DLR - NYSE

Good day, and welcome to the Digital Realty Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Jordan Sadler. 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 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 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 releasing spreads remained firmly positive and continued growth in 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 Power.

Thanks, Jordan, and thanks to everyone for joining our call. The momentum we experienced in the first quarter continued in the second quarter. In 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 0-1 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 markets. 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 3 gigawatts plus of incremental development, reduced 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 integrated 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 near-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 pro forma 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 sought submarket of London. With the acquisition of a densely connected enterprise data center campus, which we expect to be highly complementary 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 Colo 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 Express Route Metro Service in the Amsterdam and

Thank you, Andy. Let me jump right into our second-quarter results. We signed $164 million of 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 0 to 1 megawatt leasing and a standout $14 million of interconnection bookings. Our fourth consecutive quarter exceeding $50 million in our 0 to 1 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 the 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%. Re-leasing 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 to 1 megawatt segment were up 3.8% in the second quarter, while the greater than 1 megawatt segment was up 3.9%. As a reminder, the 0 to 1 megawatt segment is the primary driver of our overall re-leasing 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 1 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 1 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. Pro forma 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%. And 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. The 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 $1 billion in development CapEx, tracking closely towards our full-year guidance. As the second half should see a ramp from newly commenced projects along with the typical seasonal uplift. Turning to the balance sheet, we continued 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 bond that matured in April and a GBP250 million 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-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 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 to $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 are also maintaining our total revenue and adjusted EBITDA guidance ranges for 2024, as well as the operating, investing, and financing expectations that we 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 will be pleased to take your questions. Operator, would you please begin the Q&A session?

[Operator Instructions] Your first question comes from Richard Choe with JPMorgan. Please go ahead.

Hi. I wanted to ask about the long-term pipeline, you're seeing for the -- over 1 megawatt category. I think there is 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.

Hi. Thanks, Richard. So I would say in the greater than 1-megawatt category, we're seeing a continuation of the trends we've been playing out for the last several quarters. The biggest customers are desiring, one, contiguous capacity blocks that are very large; two, they want them right now or as soon as possible; and three, the desire of fungible markets, i.e., markets where they can service certainly GenAI workloads, trading ultimately inference, but also if they miss the measure, they can support their cloud computing needs as well. So we have not seen a -- the ease in terms of the demand for those attributes in the market.

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

Sorry, I was muted. So I wanted to double-click on renewal rates. So, I guess, a couple of items stood out. One, in the Americas, the $146 per kilowatt monthly rate and for the greater than 1 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?

Hi, thanks, Irvin. So I think the one big deal or the one market you were pointing to is just the North America greater than 1 megawatt. Now just a mix of composition 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, and we still have some great options for customers available at large capacity blocks in two parts of that market, but we just didn't penned anything in this particular quarter. So if you look more broadly, I think almost all the other, call it regions in both segments had an uptick in rates and that's always on apples-to-apples that the mix in the region could be different metros like that one example I just gave you, but that would be only outlier is the one that I just discussed.

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

Thanks and good afternoon. 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 kind of maturity dates of those investments, what to do with those as well as maybe other opportunities in the category where there is private investments in other data center assets?

Thanks, Michael. Maybe I'll kick it off and then Greg can expand upon this. So this topic is not new. I think we have embarked on this journey at least 18 -- or at least a year and a half ago and made great progress, call it accumulating north of $10 billion or call it hyperscale private ventures with numerous parties. You've seen that 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 north of 3 gigawatts of runway of growth for our customers. And maybe I'll ask Greg just to give you a slightest preview of what's next in that evolution when it comes to our private strategic product accounting initiatives.

Yes. Thanks, Andy. Thanks for the question, Michael. I think the first thing I would say is consistent with as 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. And 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 that 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. And as we said, it's continuing to evolve. And when we have something to report on that front, we'll tell you.

Your next question comes from Jon Atkin with RBC. Please go ahead.

