Digital Realty Trust Inc

NYSE:DLR

Earnings Call Analysis

Digital Realty's Strong Q3 Growth

Digital Realty's Q3 2023 showed enduring appeal to customers with record bookings in interconnection and substantial leasing across product types. Notable results include a 9% increase in 0-1 megawatt bookings and a 28% year-over-year rise. The firm demand and tight supply aid pricing power, boosting same capital cash NOI growth to an impressive 9.4%, and pushing cash leasing spreads to over 7%. Capital raised, approaching $4 billion, resulted in raised full-year guidance, expanded investment in development for high returns, and a stronger balance sheet. AI's rise has created new demand, exemplified by support for a customer deploying 32,000 NVIDIA GPUs. With a broad customer base, low churn at 1.1%, and 117 new customers, the company displays a robust growth trajectory.

Solidifying Customer Value and Driving Growth

The company has reinforced its position in the market, resulting in strong leasing across its core product categories. This momentum is evidenced by record overall bookings and acceleration in segments above one megawatt. A significant year-over-year growth in same capital cash net operating income (NOI) of 9.4% indicates the company's robust fundamentals and demand dynamics, enabling it to raise full-year guidance for key metrics.

Strategic Priorities and Operational Execution

The CEO has emphasized three key strategic priorities: strengthening the customer value proposition by enhancing connectivity-rich solutions and scale capacity; integrating and innovating through organizational restructuring and technological advancements; and diversifying capital sources, which has led to a reduction in leverage and an increase in liquidity. Innovations include the launch of Nvidia’s GPU-ready data center and a high-density colocation offering across 28 global metros. The company also remains committed to sustainability efforts.

Consistent Demand and Geographical Diversification

Demand for the company's data center capacity continues to be robust and geographically diverse. Strategic expansions include the onboarding of major cloud service providers and the development of 192 megawatts in Manassas, Virginia. The company's diligent capital allocation, including joint ventures and non-core asset sales, has yielded proceeds crucial for future growth and helped it navigate through power constraints in key markets like Northern Virginia.

Financial Performance and Forward Guidance

The third quarter showcased a record $152 million in new leases and strong renewal activity with pricing increases contributing to the most substantial re-leasing spreads since 2015. An updated guidance reflects an upward revision in cash and GAAP re-leasing spreads, robust same capital cash NOI growth, and a slight reduction in year-end portfolio occupancy. The company projects increased development spend and anticipates this strategy will be accretive to core funds from operations (FFO) per share over the longer term.

Balance Sheet Strength and Reduced Leverage

The balance sheet was notably strengthened with the debt to EBITDA ratio falling to 6.3x. The majority of the company's net debt is fixed rate and unsecured, offering flexibility for capital recycling. Management has maintained robust liquidity and is confident in executing additional asset sales and development joint ventures, which could enhance the company's funding position and further reduce leverage.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon, and welcome to the Digital Realty Third Quarter 2023 Earnings Call. Please note, 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 Third Quarter 2023 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 may make 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 third quarter. First, our customer value proposition continues to resonate. Leasing was strong across both our primary product category with record overall bookings in the 0 to 1 megawatt plus interconnection segment, and an acceleration in our greater than megawatt segment.

Second, we saw a further continuation of the improvements in our fundamental metrics. Strong demand and tight supply remains supportive of pricing, and this is evident in our results. Same capital cash NOI growth was the best in more than a decade at 9.4%, while cash releasing spreads eclipsed 7% in the quarter, which caused us to raise full year guidance for these metrics for the second consecutive quarter.

Third, we continue to diversify and bolster our balance sheet with almost $4 billion of capital raised to date, including two hyperscale core joint ventures announced in July, and another almost $200 million of noncore sales, bringing total dispositions to $2.5 billion year-to-date. The capital that we've raised this year has enabled us to increase our liquidity and and delever while expanding our investment in development that we expect to generate double-digit unlevered returns.

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. The third quarter marks 9 months since being appointed to my current role as CEO, and this marks the fourth official earnings call. While there has been about as much volatility in a single year as I can recall from my 20-plus-year career, it has been a privilege and an honor to have the opportunity to visit and work with and to watch my digital realty colleagues across the globe execute on behalf of our customers and stakeholders during these extraordinary times.

At the outset of this year, I highlighted three key priorities for our company. While we've got two months left in the year, I am very excited about our progress to date and look forward to finishing strong.

As you recall, our key strategic priorities are: first, to demonstrably strengthen our customer value proposition, which means that we are adding connectivity-rich solutions and scale capacity to drive our global meeting place strategy. We are executing this through the addition and launch of new on-ramps, the expansion of our [ colo ] capacity end markets and also by providing visibility into longer-term hyperscale capacity in our largest core markets.

We are making strides and our customers are recognizing this by landing and expanding their IT infrastructure within our facilities. For example, over the past few months, we've added on ramps from a number of the largest cloud service providers, including AWS and Oracle.

Our second priority is to integrate and innovate. For the first time, we created an Americas region and formally organized the company into 3 regions to improve overall management and accountability. In addition, we moved global operations under an experienced Digital Realty leader, bringing the standardization and consistency across our global platform. We also reorganized all things technology under our CTO organization.

Consistent with our aim to bring innovation to our customers end market, in the third quarter, we announced the launch of our first Nvidia DGX H100-Ready data center in Osaka, Japan. We also rolled out our new high-density colo offering across 28 global metros to support high-performance compute infrastructure, addressing data and AI-related growth challenges.

