Digital Realty Trust Inc

NYSE:DLR

Earnings Call Analysis

Digital Realty reports record leasing and significant AI-driven growth in Q1 2024

Digital Realty experienced remarkable growth in the first quarter of 2024, driven by a surge in AI-related leasing activities. The company signed $252 million in new leases, surpassing the previous record by over 40%, with net income per share reaching $1.67. AI has significantly boosted demand, leading to record same-capital cash NOI growth of 4.7%. The company also raised over $1 billion in capital, reducing reported leverage to 6.1x. For 2024, Digital Realty expects cash re-leasing spreads to increase by 5%-7%, and same-capital cash NOI to rise by 2.5%-3.5%.

Overview and Key Takeaways

In the first quarter of 2024, Digital Realty continued to build on its successes from 2023, demonstrating robust performance across multiple aspects of its business. The company achieved record leasing results, surpassing its previous record by more than 40%, significantly driven by artificial intelligence (AI) opportunities. This quarter's leasing volume was $252 million, setting a new high. Demand remains strong, underpinned by the broader adoption of AI, cloud computing, and enterprise digital transformation.

Operational and Financial Performance

Digital Realty reported a first-quarter core funds from operations (FFO) of $1.67 per share, reflecting solid organic growth. Total revenue increased by 7% year-over-year, reaching $230 million. This growth was balanced by a slight drag from stabilized asset sales and joint venture contributions. Furthermore, the company experienced a 9% increase in normalized adjusted EBITDA and a 4.7% rise in same-capital cash net operating income (NOI) year-over-year, driven by rental and interconnection revenue growth.

Investment Activities and Balance Sheet Management

During the first quarter, Digital Realty invested $550 million in development, delivering 32 megawatts of new capacity globally. The company also raised over $1 billion in fresh capital through asset sales and joint ventures, contributing to a reduction in leverage from 6.2x at the end of 2023 to 6.1x by March 31, 2024. Notable transactions included the sale of a $65 million plot in Sydney and a $92 million easement to Dominion Energy for building a substation in Dallas. Additionally, the company maintains a strong liquidity position with $1.2 billion in cash and over $3 billion in total liquidity.

Guidance and Future Outlook

Digital Realty remains optimistic about its growth trajectory for the remainder of 2024. The company has maintained its core FFO guidance range between $6.60 and $6.75 per share for the full year. Expectations for same-capital cash NOI have been revised upwards to a range of 2.5% to 3.5%. Continued progress is anticipated in reducing the company's leverage toward the long-term target of 5.5x, supported by positive operating trends and a strong development pipeline.

ESG Initiatives and Recognition

On the environmental, social, and governance (ESG) front, Digital Realty made substantial strides in Q1 2024. The company transitioned to 100% renewable energy supplies for its data centers in Texas, New Jersey, and Sydney. These efforts earned Digital Realty recognition as the EPA's Energy Star Partner of the Year for the fourth consecutive year. The company also expanded the use of HVO diesel, a cleaner fuel alternative, across 20 global sites, furthering its commitment to sustainability.

Market Trends and Strategic Expansion

The momentum in AI-driven demand was a significant highlight, with about 50% of the quarter's new leases being AI-related. This includes the hosting of a powerful AI supercomputer in Copenhagen and collaboration with Oracle to accelerate AI adoption among enterprises. Digital Realty continues to expand its ServiceFabric offering, now including over 90 members with more than 150 services, enabling secure, direct connections to over 225 global cloud on-ramps. This strategic expansion positions Digital Realty well in catering to evolving customer needs across its extensive global market presence.

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon, and welcome to the Digital Realty First Quarter 2024 Earnings Call. Please note that this event is being recorded. [Operator Instructions]

I would now like to turn the call over to Jordan Sadler, Digital Realty's Senior Vice President of Public and Private Investor Relations. Jordan, please go ahead.

[Jordan Sadler, executive]

Thank you, operator, and welcome, everyone, to Digital Realty's First 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 first quarter. First, our customer value proposition continues to resonate as reflected by an AI-driven acceleration in leasing activity that drove our overall leasing volume to a new record. First quarter leasing was more than 40% above our prior record, principally driven by an improvement in pricing.

Second, our fundamental strength picked up where 2023 left off with record cash re-leasing spreads and strong, stabilized same-capital cash NOI growth of 4.7%, reflecting continued strength in data center fundamentals combined with the benefit of the improvements that we have made to our portfolio over the past year.

And third, we've made meaningful progress on our 2024 funding plan [ already ], with just over $1 billion of fresh capital raised from asset sales and joint ventures to date, putting us above the low end of our guidance range for 2024, just 1/3 of the way through the year.

As a result of our efforts, reported leverage fell from 6.2x at year-end to 6.1x at March 31 and remains at 5.8x on a pro forma basis, reflecting completed and announced transactions.

With that, I'd like to turn the call over to our President and CEO, Andy Power.

[Andrew Power, executive]

Thanks, Jordan, and thanks to everyone for joining our call. Following the successful course we set in 2023, Digital Realty experienced accelerating momentum in the first quarter of 2024, headlined by a collection of multifaceted AI opportunities that drove a number of new leasing records as demand for our capacity in core markets remains elevated [ while ] visibility surrounding competitive [ new supply ] remains [ cloudy ].

At Digital, we continue to focus on our strategic priorities and on delivering on behalf of our expanding list of 5,000-plus customers across our 50-plus markets in 25-plus countries on 6 continents.

During the first quarter, we posted record leasing results surpassing our prior record by more than 40% and exceeding our leasing results for all of 2019 in just this 1 quarter. We also delivered strong operating results as evidenced by healthy stabilized same-capital growth and the highest re-leasing spreads in the company history.

We continue to innovate and integrate a further expansion of ServiceFabric through the launch of our Service Directory marketplace, which has seen the addition of over 90 members offering more than 150 services, including secure and direct connections to over [ 225 global cloud on ramps ], creating a vibrant community for [indiscernible], interconnection and collaboration.

