Digital Realty Trust Inc

NYSE:DLR

Earnings Call Analysis

Digital Realty Rides AI Wave to Record Leasing

Digital Realty reported a robust demand wave in 2023, attributing it to AI's emergence, which drove record annual levels of 500-plus leases, especially in the 0 to 1 megawatt plus interconnection segment. Renewal spreads were positive for the fifth straight quarter, and same capital cash NOI grew by 9.9% year-over-year in Q4. The company raised over $12 billion, reducing leverage to 5.8x, and ended the year with several new and expanded JV partnerships. Looking ahead, Digital Realty expects initial core FFO per share for 2024 to range from $6.60 to $6.75. The company forecasts 2% total revenue growth and a 4% adjusted EBITDA growth at guidance midpoints, or 7% and 10% growth respectively when normalized for capital recycling.

New Leasing and Backlog Growth

The company concluded the fourth quarter with notable achievements in leasing, reporting the signing of new leases valued at $110 million. Particularly impressive was their performance in the EMEA region and the robust interconnection leasing, which reflects a strong and recovering market segment. Building on this momentum, their backlog of contracts yet to commence reached a record $495 million, with expectations that commencement would intensify, particularly in the second half of 2024. While renewal leases signed during the quarter achieved an 8.2% increase in pricing, the full-year cash renewal spreads grew by a solid 6.8%, highlighting the company's pricing power and demand for its offerings.

Financial Performance and Projections

The company reported a healthy core FFO of $1.63 per share for the fourth quarter and $6.59 for the full year, fitting comfortably within their guidance range. This reflects the company's continuous organic growth and strategic financial management, including capital recycling and development investment. Revenue grew by an impressive 11% year-over-year, which was partly influenced by the volatility in utility costs, namely in Europe; however, this growth is expected to moderate in 2024. Looking forward, the company has set initial guidance for its 2024 core FFO per share in the range of $6.60 to $6.75.

Revenue and EBITDA Outlook

Management is anticipating revenue growth by approximately 2% and adjusted EBITDA to increase by around 4% at the mid-point of their guidance ranges for 2024. These projections become even more optimistic when one considers the impact of capital recycling, adjusting the growth expectations to 7% for total revenue and 10% for adjusted EBITDA. Furthermore, cash and GAAP re-leasing spreads are projected to be solidly positive, with cash NOI growth remaining robust. The company foresees continued improvement in occupancy, which is expected to rise steadily over the coming year driven by their record-setting backlog of leases.

Occupancy Rate and Capital Utilization

There is a forecasted 100 to 200 basis point improvement in total portfolio occupancy by the end of 2024. Despite a dip in the fourth quarter of 2023 to 81.7%, largely due to the delivery of considerable development capacity scheduled for occupancy, the company's strategic positioning and stable same-capital occupancy suggest a robust pipeline. The company also plans to continue its proactive capital recycling with expectations of raising $1.25 billion at the mid-point of their guidance, thereby funding their significant $2 billion to $2.5 billion net development CapEx program for the year, a course of action that is expected to further enhance shareholder value.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to the Digital Realty Fourth 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 Fourth 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 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 also 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 fourth quarter and our full year. First, we are seeing a robust wave of demand across our platform, and we are optimistic about our ability to execute. Leasing in the quarter was healthy, highlighted by strong volume in the 0 to 1 megawatt plus interconnection segment, record pricing in the greater than a megawatt category and the second highest quarter ever of new logos added.

Second, our fundamental metrics capped off the year on a high note with the strongest cash re-leasing spreads and same capital cash NOI growth we've seen in years as our unique and differentiated value proposition continued to resonate. And lastly, in the fourth quarter alone, we announced nearly $8 billion of new development joint ventures and completed over $1 billion of equity issuance under our ATM, bringing total capital sources raised during the year to more than $12 billion and reducing pro forma leverage below our year-end 2023 target.

The execution on our funding and capital plan in 2023 has positioned Digital Realty to be able to support our customers' data center infrastructure needs as the next generation technology unfolds.

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. 2023 was a milestone year for Digital Realty as we made strong progress toward our strategic objectives despite significant volatility in financial conditions and broader uncertainty around the world. For me, 2023 will be remembered as the year of AI's arrival to the data center forefront, ushering in an unprecedented new wave of data center demand, driving a step function of change across the industry's landscape. The year that Digital Realty enhanced its customer value proposition by adding connectivity-rich solutions, while also scaling our capacity for hyperscale and AI workloads.

We expanded our footprint with new connectivity-oriented locations around the Mediterranean and elsewhere; enhanced our joint venture in India with the addition of Reliance Jio and increased the number of direct access points on our campuses to the leading cloud and service providers. We accelerated the growth of ServiceFabric with more than 70 discrete services added to the platform and over 100 unique services available by year-end and enhance its capabilities with new composites like service directory.

