Digital Realty Trust, Inc. (DLR) on Q2 2021 Results - Earnings Call Transcript

Operator: Good afternoon. And welcome to the Digital Realty Second Quarter 2021 Earnings Call. Please note this event is being recorded. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question plus a follow-up and we will conclude promptly at the bottom of the hour. John Stewart: Thank you, Andrea. The speakers on today’s call are CEO, Bill Stein; and CFO, Andy Power. Chief Investment Officer, Greg Wright; Chief Technology Officer, Chris Sharp; and Chief Revenue Officer, Corey Dyer, are also on the call and will be available for Q&A. Management may make forward-looking statements, including guidance and underlying assumptions. 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 Bill, I’d like to hit the tops of the waves on our second quarter results. We continue to enhance our product mix, with a record contribution from our sub-1-megawatt plus interconnection category. We extended our sustainability leadership with the publication of our third Annual ESG Report. We raised revenue and EBITDA guidance for the second quarter in a row, setting the stage for accelerating growth in cash flow. Last but not least, we further strengthen the balance sheet with the redemption of high coupon preferred stock and the issuance of low cost long-term fixed rate debt. With that, I’d like to turn the call over to Bill. Bill Stein: Thanks, John. Good afternoon and thank you all for joining us. Our formula for long-term value creation is a global connected sustainable framework. We continue to advance along these lines during the second quarter. Our business continues to globalize, and once again, we generated solid performance and strong bookings across all regions. Our full spectrum product offering continues to blossom, with record sub-1-megawatt bookings in the second quarter and regional highs in both EMEA and APAC. Together with interconnection, the sub-1-megawatt category comprise nearly half of our total bookings, demonstrating customers enthusiastic adoption of PlatformDIGITAL to help accomplish their digital transformation initiatives. I’ll discuss our sustainable growth initiatives on page three. In June, we were awarded the Green Lease Leader Gold Award from the Institute for Market Transformation and the U.S. Department of Energy for the third year. Andy Power: Thank you, Bill. Let’s turn to our leasing activity on page seven. We signed total bookings of $113 million in the second quarter, including a $13 million contribution from interconnection. Network and enterprise oriented deals of 1-megawatt or less reached an all time high of 41 million, demonstrating our consistent momentum and the growing success of PlatformDIGITAL as we continue to capture a greater share of enterprise demand. The weighted average lease term was over eight years. We landed 109 new logos during the second quarter with a strong showings across all regions. Again, demonstrating the power of a global platform. The geographic and product mix of our new activity was quite healthy, with APAC and EMEA each contributing approximately 20%, the Americas representing nearly 50% and interconnection responsible for a little over 10%. The megawatt or less plus interconnection category accounted for almost half our total bookings, with particular strength in the cloud, content and financial services verticals. In terms of specific wins during the quarter and around the world. We landed a top five cloud service provider to anchor our new Tokyo campus. Close on the heels of this magnetic customer deployment, Japan’s most popular social media application selected PlatformDIGITAL on the same campus. NAVER, the leading Korea based cloud provider serving the greater APAC region selected our new carrier-neutral facility in Singapore to support data intensive workloads for their high performance computing and I -- AI intensive technology based platform. A European broadcaster is leveraging PlatformDIGITAL in Vienna and Frankfurt to rewire their network in favor of data intensive interconnection with benefits in performance, scalability and cost savings. A Global 2000 Enterprise Data Platform is adopting PlatformDIGITAL in Amsterdam, Dublin and Frankfurt to orchestrate workloads across hundreds of ecosystem applications, delivering improved performance, security, cost savings and simplicity. In London, PlatformDIGITAL is supporting a top three global money center banks fortification of their business continuity capabilities, without compromising their data intensive interconnection requirements Operator: And our first question comes from Jon Atkins of RBC. Please go ahead. Jon Atkins: Thanks. I got one question and then a follow up. First on M&A, Interxion is now more than a year under your belt and then you announced kind of the JV expansion into India. I wondered if you could maybe symbolize your strategy for organic growth as it pertains to the potential purchases of existing platforms or assets. Sometimes there can be assets out there with dislocated valuation, so I thought it would be worth asking about that topic and getting a refresh? Thanks. Bill Stein: Sure. Jon, happy to provide a refresh. First of all, we don’t comment on M&A speculation, particularly as it relates to specific opportunities in the marketplace. But to refresh everyone’s memory, we try to do only strategic deals. And by that, I mean, we’re looking for investments that enhance either our