And just last week, we launched Private AI Exchange powered by ServiceFabric, which enables enterprise data to be at the center of an AI architecture, directly adjacent and interconnected with AI capabilities. This architecture are leading the data [indiscernible] barriers that emerge as data is generated and exchange with multiple applications across end-to-end AI-enabled digital workflows.

We also continued down the path of bolstering our balance sheet and diversifying our capital sources with the expansion of one of our stabilized hyperscale joint ventures and the addition of a new hyperscale development JV, together with our first transaction with our perpetual capital partner, Digital Core REIT and well over the year. These transactions help to fund development pipeline capacity that our customers are seeking while reducing our overall leverage.

Operating and financial results in the first quarter were encouraging. We posted sequential growth in our core data center revenues, while growing adjusted EBITDA and core FFO per share. Development returns also continued to improve and we further enhanced the product mix of our portfolio, while maintaining strong liquidity and lower leverage.

Bookings and renewal results were even better with a number of metrics reaching new records, reflecting a strong demand environment and [ limited new ] capacity. Total bookings were $252 million, well ahead of our prior quarterly record of $176 million, reflecting the impact from the acceleration of AI and the improved pricing environment.

Importantly, when comparing this quarter's leasing to the prior record set in 3Q 2022, we leased an incremental 10% of IT load capacity while [ rates ] in a greater than 1 megawatt segment for approximately 60% higher than those achieved 18 months prior.

Perhaps have been overshadowed by these record-setting results was another strong quarter in our 0 to 1 megawatt plus interconnection segment, which delivered a third straight quarter of over $50 million. Demand for connectivity-oriented capacity remains healthy and pricing remains [indiscernible].

Our mark-to-market renewal spreads were up by 11.8%, aided by a record 18.5% increase in our greater than 1 megawatt category. Churn remained low and well controlled at 1.7% [ for the ] quarter.

[ In ] -- [ cash NOI growth ] also remained healthy, growing by 4.7% year-over-year in the quarter. And marking our fifth consecutive quarter of positive same capital growth. A year ago, data center demand was strong, driven by the growth of cloud and digital transformation while supply was tightening [ and ] power transmission constraints, supply chain delays and other factors. Since then, AI has become a significant driver of demand as hyperscalers race to develop, deploy and implement the technology while enterprise begin to explore the potential of this wave of technological evolution.

McKinsey recently forecasted data center demand growth at a double-digit CAGR through 2030. This growing secular demand is broad and deep in both enterprises and service providers need a significant new data center capacity to accommodate their expanding needs, Fueled by trends such as enterprise AI adoption, AI as a service, IoT and the relentless growth in data creation.

Reflecting these trends, I want to highlight 2 highly strategic AI [ signs ] that came to fruition during the quarter. First, we were selected to host one of the most powerful AI supercomputers in one of our data centers in Copenhagen in a collaboration spearheaded on the Novo Nordisk Foundation and the Export and Investment Fund of Denmark, researchers from Denmark's public and private sectors, access to a cutting-edge NVIDIA-powered AI supercomputer in addition to NVIDIA software platforms, training expertise.

Second, Digital Realty further strengthened its collaboration with Oracle to accelerate the growth and adoption of AI among enterprises, aiming to develop hybrid integrated solutions that address data gravity challenges, expedite time to market for enterprise deploying next-generation AI services and unlock data and AI-based business outcomes. Oracle will deploy critical GPU-based infrastructure with Digital Realty that leverages PlatformDIGITAL's open, purpose-built global data center solution and caters to enterprise and AI customers critical NVIDIA and AMD deployments among others.

Our [ 01 ] interconnection customers also continue to recognize our [indiscernible] strength and value proposition whether that related to power dense applications, a network of globally-connected data centers or other critical infrastructure requirements.

During the first quarter, we added over 128 new logos. Our wins included a leading Fortune 500 AI component maker, is expanding their presence on PlatformDIGITAL to a new EMEA market to support their streaming service capabilities.

A global cloud computing and content distribution provider are leveraging the leading connectivity proposition of PlatformDIGITAL in [ Mubasa ] to support their global edge pop expansion project.

A global 120 manufacturing company is building an AI HPC environment in Frankfurt to support its autonomous vehicle project.

A leading [ French ] cloud service providers deploying on PlatformDIGITAL to build out its edge cloud offering across the globe to support their enterprise customers' hybrid infrastructure by delivering low latency performance while retaining [ mobile ] data residency.

Fortune 500 technology distributor in [indiscernible], IT service provider chose PlatformDIGITAL and Phoenix to support data exchange and interconnect with key partners.

And a Fortune 500 health benefits provider has expanded into 2 additional North America metros to take advantage of cloud and network [indiscernible] available on PlatformDIGITAL.

Moving over to a quick update on our largest market, Northern Virginia. During the first quarter, we leased approximately 80 megawatts of capacity in a supply-constrained quarter in Eastern [indiscernible]. Demand for our capacity remains strong. And while hyperscale leasing is typically lumpy, we continue to see healthy traction on the remaining capacity, and we are focused on helping our customers and partners source the incremental data center infrastructure that they require.

During the first quarter, we worked with Dominion Energy to help address the transmission [ model ] at Ashburn by providing them with a easement to land a southern line at the Mars substation that they plan to construct on a quarter [ parcel ], [ along ] 450-acre [ digital deltas ] [indiscernible] .

We remain cautiously optimistic about getting access to additional power with Dominion's current forecast for completion of the Southern Line transmission project by late 2025.

Today, we have roughly 80 megawatts of remaining capacity available for lease within our first building on our Digital Dallas campus in [indiscernible] building center. And we have almost 200 megawatts available for development for our [indiscernible] campus in Manassas, which was contributed to our JV with last [indiscernible] in the first quarter.