We also added 9,000 new cross connects in the year, indicative of our growing connected data communities. 2023 was a year that we integrated and innovated at a faster pace than ever before. We strengthened our leadership team and aligned our platform to 3 regions to be consistently structured around the world. We adapted our product portfolio to meet market demand, evolving our offering to efficiently support next-generation chips like the NVIDIA H-100 in numerous data centers.

Our high-density colo capability deployed across 32 markets spending all 3 regions is equipped to handle 3x the H-100 requirements. And we continue to add green energy solutions to power many of these power-dense applications, like our large solar PPA in Germany and our agreement supporting 100% renewable power in Texas, San Francisco, New Jersey and Sydney.

And 2023 was the year that Digital Realty took decisive action to strengthen our balance sheet by developing a portfolio of private capital partnerships and vehicles that diversified our capital sources while enabling us to support our customers' fast-growing requirements. And we did all of that while continuing to provide the operational excellence that is expected of a global data center leader and that our customers rightfully demand.

On this call a year ago, I outlined the plan to Bolster and diversify our capital sources. Our goals were to reduce our leverage towards 6x by the end of the year. Increase our liquidity to fund our development program and diversify our capital sources to limit our reliance on the capital markets, increasing our ability to meet the accelerating demand for data center capacity and to enhance our returns on invested capital.

We outperformed on each of these goals, sourcing over $12 billion of new capital and commitments for new investment and debt repayment, reducing pro forma leverage to just 5.8x when adjusted for transactions that have been announced or closed since year-end. We also ended the year with 5 new JV partners and expanded some of our existing relationships. To round out the year, we announced 3 significant transactions in the fourth quarter, including 2 development joint ventures and the successful resolution to our relationship with Cyxtera. We also raised $1.2 billion of equity under our ATM since the end of September. I will quickly run through the highlights of these transactions.

In early January, Greg completed his famed Triple Lindy with the Cyxtera transaction by selling $275 million of assets to Brookfield along with the purchase of Cyxtera's leasehold positions in Singapore and Frankfurt for $55 million, yielding net cash of $220 million to Digital Realty. In addition, Brookfield assumed 3 existing leases and amended 3 others in our portfolio to accelerate their expiration to the end of September 2024.

Finally, Digital Realty obtained and exercised an option to purchase a Cyxtera data center and the [ cloud ] readiness state, adding one of London's highly sought-after submarkets to PlatformDIGITAL's connectivity and enterprise colo offering. This transaction remains subject to customary closing conditions and is expected to close towards the end of the first quarter.

In November, Realty Income purchased an 80% interest in 2 [ $400,000,000 ] data centers that are under development and leased to an investment-grade financial services company. The tenant has the option to expand the facility up to an estimated potential cost of $800 million. We received $200 million upon closing and reduced our funding obligations for the remainder of this project to just 20% of the total capital, enabling us to reinvest the capital in higher-return projects.

Finally, the $7 billion development joint venture with Blackstone is our largest and most forward-looking transaction and accelerates the monetization of nearly 20% of our 3-plus gigawatt land bank. This JV involves the sale of an 80% interest in nearly 500 megawatts of capacity across 4 campuses in Paris, Frankfurt and Northern Virginia and enables us to better support our hyperscale customers' needs.

Approximately 20% of venture's total potential data center capacity is expected to be delivered through 2025. We will retain a 20% interest in these developments and earn fees for developing, leasing, operating and managing these facilities. All told, in 2023, we announced or completed joint ventures and asset sales driving leverage down roughly 1.3 turns from the first quarter peak, accelerating our ability to deliver needed capacity to our customers and enhancing our returns on invested capital.

I would also be remiss if I did not mention Digital Core REIT's successful $120 million follow-on equity offering last week, which will support the REIT's planned acquisition of an incremental 24.9% interest in our jointly owned asset in Frankfurt for $125 million.

Let's shift to a brief recap of our results and offer some insights into the trends we are seeing across our business. I'm pleased with our results for 2023, which helped to lay the foundation for an acceleration in long-term sustainable growth in earnings and free cash flow that should take shape as we head into 2025. Our fourth quarter results were broadly consistent with the first 3 quarters of 2023 with continued strength in our operating performance KPIs and incremental improvement in our financial position as we continue to execute on our value proposition with the goal to support the increased demand for data center capacity.

Leasing remained healthy, especially in our targeted 0 to 1 plus interconnection segment with 134 new logos, bringing our total new levels for 2023 to a new annual record of more than 500. Renewal spreads were strong for the fifth consecutive quarter, remaining positive across product types and regions. Same capital cash NOI growth continue to demonstrate the underlying strength of our business with 9.9% year-over-year growth in the quarter.

