Digital Realty Trust(DLR) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Utilities expenses decreased by 5% sequentially due to joint venture contributions and seasonal impacts [1] - Operating expenses increased in Q4 due to seasonally elevated maintenance spending [1] - Property taxes returned to normalized levels after a one-time reassessment in Q3 [1] - Total portfolio occupancy slipped to 81.7% in Q4 2023 but is expected to improve by 100-200 basis points by the end of 2024 [14] - Cash NOI growth for the full year was 7.5%, with 6.5% on a constant currency basis [75] - Core FFO for Q4 was $1.63 per share, and$6.59 for the full year, within the guidance range [68] - Cash re-leasing spreads increased by 8.2% on a cash basis in Q4, setting a high watermark for the year [67] - Total revenue grew by 11% year-over-year, despite the impact of stabilized JV contributions and noncore asset sales [98] - Adjusted EBITDA increased by 9% year-over-year in Q4 [119] Business Line Performance - The company added 9,000 new cross-connects in 2023, indicating growth in connected data communities [8] - Leasing remained strong, especially in the 0 to 1 megawatt plus interconnection segment, with 134 new logos added in Q4, bringing the total for 2023 to over 500 [30] - Interconnection revenue was $106 million in Q4, up 9$495 million at the end of Q4, with two-thirds expected to commence in 2024 [61] Market Performance - Northern Virginia remains a key market, with over 100 megawatts available for lease in Loudon County and nearly 200 megawatts in Manassas [18] - The company is in active negotiations for substantially all of its capacity in Loudon County [18] - Demand is strong across major markets, including Northern Virginia, Santa Clara, New Jersey, Paris, Frankfurt, Singapore, and Seoul [84] - The company has over 900 megawatts of buildable capacity at DigitalDose, with potential access to power by 2026 [35] Strategic Direction and Industry Competition - The company strengthened its balance sheet in 2023 by developing private capital partnerships and diversifying capital sources [4] - The company is focused on supporting hyperscale and AI workloads, with high-density colo capability deployed across 32 markets [51] - The company is prioritizing locations that enhance Platform Digital connectivity and connected campus communities [32] - The company is leveraging its global platform to meet the accelerating needs of its growing customer base, particularly in AI, cloud, and enterprise digital transformation [41] Management Commentary on Operating Environment and Future Outlook - Management highlighted 2023 as the year of AI's arrival in the data center industry, driving unprecedented demand [15] - The company expects normalized growth of 7% in revenue and 10% in EBITDA for 2024 [12] - Management anticipates a favorable pricing environment and positive renewal spreads in 2024, driven by strong market demand [31] - The company expects to benefit from the active management of its existing 500-megawatt portfolio in key markets [35] - Management is optimistic about the long-term growth potential, particularly with the AI wave of demand [41] Other Important Information - The company completed significant transactions in Q4, including joint ventures and asset sales, reducing leverage by 1.3 turns from the Q1 peak [28] - The company raised $1.2 billion of equity under its ATM program since the end of September 2023 [26] - The company announced nearly$8 billion of new development joint ventures in Q4 and completed over $1 billion of equity issuance under its ATM program [45] - The company expects to recycle$1.25 billion of capital in 2024 through noncore asset sales and stabilized joint ventures [100] Q&A Summary Question: Hyperscale demand and pricing outlook [11] - The company sees strong hyperscale demand, with AI driving incremental demand. Pricing is favorable due to supply constraints, and the company expects continued positive mark-to-market opportunities [64] Question: Leverage and dividend outlook [21] - The company aims to reduce leverage to 5.5 times and expects to grow the dividend as AFFO and cash flow grow [78][131] Question: AI demand and workload trends [40] - The company sees strong demand for both training and inference workloads, with AI embedded in many existing customer solutions [105] Question: Capital expenditure and development spend [52] - The company expects to spend over $3.5 billion in total CapEx in 2024, a 15% increase from 2023 [53] Question: Lease renewal spreads and pricing assumptions [137] - The company assumes current market pricing for renewals, with 0 to 1 megawatt leases influenced by inflation and greater than 1 megawatt leases influenced by expiring rates [69] Question: Enterprise sales cycle and macro pressures [116] - The company has not seen significant macro pressures in its enterprise business, with strong engagement and new logo growth [128] Question: Mix between 0 to 1 and greater than 1 megawatt leasing [125] - The company expects the mix to fluctuate but remains focused on both segments, with a strong value proposition in each [39]