As a reminder, [indiscernible] is currently outside of the constrained area and [indiscernible] is accessible there.

Before turning it over to Matt, I'd like to touch on our ESG progress during the first quarter. We continue to make meaningful progress and be recognized for our strong ESG performance in 2024. We went live with a switch to 100% renewable energy supplies for our Texas, New Jersey and Sydney data center portfolios, benefiting 30 sites and addressing more than 10% of our mobile electricity footprint.

We are recognized by the EPA as Energy Star Partner of the Year [ with ] sustained excellence for the fourth year, and we added a new [ grid ] building certification at our MRS 4 development and Marseille, France. We also announced a partnership with a leading global energy solution provider to use our UPS systems to support Ireland's transition to renewable energy.

And we've announced a significant expansion of our use of HVO diesel, a cleaner fuel made from waste cooking oils and [indiscernible] to power our backup generators. This will help our use of HVO to 20 global sites and 15% of our global portfolio by IT capacity.

We remain committed to minimizing Digital Realty's impact on the environment while delivering sustainable growth for all of our stakeholders.

With that, I'm pleased to turn the call over to our CFO, Matt Mercier.

[Matthew Mercier, executive]

Thank you, Andy. Let me jump right into our first quarter results. We signed a record $252 million of new leases in the first quarter, led by $175 million of greater than 1 megawatt leasing in the Americas and another $53 million of 0 to 1 megawatt plus interconnection leasing, with interconnection bookings remaining firm at $13 million.

Turning to our backlog. Given the record leasing, the backlog of signed but not yet commenced leases swelled to a new record of $541 million at quarter end, with new leasing outstripping a record $156 million of commencements during the quarter. Looking ahead, more than half of the record backlog is slated to commence during the remainder of 2024, indicating that commencements are likely to remain elevated.

During the first quarter, we signed a record $248 million of renewal leases at a record increase of 11.8% on a cash basis. Re-leasing spreads were once again positive across products and regions, with particular strength in the Americas. Re-leasing spreads have been increasing steadily for well over a year now, and while we expect that they will remain very healthy, they're likely to moderate in this quarter's record given the significant weighting of lease expirations in the 0 to 1-megawatt segment for the remainder of the year.

In addition, we think it is important to consider a normalized view of the headline renewal spreads as 2 separate items skew our reported spreads higher in the first quarter. First, there was a notable outlier in the other category that should not be considered recurring or repeatable and removing this transaction would reduce our overall reported spreads by [ 250 ] basis points to 9.3% for the quarter.

Second, there was a significant early renewal transaction in our greater than 1 megawatt segment that was part of a large package deal as we work to support this customer's broader data center capacity needs in one of our tightest markets. While this transaction enabled us to opportunistically pull forward some of our below-market expirations from the outer years, our forward year lease expiration schedule remains dominated by our 0 to 1 megawatt segment, which tends to experience spreads in the low to mid-single digits, akin to what we saw in the first quarter.

Excluding both the outlier transaction and the packaged deal renewal, re-leasing spreads in the quarter would have been up 3.4% on a cash basis. We feel that this is a more predictable aspect of our portfolio, that we will continue to see opportunities and may periodically be able to capture the growing mark-to-market opportunity in our greater than 1 megawatt portfolio.

In terms of earnings growth, we reported first quarter core FFO of $1.67 per share, reflecting strong organic operating results, partly balanced by dilution associated with the stabilized asset sales and JV contributions completed early in the year and the ongoing deleveraging of our balance sheet.

And normalizing for the sale or JV of $3 billion of stabilized assets completed since the beginning of last year, total revenue growth was 7% year-over-year in the first quarter due to the benefit of improved leasing spreads, along with favorable new leasing. Revenue growth in the quarter was tempered by the decline in utility expense reimbursements as electricity rates fell sharply in EMEA year-over-year.

Normalized adjusted EBITDA increased 9% year-over-year, reflecting the strong revenue growth and modest increase in operating expenses. As Andy noted earlier, stabilized same-capital operating performance saw continued strength in the first quarter, with year-over-year cash NOI up 4.7% driven by 4% growth in rental plus interconnection revenues and further supported by expense control.

Moving on to our investment activity. We spent $550 million on consolidated development in the first quarter, plus another $23 million for our share of managed unconsolidated JV spending while delivering 32 megawatts of new capacity across the globe for our customers.

It's worth mentioning, the approximate $300 million of sequential decline in our development spending this quarter which highlights the effects of the contributions of our 3 development JVs. However, seasonal and other timing-related factors also contributed to less CapEx spending in the first quarter.

Turning to the balance sheet. We continue to strengthen our balance sheet in the first quarter with the closing of previously disclosed transactions, including the Cyxtera transaction, the first phase of the Blackstone hyperscale development JV and the sale of an additional [ 50% ] share of the 2 stabilized hyperscale assets in our Chicago JV to GI Partners.

During the quarter, we also completed a hyperscale development JV with Mitsubishi for 2 assets in the Dallas Metro. In terms of new news, we also sold a piece of land in Sydney, Australia for $65 million, and we provided an easement to Dominion Energy to build the Mars substation on our Digital Dallas campus for $92 million, which all contributed to a reduction in our reported leverage to 6.1x at the end of the first quarter versus 6.2x at the end of 2023.

Then in April, we continue to recycle capital by selling 75% of [ CH2 ], the third and final stabilized hyperscale facility on our Elk Grove campus at a 6.5 cap rate to GI Partners, raising nearly $400 million. And [ result at ] Digital Core REIT, an additional 24.9% interest in our Frankfurt site, for Digital Core REIT previously owned 25%, raising another $129 million.

In addition, we used some of our cash on hand to pay off the $600 million of maturing euro notes. After adjusting for these transactions, along with the anticipated closing of Phase 2 of the Blackstone transaction later this year, pro forma leverage is 5.8x.