And churn remained low and well controlled at 1%, while occupancy was impacted by the delivery of significant vacant development capacity. The combination of cloud and AI is driving unprecedented demand for scale and hyperscale capacity alongside the steady enterprise and connectivity-oriented demand we're experiencing within our 0 to 1 megawatt plus interconnection segment.

Supply constraints driven by limited availability of power and global supply chain delays have continued to drive the pricing pendulum in our favor, while our growing value proposition is increasing interest in our existing inventory and the new development that we have underway. Ongoing conversations with customers portend a significant potential acceleration of leasing and development, and we believe we are well positioned.

The demand seems to be spilling across most markets, particularly for larger capacity blocks, though there are a few pockets of strength worth noting, including Northern Virginia, Santa Clara, New Jersey, Paris, Frankfurt, Singapore and Seoul. Our new capacity is concentrated in core markets aligned with our global meeting place strategy. While the scale of data center infrastructure opportunities has increased alongside AI's arrival, we remain disciplined and thoughtful, prioritizing locations that enhance PlatformDIGITAL connectivity and our connected campus communities.

During the fourth quarter, Digital demonstrated the benefits of collaborating with our partners with the signing of an Oracle Cloud Infrastructure dedicated region deployment by a financial services customer, showcasing the potential of the collaboration between Oracle and Digital Realty to fulfill enterprise customers' hybrid cloud requirements.

Other customers are recognizing the growing value of PlatformDIGITAL's broad and open structure. An AI service provider leveraged PlatformDIGITAL's pre-provisioned high-density colo offering to improve their time to market in order to extend our North America and AI cloud offering that provides managed AI as a service for a global manufacturing client.

A global service provider and partner targeting enterprise's customers added more connectivity for their hybrid offerings on PlatformDIGITAL, enabling them to upgrade their IT environments to a consumption-based IT infrastructure and managed services model. A Global 2000 leader in material sciences for industrial and scientific applications needed a data center provider with global interconnectivity and access to cloud providers in Seoul and shows PlatformDIGITAL to enable them to deploy and interconnect a private AI node.

A Global 50 financial services company is migrating from an on-prem data center to PlatformDIGITAL and utilizing ServiceFabric to improve sustainability, resiliency, scalability, security and carrier diversity. And a leading Global 2000 consumer goods manufacturer grew their presence on PlatformDIGITAL by adding 2 additional metros to support their IT workloads and cloud connectivity.

Moving over to a quick update on our largest market, Northern Virginia. We have over 100 megawatts available for lease today in Loudoun County and nearly 200 megawatts of capacity available for lease in Manassas. We are currently in active negotiations with a handful of customers for substantially all of our capacity in Loudoun, though, in contrast with the rumor mill, nothing has been finalized just yet. Beyond this capacity, we have another 900 megawatts of buildable capacity at Digital Dallas, which we are cautiously optimistic will gain access to power in 2026 and beyond. We also expect to benefit from the active and ongoing management of our existing 500-megawatt portfolio in this market over time.

Before turning it over to Matt, I'd like to touch on our ESG progress during the fourth quarter. We continue to be recognized for our strong ESG performance in the fourth quarter and in 2024. We placed second on Sustainability Magazine's list of top 10 Sustainable Data Center Providers. We improved to #8 on the U.S. EPA's Green Power Partnership National Top 100 for renewable energy use and we were named as a Top Rated Regional Performer in North America by a leading global ESG ratings provider. 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 over the call to our CFO, Matt Mercier.

[Matthew Mercier, executive]

Thank you, Andy. Let me jump right into our fourth quarter results. We signed a total of $110 million of new leases in the fourth quarter with $53 million of 0 to 1 megawatt plus interconnection leasing, led by strength in the EMEA region. Interconnection bookings rebounded sequentially to $13.5 million, and we finished the year with 220,000 cross-connects despite continued network grooming.

Turning to our backlog slide. The current backlog of signed by not-yet commenced leases increased to a new record of $495 million at quarter end as new leasing outran $84 million of commencements in the quarter. We expect commencements to pick up as nearly 2/3 of the backlog is scheduled to commence in 2024, with the majority coming in the second half of the year. During the fourth quarter, we signed $210 million of renewal leases with pricing increases of 8.2% on a cash basis, setting the high watermark for the year, though this was skewed over 100 basis points by shorter-term renewals in 1 market.

For the full year, cash renewal spreads were up 6.8% or 5.5% when normalizing for short-term extensions. Re-leasing spreads were positive across product, market and region in 2023, setting the foundation for an acceleration in long-term sustainable growth. In 2024, we expect the pricing environment to remain firm and renewal spreads to remain positive, principally reflecting the near 80% weighting of lease expirations in the 0 to 1 megawatt segment. In terms of earnings growth, we reported fourth quarter core FFO of $1.63 per share and $6.59 for the full year within our guidance range.