geographic footprint or our product offering, thinking about specific deals. When you look back on Interxion, I think, we were fortunate with there we were able to do both. We were able to enhance our geographic penetration and add significantly to the colocation mix in Europe. We -- as it relates to --and the CyrusOne situation, which I think is what you probably were alluding to. We think that’s a good platform. We have all this respect in the world for both Bruce Duncan and Steve and Dave Ferdman. But its gives us more of what we already have. And so I just don’t think that’s something that would be of interest to us. Jon Atkins: And then on asset recycling that Andy mentioned towards the end, there was a press item from June about the potential formation of a Singapore REIT. And I wonder if you could give us an update as to what’s happening and kind of the rationale? Andy Power: Thanks, Jon. So I think there’s two concepts kind of interlinked in your question. So non-core capital recycling, we’ve been doing a fair bit of that, most recently executed on portfolio in EMEA close to $700 million. That was not core or strategically digital. And it’s kind of similar to a transaction we did back in, I think, 2019. So call it, folks in our portfolio, we see the most robust and diverse customer growth. So that’s one leg of the stool that you can see will continue on, we activated this year, again, in terms of funding our business plan by recycling that capital into more strategic projects. We’ve also done what’s I will call it private capital partnerships. So similarly with that same transaction back in 2019 with Mapletree, we raised 80% stake and $1 billion of core assets, assets that we never really want to part with and we maintain operational control of as a minority partner. And so, I think, you’ll see us continue to do both. But there’s a big difference in our minds. Non-core things that we’re willing to call it 100% and we wish the new owners well, and core really keeping those assets as part of our collective platform and just trying to recycle capital of the slower growth assets. Both of which I think at the end of the day, hopefully, accelerates our growth and allows us to redeploy that capital into higher return opportunities. Jon Atkins: Anything specifically about the price item from I think Bloomberg and data center knowledge about forming a REIT in Singapore? Bill Stein: I can say that kind of ties to both the questions. Coincidentally, Singapore REITs have been the buyers of our two biggest portfolio sales. They’ve not been the only buyers. We’ve also done other one-off assets sales to other private buyers that were non-core. As relates to any vehicle that we would do like that, we would only think about that in the core contacts, if we’re going to extend our brand and sponsorship to it. So I think -- I can’t comment on what that specific rumor was kind of pointing to, but it kind of is interwoven with both concepts a little bit. Operator: The next question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead. Jordan Sadler: Thank you. Good afternoon. So I wanted to follow up a little bit in terms of sort of investment opportunity. Bill, you’ve talked about, strategic, accretive and I think enhancing growth -- growth enhancing for some of the strategic objectives or criteria for acquisitions. If you can check those boxes, it would seem that, an acquisition even something domestic could make sense. The piece that I am struggling with a little bit, it may be like the growth enhancing. Strategic make some sense that even though there’s some overlap accretive, I get -- we can figure that out, growth enhancing, the piece I wanted to ask you about was, does market share help in terms of sort of the growth outlook. In other words, if you’re controlling certain -- a greater extent of the marketplaces and certainly these large hyperscale Tier 1 markets in the U.S. You think that would mitigate some of the downside rent pressure we’ve seen in that vertical? Bill Stein: Yeah. Jordan, I guess, when I think about -- so what we’re trying to accomplish here and certainly in recent history, I mean, you saw the press release today, right, where we bought a piece of land in Seoul Korea and we already own a carrier-neutral data center in downtown Seoul, and now we’re going to build a campus out in the suburbs. And what we’re trying to do is replicated and so what we’ve created in other markets in the world -- and around the world to the connected campus with a carrier-neutral dense network that you can tether the campus back into. And I think that when you look around the world today, they’re just aren’t that many platforms. I mean, there is not an Interxion in Asia. And I think that would you going to more likely see from us is what you’re seeing in Seoul, we are in fact pursuing similar models in other parts of Asia and in other parts of the world where we’re going into new markets and planting the flag with both network dense facilities and campuses. So just to repeat what our criteria is, yes, it has to be strategically important to us in terms of either geography or product additive to both, it needs to be, we’d like it to be accretive to our near-term earnings idea and certainly accretive to growth, which is what Interxion was and Ascenty. And importantly prudently financed, so a capitalization… Jordan Sadler: Okay. Bill Stein: … that is consistent with how we finance the rest of the business here