We continue to keep significant cash on the balance sheet with approximately $1.2 billion on hand and over $3 billion of total liquidity at March 31 to support ongoing investment opportunities.

Moving on to our debt profile. Our weighted average debt maturity is over 4 years, and our weighted average interest rate is 2.9%. Approximately 85% 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 97% of our debt is unsecured, providing ample flexibility for capital recycling.

Finally, after paying off the [ earnouts ] in April, we have [ $316 ] million of debt maturing through year-end 2024. Beyond that, our maturities remained well [ levered ] through 2032.

I'll finish with guidance. We are maintaining our core FFO guidance range for the full year 2024 of between $6.60 and $6.75 per share, reflecting the continued improvement we are seeing in our core business. Positive underlying operating trends are partly balanced by potential acceleration in development spending and additional capital recycling, as we move our leverage down towards the long-term target and position the company for the accelerating opportunity in front of us.

We are maintaining our total revenue and adjusted EBITDA guidance ranges for 2024, so we are notching up our cash and GAAP re-leasing spreads along with our same capital cash NOI growth expectations, reflecting better-than-expected execution on the leasing front in the first quarter, and the strength in fundamental conditions that we continue to see across our portfolio.

Specifically, cash re-leasing spreads are now expected to increase 5% to 7% in 2024, up 100 basis points at the midpoint from the prior 4% to 6% range. And same-capital cash NOI is now expected to increase by 2.5% to 3.5%, up 50 basis points from the 2% to 3% range we provided in February.

Highlighted in our investor presentations, excluding the nearly 200 basis points of power margin headwinds that we have previously discussed, our same-capital cash NOI growth for 2024 would be 4.5% up to 5.5%.

While these improvements and stronger core FFO per share realized in the first quarter bode well for the balance of the year, there are a few mitigating factors to consider as you're refining your models. First, we will see a modest drag on the $500-plus million of capital recycling completed in April. Second, we are only 1/3 of the way into the year, and there is still significant potential for both development spend and asset sales guidance to reach the high end of their guidance ranges.

In addition, it is worth pointing out that the interest rate outlook and [indiscernible] have changed considerably since we provided guidance and remains another source of uncertainty for the balance of this year.

Just one final reminder and update. Over the course of 2024 and 2025, we expect that our $6 billion development pipeline will become increasingly accretive as higher-yielding projects are complete and stabilized. The expected yield on our stabilized pipeline ticked up another 20 basis points sequentially, reflecting the addition of higher-yielding projects and the completion or contribution to joint ventures of lower-yielding projects.

To help provide increased transparency around this important and evolving aspect of our company, we have enhanced our development life cycle schedule on Page 25 of our supplemental to: one, reflect our proportionate share of total data center development, including our unconsolidated joint ventures; and two, to provide increased disclosure around our developable capacity in terms of [ IQ logo ]. We hope you find this helpful.

This concludes our prepared remarks. And now we will be pleased to take your questions. Operator, could you please begin the Q&A session?

[Operator]

[Operator Instructions] Today's first question comes from Jon Petersen with Jefferies.

[Jonathan Petersen, analyst]

Great. I guess I could start with -- actually, we start on the leasing side. So the -- I was curious how much of the leasing that was done this quarter was inside of some of the joint ventures, like maybe the Blackstone joint venture, that you did.

And in terms of the yield on development in Northern Virginia -- or North America, I noticed that was up 200 basis points to 12.3% as your expected yield from last quarter. I guess, is that kind of a good number to think about of what new developments you're signing today are as kind of in the 12-plus percent range.

Sorry, can you guys hear me now?

[Operator]

[Operator Instructions] We can hear you now. Yes, sir. Please proceed with your answer.

[Andrew Power, executive]

Sorry about that. So John, thanks for the question. So I'd say the lion's share of high, high percentage was not done into any of the JVs. I don't have the exact stat given we have now numerous strategic capital partners across our hyperscale platform, be it stabilized JVs. But I'm very confident that none of the leasing we reported in this quarter went into the deal you identified with Blackstone. We are seeing great traction on those projects. But this quarter, [ no ], that lease went inside.

On your second question in terms of improvement in ROIs, in particular in North America, I would say we are we've definitely moved the needle quite dramatically on that category from some of our build-to-suit projects that [ call ] closer to 7% that we joint ventured to now north of 12% ROIs. And we're still working through projects that are obviously weighing that down a little bit, and we have projects that are entering that schedule on the higher side as well given the rapid improvement in the rate environment.

[Operator]

And our next question today comes from Jon Atkin with RBC Capital Markets.

[Jonathan Atkin, analyst]

So you mentioned rate environment and maybe continuing on that seem a little bit in terms of pricing. As we think about next year's core FFO per share growth rate, you gave a little bit of commentary on that in the last call. And any updated thoughts in terms of what we should be considering around puts and takes as that number potentially goes higher, whether it's execution of leases or pricing or renewals or whatnot?

[Andrew Power, executive]

Thanks, Jon. Maybe I'll speak to market rates and where we are able to execute on new leases signed and also renewals first and then hand it over to Matt in terms of FFO trajectory into next year.

As you saw from our results, we're obviously benefiting from overall supply/demand dynamic with robust demand trends be it enterprise digital transformation, cloud computing and now AI on top of that, that's playing out in our 01-megawatt category as well as our greater than megawatt category. And that's all having a backdrop of supply constraints from numerous sources. And we were able to continue to push rate both on the existing contracts that were coming up for renewal as well as on new contracts to higher and higher levels. That is, obviously, you see in the leasing results and believe that trend is going to remain intact for some time.

Matt, why don't you speak to the FFO trajectory, please?

[Matthew Mercier, executive]

Sure. Thanks, Jon. So what I would say is I think we're -- based on our first quarter results, we -- our optimism is improved -- has improved in terms of our -- what we expect to see and what we talked about last quarter in terms of improving growth as we look to 2025.