Earnings reflect the continued strong organic results, together with the impact from capital recycling, deleveraging and increased development spending throughout the year, as discussed on our third quarter call. Total revenue was up 11% year-over-year despite the incremental drag from the stabilized JV contributions and the noncore asset sales that closed in the third quarter. As we also noted last quarter, year-over-year revenue growth continued to be positively impacted by the significant volatility in utility costs and reimbursements, particularly in Europe. Energy dynamics proved to be a tailwind for our results in 2023. Assuming more normalized energy prices, we expect the related upside impact will moderate in 2024. Interconnection revenue was $106 million, up 9% year-over-year, reflecting continued unit growth and price increases.

Moving over to the expense side. Utilities were 5% lower sequentially, reflecting the joint venture contributions over the summer, combined with seasonal impacts. Operating expenses increased due to seasonally elevated maintenance spending in the fourth quarter. Property taxes fell back toward normalized levels, reflecting the onetime property tax reassessment experienced in the third quarter. Net of this movement, adjusted EBITDA increased 9% year-over-year.

Improvement in our stabilized same capital operating performance continued in the fourth quarter with a year-over-year cash NOI up a strong 9.9% and up 7.7% on a constant currency basis. For the full year, results were also strong with cash NOI growth of 7.5% and 6.5% on a constant currency basis. Focusing on investment activity, we spent $3 billion on development in 2023, net of the proceeds received from our first development JV closing in November, and we delivered over 230 megawatts of new capacity across the globe.

Turning to the balance sheet. We continued to strengthen our balance sheet since the end of the third quarter with the sale of $1.2 billion of equity through the ATM at an average price of $133 per share, achieving our goal of lowering our leverage towards 6x in finishing the year at 6.2x. After year-end, we made further progress on the balance sheet with the closings of the Cyxtera transactions in the first phase of the Blackstone joint venture. GI Partners also exercised their option and closed on an additional 15% share of the 2 stabilized assets in our Chicago JV, bringing their stake to 80%.

Pro forma for these activities' year-end leverage was 5.8x. S&P recognized our progress in December and upgraded our outlook. Early in the fourth quarter, we paid off our $100 million Swiss franc notes and closed the Realty Income joint venture, which generated $200 million of gross proceeds and reduced our CapEx commitments for the remainder of the project's development. We continue to keep significant cash on the balance sheet with over $1.6 billion at year-end as we continue to prioritize liquidity and to support ongoing development spend.

Moving on to our debt profile. Our weighted average debt maturity is nearly 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 85% 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 remained well laddered through 2032. I'll finish with guidance. We are providing an initial core FFO per share guidance range for the full year 2024 of $6.60 to $6.75, reflecting the underlying growth of our business, offset by the impact of the deleveraging activities we completed or announced in 2023. As a reminder, over the course of 2024 and 2025, we expect that our $6 billion development pipeline will become increasingly accretive as higher-yielding projects deliver.

For 2024, we expect total revenue to grow by 2% and adjusted EBITDA to grow by 4% at the midpoint of our guidance ranges. When normalizing this growth for the impact of capital recycling, total revenue and adjusted EBITDA are anticipated to grow by 7% and 10%, respectively, in 2024. We expect both our cash and GAAP re-leasing spreads, along with same capital cash NOI growth to remain solidly positive, while occupancy is expected to improve steadily throughout the year as our record backlog commences and available capacity is leased.

Specifically, cash re-leasing spreads are expected to increase by 4% to 6% in 2024. Same capital cash NOI is expected to grow by 2% to 3%, given the tougher base year comparison versus last year's 7.5% growth and our expectations for FX and energy pricing in our colo segment. Total portfolio occupancy is expected to improve by 100 to 200 basis points by the end of 2024 while total occupancy slipped to 81.7% in the fourth quarter of 2023. This was predominantly driven by the delivery of substantial vacant development capacity that is slated to be occupied as same-capital occupancy was stable quarter-over-quarter.

We also expect to continue to recycle capital in 2024 with noncore asset sales and stabilized joint ventures raising $1.25 billion at the midpoint of our guidance range. Nearly 1/3 of this activity was completed in early January, while the balance should close throughout this year. Along with cash on hand and retained cash flow from operations, this capital is expected to be the primary funding source of our $2 billion to $2.5 billion net development CapEx program for 2024.

To be clear, this approximately 25% reduction in development spend year-over-year represents Digital Realty's share of CapEx spend. The total development spend on these projects will be higher when including our partners' pro rata share. This concludes our prepared remarks, and now we'll be pleased to take your questions. Operator, would you please begin the Q&A session?

[Operator]

[Operator Instructions] The first question today comes from Michael Rollins with Citi.

[Michael Rollins, analyst]

Thanks, and good afternoon. A couple of questions. First, in terms of -- you were just describing the shift in same capital cash NOI growth from 7.5% to 2% to 3%, can you unpack more of what you're seeing in '24 relative to '23? And how pricing kind of comes into the expectation for 2024?