Yes, good afternoon. I wonder 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, Jon. So I mean, we are -- if you almost think it was like a continuous conveyor belt of trying to deliver timely product for end customers' needs, that's certainly playing out in our enterprise colocation markets model. And now apply more than ever on the larger capacity blocks. This quarter and -- this quarter the book to sign a commencement was elongated out to about 20-ish months. That was based on one particular customer that we serviced and they had a very locational sensitive need than a radius restriction. And the only thing where we had in that radius was the land state. Luckily, it was on a cadence where we own the land and we were ready to get moving on. So that obviously elongated to be called delivery timeline for that particular signing. We excluded that, where we were basically call signing commencing like 4.5 type months. So we're continuously obviously delivering capacity and adding new capacity, whether it's from land to sell active suites and making sure we're maintaining our production slots and vendor relationships from that time of delivery in our 50 plus metros around the world.

The next question comes from Jon Petersen with Jefferies. Please go ahead.

Okay. Thank you. I was hoping you could talk about some of the larger greater than 1 megawatt lease expirations that are coming up in the coming quarters. How many of those have fixed renewal options and how much can be mark-to-market rents? And if I can sneak in a follow-up question, I think there is a $168 million impairment in the income statement. Just curious what that is really into.

Yes. Sure. Thanks, Jonathan. So in terms of lease expirations, so what I'd say is less than half of our or greater than 1 megawatt leases have options with total 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 and that doesn't always happen to -- 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 did have impairment 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. We -- and I'd also put that in context to the fact that we've generated, call it, 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 the comments on the pipeline coming off two very strong quarters of leasing and with the development pipeline, 66% leased, including 80% in 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 a broadening of demand?

Hi, thanks, Ari. Why don't I first let Colin just speak to the pipeline overall and then we can kind of talk about a little bit development side of that as well as new markets?

Yes. Thanks, Ari. I appreciate the question. Andy highlighted strong performance over 1-megawatt -- pipeline overall for 1-megawatt trends to -- is trending positively below 1 megawatt, which we deem as important as heading in the right direction as well, record pipeline driven from digital transformation, cloud, and AI. And you saw that trending positively in our results, both directly and indirectly. Indirect execution has picked up the last quarter and we're now 23% of our pipeline being indirect, which we think is a positive sign on 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 like zero value of proximity and the metro play that we have in key metros across the globe being particularly important. Finally, the ability both for enterprise and hyperscalers to grow in scale and capacity is of keen value really across the spectrum of low and above 1 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 demand. I'm talking cloud commute from the numerous CSPs, enterprise, hybrid, IT, and service providers in markets where we see really long-term barriers. And to be speaking to our actions on those, a sizable piece of our activation in shells moving from our 3-plus gigawatt land bank into shells and ultimately to be delivered in suites is all in those same core markets.

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

Hi guys. Thanks a lot. So I guess, two, if I could. Andy, I guess last quarter you talked about how 50% of these record bookings were -- or 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 is still some very large customers in what was the new leasing number this quarter. Could you kind of revisit on an apples-on-apples basis, how 2Q unfolded versus 1Q from an AI versus non-AI type of new leasing pattern? And how do we think about this? 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 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 will 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 the bull case for growth to take all these great things that are happening with the top line and turn them into bottom line growth? Thank you.

Thanks, Dave. So obviously posted apples-to-apples from a 50% contribution last quarter to this quarter is probably closer a quarter of our science. We would say, we really pin on AI use cases. But I would caveat that in a few ways. One, that's in a quarter that's not our record quarter, but I think the top four quarter overall signings, great contribution of both 0 to 1 and plus 1 megawatt, as well as a near record in interconnection signings. And that means we're still winning with the traditional demand drivers of digital transformation, cloud computing, and the like, that though that demand is not nearly exhausted shelf or played 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 drawing, already thinking about evolving that capacity block or signed 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 needed. The second part of your question, let -- 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 save the resolution of the Cyxtera relationship, but that was I think making lemonade out of lemons more than anything. And when I use the word offense, I mean, that's converting this 3 plus gigawatt land bank, which we've assembled over the 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 in -- at 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 and you've seen our value proposition really resonate in all of our customer segments across our core markets. And lastly, our eye is on the price of accelerating the bottom line. That's where we reoriented our strategy 18 months ago about our value proposition, integrated, innovating, bolstering, diversifying our capital sources. And all those things were about, call it making sure we're driving per share -- FFO per share growth that's accelerating and it's going to be continuously compounding for years to come. So there is been no divergence in that conviction of what comes next for the rest of 2024 and what we've said about 2025, next year.