at Digital. And anything you want to add or? Andy Power: I got two… Bill Stein: All right. Andy Power: Yes. I got two out of three right. Bill Stein: You did. And we -- we’re not the levered up in other words to make… Andy Power: It was very to higher rate... Jordan Sadler: Yeah. Yeah. Yeah. Bill Stein: Yes. Jordan Sadler: Okay. I hope this wasn’t the interview. Bill Stein: But to put a finer point on it, we’re not going to lever up these assets to make the number works -- numbers work. Jordan Sadler: Okay. Andy, if you have anything else, I will follow up. Andy Power: I think the second or third part of your question was, can you drive pricing power to market share, which I think episodically there is opportunities to do that. I think if you look back to our DuPont Fabros transaction that was a market share moving transaction where we up-tiered our relationships with many customers to kind of to control near-term supply. And I think that concept maybe works in more overall supply-constrained markets predominantly outside the U.S. or even like a Santa Clara for that example. I do not -- I’m not confident. I think your line of thinking would be other domestically-focused larger footprint players is that, does that M&A create better pricing power and today’s backdrop, I don’t see that same events playing out, but again life such in America. Jordan Sadler: That’s helpful. And then coming back Bill to sort of been around the world. India, can you guys potentially de-size the India JV opportunity for us? Just sort of initial sizing, I mean, is this -- could we see a platform purchase like Ascenty, like you did with Brookfield then there or is this going to be a de novo opportunity? Bill Stein: I’m going to hand that one over to Greg. Greg Wright: Okay. Thanks. Hey, Jordan. Look, I think, describe the India joint venture. Jordan, it’s actually a hybrid. Look, as you know, we’ve had a strong relationship with Brookfield. We’ve had a great experience with the Ascenty, but when we purchase Ascenty, we bought -- we came into that platform together and purchase an existing platform that had 14 assets. Eight of which were under construction, six of which were operational assets and a team in place. This is going to be different from that. But we are, again, going in 50-50 joint partners, joint branding and alike, which you’ve seen in some of our press materials. But here, we’re going to be and we have some folks that are already residing in the JV, but we’re actually going into India here to build a platform, and ultimately, we expect it to be like Ascenty. I mean being a standalone platform with a strong management team that drives the business. And I think when we look at India, we’re not looking to go into India and just do like-for-like product. We’re looking to do differentiated product and we think Brookfield as a partner here and given their presence in the tower space, and given what’s happening in India in the mobile market and alike. We think we have a great opportunity to do that. And so, but the general governance and construct if you will is very similar to Ascenty, but the basic premise of going in. We’re going into build a platform. We’re not buying a platform. So I’d say that’s how I describe it. Operator: The next question comes from Sami Badri of Credit Suisse. Please go ahead. Sami Badri: All right. Thank you. First question I just wanted to just run by you guys is, maybe you could give us a little bit more color on what’s going on releasing spreads? Because in the greater than 1-megawatt releasing spread slide, which is slide 10, there was a meaningful improvement in spreads and I think we were going from down 11% to just down 1%. And I was hoping you just walk us through this. So that’s part one of the question. Part two is, are essentially done with a lot of those high negative renewal spread, I mean, leases that we’ve kind of been discussing on a last couple of quarters. Are you guys in the clear, is this -- are we going to see some lumpiness? Thank you. Bill Stein: Hey. Thanks, Sami. Let me tackle that. So, like-for-like megawatt -- north of a megawatt quarter-over-quarter certainly saw an improvement from down just close to 11% on the prior quarters, 30-ish megs, the 23.5 megs came -- renew this quarter, came through this quarter, basically flat, negative 90 bps. Overall also improvement basically at 0.1% positive and over 2% positive GAAP. So, definitely move in the right direction. At the same time, I wouldn’t call it be standing on the aircraft carrier with a victory flag just yet. We’re still working through some still certain contracts that are above market. Hence we maintained, I will call it, language around our full year guidance of slightly negative. I did -- since parsing through both categories, in the -- in that category literally 82% of the megawatts that renewed were positive. So close to 2% positive. So really was like one or two negative that drug down the category to be flat. And in the over-to-up to that is greater than percent positive cash mark-to-markets in terms of the megawatts renewed. So, I would call, it’s still episodic, moving in a better direction and that’s a thematic things that I don’t think this one quarter was a massive inflection point. We did gradually getting to better territory this year versus last year. And also feel that same trend kind of continuing based on the mix we see in the future. Sami, can you remind me your second question though? Sami