[Andrew Power, executive]

Thanks, Mike. So we'll try to weave that into 1 answer in sort of trying to stick to 1 question and get through the whole roster and maybe loop back. But I'll turn it to Matt to call -- give you the bridge from -- on a same-store basis.

[Matthew Mercier, executive]

Sure. Thanks, Mike. So a couple of things that I would call out. First, in terms of, call it, the re-leasing spreads and their influence, first off, I think as we know, not all of our leases roll within the calendar year. So we roll roughly, call it, 20% to 25% of our portfolio in the year. And of that, 80% is in the 0 to 1 megawatt category, which is influenced by inflation or CPI, which we've seen come down over the course of the year, and therefore, part of the mark-to-market pricing within that segment.

Then when you flip over the other 20%, which is in the greater than a megawatt category, we're seeing, in '24, expiring rents that are higher than what we saw in '23, which creates a tougher comp in terms of the role despite strong market rents and overall growth. So that's on the spread side. The other part that I would call out is in '23, we saw benefits or tailwinds from FX as well as power pricing, which we're not seeing in '24. And lastly, in '24, we are expecting higher property tax expense. So putting all those together kind of is why you're seeing sort of the still positive, but not as positive, this '23 results for same-store portfolio in '24.

[Operator]

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

[David Barden, analyst]

Maybe first, last night, we heard from one of your peers that the higher power prices in 2023 have created some sort of lagged crowding out effect in terms of budgeting and decision-making. And I was wondering if you could kind of talk a little bit about that. Kind of something like maybe you're hearing or seeing some of that in your colo business, but it wasn't crystal. And then just as a follow-up, if I could. Matt, can you break down that $1.25 billion in kind of -- or the rest of the $1.25 billion that's closing this year? What is -- how does it all breakdown and the cadence of that?

[Andrew Power, executive]

Thanks, Dave. This is Andy. I don't think we're experiencing the same exact dynamics on power as what you heard last night, quite honestly. I think what Matt -- you just heard from Matt is the comps on a growth basis in the same-store pool are not as -- we benefited in '23 from power, and we're not going to have that kind of benefit repeat itself in 2024 -- and I think this all is going to be washed out once we say goodbye to '25, assuming we don't go back into this -- another, call it, very volatile power environment, so it's almost onetime in nature.

I don't believe that it's impacted buyer behavior. And I don't believe we're suffering or benefiting depending on the period to the same degree of what was described. Maybe that's due to the market mix, overall business and in our hedging strategy, which are not identical. I can tell you, from a business standpoint, and you can see this in the results, we capped off a very strong year, let's call it, focused on the enterprise colo connectivity segment. Record overall new logos, north of 500; strong quarters of new signings. You had a very strong interconnection quarter, both in new signings and also a flow through the P&L, which has been accelerating and net absorption, certainly in that category, that was strong in the fourth quarter and through the year. So I don't see the power flowing through.

I know we're trying to get to one question per se and then rotate back, so as we move there, Greg, why don't you just touch on the components of the $1.25 billion in our guidance for data?

[Gregory Wright, executive]

Sure. Thanks, Andy. Look, I think, again, there are 2 components there. It's really -- it's a stabilized joint ventures, and it's our sort of noncore asset disposition. And when you look at that, call it, $1.250 billion or a range of $1 billion to $1.5 billion, call it, I think it's important to note that over 1/3 of that has already been announced and is either closed or is pending close. So obviously, we feel good about that number. And it's clearly much less in the context of last year.

[Operator]

The next question comes from Michael Elias with CB Cowen.

[Michael Elias, analyst]

So Andy, we're in the middle of one of the strongest hyperscale demand environment that we've seen in recent history. I was wondering, can you talk about the go-forward demand pipeline and the relative strength of the pipeline versus last year. And as part of that, can you talk about the opportunity set for the pricing for new leasing, specifically, is -- do you see there being a governor on pricing given the supply-demand backdrop that we're seeing?

[Andrew Power, executive]

Thanks, Michael. So I would say, on a year-over-year basis, we're -- the dynamics has changed tremendously on so many fronts. Overall, the pipeline for hyperscale has continued to grow to new heights. I view the AI demand is a new wave of demand, incremental call enterprise; hybrid IT, certainly an incremental to hyperscale cloud compute. And this has all played out in the backdrop of tightening supply-demand dynamics that has called -- as we've described, over several quarters now, moved the pendulum on pricing more and more in the favor of providers like Digital Realty.

Is there a ceiling? Listen, I think we've seen rates run tremendously. We, just this quarter, reported in that segment north of a megawatt, call it, our highest GAAP rate ever at $145 million. We are continuing to see -- it's almost like some of these customers, who are often on calendar fiscal years just like Digital Realty, wrapped up one budget cycle and got a budget refresh and came back in 2024 with the incremental appetite for demand.