And a big part of that, I would say, is driven by the successful leasing execution that we saw this quarter, $250 million and the shorter [ signed commence ] lag, which is at 7 months, it really sets us up for accelerating revenue and therefore, bottom line growth as we exit this year and into next year.

But from boiling all that down, I would say that the growth algorithm is generally similar to what I discussed last quarter, which is we'd expect to see, call it, plus 4% related to our stabilized same-store portfolio. On top of that, you'd add another, call it, 2-plus percent as we deliver developments into our operating portfolio at yields that are continuing to improve. There'll be some offset, call it, in the 1% area, given higher rates and the debt refinancing that we have over the next couple of years. And I think that kind of sets us up for mid-single-digit and greater growth going forward.

[Operator]

And our next question today comes from Eric Luebchow with Wells Fargo.

[Eric Luebchow, analyst]

I wanted to dive into Northern Virginia a little bit. Can you maybe just provide an update on the timing of the Dominion transmission upgrades and when you think you can get even more capacity into that market? And then on rental rates in Northern Virginia, I think that probably had a big influence on the 170-plus you reported in North America. Could you just talk about where you're seeing rental rates in that very supply-constrained market and what that kind of -- how that influences your yields, your underwriting and your development table?

[Andrew Power, executive]

Sure. Thanks, Eric. So Northern Virginia, obviously, has been a highly dynamic market for some time here. We were very pleased to come together and support our partner at Dominion with a very strategic easement to be the landing of the Mars substation, which we are -- it is our understanding, they are on track to be delivering power and bring power back online by the beginning of 2026 from that southern line. So there's not been a divergence in terms of timing what that was previously expressed to us.

We definitely benefited from the increase in rates in that market. Our largest signing was in that market as well as a few other decent-sized signings, although we also had some very great signings in the London market, and north of a megawatt signings also in Copenhagen. So they were not the only contributors in the plus the megawatt category.

The rates, I would say, the market rates in general are call it, continue to improve in that market and as the precious capacity becomes more and more finite, as you saw on that slide, we now have -- are turning our attention to really 80 megawatts remaining at Digital Dallas as well as the Manassas campus, which is not impacted by the power delays. And I'd say rates in both Manassas and Loudoun County are converging right at this moment, call it in the 165, to almost 180 type area on a market basis. That'd be the cash rate, not a GAAP rate that we report.

[Operator]

And our next question today comes from David Barden with Bank of America.

[David Barden, analyst]

I guess if I could just explore, Andy, the commentary around how AI is contributing already to your business. A lot of the retail data center-centric companies have kind of said that's not really a thing for them yet. So could you kind of elaborate a little bit on within that greater than 1 megawatt category, how much of that is the hyperscale? Is it really hyperscale? Or is it these maybe more bespoke Copenhagen Nordisk Foundation engines that are coming online? And what do these builds look like, in what way are they different than maybe what you've been doing historically? And how is that informing how your development is evolving?

[Andrew Power, executive]

Sure. Thanks, David. So let me just give you the [ tops of the ways ] then I'm going to turn it to Chris on how we're tapping our infrastructure capabilities to really excel in this category.

Obviously, the data points are smaller in the more enterprise-oriented wins, but they are there. We, I would say, call it, less than 0.5 megawatt supported through a partner, a global manufacturing company, on its AI journey in Europe. You noted the slightly larger than that, but still not -- certainly not hyperscale. The great win we had with Novo Nordisk supporting them in their NVIDIA-backed chips with a real landmark win with a supercomputer in their market.

And then for some time, we've seen the emergence of the hyperscalers with larger capacity block needs. And the largest of our wins in the quarter, I would characterize as an AI wind as well. And all in all, it's probably close to 50% of this quarter's signs, which is up relative to prior quarters. And I think there's a lot about what our platform offers that really allows us to capture this demand, maybe even earlier in the an evolution of AI than some others, but Chris can speak to that as well.

[Chris Sharp, executive]

Yes. No, I appreciate it, David. This is Chris Sharp. And so a couple of [ comments ]. I think you're thinking about it correctly in that there's 2 lenses, right? There's kind of that hyperscale lens that has AI built within it. And then there's this other pocket that we kind of look at that's definitely emerging with private AI. And so these are these larger deployments that we're seeing come out from multiple types of enterprises.

And I think it's important to understand from a design perspective, it kind of starts with a little bit broader in how we master plan our campuses. And so I think the work that we've been doing around building out substations and doing a long-term plan within the market has allowed us to then bring a very large capacity block design to market, which is very modular. And I think in that modularity, it's something that we continue to ideate with our customers to be able to support the varying power densities.

And I think we talked last call about HD colo and being able to do what we're very proud about, [ with ] 70 kilowatts, but then you'll see us start to evolve over the next quarter here, the ability to even support 150 kilowatts. And so being able to support these densities, which is representative of the AI workload is absolutely paramount to our modular designs and be able to do that very efficiently.

And then I think the last piece is the heritage. The heritage of the team on a global basis, being able to really meet and ideate with these customer [ bases ] is what's really building a distinct differentiator for us to not only capture that hyperscale AI, which we see growing and burgeoning, which you see in the prepared remarks with Oracle and some of those customers.

But then I think directly to your point, David, these smaller, if you will, from a hyperscale perspective, private AI around Novo Nordisk Foundation and just we really are at the cusp of a lot of this AI demand coming into the PlatformDIGITAL globally.

[Operator]

And our next question today comes from Irvin Liu with Evercore ISI.

[Jyhhaw Liu, analyst]

Maybe to piggyback on the prior question related to retail and enterprise. Do you see potential for AI tailwinds to perhaps drive meaningful acceleration to your 0 to 1 megawatt segment, similar to what you saw in the greater than 1 megawatt segment this quarter. Just as AI workloads begin to evolve towards private AI and inferencing?