We are also partnering with other leaders around the world to enhance our open platform. In this vein, we recently added BT and Lumin to our Service Fabric platform, which connects our data centers globally extending the reach of our customers and partners. And we made some nice progress on the sustainability front in the quarter, which I'll circle back to in a moment.

Finally, we set out to bolster and diversify our capital sources. And to date, we've reduced leverage by 0.8 turns of EBITDA from the 1Q peak and increased liquidity to $3-plus billion, including $1 billion of cash on hand. We executed on our funding plan that included the completion of 2 stabilized hyperscale JVs this quarter, tapping into some of the deepest pools of private capital, and we remain confident in our ability to add to this progress with development JVs in the near future. If we deliver on our key strategic priorities, we expect that this will translate into better long-term sustainable growth for our customers, team members and in turn, our shareholders.

Digital Realty continues to make progress in the third quarter with further improvement in our operational results highlighted by 9-plus percent same capital cash NOI growth strong leasing results with record 0 to 1-megawatt [ suns ], the highest greater than megawatt pricing since 2016, record leasing in APAC with broad strength in the Americas, and record interconnection revenue with the strongest growth since 2018.

The momentum across the data center infrastructure landscape is strong. Demand for our data center capacity remains broad-based both geographically and by product, as reflected in our leasing results. New supply in our top markets remains constrained and is likely to remain so due to limited availability of power, growing supply chain challenges and tighter financial conditions.

While the demand drivers we have enjoyed for the last several years, including cloud, digital transformation and hybrid IT remain largely intact AI applications have added a meaningful new layer, which is just beginning to materialize in our leasing results this quarter, and we are ready for it.

When Chris first started speaking publicly about AI and high-performance compute at our Investor Day in December 2017, we are already in the process of architecting and designing our facilities to support the evolving densities and our most innovative and leading-edge customers.

While there are multiple high-density workloads running in our portfolio since at least that time, in the last quarter alone, we were able to accommodate a handful of high-density compute deployments from one of our service provider customers in a 10-plus year old data center in one of our smallest markets. And we are currently supporting one of our customers' AI infrastructure deployments that will incorporate 32,000 Nvidia H100 GPUs.

This doesn't mean that Digital Realty will be chasing large AI deployments far and wide, as we will continue to assess the longer-term opportunity set of remotely located single-tenant non-differentiated data centers. But it does mean that there has been an increase in demand for our highly connected campuses in core markets. We're being thoughtful in how we approach these opportunities.

As we consider leasing our capacity, I expect that we will seek to support our long-term engaged partners that have become embedded within our meeting place community that value our strategic locations and the connectivity across platform digital. At the same time, in certain markets, we will selectively support customers that have a differentiated product offering as we've always been at the forefront supporting leading technology companies as they push their infrastructure capabilities.

Let's move to our third quarter results. This quarter continued to demonstrate the fundamental recovery that we've been highlighting throughout this year. Leasing activity was strong and broad-based across product types and reflected the pricing recovery we have seen throughout our portfolio.

While we routinely lead with our headline leasing figures, it is important to point out the record posted in the 0-1 megawatt plus interconnection segment in the quarter, which increased by more than 9% sequentially and nearly 28% over the prior year period.

Total new leasing during the quarter was $152 million with record 0-1 megawatt signings representing just over 1/3 of total signings. Greater than a megawatt science moved higher for the second consecutive quarter led by the Americas region, while our team also put up a record quarter in APAC.

Pricing remains firm with notable highs achieved across the greater than 1 megawatt segment with strength in the 0-1 megawatt category. Growing recognition of our value proposition, including our comprehensive product offering, along with strong demand trends and reduced availability are supportive of pricing and are helping to drive better core growth and higher returns on investment.

In the third quarter, we saw re-leasing spreads climbed to 7.4% on a cash basis contributing to the strongest same capital cash NOI growth in more than a decade. During the third quarter, churn remained low at 1.1%, and we added 117 new customers extending our string of 100-plus new logos per quarter to 3.5 years. Another strong validation of the value that enterprise customers around the world recognize in platform digital. Our focus on deepening the value of our campus has resulted in enhanced cloud access for Digital Realty.

Recently, 4 out of 5 top B2B cloud providers complete multisite on-ramp and edge expansions to serve data-intensive workloads on 2 continents via Platform Digital. In addition, AWS announced a direct connect location in Seoul, the first carrier-neutral facility in the market, while we announced the Oracle FastConnect availability in Madrid to their EU sovereign cloud.

Other key wins during the quarter included a speech to text AI provider completed their second HD colo deployment in 6 months on Platform Digital, multiple new logos in the health care vertical in the quarter, two Global 2000 health care companies deployed on Platform Digital, one supportive data-intensive AI workloads and the other implementing a 2-site data compliance solution. An international Tier 1 telco added a multi-metro expansion across 2 continents of Platform Digital to support their retail enterprise customers. A Global 2000 Bank is implementing multi-site, multi-region network hub deployments now totaling 15 metros and a Global 2000 insurance company is expanding a distributed data hub on Platform Digital to support M&A data compliance.

Moving over to our largest market, Northern Virginia. More than a year since we learned the power constraints in this market, we have continued to work constructively with the power providers to confirm the commitments that we made to our customers and to provide growth capacity for our customers through new development and select churn opportunities. As discussed on our last earnings call, we identified almost 100 megawatts of development capacity in Loudoun County that we expect to be able to bring to market prior to 2026. This includes 56 megawatts of available capacity underway within the current development pipeline and the potential to move forward on another 40 megawatts.