These customers are seeking some of the same things. When we intersect with that demand, it's in our large-scale hyperscale campuses that are in our major markets and especially with larger capacity blocks that have contiguous capacity or the most sought after. And those rates continue to run in terms of what we've signed and where we put up quotes. And I think we're very well positioned.

If you look at our footprint, you can see a lot of it on development capacity life cycle, which is just a portion of what we activate in Northern Virginia right now, but some of the other major markets as well, to capture a good -- more than our fair share of that demand.

And lastly, I think there's a broader acknowledgment whether it is hyperscale compute or AI workloads that these customers -- our time to market, many of them are trying to land precious GPUs that are just enormous business opportunities for these customers. And our rent, even historically, but certainly today, plays a very small economic piece in that equation relative to their ability to launch their services and be first to market many times.

[Operator]

The next question comes from Jonathan Atkin with RBC.

[Jonathan Atkin, analyst]

I was wondering if you could talk a little bit about where we might end the year kind of in terms of leverage. What are some of the outcomes there and the role of ATM issuances, equity issuance as part of that?

[Matthew Mercier, executive]

Sure. Thanks, Jonathan. So look, I think you've seen the results of the work we've done in '23, where we talked about getting down to the 6x area. And the execution that, not only Greg's team on -- did with the transactions that we closed, but also sales on the ATM that we did early in the year and then more recently, getting to that point and actually breaking through that. When you look at it on a pro forma basis, we're at 5.8x.

And we -- and so we continue to want to get down towards that 5.5x area, which is the same messaging we've had since the start of '23, and we've executed on that path. And we think that the plan that we've laid out here in terms of our guidance will enable us -- to get us there where we're continuing some level of capital recycling given the broad and diverse sources of capital that we've got available to us. And that's the plan we're going to continue to go down in terms of marching towards that 5.5% area, which is a smaller task than what we did in '23.

[Operator]

Next question comes from Irvin Liu with Evercore ISI.

[Jyhhaw Liu, analyst]

I'll stick to one. Andy, you mentioned demand for large blocks of capacity in several key markets such as NOVA and Silicon Valley among some of the other major markets. At an aggregate level, I think overall supply remains very low in some of these markets. But specifically for you, has lower available capacity been a gating factor for your greater than 1 megawatt signings performance?

[Andrew Power, executive]

Thanks, Irvin. The -- we certainly have a really great opportunity to intersect with these large capacity block needs of our customers, be it for AI or hyperscale. It is, I would say, maybe potentially unparalleled in what we can offer in Northern Virginia today in terms of available capacity in a market that's shut down in terms of new power until 2026.

But the list goes beyond that, whether it's Dallas, Santa Clara, Paris, Frankfurt, Amsterdam, Seoul or parts of Japan, not to mention some of our joint ventures in Latin America and South Africa. We've taken our approach, quite honestly, where many of these capacity blocks, for ourselves and many providers, were at the early stages of development. They were wetland, weren't pad-ready. Shelves are coming online and just the first suites were coming online. And throughout 2023, we took a more, call it, approach whereby we didn't go run after the first deal out of the gate for some of these customers, because we knew we weren't losing a revenue opportunity because the capacity wasn't even being able to be moved into or at least commenced.

And in hindsight, that's proven fortuitous, because as the year has played out, and certainly as 2024 has gotten off out of those gates, we've continue to see what we're offering is becoming much more and more attractive to an even broader and diverse set of customers. So I don't think we'll be able to spend -- it'd be late -- too long in 2024. We obviously now have some capacity blocks that are actually live and we can commence rent on, so we do have some urgency to get that going. But I think our patience and prudence here and approach allowed us to prove right.

Listen, sometimes it's better to be lucky than smart. If I would have known Ashford would have ran out of power years ago, I would have -- we wouldn't have sold all that capacity we had to release at the time. But this time, we're -- the luck was on our side.

[Operator]

The next question comes from David Guarino with Green Street.

[David Guarino, analyst]

Andy, on your comments, at least how I heard on a potentially very high ceiling for rental rates, as I kind of take that into consideration and look across the lease expiration table in the greater than 1 megawatt category, it appears you guys have a pretty favorable mark-to-market rent opportunity over the next few years. Am I fair to make that assumption? Or is there a chance that some of your leases might have clauses that could limit how much you're able to participate in the upside?

[Andrew Power, executive]

Thanks, David. So the -- I think you heard me loud and clear on where rates have come from and where they've gone or where they're likely to continue to move and some of these markets haven't even hit peak historical rates if you look at the whole span of data center capacity, so I don't think we're at a rent bubble or near that necessarily.

And it's been on the back of real constraints and build costs that's -- have inflated and issues. So they are -- I believe these rental moves are justified. I think you will continue to see the cash mark-to-markets flow through in our favor. We did call out in -- throughout last year and in the script for this quarter, that we had some episodic short-term renewals inflated our cash mark-to-market, but we think being, call it, 4% to 6% in that category overall is pretty in our favor.