Badri: I think you kind of already hit it, but the second part of the question was just kind of, are you guys essentially going into the clear regarding a lot of the high negative renewal spreads leases that came with the DFT portfolio? You kind of answered it, but that was the second question? Bill Stein: I don’t think, I won’t kind of go through my victories piece here. I don’t think we’re fully out of the woods, but where the trend is moving in our direction and we benefit from an incredibly diverse platform and as you look at our expirations going into this year, rest of this year or 2022 and beyond. The mix just is improving, right? The bars have gotten shorter. The concentration in the greater than megawatt is become more international, places where we’ve had greater pricing power. So, not fully in the clear, but I feel like we’re inching our way into better territory every day. Sami Badri: Got it. Thank you. Operator: The next question comes from Brendan Lynch of Barclays. Please go ahead. Brendan Lynch: Great. Thanks for taking my question. Maybe, Andy, I’ll just follow up on that renewal issue. It does seem like things are going better now. Is it possible that a few years out renewals could actually be a tailwind or are the escalator structured, so that it’s generally neutral at best? Andy Power: Yes. I think there’s definitely potential for fewer out cash mark-to-markets to be a positive tailwind here. I mean, we -- if you look at our -- the diversity of our product here we are -- it’s a very sticky product. We’re typically doing renewals in many markets better than new rates on new deals given the propensity inertia for our customer to stay. Our interconnection capabilities kind of further that stickiness, these markets where we’re even bringing on new capacity are running up to physical barriers, whether supply of power, access to land, connectivity, government moratoriums are popping up in certain countries. And then the whole concept inflation and its impact to newer incumbents and overall cost structures. All those things point to a world of higher pricing power in this aspect and certainly more so for Digital relative to a new entrance. Brendan Lynch: Great. That’s helpful. And maybe a question for Chris as well. Chris, maybe you can give us just a little bit of insight on the fabric of fabrics platform and kind of simplify that for us if you can? Chris Sharp: No. Absolutely. Appreciate it. Yeah. So it’s a continuation. We’ve been investing in PlatformDIGITAL to make it more robust, where we have over 4,000 customers today. And as Andy alluded to earlier on Bill’s comments earlier that we’re adding 100 new customers every quarter. So, what we’ve talked about with the fabric of fabrics and the partnership that we pulled together with Zayo is that these capabilities are proven to be very successful with our enterprise customers. And I think what we’re talking about here today is about expanding those capabilities and those connectivity capabilities to a broader set of customers. And so I think that’s one of the core things that we’re really starting to drive and it’s resonating well with our customers and that a lot of enterprises are out there looking for an open platform to really achieve their goals and remove complexity out of their deployments. And so that’s what the PlatformDIGITAL is and what fabric of fabrics means as we pulled together a carrier-grade partner with Zayo and there the first partner that we’ve executed this with and you will see other partners coming online to expand that value focused on our customers’ success. Operator: The next question comes from Mike Funk of Bank of America. Please go ahead. Michael Funk: Yeah. Thank you for the questions, and good evening, everyone. First was the basic just math question to check my facts. So, I think, in the first quarter you did core FFO of 167 a share. I think you guided same kind of down $0.10 sequentially due to a number of factors. But the $0.12 non-cash charge wasn’t in that guide, right? So, if you strip that out, you actually were really only down about a penny quarter-over-quarter, right, for the core FFO. And if you think about rolling that forward the second half of the year saying you really had an $0.08 core FFO each, why wouldn’t that core FFO per share a be excluding the $0.12. Why wouldn’t that recur in 3Q and 4Q? What’s going to change in those two quarters stripping out that one-time charge? Bill Stein: So, two data points. One, we are increasing the guidance, net of the $0.12, right? So the $0.12 is a non-cash deferred tax hit. Sensibly, we revaluing a liability that due to the U.K. changing its corporate tax rates by 600 basis points that $35 million or $0.12 flows through one-time and it’s non-cash, does not hit AFFO, which you can see that I think the lowest payout ratio we’ve had in five quarters now. So, by the fact that we’ve increased the guidance notwithstanding that $0.12, it’s essentially would have been a raise. And if you backed out the $0.12 to the midpoint of our new guidance you’re close to, what would be 6% year-over-year growth on the core FFO. The reason it doesn’t all the beat in this quarter to heart of your question like it doesn’t all flow-through some of the beat which is OpEx timing, so timing relative to some of the OpEx spend which got pushed out from 2Q into back half of the year. Michael Funk: And that was related to some of the deferred OpEx in 2020, is that still what