In addition to this [ ash ] from focused capacity, we continue to advance the ball on our 192-megawatt development in site in Manassas, and we are now officially underway and will soon be patent ready to support construction of the first of two buildings on the site in early 2024. We are very excited to be able to offer this availability to our customers.

Moving on to our investment activity. Digital Realty investment team has already had an extraordinarily productive year, including the $2.3 billion of JVs and noncore asset sales completed in the third quarter. Within the noncore bucket, we sold two facilities during the quarter, including one in the U.K. and the other in Chantilly, Virginia, totaling almost $200 million, including the $150 million noncore disposition in Texas that we completed last quarter, we're tracking well towards our $500 million target for the noncore asset sales in 2023.

We closed two separate stabilized hyperscale joint ventures in July with the contribution of two assets in Chicago and three in Northern Virginia, raising $2.1 billion of proceeds. We've also made substantial progress on the third bucket of our funding plan, the development joint ventures, and we expect to have more to say about this in the fourth quarter.

Before turning it over to Matt, I'd like to touch on our ESG progress during the third quarter. We've continued to make progress on our water conservation initiatives, including a water saving initiative for cooling towers and our SIN10 facility in Singapore. The project won the inaugural Green Innovations, Water Solutions Award at the Singapore Environment Council's Environmental Achievement Awards.

The project is expected to save over 1.2 million liters of water each month and improved water usage efficiency by 15%. The solution has now been evaluated for wider rollout across our portfolio.

In the third quarter, we also announced that we are ranked in the top 10 on a U.S. EPA's National Top 100 list of the large green power users from the Green Power partnership. The company also ranked seventh on the EPA's list across technology and telecommunication providers.

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.

[Matt Mercier, executive]

Thank you, Andy. Let me jump right into our third quarter results. We signed a total of $152 million of new leases in the third quarter with broad-based strength across each of our two primary product groups and geographic strength in the Americas and APAC. We leased a record $54 million in the 0-1 megawatt plus interconnection category, accounting for 35% of total bookings. This product segment remains a consistent and steady source of growth as we continue to execute on our global meeting place strategy.

Interconnection bookings were strong once again at over $12 million as we added another 2,000 cross connects in the quarter, finishing with 218,000 total cross-connects, greater than a megawatt bookings totaled $97 million in the quarter with outsized contributions from Portland and Hong Kong. This was our highest greater than a megawatt signings quarter since we discussed sharpening the lens with regard to capital allocation decisions one year ago.

Our greater focus and increased threshold have resulted in higher average returns in the greater than a megawatt category as implied by the growing expected stabilized returns in the Americas that we present on the development life cycle schedule in our supplemental. Pricing continues to improve across most markets globally with outsized pricing power experienced within the greater than the megawatt segment, which saw pricing on signed leases at the highest level since the first half of 2016.

Turning to our backlog slide. The current backlog of signed but not yet commenced leases increased to a new record of $482 million at quarter end. As commencements of $110 million were more than offset by elevated new leasing volume in the quarter. We expect nearly 15% of the backlog to commence in the fourth quarter with a little over 50% commencing throughout 2024.

The lag between signings and commencements in the quarter ticked up to 12 months, driven by new development and build-outs to support larger scale leases. During the third quarter, we signed $156 million of renewal leases with pricing increases of 7.4% on a cash basis, the strongest re-leasing spreads achieved since 2015.

While renewal pricing was strong across product segments and across our 3 regions, the overall result was upwardly skewed by a single transaction within our other category. Excluding this outlier, renewal, releasing spreads in the quarter would have been up 4.5% on a cash basis and 6.4% on a GAAP basis. We feel that this is a more representative picture of the renewal spreads that we are seeing throughout the portfolio, which is consistent with the broad-based improvement we've seen throughout this year.

With renewal rates trending higher over the first 9 months of the year, we are raising our full year guidance for renewal spreads to reflect the success year-to-date and today's improved fundamental environment. Renewal spreads in the 0-1 megawatt category continued their steady climb with 4.4% growth on a cash basis in the third quarter on $125 million of volume. Greater than a megawatt renewals continued to post strong results, with cash renewals higher by 5.6%, albeit on lighter volume of $19 million in the third quarter.

In terms of earnings growth, we reported third quarter core FFO of $1.62 per share, broadly consistent with consensus expectations, but down $0.06 per share versus the second quarter, primarily reflecting the impact of the asset sales and the equity raised in the quarter and the redeployment of capital into accelerated and increased development. On a constant currency basis, core FFO was $1.60 per share relative to the $1.67 we reported in the third quarter of 2022.

Total revenue was up 18% year-over-year and 3% sequentially despite the impact of the more than $2 billion of asset sales completed early in the quarter as the benefits of improved pricing are starting to take hold. Importantly, Year-over-year revenue growth also continues to be impacted by the significant volatility in utility costs and reimbursements, particularly in Europe. Most of these energy costs are directly passed through to customers.

Excluding the impact of utility and other reimbursements, total revenue was up 13% year-over-year. Interconnection revenue of $107 million marked another quarterly record and was 12% higher than the year ago period. Excluding Teraco, interconnection revenue was up 11% year-over-year, the highest interconnection growth since 2018 and and reflects the ongoing organic strength in our core footprint. Quarter-over-quarter interconnection revenue was up almost 3% and as 2,000 new cross connects were added, increasing the total global installed base to 218,000.