And to your question on the bigger deals where you're going to have these potential roll-ups, yes, we do have subsections of our contracts that have clauses that are certainly in the favor of our customer. When the market was quite the opposite of what it was today and it was filling vacant capacity, we certainly had to succumb to some of those clauses that our customers. But they all often are very narrowly defined in terms of fixed duration of renewal time period and other bells and whistles. And when a customer, which they often do, wants to negotiate outside of that box, that opens up the contract renegotiation. And we try to collaborate with our customers to come into a mutually agreeable outcome.

So that's a long-winded way of saying, I don't think we'll be able to roll every one of those, call it, sub 100-plus megawatts directly up to the 140 or 150 or 160 or wherever we're going in the market. But I think we'll -- I do think there is going to be a positive mark-to-market in that category for some years to come.

[Operator]

Next question comes from Aryeh Klein with BMO Capital Markets.

[Aryeh Klein, analyst]

Andy, there's a lot of moving parts that are impacting the 2024 guidance that I think Matt mentioned 10% EBITDA growth normalized for the deleveraging activity. I guess as you move past some of the headwinds creating dilution, and as you noted, it seems like pricing and mark-to-market tailwinds should be here for a while, what kind of growth do you think you can deliver beyond 2024 on the bottom line from a longer-term standpoint?

[Andrew Power, executive]

Matt, do you want to start us off on that one?

[Matthew Mercier, executive]

Sure. Yes. So a couple of things. So Aryeh, thanks. As we did mention, on a normalized basis in '24, for a lot of the -- for the transactional activity that hit in '23 and some -- and what we expect in '24, I do want to reiterate, we're looking at normalized growth at 7% on revenue and 10% on EBITDA as you noted.

And so '24 is seeing the impact from the timing of those transactions and close, where in '23, they were in the second half of the year. In '24, we're expecting them, as Greg noted earlier, where we've already got a decent portion of that under contract, those are closed in the first part of '24, so creating some of that impact on '24 bottom line. And we did all that at the same time, again, just as a reminder, that we're delevering over a turn.

If you look through all that, what we would expect is that we look at it in sort of 2 buckets in terms of cost -- the growth algorithm. First one being, we would expect on our stabilized same-store pool to have -- see growth in that 3% to 4% area. On top of that, looking at our development pipeline, favorable pricing, better yields. And as those start to deliver in '24 and '25, we would expect to see another 1% to 2% on top of that, too. Together, that gets us to kind of the mid- to high single digits that we should expect to see in '25 and beyond.

[Operator]

The next question comes from Frank Louthan with Raymond James. Please go ahead.

[Frank Louthan, analyst]

Sorry about that. I heard from several of your peers and some equipment companies and so forth about some macro issues that they're seeing with some elongated sales cycles and squeezing some IT budgets, you mentioned some cross-connect grooming you've seen. Are you seeing anything like that from your enterprise business or elsewhere from any sort of macro pressures in part of your business?

[Andrew Power, executive]

Thanks, Frank. I want to have Colin tackle what we're seeing in the, I'll call it, enterprise sales cycle.

[Colin McLean, executive]

Yes. Thanks, Frank, for the question. Appreciate it. As Andy highlighted, the pipeline across the board is robust and that's both above and below 1 megawatt. We certainly see our customers engaging consistently with this related to growing their platform globally. So that $53 million back to back strong quarters, I think, is a testimony to how we're supporting their needs pretty well. In fact, 1,000-plus companies landed with us in Q4, which, again, I think is a strong growth testimony.

In terms of time to close overall, I think we had highlighted previously a couple of hiccups, maybe early in the year, Q1, Q2 in terms of expanded time to close. We haven't really seen that, honestly, to date. It's really flattened out. And so I really think it's a byproduct of us engaging showing up differently.

The new logo engagement, I think, overall has been particularly strong. We did 134 new logos last quarter. So on the enterprise side, on the whole, I think we've seen pretty strong interest, pipeline and then execution on the whole.

[Chris Sharp, executive]

Right. And one thing I'd like to spread a bit more detail on the equipment. With the offering that we launched last year around the high-density colo in anticipation of a lot of private AI type of deployments coming to market, a part of that program is, not only that the 32 markets and 3 regions being able to do 70 kilowatts a rack, what we're really doing is pre-buying a lot of the technology to support that power density to allow our customers to deploy in a very timely fashion, but also expedites a bit of that higher end kind of new AI capability coming to market.

[Operator]

The next question comes from Matt Niknam with Deutsche Bank.

[Matthew Niknam, analyst]

Financial question. So with leverage now back under 6 turns on a pro forma basis, how do you now think about the dividend and potential forward growth relative to incremental investments in the business and/or potential M&A?