[Andrew Power, executive]

Sure, Irvin. So I mean, the here and now I think AI is having a numerous positive implications for the sector. And I'll have Chris speak into what's next because I don't think we're really at what's next, be it inference, private data sets, enterprise consumption. But the here and now you have a backdrop of big existing customers with desires to have immediate [ see ] around the capacity.

There's still -- we're winning that in our core markets where we see robust and diverse demand. We are not falling. We're chasing this demand into [ unproved ] locations. We're intersecting it, where we're supporting availability zones or on ramps, where there's network density and not in unproven markets.

You're also seeing new players pop up that obviously are not front of queue for those larger capacity blocks who are going to try to get their hands on what we have and are often able to fit in some of the more challenging places in our portfolio to sell, but they're going to take it because they have [ urgency ] around their business models [ in bringing ] their AI models on. That's the right now, the last quarter, the next quarter, but there's more to come here in this AI story. And I'll let Chris expand upon it in terms of the next chapter.

[Chris Sharp, executive]

Yes. Thanks, Irvin. Absolutely. And I think one of the things that we really have thought about for some time now is the data is at the core of a lot of these AI kind of capabilities coming to market. So being to able place that algorithm right next to the data in that market, I think it's everything that we've been looking at and doing that algorithm in proximity to the data is absolutely paramount for a lot of these kind of 0 to 1 megawatt offerings.

And so what we've been thinking about with HD colo and why I talk about on a rack by rack basis, is allowing our customers to leverage a lot of their existing kind of inventory and architecture to bring AI in proximity to that capability. And I think that's where, even recently, we talked about private AI exchange, that's really focused on removing that technical barrier. So customers can get the right state-of-the-art infrastructure, be it NVIDIA, be it AMD and being able to support those power densities in an existing environment. So we do see the future of that coming to market [ in ] that fashion.

I will tell you that -- you brought up inference, inference is being done within training today just because of time to market, but we do see inference picking up and being a longer-term demand cycle over the years, which I think PlatformDIGITAL is well positioned to continue to support.

[Operator]

Our next question today comes from Richard Choe with JPMorgan.

[Richard Choe, analyst]

You noted a pull forward of leases in Northern Virginia. Do you have other -- are you having other conversations? And should we expect to see more of those?

[Andrew Power, executive]

Thanks, Richard. Maybe I'll hand it to Colin here in a second to talk about the broader backdrop for both the enterprise and also the hyperscale AI side. But I wouldn't call our Northern Virginia activity as a pull forward. As you could see, [ they're signed ] to commence time materially step down, there is urgency around the capacity blocks. We still have significant runway of precious capacity in the Northern Virginia market between now and 2026 that our numerous customers have desires for and we're in various stages of negotiation.

And it's not just in Northern Virginia story. We have the similar types of opportunities in other parts of the North America portfolio, be it Santa Clara, Dallas, New Jersey. And we'll also have the equivalent in the major flat markets in Europe, and in parts of Asia Pacific. So -- and I think this trend is going to continue for some time. Now again, you can't predict some of these large capacity blocks executing on consecutive quarters necessarily but I believe it's going to continue. But Colin, why don't you speak a little bit about the pipeline [indiscernible]?

[Colin McLean, executive]

Thanks, Andy. Appreciate the question. Yes, I mean, overall, I would say our pipeline kind of reflects some of the same characteristics or bookings this quarter. So pretty AI heavy, as Andy highlighted, up 50% of our bookings this quarter were AI. I would say our pipeline is representative of that. But honestly, it's a pretty diverse characterization overall between enterprise, namely hybrid, IT, cloud compute and then AI. So I think it's a pretty robust platform across the globe, and you saw that in some of our bookings, in particular, London really jumped up this quarter.

If you look at the sub-1-megawatt, and really what's going on in the digital transformation story, the explosion of data and really the IT spend, you're seeing a pretty pervasive enterprise activation going on where that is really taking place really across the globe in a big way. That's, in our view, enabled by channel, which this quarter, we had about 22% of our business go through channel, which was, I think, substantive. And those channel partners are really helping us tap into new logos, which you might have seen was 128 this quarter, which I think was fourth highest on record. So I think that's substantial.

So overall, I'm pretty pleased with the balance we're seeing across the portfolio and the pipeline and hope to see that continue in the future.

[Operator]

And our next question comes from Michael Rollins with Citi.

[Michael Rollins, analyst]

Just curious if you take a step back, where does the overall mark-to-market it for the portfolio and the anticipated duration over which you could achieve that if pricing were to stay at current levels?

[Andrew Power, executive]

I think you asked the overall mark-to-market on the portfolio, Mike?

[Michael Rollins, analyst]

Yes.

[Andrew Power, executive]

So as I think I think you can get the -- obviously, you look at the in-place rates even pro forma for our recent positive cash mark-to-market on our schedule. I think that question provide more focus is on the greater than megawatt category, which we've seen the greatest resurgence or uptick that it does tick down, call it lower for the next few years, call it down to the 130s and then IT even hits 100 upon exploration as the low watermark in a few years' time.

And I just commented on the Northern Virginia rates, if they call it, 155 to 180. Not all markets are at Northern Virginia. There are some markets that are ahead of Northern Virginia. But it does feel like big deals are gravitating towards that mid-100s type area pretty quickly and universally and it does not seem like that trend is taking any cessation or pause.

[Operator]

And our next question today comes from Frank Louthan with Raymond James.

[Frank Louthan, analyst]

Great. And kind of to that point, when you're looking at new investment and expansion, how much are you focused on retail colo expansion versus wholesale? And what's kind of pushing you in one direction or the other?

[Gregory Wright, executive]

Frank, it's Greg right here. Look, I think Consistent with past practice, we continue to play across the product spectrum, and it's going to vary by market, right? I mean, as we've mentioned, we're using our third-party capital model to continue to support our hyperscale customers and grow that element of the business. As you know, demand for that business is projected to increase 2.7x between now and 2030.