Moving over to the expense side. Utilities were seasonally high given the warmer summer months and off an already elevated 2023 base. Rental property operating expenses remained essentially flat for the second consecutive quarter, partly reflecting the benefit of the removal of expenses related to the dispositions and joint ventures. However, on the noncontrollable expense front, property taxes spiked higher quarter-over-quarter to $72 million, driven by an elevated reassessment on some of our properties in Chicago. While these expenses will be largely passed on to our underlying customers, it will also be disputed over the coming years.

Net of this movement, adjusted EBITDA increased 10% year-over-year. One nonrecurring item worth noting in the quarter was the $113 million noncash impairment charge related to the lower value of our holdings in digital core REIT stock. The Singapore REIT IPO-ed in December 2021 at $0.88 per share, but was valued at $0.53 per share at the end of September, driving the noncash adjustment in our carrying value of the investment.

Improvement in our stabilized same capital operating performance continued in the third quarter, with year-over-year cash NOI up a strong 9.4% but moderating by 1.5% sequentially due to the expected increase in utility bleed during the seasonally warmer months. Even on a constant currency basis, year-over-year cash NOI growth was strong at 6.6%. These results demonstrate the strongest period of organic growth in our same capital pool since 2014, and extends the [ turn and ] fundamentals that we have been highlighting throughout this year.

Turning to the balance sheet. We meaningfully strengthened our balance sheet during the third quarter, driven by the success that we've had on our funding plan. This progress continues today, and as a result, we have raised our full year capital raising target for the second consecutive quarter.

In the third quarter, we generated over $2.6 billion proceeds from JV closings, noncore asset sales and settlement of the equity forward. Roughly $1 billion was redeployed into our development program and a little over $500 million was used to repay higher cost USD borrowings on our credit facility. The remaining amount was kept in cash, earning interest at a rate in excess of the remaining borrowings under our credit facility.

As a result, at quarter end, we had over $1 billion of cash on our balance sheet and our leverage fell to 6.3x net debt to EBITDA, down from 6.8x at the end of the second quarter and we are now within spitting distance of our near 6x leverage goal that we set out to achieve by year-end. Since the end of the quarter, we paid off CHF 100 million notes that matured in October and are confident in our ability to execute on additional asset sales and development joint ventures that are left in our upwardly revised funding plan.

Moving to our debt profile. Our weighted average debt maturity is over 4.5 years, and our weighted average interest rate is 2.9%. Approximately 84% of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform and our FX hedging strategy. Approximately 86% of our net debt is fixed rate and 97% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, we have less than $1 billion of debt maturing in 2024 and beyond that, our maturities remain well laddered through 2032.

Lastly, let's turn to our guidance. We are tightening our core FFO per share guidance range for the full year 2023 by $0.03 at the high and low ends to a new range of $6.58 to $6.62 per share, maintaining the midpoint of $6.60 per share. We are also tightening the range for full year adjusted EBITDA, affirming our full year guidance midpoint of $2.7 billion.

Our full year revenue guidance range is being adjusted down by about 1% at the midpoint to a new range of $5.475 billion to $5.525 billion to reflect the impact of lower pass-through oriented tenant utility reimbursements given the moderation in electricity pricing in EMEA.

Importantly, you'll recall that last quarter's core FFO per share guidance reflected a $0.05 to $0.07 per share impact from a bankrupt customer, including $0.02 that was realized in the second quarter. In the third quarter, we received all of the rent due from this customer across our portfolio, but we did incur a $0.01 write-off related to unpaid utility expenses and we expect that we could see up to another $0.02 of dilution related to this customer in the fourth quarter. In addition, we could see up to $0.01 of drag related to the carryforward of increased Chicago property tax assessment and $0.01 of drag related to the acceleration and increase of development spend as we capitalize on the opportunities we are seeing in front of us.

With the continued improvement in our fundamentals during the quarter, we are also updating the organic operating metrics supporting our full year guidance, including cash and GAAP re-leasing spreads of over 5%, up from 4%. Same capital cash NOI growth of 6% to 7%, representing a 200 basis points increase versus prior guidance and a reduction in year-end portfolio occupancy to between 83% and 84%, reflecting the delayed timing of the sale of a vacant nondata center asset in our portfolio.

Given the successful leasing executed in the third quarter and the increased level of demand embedded within our pipeline, we are increasing our full year development spend guidance to $2.7 billion to $2.9 billion for 2023, representing the $400 million increase at the midpoint. Similarly, reflecting the continued execution on our funding plan to date, we have also updated our guidance for dispositions and JV capital to $2.7 million to $3.2 billion, representing a $350 million increase at the midpoint, which is in line with the increase in our expected development spend for this year. While development has been an important driver of our growth for the last decade, in the short term, we are experiencing the headwinds from the sharp regime change in interest rates.

This year, we've sold assets at [ 6 caps ], and new borrowings on our [ liner ] at similar levels, whereas GAAP requires us to capitalize interest at our weighted average borrowing cost of less than 3%. In other words, increasing our development spend today, to capitalize on the growing opportunities we are seeing is dilutive to near-term earnings.

These projects underway are completed at incrementally higher yields and the relatively low rate of capitalized interest burns off. We expect development completions will become increasingly accretive to core FFO per share. The good news is that fundamentals are helping to mitigate a portion of this dilution.

This concludes our prepared remarks, and now we'll be pleased to take your questions. Operator, please begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Jon Atkin of RBC Capital Markets.