you’re talking about? Bill Stein: Correct. Correct. I would call COVID-related… Michael Funk: Okay. Bill Stein: … catch up a little bit. Michael Funk: Got it. Understood. And then let me a little bit of commentary on the leasing environment. I know there was a lot of concern about leasing this quarter for the industry, but came in very strong, given the visibility you have into the back half of the year would have it might be. What are you seeing in terms of demand from hyperscalers and/or demand picking back up from enterprise customers? Bill Stein: I think, Corey, why don’t you pick us up there? Corey Dyer: Yeah. Sure. Thanks a lot. Thanks, Mike, for the question. With regard to enterprise demand and then I’ll let you handle the hyperscale I think was part of this question as well. But in our opening remarks, we mentioned that over $50 million of our business was from the sub-1-megawatt plus interconnection, which is really approaching about 50% of our bookings. That’s really proxy or our -- for our enterprise business. On top of that our best channel quarter ever, we also saw an increase in multi-site, multi-region customers, which are all indicative of kind of the strength of the enterprise demand where we’re going. So, I would tell you that for the second half we see strong sufficient demand across all the regions, as they take care of and addressed the needs for data gravity and hybrid IT architectures, all of which has been driven by enterprise customers across all the regions. We mentioned the strength in each of the regions both AP and EMEA, as well as North America. So we’re seeing that kind of flow-through. And looking at our funnel, we see strength across all those regions multiple industries and verticals, financial services to cloud and others. So, pretty excited about where we are and confident in demand from the enterprise side and I feel like that’s going to continue. I don’t know if, Andy, want to talk to the hyperscale part of it. Andy Power: Yeah. I’ll just add on real quick on the larger hyperscale customers, strong Americas quarter, which is really largely, we did have a top five CSP land with us in Sao Paulo, but the lion’s share was Hillsboro in Toronto. So, some great wins from hyperscalers in that market. Top five hyperscale landed both in Paris and Frankfurt, grew with us in Paris and Frankfurt and then over in APAC as mentioned in prepared remarks at the leading Japanese social media platform landed with us in Tokyo in addition to a top five CSP. I think we’ve now set as the anchor to Tokyo -- our Tokyo campus on the prior call. So, I think, dramatically two things are playing out here. One, the hard work in terms of creating this global platform for these hyperscalers across approaching 50 metropolitan areas on six continents and really trying to be their trusted partner of choice around the globe is certainly benefiting our leasing or signing activity. And I would also say, we’re making some great inroads to whether you call it next here or next-gen hyperscalers. We made -- I think couple of quarters ago, we had a hyperscale win with a Singaporean-based technology company. I mentioned the Japanese social media company. We mentioned Korean company NAVER. So, definitely penetrating a broader cast of customers than just top five CSPs that we have done. Operator: The next question comes from Michael Rollins of Citi. Please go ahead. Michael Rollins: Thanks and good afternoon. Just a couple of questions. First, if you look at the bookings trajectory and just some of the commentary we just heard, as well as just the backlog position. Should 2022 to be a better year for organic revenue growth and core FFO per share growth relative to 2021. And then, secondly, on a separate topic, just curious as you have a range of assets in your portfolio, some very young, some older, what are you seeing in terms of the maintenance capital and the pricing on facilities that are a bit more tenured relative to maybe similar facilities that are a bit newer in vintage? Thanks. Bill Stein: Sure. Michael, why don’t I try to tackle those in reverse order? So in terms of maintenance capital, obviously, the older facility, the more you propose end of life on various components. But that’s no different than any piece of infrastructure or real estate. So, we’re placing the roof, placing a chiller, you kind of get to these 20-year, 30-year end of life and one by one. Now, the good thing is, we’ve built this portfolio over many years and essentially keep adding newer product to the mix at the same time. So, we’ve been able to keep our -- recurring CapEx at a pretty modest hit to our AFFO. We actually dialed it back slightly just this for the year our guidance table. So, I wouldn’t say any material upticks and we do a lot of maintenance throughout the year in terms of fixed repair, preventative and to ensure that there is no looming infrastructure headaches call on the horizon. From a pricing standpoint, obviously, there is a smaller nuance, whether it’s PV efficiencies or power densities, which we certainly are innovating and bring to bear a new technologies in terms of legacy facilities. But net-net, the biggest drivers supply and demand in the market, a data center that becomes available for us in Santa Clara or Singapore or Frankfurt or markets that are compelling demand outpacing supply, customers are creating the availability and not looking for the birth date. So, I think that’s more of a driver