And then when you look over at the colocation in the enterprise segment of the product spectrum, that's still supposed to grow. It's still a very large market. People forget about how large that market is, and the solid growth in that market, too, is still like 2.3x. So I mean, we're not sitting here today saying, hey, it's a zero-sum game. We're only going to do enterprise/colo versus hyperscale. It's going to vary by market and what our customer needs are. But we're actually pretty bullish and optimistic on both right now in terms of underlying fundamentals and potential for rent growth.

[Operator]

And our next question comes from Simon Flannery of Morgan Stanley.

[Simon Flannery, analyst]

Great. Great to see the leasing in Loudoun County. It looks like the Americas was about 80% of your leasing. Could you just talk a little bit about Europe and Asia Pac. It seems like AI is sort of starting off in the U.S. You talked about Copenhagen as well. But just help us think about broadening that beyond the kind of U.S. markets. And then, Matt, on the leverage. Could you just update us on getting -- once you get to the 5.8, what's the plan from there?

[Andrew Power, executive]

Thanks, Simon. So I'll do the quick non-U.S. world tour. You're correct, Americas had put up some record results in contribution, and that was not just in the greater than megawatt category. It was also a major contributor in our less than megawatt category, which is great to see.

Outside the U.S., starting in EMEA on the 0 to 1 megawatt category, Frankfurt, Amsterdam and London shined. And on the greater than 1 megawatt category, which Colin, I think touched on, London turned out to be a big contributor this quarter, which has not been for a while, which is also great to see. We saw a fair bit of importing business into Europe from outside of Europe, on both sides and firm pricing.

In APAC, while this particular quarter, we did not have a significant contribution from the greater than megawatt category. We did have strong results both in pricing and volume on the 0 to 1 megawatt category with Singapore, Hong Kong and Seoul leading the way. And I would just say that the greater than megawatt category is just the fact that there's just fewer markets in APAC that we're landing big deals into so it's not as consistent of every single quarter being a major contributor. But all in all, I agree with your sentiment that AI is certainly landed on the U.S. shores sooner than the rest of the globe, and I think it has a great propensity to likely globalize as did cloud.

[Matthew Mercier, executive]

Yes. Makes sense. So on the leverage front, I mean, just to take a little step back. I mean, hopefully, as you've seen, we've made some considerable progress. You go back a year ago, we were at a little over 7x. We're now at a reported 6.1x, so a full turn of leverage that we've taken out in the last year, thanks to all the work and execution that the broader team has done.

We continue that. As Greg [ is seeing ] even subsequent to the quarter, we brought in another $500 million of proceeds from some additional JV activities as well as transaction within our Digital Core REIT showing the diversity of capital sources we have. We're going to continue to see as a result of the strong operating fundamentals, continue to increase our overall EBITDA and we're now sitting at approximately $3 billion of liquidity.

So we're well on our way, and we feel confident about being able to achieve our goal of getting down to 5.5x leverage this year. And I think we've done a lion's share of the work. So we'll continue to execute and feel pretty good about it.

[Operator]

And our next question today comes from Aryeh Klein with BMO Capital Markets.

[Aryeh Klein, analyst]

I guess one of your larger customers is at risk of a potential ban in the U.S. Can you maybe talk a little bit about how you perceive the risks around that? And maybe the potential mark-to-market opportunity if it came to that.

[Andrew Power, executive]

Thanks, Aryeh. So on all scenarios, we don't want to speak to confidential customer information whatsoever. Obviously, anyone who's picked up a newspaper can refer to the scenario you're talking about. 2 comments: first one, which is just from the cheap seats, I would -- my personal opinion is not to jump up to any draconian conclusions on outcomes just yet. There's a lot of innings left in that game and a lot of outcomes that could happen. So I won't jump to a doomsday scenario for Digital. [ I don't know ] -- depending on what plays out in ensuing months.

And even under that scenario, I would group them among all of our hyperscale customers that have maximized the pricing curve when markets were less softer and have contracts that are, like all our hyperscale customers, some of the best contracts on the books in terms of markup opportunities, certainly, on the south of 100 -- rather than the north of 100 [ side ], by and large. So if the doomsday draconian scenario was to play out, which I'm discounting, we would have some churn to refill, but probably couldn't come at a better time with a better mark-to-market opportunity for the company.

[Operator]

And our next question comes from Matt Niknam with Deutsche Bank.

[Matthew Niknam, analyst]

Just bigger picture question. With pricing seeing the type of growth they're seeing, supply chain constraints that I think largely plagued the industry a couple of years back are now largely resolved. Can you help us frame what you're seeing in terms of new hyperscale builds that are in-sourced relative to outsourced to partners like yourself?

And I guess, more importantly, how Digital can enhance the utility it offers its larger customers in what's looking like a firmer pricing backdrop that's likely to persist for some time.

[Andrew Power, executive]

Matt, so I would not characterize the world of supply constraints or just hindrances to supply as being in the rearview mirror in general. And maybe we're not talking about the proverbial waiting for your refrigerators COVID supply chain equivalent. But the friction to supply, whether it is power transmission, power generation, supply chains on data center components or just positions in queue for production or components for substations, broader sustainability concerns, nimbyism in general, that friction is existing, and it's happening in a backdrop where I think we can add more and more value to our customers than probably ever before.

And even despite historical preferences or to often do it yourself, I think by and large, the customer base is seeing having the benefit of global outsourced trusted partner with 20 years of experience operationally, delivery-wise, and really turn in to Digital in their times of need and really at a time or it could be continuing of urgency around those capacity blocks. And that's certainly been highlighted in the Northern Virginia market, but I think that's a broader Americas phenomenon and a growing global phenomena.

[Operator]

And our next question today comes from Michael Elias with TD Cowen.

