. So as we grow the bottom line, which is going to benefit and accrue benefits to not only core FFO, but then down to AFFO, we then look to keep our dividend growth in line with that bottom line per share growth as well.

Great. On the new logo question, a couple of trends just maybe to highlight in that question. So, first, we really believe it's in the hybrid world. So, we're seeing that continued trend in the new logo-based hybrid work cloud data that our new logo requirements really serve well across our global platform. Number two is the mix of that 148 was very much split between commercial and global 5,000 accounts. So, You know, we're seeing continued interest in the platform across the larger customers who buy with more frequency in the smaller spectrum. Not sure that we can necessarily point to a growing density in that particular base of clients yet or capacity, but I can tell you this particular base of clients sees real value, as I mentioned, in our global platform, which really serves well across their requirements.

And just one, Chris, why don't you just chime in on what that really means on the HD Club on 2.0. I would say an uptick.

I think I agree with Andy on the macro trend of what we're doing with HDColo. It's just really aligning the right capability to cool some of these higher power density requirements coming into the market. And so you see a lot of the capabilities that we've brought in across 170 facilities. We can execute these higher density solutions in 12 weeks or less. And I think what's interesting about that is the capacity blocks are getting larger, but the capabilities that customers are trying to bring to market are definitely challenging for a lot of your traditional colo offerings where we've really started to see that come to market about six to seven months ago. And so we've been able to pre-procure a lot of these capabilities to get ahead of that challenge. you know, just kind of current rack densities in the market today are six to eight kilowatts. And I think one of the things I think you're really hitting on is like, what are some of these new requirements coming in? And so healthcare, we're seeing 10 kilowatts a rack. I mean, gaming, you're seeing 15 kilowatts a rack this last quarter. And then Some of the AI software capabilities, 40 kilowatts. But at the end of the day, we can meet a customer requirement of 150 kilowatts. So we have a lot of runway with that. And to put a little context to it, in the most recent state-of-the-art NVIDIA GB200, we can support that requirement in an under 12-week fashion with our current HD co-op offering.

So definitely seeing a lot of growth in that market.

The next question comes from Anthony Ho with Truist Securities.

Please go ahead.

Great. Thanks for taking my question. I noticed that the wait hours commencement period for new leases are 20 months away. I'm assuming most of these leases are probably for 2026 deliveries, but are customers looking to sign leases for 2027? If they are, what type of customers are looking to take up space this far out?

So, I mean, customers are

especially when it comes to larger capacity blocks. They're really trying to future-proof, and that's where three gigawatts of growth comes in handy. So they certainly, the nearest term deliveries are precious, but they're thinking years ahead. Now, that particular example, as I mentioned, the 20 months was elongated because that customer, one particular customer had very much their eyesight on a particular market, and they had reduced restrictions about where they could grow. And where we could support that growth, we were literally at layup capacity. So that we were able to do deliver as fast as we could, but it certainly elongates it. Excluding that one outlier, we're close to four and a half months. And I think you'll, I wouldn't count on those outliers consistently popping up.

They'll be more sporadic.

The next question comes from Brandon Nispel with KeyBank Capital Markets.

Please go ahead.

Thanks for taking the question. Question for Matt. Can we talk about not updating the guidance at all? Maybe there's some moving pieces from FX and the recent acquisition that you call out. Just as I was looking at it, you know, if you look at the first half of the year and annualize it, revenues really need to accelerate while adjusted EBITDA would need to be backwards actually to hit the midpoint of your guide. So I guess the question is, is the EBITDA FFO guide just conservative? Are there some Uncertainty in terms of timing of commencement, unusual expenses, hoping you can just unpack that for us. Thanks. Sure.

I don't, look, there's, I would, again, I'd probably focus, you know, kind of on the bottom line. You know, if you look at where we are halfway through the year, we're a little less than halfway through the midpoint of our core FFO guidance. And we talked about we expected this quarter would have a little bit of pressure because of the capital recycling efforts that we've concluded with closing CH2 and having the related income from that come out this quarter. And so, you know, look, what we're going to see is in the second half growth, we're expecting to improve and accelerate as the backlog of deals and Signs come online, as we expect. You know, as we haven't changed the guidance, we've obviously given a wide range. But if you look at, I think, where we are this year and the expectations for accelerating in the back half, which I think will set us up very nicely for 2025, we feel pretty good about the midpoint of guidance and being able to achieve that.

Thank you. That concludes the Q&A portion of today's call.

I'd like to now turn the call back over to President and CEO Andy Powell for closing remarks. Andy, please go ahead.

Thank you.

Digital Realty posted another strong quarter in 2Q with record leasing in the first half, demonstrating how Digital Realty is positioned to support the elevated level of demand we continue to see for data center infrastructure. Fundamental strength continued through the second quarter with robust leasing volume, healthy pricing, and record commencement poised to drive an acceleration in bottom line growth. We continued to innovate and integrate with the rollout of HD Colo 2.0 and the addition of new cloud on-ramps to platform digital in the quarter. And we have repositioned the balance sheet by recycling capital out of stabilized assets, diversifying our capital sources, and reducing our leverage. All this was done with an eye towards improving our growth profile while supporting our customers' growing needs. We are excited about this quarter's results and remain optimistic about the outlook for data center demand and our position in the market. I'd like to thank everyone for joining us today, and we'd like to thank our dedicated and exceptional team at Digital Realty who keep the digital world turning.

Thank you.

The conference is now concluded. Thank you for joining today's presentation.