of the pricing activity. From your first question, I mean, on call it, 2022, I mean, we’re only called halftime here, so not ready to rollout season two or wherever. But I would say, a couple of things that set us up for accelerated growth overall. One, I just talk a little bit to the cash mark-to-market position and it’s been improving this year relative last year and see horizon where it could continue to prove. Two, this year, we took significant -- relative to our certainly -- actually we took back significant amount of capacity that we’re chopping wood on releasing. So that we’re having downtime from that baking capacity in our numbers this year, you can see that our occupancy as well. And you’re going to see that kind of come online as we refill that and have a greater contribution to revenue in 2022 than it does in 2021. So, I think those elements and the fact that I think we’ve now put up I should count this, but I think it’s close to eight pretty darn good quarter of consecutive leasing, right? You obviously have to adjust to our pre-Interaction days relative to our denominator, but the leasing has been pretty darn consistent for some quarters now. So, I think, all those things paint the picture, as well as a pretty attractive development pipeline, which will obviously create as contribution to 2022 to 2021. Operator: The next question comes from Simon Flannery of Morgan Stanley. Please go ahead. Simon Flannery: Great. Thank you very much. Good afternoon. Great to see the enterprise coming back this quarter. Do you think we’re pretty much back to normal now in terms of your operations? I know there’s been COVID and picking up again in certain regions. Any comments around supply chain inflationary impacts and how that might be affecting you? Bill Stein: Let me try to give up that question, because I think there is a couple of great points in here. Maybe, Corey, you want to pick up on enterprise demand? I was really pleased on that front of -- north of $90 million in EMEA, zero to 1 megawatt close 30% of our bookings, before I could speak to that and then maybe Chris and I can handle inflation impacts on our customers and our supply chain. Simon Flannery: Thanks. Corey Dyer: Yeah. Thanks. I mean I went through it a little bit with some of the kind of I’ll say proxy items for enterprise success and the fact that we’ve got a strong pipeline. And I call it a strong well-qualified pipeline with quality as well. So really feel good about where the enterprise is and the follow-on. All of the acceleration in the hybrid IT and the move to, I’ll call it, work-from-home, I think, it’s just accelerated the enterprise demand and how we’re set up with our channel initiatives and what we’re doing there are just going to help us continue to build on that. So, rather than repeat what I -- I think I answered with Mike earlier, I would just tell you that the enterprise demand is strong and I think we’re in a good place going forward. It’s been accelerated a little bit by the pandemic in the last couple of years. But in a good place going forward. Bill Stein: Yeah. No. Thanks, Corey, and I appreciate the question, Simon. I think from a supply chain and what we’ve seen in the industry, we haven’t seen any material impacts or delays at this point in time. We work extensively with our customers to understand their needs and the requirements for the infrastructure in their deployments and so we align their orders to manufacturing dates. There has been some delays, but most of the time we can signal that right in the beginning of the sales cycle to ensure that they can order them and not miss any kind of delivery dates from that perspective. But again it’s something we constantly watch with the different types of manufacturers out there. And I think, Andy, referenced this earlier, our VMI program with the infrastructure that we leverage and delivering our own services. We’re way ahead of that and I think we’ve really differentiate ourselves with the weight in the market that we can execute I think beyond most of the other companies out there. So, it’s something that we watch closely, but no material impacts to-date. Operator: The next question comes from Erik Rasmussen of Stifel. Please go ahead. Erik Rasmussen: Yeah. Thanks for taking the questions. So, Q2 leasing was somewhat steady in the quarter. I know you called out U.S. and hyperscale came back, and then I think the strength on the less than 1-megawatt category. But were there any limitations with overall capacity in certain markets or is there anything else to sort of call out that could have put a damper on or kept a lid on sort of your leasing in the quarter? Bill Stein: I mean, in any given mark -- quarter, there is always certain markets that I call it tighter on the inventory standpoint. I mean we spoke about that how we went into that Ashburn, luckily, it was a good time for us to run into that in Ashburn because the market has softened. What comes to mind right now, Erik, are a few markets that are certainly a little bit on the tighter side. We have -- I don’t think we’ve done a much activity in Santa Clara for several quarters now, because that market has been so tight and we are waiting for a new capacity to come online. In Atlanta where we’re really solely focused on colo connectivity of 56 Marietta, which is both highly connected data center in Southeast is 100% full. We’re waiting for an annex building essentially to bring on the call it several