[Michael Elias, analyst]

And congrats guys on a record leasing quarter. Just a quick one for me. I know it's been a while since you guys have done an acquisition. Maybe for Andy or Greg, curious how you're thinking about the potential for M&A, particularly given where your stock is trading right now?

[Andrew Power, executive]

Going to Greg on that one, Michael. Thank you for the compliment.

[Gregory Wright, executive]

Yes. Thanks, Michael. Look, I think right now, our appetite for acquisitions, unless they're smaller tuck-in strategic acquisitions. Michael, I think we've discussed this before. It's not that great right now.

When we look across most markets, we think we already have the footprint and the product and the team to continue to drive our business and succeed. And as you know, most of our legacy M&A activity was either gaining access to markets, to product or to teams in select markets where we didn't have a real presence. We don't have nearly as much of that today, particularly when you look across the Americas and EMEA.

Over time, would we continue to look in markets through APAC to potentially grow, yes, but there's not a lot of those platforms, if you will, for example, there's not the logical interaction sitting in APAC for us to try to do a strategic transaction. So while you never say never, I think we look at things today. And Matt and Andy and the team laid out where we are in our development yields and the like. And you look at this on a risk-adjusted basis. And we still prefer right now, at least given current conditions, to buy land and build organically. And we think that's a better risk-adjusted return than what multiples would imply in the M&A market. So I don't think you're going to see a lot. But again, you never say never.

[Operator]

And our next question comes from Nick Del Deo with MoffettNathanson.

[Nicholas Del Deo, analyst]

Andy, earlier you said that you're not going to chase demand into unproven markets, which you're seeing a fair bit of demand today. I guess what sort of thresholds would those markets have to cross before they might become interesting in your eyes, especially if power constraints in key markets remain exceedingly tight or even get worse. Or are they like so far down the list of priorities that we really shouldn't be thinking about them?

[Andrew Power, executive]

Thanks, Nick. So I think if you look at our strategy, we're focused on supporting workloads, be it enterprise, digital transformation or hybrid or hyperscale, cloud or AI in markets with robust and diverse demand and supporting applications with latency and locational sensitivity.

The cloud has been around for a long time and did not put [ AZs ] as in every single NFL city in America or it's equivalents around the globe. They picked locations where GDP population, infrastructure and data are essentially there, which I think lends itself to greater longevity and sustainable growth in our asset class and our strategy and our business.

Now there's markets that have been added to that list over time. They didn't get -- put chiseled in stone and put away on a shelf years and years ago. But -- so I think new markets for us would have to give us the similar conviction we have, invest in our core markets to want us to go there. So that could happen. That certainly could happen in a rapidly changing world, with power becoming such a precious resource as well as other precious resources. But anything we're thinking about is investing in -- we're not in this [ risk trade ], we're investing in this for the long term, for long-term sustainable growth.

And we're fortunate, if you can look at our newly tweaked and disclosure on our development cycle, we've got north of 3 gigawatts of growth in land capacity or shell capacity in those core markets. So we've got a lot of runway to harvest that demand before even feeling the urgency to chase into less proven markets.

[Operator]

And our final question today comes from Erik Rasmussen at Stifel.

[Erik Rasmussen, analyst]

Obviously, North America is very strong, greater than 1 megawatt. And I think based on your commentary, a lot of that was AI driven. And then also, it seems like it's going to -- AI will sort of follow a similar pattern as we saw with cloud. So would you expect -- I mean I wouldn't expect similar levels of quarterly leasing, but would you expect sort of a similar outperformance throughout the year in North America, especially the greater than 1 megawatt based on sort of the other regions. Just want to get a sense of sort of how the year could be shaping up in terms of the bookings.

[Andrew Power, executive]

Thanks, Erik. So just more on the tactical on the quarterly bookings. I mean, we're out of the gates here with a great start on both the less-than-megawatt category, call it north of 50 for several consecutive quarters now. I think 2 in a row, north of 53, great new logos contribution and obviously, an overall record which we discussed. By and large, I wouldn't say usually another record follows the prior record. On the one hand, but on the other, we're certainly in a different territory right now in terms of demand. We have the large capacity blocks that are deeply sought after. We have a team focused on executing, and we got 3 more [ at bats ] in 2024 to put those results up.

Bigger backdrop. If you look back at cloud globalizing, it's one of those things that the famous quote "It happened slowly and then it happened really fast." I can remember years of the thesis being it's going to globalize forever and ever, and then it really took off. So I'm not -- I wouldn't -- I couldn't pound the table and say, in [ 2024 year ] is the year that AI globalized like cloud. But [ size ] do point that it should follow a similar trend over time.

[Operator]

Thank you. That concludes the question-and-answer portion of today's call. I'd now like to turn the call back over to President and CEO, Andy Power, for his closing remarks. Andy, please go ahead.

[Andrew Power, executive]

Thank you all for dialing in. We really appreciate it. Digital Realty had a strong first quarter with record leasing results that reflected the growing impact of AI on our business. Fundamental strength continued through the first quarter with healthy same-capital organic growth and robust re-leasing spreads.

We've continued to innovate with the expansion of ServiceFabric, new products like our Private AI Exchange, along with modular designs to accommodate increasingly power dense workloads.

Finally, we've closed a number of transactions already this year bringing in additional private capital and enhancing our ability to deliver new capacity to meet our customers' growing needs. We are excited about this quarter's results and look ahead with continued optimism. The 3 key demand drivers, AI, cloud and enterprise digital transformation are showing no signs of letting up, and we are well positioned with over 300 data centers across the key markets around the world.

I'd like to thank everyone for joining us today and would like to thank our dedicated and exceptional team at Digital Realty, who keep the digital world running. Thank you.

[Operator]

Thank you. This conference has now concluded, and we thank you for joining today's presentation. You may now disconnect your lines, and have a wonderful afternoon.