[Jonathan Atkin, analyst]

So I was interested in the development JVs that you alluded to. It sounds like there's something relatively imminent or maybe a couple of transactions. Can you point to the leverage reduction benefit that we should expect? And then related to that, give us a sense of the tailwinds and the headwinds that might affect core FFO per share for next year.

[Andrew Power, executive]

Actually why don't you let Greg touch on his activity, it's been the tip of the spear on our development JVs, which unfortunately, we couldn't time not just 1 but 2 announcements like last quarter, but we haven't been idle and they're making some great progress. But Greg, why don't you give us some color?

[Gregory Wright, executive]

Yes. Thanks, John. Look, I think as Andy mentioned, look, last quarter, which we already announced, we were -- we had our two stabilized joint ventures with TPG in Northern Virginia and obviously, GI and Chicago, which generated about $2.2 billion of proceeds. And we -- what we found in that process was demand was very robust to invest in data center assets in the private market, and the same holds true.

We're continuing to see even more demand for stabilized assets. And I would go as far as to say it's even greater investor demand, when you look at the development potential development JVs. All I can tell you is we're working hard, and we hope we have something here in relatively short order to report. But right now, no more guidance than that. Other than that, demand remains strong, and we remain encouraged.

[Operator]

The next question comes from David Barden of Bank of America.

[David Barden, analyst]

I guess I want to follow up a little bit on the second part of Jonathan's question, which was thinking about 2024. When we began 2023, we were looking at same-store cash NOI growth in the mid-3s and now it's pushing towards 7%. We're talking about a decade level improvements in interconnection and sub-megawatt leasing and greater than 1 megawatt leasing.

Andy, you frequently talked over the year about how re-leasing and greater than 1 megawatt, you couldn't confidently say would be greater than zero and here we are. And then we've lapped the first year of the Teraco acquisition, which was supposed to be dilutive in year 1, neutral in year 2, accretive in year 3. So outside of some accounting issues, it kind of feels like all the needles are pointing up into 2024. And before I get too excited, tell me where I'm wrong.

[Andrew Power, executive]

Before I hand off to Matt to give you a 2024 guidance on this call, which I can tell you we weren't prepared for. I'll just chime in with just some color. So you're right, the trend has been our friend on multiple fronts. And I think we tried to signal this at the outset of the year, and we were a bit of a show-me story, but we saw our value proposition resonating. We saw the pricing environment firming and continue that momentum, whether it's asking rates, ROIs on our development pipeline at cash mark-to-market in both product sets, and I would say that environment is continuing.

But before Matt take the air out of the balloon with no early guidance, I mean there are obviously headwinds that Matt can talk to that we're still working through. But Matt, why don't you [indiscernible] your thoughts?

[Matt Mercier, executive]

Yes, sure. Thanks, David. I mean I think we -- and we kind of talked about this a little bit towards the end of my prepared remarks, but I think, as you know, we've been -- one, we've been pretty clear about a desire to deleverage, which we've made substantial progress on.

We started the year close to [ $7 billion, we're at $6.3 billion ]. We're making progress on that like I stated at the start of the year. And we're doing that through level of capital recycling asset sales that are going to have an impact not only on this year, but we'll have some follow-through into next year. And we're doing it at a time also where we're looking to take advantage of what we see is a great opportunity in the market where supply-demand fundamentals are about as strong as they've been, and we see opportunities to deploy capital, but that capital is coming at a higher cost today than it was. And therefore, it's dilutive near term until that capacity comes online. And we think it's the prudent thing to do, but that's part of the dynamic that we're dealing with.

[Operator]

The next question comes from Michael Elias of TD Cowen.

[Michael Elias, analyst]

First, could you help us think about the sources of funding? And really what I mean by that is you raised equity at $97 a share, but you didn't raise equity when your stock was at $130. Presumably, the cost of that equity would have been lower than selling assets at, call it, a 9% cap rate. Just wondering how you're thinking about the use of equity as you march towards that, call it, 5.5x leverage target next year? And then I have a follow-up.

[Andrew Power, executive]

So Jordan's guys playing by new rules to make sure everyone get at least one question on the call. So we've got one question, but we'll try to get you on the next round for your follow-up. I think our actions are speaking louder than our words hopefully here, whereby we had tremendous success in the first half of the year or dribbling into the month of July on both noncore dispose followed by major hyperscale stabilized assets. And the fact that we haven't moved forward with any additional equity issuance of common stock, I think this speaks to our conviction on the next leg of private capital raisings with the development joint venture or joint ventures being the next leg of the stool.

So -- and I think those are things that will -- are strategic and different for our company relative to prior experience, where we're going to share the cash flow period of these projects that are large, massive capital-intensive and long-term projects and allow some of these great fundamentals we've seen flow through to the bottom line. That doesn't mean we're 100% averse to ever issuing equity at the right time in the right quorum at the right price. But I think we believe we've got some incremental milestones or wins to put on the board here that are in the not-so-distant future before we be ready.

And this is on the back of tremendous progress. We've taken the balance sheet down, what 0.8 turns of EBITDA, literally in 2 quarters worth of reporting. So -- and so I'm pleased with the progress, and I would say that we have more good news to come.

Before -- one last thing. I want to hand over to Greg because you made a comment on the noncore dispos, just -- I think that we should clarify what that really means to us.

[Gregory Wright, executive]

Yes. Thanks, Andy. Hi Michael, Look, I don't think it's right to say a 9% -- you're selling an asset at a 9% cap rate versus what your implied multiple is on your company. In our minds, from a capital allocation perspective, those are 2 very different things. One is the assets we sold, they're noncore assets, right? One's in Watford, ones in Chantilly.