megawatts of colo capacity. Outside the states, Frankfurt, has been a bit of a Tetris game in terms of fitting the customers in, in certain markets. And then Singapore, that’s a market where I don’t think we’re fully sold out, but it’s -- we’ve raised our rates, given the supply/demand -- tremendous supply/demand imbalance. We do look at -- any turn will have in that market, where we look to reprioritize for enterprise colocation and connectivity. Those are the ones the main we want to come top of mind. But I mean, across 47 metros and developing a new capacity, at least half of them. I’m sure there’s one or two else that will be similar. Erik Rasmussen: Great. And then maybe just staying with the leasing, Europe seemed to -- there was some lower leasing on the greater than 1-megawatt category. Has there been any change in sort of the hyperscale side that would suggest that things may be slowing or that we could be getting a little bit of an air pocket there or, I wouldn’t say, air pocket, but just a slowing or is it more of just sort of timing in that market and just the lumpiness nature of overall hyperscale? Bill Stein: I don’t see anything close to an air pocket in Europe. So, as a reminder, Europe had a pretty phenomenal 4Q and a pretty strong 1Q. So you are coming off two quarters of pretty good leasing and what we’re seeing in the back half of the year. I think that trends going in the north of megawatt territory is going to continue its broad phrase. It’s certainly flat oriented where we’ve talked about Paris and Frankfurt is to extend our markets, but we’re also seeing some great demand outside the flat markets and we now have a European platform that’s across 10, maybe 12 European countries. So we’re servicing the hyperscalers and some larger enterprise requirements in many of them. But I think -- the thing -- what -- I hate, Europe didn’t have a great, what -- north of megawatt quarter because had a really fantastic less than megawatt quarter over $19 million and had numerous markets through major contribution in that less than megawatt interconnection category. So net-net, still really pleased with Europe Operator: The last question comes from Frank Louthan of Raymond James. Please go ahead. Frank Louthan: Great. Thank you very much. On Singapore, what goes up comes down. It’s been a really nice boost this year with kind of their, where they restricted the supply. But at some point, is that -- at some point, it probably resolves itself, what kind of terms are you getting there with the higher prices, signing leases, are customer just taking shorter duration terms given the price hikes. And are we looking at a -- some of this pulling back a little bit in 12 months or 24 months or do you think this is going to be a longer term situation there? Bill Stein: Yeah. One, I would say, the customers are not seeking shorter contract durations, because we price those at higher rates. And you saw the activity, the Singapore rates are clearly shown through our APAC rates, which you can see our up again quarter-over-quarter. I don’t -- Singapore is one part of the world that I have a high degree of confidence. What goes up may not come back down. I mean, one, it’s an island state. It is incredibly government-controlled. Everyone’s operating under long-term ground leases with the government and they take a very thoughtful and measured approach to supply chain overall, who gets land, who gets to bring data center capacity online and they’re really trying to curate it, so they have the right providers and do so in a more environmentally friendly way. That’s the genesis of this, right? So that’s a market I do not see, in addition to the fact it’s an island. So, you quick -- more quickly rather the natural resources in Singapore. Frank Louthan: Great. All right. Thank you very much. Bill Stein: Thanks, Frank. Operator: This concludes the question-and-answer portion of today’s call. I would now like to turn the call back over to CEO, Bill Stein, for his closing remarks. Please go ahead. Bill Stein: Thank you, Andrea. I’d like to wrap up our call today by recapping our highlights for the second quarter. As outlined here on the last page of our presentation. One, we continue to enhance our product mix, with record bookings within our sub-1 megawatt plus interconnection category demonstrating the progress we’ve made in offering the full product spectrum to our customers globally. We are also committed to delivering sustainable growth for all stakeholders and we provided additional transparency with the publication of our third Annual ESG Report. We’ve also raised full year revenue and EBITDA guidance for the second quarter in a row, setting the stage for accelerating growth in cash flow. Last, but not least, we further strengthened our balance sheet, redeeming high coupon preferred equity and raising very attractively priced long-term fixed rate financing to support customer growth around the world. I’d like to wrap up today by saying thank you to the entire Digital Realty family, whose hard work and dedication is directly responsible for this consistent execution. I hope all of you stay healthy and safe, and enjoy the rest of your summer. We hope to see many of you in person again later this year. Thank you. Operator: The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.
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Digital Realty Trust, Inc. (NYSE:DLR): A Leader in the Data Center Industry