Your next question comes from Eric Luebchow with Wells Fargo. Please go ahead.

I appreciate it. Thanks for taking the questions. 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 and whether that continues 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 kind of 10% to 12% development yields you have in your pipeline move even higher? Thank you.

Thanks, Eric. I mean, I would outcast 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 being cloud computing and 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 will be three quarters in common. And I also believe they will likely outstrip the -- whatever inflationary cost we see in terms of build costs and at least maintain these ROIs, if not continue to notch it up slightly higher.

The next question comes from Jim Schneider 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 the time horizon, 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 is a few phenomenons happening. One, we're getting closer, I mean, some of these constraints popped up now a years in a 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 above or within like in Santa Clara and there is other non-U.S. markets as well. At the same time as we approach the power constraints, there is obviously a good 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 didn't standstill while the power was constrained. The second phenomenon I think they're seeing is -- this is becoming a more pervasive topic. It was very focused on one cloud 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 has got broader generation issues in the economy that we're trying to green. It's got transmission issues that navigate municipalities and substation deliveries and transmission lines cutting through the backyards of folks that rather not have them 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 could -- history could repeat itself here. So I think this is going to make our value proposition with what we deliver to our customers even more compelling and valuable at the end of the day.

The next question comes from Vikram Malhotra with Mizuho. Please go ahead.

Hi, good afternoon or evening. Thanks for taking the question. I guess just a bigger picture, you've talked about leasing spreads in greater than 1 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 opportunity set in the greater than 1 megawatt from -- 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 is a lot of supply coming down the pipe?

I'll take the -- mainly the second -- first and second part of your question, I'll ask Matt to comment on our outlook on leasing spreads and really kind of talk about the stairstep in our exploration schedule, which does -- call it, become even more attractive in its coming years. But I think from -- the heart of your second question is the broader AI theme question you're hearing more on -- in the mainstream media over AI overdone, this is a bubble, what could come next? I think some of that is not unnecessarily 100% germane 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. Two, 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 provider demand are continuing to grow over time, and even if the AI has peaks and valleys. And we're doing it in markets that we believe are real term -- 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 don't -- 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 question?

Sure. So what I look, what I call it is -- if you look at the greater than 1-megawatt leases that are expiring, call it the next 18 months, the rate -- average rate on that 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. So I think you're going to see a continued positive trajectory on our leasing spreads, not only in the greater than 1-megawatt category, but I think also across all the categories. So I think you'd also recall within our 0 to 1 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 -- I think 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 Louthan with Raymond James. Please go ahead.

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

Colin, why don't you -- I think that's a great question because we are obviously spending a lot of time on the bigger deals right now. But Colin, why don't you walk-through on the highlights of the quarter?

Sure. Frank, 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 was particularly strong 0 to 1, fourth consecutive quarter over $50 million, which I think was -- which is in also the third highest ever from 0 to 1. We think this consistency is really driven from our ability to serve the full spectrum of requirements for our enterprisers and service providers across the Global 5000 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 particularly strong point with over 20% booking contribution from the indirect side overall. So we view this segment as continuing on 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 0-1 segment across enterprises and service providers. And Andy highlighted a couple of those key wins on opening remarks, namely Fortune 5,000 clients, excuse me, offering their virtual desktop requirements and the global manufacturing win we had on the enterprise side. I also want to highlight the particular highlight of the Microsoft ExpressRoute launch into Dallas, which we feel like is a presumably 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 gap on CapEx? And if so, I just want to be clear, what is the explicit FFO per share that you can grow -- that you guys are solving for as part of that algorithm? Thank you.

Thanks, Michael. So the -- just to clarify, I would say, CapEx is the core and I think it's how we funded, which I think the same concept you're outlining in your question. The CapEx intensity is being pulled forward, right? We talked about this of greenlining more shell capacity, ultimately suites in a super 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 for good -- and supporting great customers in numerous markets. And we've now positioned ourselves in 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, call it mid-single digits, call it floor to our growth next year and then it'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.