What does that mean to us? I mean these are noncampus assets with limited connectivity, right? And when you look at Chantilly, [ Wilton nova ], it's neither of the major markets of [ Lauder Manassas ], right? And so when you look at these assets, they're older, they're stand-alone assets.

Now this is a very, very small portion of our business. But we call these assets out. So I don't think we can sit here and assess a cap rate on 1 or 2 noncore assets versus selling equity in the business. These are assets that are not part of our core business going forward and nonstrategic to us, that's a very different analysis. So I would just caution folks to say, "Hey, here's a couple of assets that were noncore that were signed as a 9, therefore, that's not the right cost of capital play or the right capital allocation because I think it is.

[Operator]

The next question comes from David Guarino of Green Street.

[David Guarino, analyst]

On Page 9 of your presentation you put out today, it feels like those new leasing bars, they just keep reaching to the sky. You think there's a sustainable pace of activity for Digital Realty and maybe even broadly, is it a sustainable pace for the industry as a whole? Or is there a risk maybe that the dirty word digestion phase starts to come back in [ vocuabulary ] again?

[Andrew Power, executive]

Thanks, David. So I mean, what's great about this quarter is not just the size of that bar, but just what really went into it. And as I said in the prepared remarks, we usually call it historically led off with the top line number, but I think it was even more important to start with a tremendous foundation. Less than a megawatt interconnection signings quantity of customers, broad-based across the regions, including interconnection was at a record. It was up dramatically, not just year-over-year, close to 28%, but 9% quarter-over-quarter and that is that flywheel success that we've been investing in and starting to see more and more harvesting the fruits of our labor.

On the bigger portion of that, it was not one single deal, is our largest deal not even 1/3 of the total signings. It was broad-based across the geos as well. And these are playing to a continuation of demand trends that have been here for a little while, but certainly not exhausted.

When you look at the pace of how fast the cloud is growing, digital transformation, hybrid IT. You look at our new logo contribution largely enterprise [ base 117 ] from around the globe and artificial intelligence, which is something we've had a hand in supporting for many years in high-performance compute power densities. That is just starting to blossom in our numbers. And I think that is just an incremental tailwind of demand where it doesn't feel like the digestion period is anywhere near coming to the amount of capacity demands we're seeing for the industry overall.

[Operator]

The next question comes from Eric Luebchow of Wells Fargo.

[Eric Luebchow, analyst]

So I wanted to touch on kind of your outlook for renewal spreads, which have been pretty strong the last couple of quarters. So if I look at your expiration schedule, it looks like your in-place rents really start to look even more attractive the further out you look.

So maybe you can talk about kind of the near-term outlook. Is it going to be a little more subdued as you work through some of these higher in-place rents? And then maybe are there any of your larger footprint contracts that have any contractual terms that may limit your ability to push rents as high as you would like?

[Matt Mercier, executive]

Sure. Thanks. So I think, first off, I think as a note, we feel pretty confident about the pricing environment right now and that I think we demonstrated that with the continued increase in releasing spreads that we put into our guidance where we said greater than 5%. And we've had -- we called out some items this year that have been, we'll call it, slight outliers, but we'll -- we still see a strong pricing environment that we're and we expect that to continue into the fourth quarter where we expect positive renewal spreads across all of our product types.

I think going into next year, again, not giving guidance, what I would say is come back to the environment that we're in. I mean, there's nothing that suggests that pricing won't continue to be robust and strong across all of our major markets, where things might be different. Again, that you were alluding to is the basis against which those strong pricings are compared against. We are not seeing the same, I still expect that we'll have positive renewal spreads next year. but we'll be able to provide more granularity in terms of the level that, that is once we give guidance next quarter.

[Operator]

The next question comes from Frank Louthan of Raymond James.

[Frank Louthan, analyst]

So when you guys are having conversations with a customer that's primarily looking at an AI deal when you win an AI deal, what is it that they're coming to you for versus maybe some of the less expensive campuses kind of the middle of nowhere that we've heard about and that sort of thing. So how are you winning in AI? And what is it they're looking to get from digital versus some of your peers or some of the private players?

[Andrew Power, executive]

I'm going to toss [ just to call ] in a second. But I just -- there's many shapes and forms of AI, and I reiterate, this is still early innings of what's going to be a vast build-out of required infrastructure. So our intersection of supporting AI is called in the single megawatt or 2 for enterprise adjacent to the existing workloads expansion into multiple -- many, many megawatts of contiguous capacity and everything in between. And we're in a world right now where it's about large language model training, obviously, the inference -- the dawn of inference and the implications will hopefully point to incremental location latency-sensitive needs.

The private consumption of AI or the consumer consumption as well outweighing the enterprise, that's going to change. So I think this is -- this demand case, I think, is going to grow and change and it feels like come in our favor. But Colin, why don't you speak to some of your experience front line with the customers?

[Colin McLean, executive]

Sure. Thanks, Andy. Frank. I appreciate the question. I would just amplify what Andy is saying is the demand principles are not monolithic. I mean you're talking about a wide gamut of requirements across the customer platform, which really plays well to our broad-based portfolio. So I think we do as good a job as any to support broad base requirements [indiscernible], but also having mixed dynamic requirements in terms of densities.