  • Significant increase in consensus price target from $160.25 to $220, reflecting growing optimism about Digital Realty's future.
  • Recovery in the REIT sector highlighted by a decrease in Treasury Yields and a strong start to the earnings season, benefiting companies like Digital Realty.
  • Despite overall market caution, Digital Realty shows positive performance trends, with some analysts like Deutsche Bank's Matthew Niknam setting a conservative price target of $144.

Digital Realty Trust, Inc. (NYSE:DLR) is a key player in the data center industry, offering a wide range of solutions for businesses and service providers globally. Its PlatformDIGITAL® helps companies expand their digital operations and tackle data challenges. The company competes with other data center providers like Equinix and CyrusOne, but its global reach and comprehensive services set it apart.

The consensus price target for DLR's stock has seen a significant shift over the past year. Initially, the average price target was $160.25, reflecting a cautious stance from analysts. Recently, this target has risen to $220, indicating increased optimism about Digital Realty's future. This change may be due to the company's strategic moves, strong market position, or favorable industry trends.

The real estate earnings season is currently in progress, with results expected from numerous REITs and housing companies. REITs, including Digital Realty, are showing signs of recovery after a challenging period. This recovery is partly due to a decrease in Treasury Yields, which had previously been at two-decade highs. As highlighted by Seeking Alpha, REITs are regaining popularity after three years of underperformance, leading to attractive valuations.

Despite a modest decline in US equity markets, real estate equities like DLR have performed well for three consecutive weeks. This positive trend is supported by easing interest rates and a strong start to the REIT earnings season. However, Deutsche Bank analyst Matthew Niknam has set a more conservative price target of $144 for DLR, suggesting some caution remains among analysts.

Stifel Raises Digital Realty Trust Price Target to $175, Citing AI Demand and Favorable Market Trends

Stifel analysts raised their price target for Digital Realty Trust (NYSE:DLR) to $175 from $165, while maintaining a Buy rating on the stock. The analysts expressed confidence in the company's ability to meet its 2024 guidance, which includes cash renewals of 5%-7% and same capital NOI growth of 2.5%-3.5%.

The analysts highlighted the favorable macroeconomic environment and strong industry fundamentals, which support increased pricing leverage for Digital Realty. They noted that the company is benefiting significantly from the AI boom and expects the number of deals to accelerate in 2024. Additionally, Digital Realty is anticipated to deliver additional capacity to constrained markets, bolstering its market share and leadership position.

Stifel emphasized that Digital Realty’s operating environment remains robust, with sustained demand and positive leasing trends. The analysts also mentioned that the company's portfolio is well-positioned for upgrades and can pivot to higher density AI deployments, with new builds accommodating liquid cooling on a larger scale.

Digital Realty Trust Earns an Upgrade at BMO Capital

BMO Capital analysts upgraded Digital Realty Trust (NYSE:DLR) stock to Outperform from Market Perform, raising their price target to $170 from $144. The analysts cited several factors for the upgrade, including an improved balance sheet, strong demand, rising prices, and increasing mark-to-market values.

The analysts anticipate that Digital Realty Trust will overcome its recent stagnant FFO growth, projecting accelerating Core FFO growth of 1.5% in 2024, 6% in 2025, and 8% in 2026. The analysts also highlighted the company's strong positioning within the AI-driven thematic, especially among REITs, and see potential for further multiple expansion.

Digital Realty Trust Reports Q4 Beat

Digital Realty Trust, Inc. (NYSE:DLR) reported its Q4 results, with EPS of $1.54 coming in better than the consensus estimate of $0.32.

Analysts at Berenberg Bank view the results and leasing volumes as mixed. While leasing volumes continue to be impressive (the highest bookings in company history), the analysts highlighted that the pricing continues to be challenged with same-store NOI for 2022 guided to be -3%, with pricing on renewals expected to be flat. Ongoing development yields were also down notably in Q4.

Given the current macro environment, the analysts are less bullish on operators where pricing power is challenged, however, they mentioned that they cannot argue with the company’s ability to scale globally. The analysts reiterated their buy rating, while lowering their price target to $157 from $176.