The next question comes from David Guarino with Green Street. Please go ahead.

Thanks. I appreciate the industry statistics you guys included in your investor presentation. And I wanted to ask specifically about the declining global vacancy you highlighted, which it's 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?

I think Dave - you got to remember that our portfolio is not all -- just call it hyperscale. And the hyperscale portion of this business can literally be 100% leased in many buildings or markets, right? And my gut is that chart, which I think data center walk, 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-store occupancy quarter-over-quarter and we have a big same-store pool. It's not mountain. We're also actively taking it one step backwards sometimes on occupancy to take two, three, four steps forward when vacant -- when suites come back and scale and we convert those to Colo and really support our customers' Colo growth as well. So this was the year we said that with occupancy, we're going to be moving the needle and we have been moving the needle. We got more to do in that arena. So I think we'll be seeing -- 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 their occupancy, we show by markets. There are certain markets of way less than 60% vacancy that are just very much heavily weighted towards our hyperscale business. They just have a much, much smaller a footprint like Northern Virginia, where 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.

Your next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Hi, guys. Thanks for getting me on. I had 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 1 megawatt base? And then secondly, you talked about leverage getting back under 5.5 turns, the prospect of improving bottom line growth from next year. How do you think about the dividend and the potential for forward growth in the dividend relative to some potential incremental investments in the business? Thanks.

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

Yes, sure. So thanks, Matt. So in terms of the dividend, 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 a 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, we're also -- I think as we've also mentioned throughout this call, we're keenly focused on growing the bottom line and accelerating that growth in outer years. So as we grow the bottom line, which is going to benefit and accrue benefits to not only core FFO but then on 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 base, hybrid work, cloud, data that our new logo requirements really are served well across our global platform. Number two is the mix of that 148 was very much split between commercial and Global 5000 accounts. So we're seeing continued interest in the platform across the larger customers who buy with more frequency in the smaller area of the 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 the early reads on the HD Colo 2.0, with some of the -- I would say an uptick in the enterprise segment?

No, so I think I agree with you, Andy, on the macro trend of what we're doing with HD Colo is just really aligning the right capability to cool some of these higher-power density requirements coming into the market. And so we see a lot of the capabilities that we brought in across the 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 like 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. But just kind of current rack densities in the market today are 6 to 8 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 of rack. I mean, gaming, we're seeing 15 kilowatts of 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 Colo offering. So definitely seeing a lot of growth in that market.

Your next question comes from Anthony Hau with Truist Securities. Please go ahead.

Great. Thanks for taking my question. I noticed that the weighted average 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 pick up space thus far out?

Thanks. So I mean customers are -- especially when it comes to larger capacity blocks, they're really trying to future proof and that's where our 3 gigawatts of growth comes in handy. So they certainly -- the nearest-term deliveries are precious, but I think in the 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 then various restrictions about where they could grow and where we can support that growth, we are literally their capacity. So that we were able to do deliver as fast as we could, but it certainly elongated. Look, excluding that one outlier, we're close to 4.5 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 KeyBanc Capital Markets. Please go ahead.

Hi, thanks for taking the question. Question for Matt. Can you talk about not updating the guidance at all? Maybe there is some moving pieces from FX and the recent acquisition that you call out. Just as I was looking at it, if you look at the first half of the year and annualize it, revenue 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 guidance is conservative? Are there some uncertainty in terms of timing of commencements, unusual expenses? Hoping you could just unpack that for us. Thanks.

Sure. I don't -- look there's a -- I would, again, I'd probably focus kind of on the bottom line. If you look at -- 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 be -- would have a little bit of pressure because of the capital recycling efforts that where we've concluded with closing CH2 and having the related income from that come out this quarter. And so 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 signings come online. And as we expect -- 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 Power, 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 commencements poised to drive an acceleration in bottom line growth. We continue to innovate and integrate with the rollout of HD Colo 2.0 and the addition of new cloud on-ramps to PlatformDIGITAL in the quarter. Then we have repositioned the balance sheet by recycling capital out of stabilized assets, diversifying our capital sources, and reducing our leverage. All of 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 today and would like to thank our dedicated and exceptional team at Digital Realty, who keep the digital world turning. Thank you.