And so what we try to do is to map that [ right customer to right market to right workload ]. And again, across 300-plus data centers, I think we can serve that pretty well. We also feel pretty strongly that core market orientation, i.e., proximity to eyeballs and GDP is still going to remain a core requirement for much of this AI workload. So we feel like that maps really well to our course of assets across the globe.

[Operator]

The next question comes from Ivan Liu of Evercore ISI.

[Jyhhaw Liu, analyst]

So Greg mentioned the strength in demand for both stabilized and development JVs, but in light of a more volatile rate environment, especially in recent weeks, have you sensed any meaningful shifts in the appetite for JVs when you're discussing with potential partners?

[Jordan Sadler, executive]

Greg, has your phone been ringing [ any later? ]

[Gregory Wright, executive]

No. Look, it's a good question, but the answer is no. Remember, when investors are out there making investments in different sectors, right? Everything is on a relative basis. And I think when investors look at data centers today, and they look at the quality of the facility, the quality of the customer base, the term of the lease, the strong organic growth in the business today.

It's the best place for them to invest. In fact, I would argue that over time, you're going to continue to see data centers becoming more mainstream investing rather than a niche play investing when you look at the level of demand out there, whether it's through pension funds, endowments, sovereign wealth funds and the like.

So no, I mean, it's also an interesting as there's pockets of capital that are driven -- we'll do this unlevered, so they're willing to be patient and wait for leverage and wait for rates to come back down.

And I think that also, to your point, Ivan, and I think that's what I mentioned earlier, there's even an outsized demand on the development side. I think the fact that we're in a higher rate environment is driving more demand, if you will, towards development. So -- but no, we have not. In fact, I would go the other way. I would say that we've seen an acceleration in the demand for development JVs.

[Operator]

The next question comes from Michael Rollins of Citi.

[Michael Rollins, analyst]

When you take the demand that you're seeing, the backlog and the target for the development joint ventures, can you give us a bit of a preview on the range of development capital that digital will place on balance sheet in 2024?

[Andrew Power, executive]

So I mean -- this isn't new news. And I think I framed this at some of the investor meetings we've had through the fall or even on back to [ NAREIT ]. Listen, we are a large -- the largest global player in the space here and we are taking a strategic change to how we're funding the business was one of my three top priorities. And what we're not going to do is tie ourselves to a partner for all time and reduce our flexibility, but we're going to be looking at targeted large-scale projects. These are projects that are supporting will support customers, we believe in their growth campuses multiple megawatts. So not noncore at all like things that we would invest 100% if we weren't looking to change our funding strategy to drive more bottom line growth.

And I think you can think the concentration of those type of projects to date are mostly in North America and Europe, given our business is already in a shared an adventure in Latin America and was a little bit smaller in APAC. And I think it's going to be very targeted trying to find the right capital source that is like-minded in terms of their vision for the asset class and looking for a partner that wants to really invest alongside we think is the best-in-class in this industry.

[Operator]

The next question comes from Matt Niknam of Deutsche Bank.

[Matthew Niknam, analyst]

Just one on cash flow. So the accounts receivable looks like it increased another $167 million sequentially, and it's been a drag of over $400 million year-to-date. Just wondering if there's any color you can share on what's driving this? And then maybe how to think about the prospects for any sort of reversal in upcoming quarters?

[Matt Mercier, executive]

Yes. Thanks, Matt. This is Matt as well. So yes, we've had what -- I think the important points that I'd call out here are two things. One, the majority of the increase that we've seen over the last couple of quarters in our accounts receivable has been tied to actually VAT receivables as a result of the increased construction that we've had, particularly over internationally in EMEA.

When you look at our trade payables, which are really only actually roughly half or a little over half of that balance, we have increased trade payables over the period, but it's also been fairly much in line with our increase in revenue as well. And we've actually been able to bring down our amount of trade payables in the last couple of quarters as well. But again, it doesn't appear that way when the total receivables balance has increased.

But again, I think the two sailing points are only -- roughly only half of our -- that balance is tied to what I call trade receivables, which are actual rent and other billings that are sent to customers. A good chunk is related to VAT receivables tied to our construction, which has been the part that's been growing more substantially, which also has a liability offset as well.

[Operator]

The next question comes from Aryeh Klein of BMO Capital Markets.

[Aryeh Klein, analyst]

Maybe following up on the JV question. Fundamentals are really strong. It feels like you believe there's a lot of runway there. Obviously, there are funding considerations. But have you rethought perhaps for [ Singa ] JV versus going at it on your own and essentially keeping the upside to yourself?

[Andrew Power, executive]

So I don't -- I think consistent with what I've shared reiterated on this call, we believe that this opportunity when it comes to our space, digital transformation, cloud computing, hybrid IT and now the advent of artificial intelligence really coming to fruition is so large, long-term, capital-intensive that really tapping into both private and public capital in different measures is the right way to maximize value for our shareholders. And we are certainly experiencing an inflection in our operating fundamentals that has built upon good results throughout the year.

We've been doing a tremendous amount of deleveraging this year. We'll be, call it, rounding third base on the deleveraging next year, getting back to the targets Matt's laid out. And we also have headwinds when it comes to, call it, some -- a modest amount of debt coming due in terms of refinancing, but we view that the development joint venture remains to be the right move to drive more to the bottom line.

And again, as I said in a question or two ago, we are not tying ourselves to this strategy and partner for all time, right? This has allowed us to accelerate those earnings and then have be able to throttle the levers here as to how much we share in terms of development joint ventures with partners down the road.

[Operator]

The next question comes from Simon Flannery of Morgan Stanley.

[Simon Flannery, analyst]

If I could just check in on the development CapEx point. Again, you raised the guidance $400 million at the midpoint for this year. We've obviously just got a couple of months left here. Could you just go through a little bit what we're seeing that increase being spent on? Is that higher cost per megawatt coming through on some of your existing projects you're pulling stuff forward from next year, what else might be contributing to the increase?

[Andrew Power, executive]

It's not budget overruns or anything like that, it is called conviction in the demand landscape. And I mean we can -- Matt caan run through it. But I think the biggest piece is Northern Virginia, which goes back to our success in freeing up, call it, 100-plus megawatts in the Loudoun County pinch point and now activating that. But Matt, anything else I'm missing there?

[Matt Mercier, executive]

No. I think, Andy, you hit it. I mean the majority of our development pipeline increased the call roughly 60 megawatts. We had 100 megawatts of new starts vast majority of that was in North America and in Northern Virginia specifically.

If you look at our supplemental quarter-over-quarter, our cost per megawatt, I think broadly globally has been roughly flat. So it's just a view of new development starts looking to get those completed as quickly as possible. So if we can deliver on time for our customers and take advantage of the market that we're in.

[Operator]

The next question comes from Nick Del Deo of MoffettNathanson.

[Nicholas Del Deo, analyst]

Andy, you've talked about being more disciplined about returns and the sort of deals you accept. Do you feel like you're successfully winning your targeted share of higher value or more strategic deals at your desired returns for each product? And kind of along those lines, do you feel like customers' perceptions of what you have to offer and where you add value is consistent with how you're trying to reposition the company's assets?

[Andrew Power, executive]

Thanks, Nick. So I could tell you just yesterday, my team and I were on a called recurring check in with one of our top cloud customers. And that dialogue was multifaceted. It was obviously concentrated on how we can support their growth in their availability zones, how we can commence faster. There's operational elements, it ranges across all the theaters and it also had how we can drive greater consumption to their cloud and their services from our 5,000 existing customers from the 100 plus we added this quarter and the next quarter, how we're integrating them onto our service fabric natively.

And so I think we are -- and I think you're seeing those results paying dividends in that customer appreciation. And you're seeing that in the litany of, call it, magnetic destinations, be it the on-ramps we announced around the world as well as the pickup in the demand that we characterize as less than megawatt interconnection accelerating.

So I do see a connection there. I think we've delivered a tremendous amount of value to our customers, improving their top line and their bottom lines in a safe, secure fashion. And when obviously, I think some of your question was [ dovetails ] also to some of the larger customers, I think that we're just being transparent and honest with these customers that we're really trying to build a durable business to stand the test of time. And that doesn't mean we try to win 100% of a hyperscales market share, but if we're in 50 metropolitan areas, there's probably 25 or 30 where we have something that they really need, and we can really help them like no other. And that's through our supply chain, our large campuses that future-proof their growth, operational excellence and other value adds and just being a one-stop shop for all their needs. So I think that's a long, long-winded answer to yes.

[Operator]

The next question comes from Erik Rasmussen of Stifel.

[Erik Rasmussen, analyst]

Just getting back to the development JV. This is obviously the missing piece in the capital recycling efforts. But -- and I saw that you raised the disposition guidance for the year. Is [ $750 ] still a good range for this? And I guess, from your commentary, it seems like there's more than one deal that this can represent?

[Gregory Wright, executive]

Eric, this is Greg. The answer is yes, [ $750 ] is still a good deal. And yes, we are working on more than one.

[Operator]

The next question is a follow-up from Michael Elias of TD Cowen.

[Michael Elias, analyst]

So I wanted to ask about the unlevered return environment, particularly for hyperscale. I think earlier in the call, you mentioned something to the effect of double-digit unlevered yields. When you're thinking about doing some of these larger footprint deals with your top customers, just curious where you're seeing those deals clear? And as part of that, where do you think that this could evolve to over, call it, the next year?

[Andrew Power, executive]

So I think I'd point you to our development schedule, which has now been in the double digits category across the board for the whole portfolio, including an increase in, call it, 65 megawatts quarter-over-quarter. North America, where, I would say, is the current home to the largest deals is in double digit by itself and has moved up dramatically.

I don't -- when we look at the risk award, there's obviously episodic scenarios where returns for big deals with hyperscalers could go higher. But I think I think that once you kind of ascend into the double digits, given the current state of, call it, cost of capital in general, I think you're in the proverbial end zone in terms of creating value on many ways. So I wouldn't bank on incremental stair stiffs of shifts beyond that.

But I think we're in a time in the world where the demand remains robust and diverse, outpacing supply. That dynamic does not feel to be abating. And I think we've got a great hand to support tremendous customers' growth around the globe and create a lot of value for a lot of stakeholders.

[Operator]

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. Please go ahead.

[Andrew Power, executive]

Thank you, Andrea. Digital Realty had a strong third quarter. Our results demonstrate that our value proposition is resonating with our customers. We posted another quarter of strengthening organic operating results with record 0-1 megawatt bookings, strong re-leasing spreads and our best same-capital cash all growth in over a decade.

During the first 9 months of the year, we've raised over $3.5 billion of new capital, enabling us to meaningfully delever while reinvesting to support our customers' growing needs, and we are not done yet. I'd like to thank everyone for joining us today and express my personal gratitude to our dedicated and exceptional team at Digital Realty to keep the digital world spinning. We look forward to updating you on our progress and meeting with many of you at NAREIT in L.A. in a few weeks. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.