[Andrew Power, executive]

Thanks, Matt. So multifaceted, I'm going to hand to Matt to explain how the dividend call works in terms of taxable income and distribution and why the dividend is set where it is set. Because I think the topic of M&A, I mean, you could look at the linear press releases or just recent events we've done in just the last several months through resolving our relationship to Cyxtera to growing our platform in India with the addition of Reliance Jio. We also just had a big announcement with a leader in the GPU space recently to disposing of some noncore assets, JVs, stabilized assets and adding strategically to our landholdings across key markets. So we've been incredibly active on pieces of that.

I think more -- the broader context of M&A, I think the most critical puzzle pieces have kind of been picked over. And most of our activity from here are, really, call it, extending our strategic advantages and bolt-on in nature to what we have. I don't see any, like, key gems out there that would be really additive to our global platform at [ speed ]. Matt, why don't you hit on the dividend because Matt brought that up?

[Matthew Mercier, executive]

Sure. I mean, similar to what we've talked about in '23, I mean, there are 2 major components in terms of the dividend and related to taxable income. There's our ordinary income that we get from operations, and then there's also the income that's generated from transactions and the related gains that we have from executing those, which we had a sizable amount on the '23.

Now we're looking at less transaction size in '24, but as you just saw in the guide, we talked about $1 billion to $1.5 billion, so we expect that there'll still be related income from that. And we still have cash flow even after dividend and we think we'll be able to support where we are. And ultimately, our goal and target is that we grow the dividend as AFFO and as our cash flow grows, which we expect we'll start to see over the long term related to the growth algorithm that I talked about earlier.

[Operator]

The next question comes from Simon Flannery with Morgan Stanley.

[Simon Flannery, analyst]

I wanted to just talk about the mix between the 0 to 1 and the greater than 1 megawatt. It looks like you had almost 50% coming from 0 to 1 plus interconnection. That's been gradually rising over the last few quarters. So how do we think about this going forward? Your focus on -- should that mix trend higher than the 50-50? Or is it going to be jumping around as it has done in the past?

[Andrew Power, executive]

Thanks, Simon. So one of our top, top, top priorities is to continue to focus on delivering an acceleration in that 0 to 1 megawatt interconnection cohort, enterprise connectivity to our customers, the most granular and the largest volume of over 5,000 customers as well as our new logos. So by and large, the more quarters where that represents a larger and increasing piece of the mix and continues to accelerate like it has done recently, that is filling our existing vacant capacity. It's wins at our highest rates, it's multi-market, multi-geo enterprise customers and is the place where we believe we can deliver the greatest value to our customers, most consistently, in long-term and durable.

There will be episodic quarters where that will be a lower percentage. But that's likely not because we've faltered at our execution. That's likely because we've also are supporting some of the largest hyperscalers around the world. We're bringing our capacity in over half of our 50-plus metropolitan areas, places where we can really add value to those customers, where they've already landed their compute or [ Az ], where they want to grow at our continuous capacity with operational excellence, where we have that long runway of growth that they can get from no one else.

And those would be quarters where we'll be signing larger, lumpier deals, obviously, into those capacity blocks. So we think both of these are large addressable markets where we have a distinct value proposition and a competitive moat that we'll continue to focus on executing each and every day.

[Operator]

The next question comes from Erik Rasmussen with Stifel.

[Erik Rasmussen, analyst]

Maybe just on AI. It seems most of the demand in the early stages is expected to come from training versus inferencing. But we heard from Microsoft on their earnings call, and they said that most of the AI strength that they were seeing for Azure was, in fact, from inferencing workloads. Are you seeing the same as it relates to sort of the demand patterns from your customers? And then maybe, any way to quantify how much AI has contributed or the size of the opportunity?

[Andrew Power, executive]

Thanks, Erik. Let me just touch on this a little bit and then hand it to Chris to walk you through chapter and verse. I look at where our heritage is as a company. This AI opportunity is tremendously in our wheelhouse. We came with this from a hyperscale piece of the business and build the colo connectivity capabilities organically and inorganically. We are often taking larger halls that are at higher power densities and using our engineering prowess to work for enterprise customers and pushing their boundaries on power densities. I can tell you, AI workloads were at Digital before I joined over 9 years ago.

We've done retrofits on existing deployments just to fit out for customers needing AI just this year. At the end of last year, I was touring one of our Paris facilities, where one of our partner customers have fitted out a liquid cooling for a multinational financial services company, live environments which meant that they had to get going on that years ago to be live at the end of last year.

So this is right in our wheelhouse, and we've been winning in that category in the last year in the, call it, several hundred kilowatt domain to the 30-plus megawatt piece of this, and you've seen some testimonials on that. Chris, why don't you give a little bit of color as to some of the verticals we've been winning and where do you see this going as well?

[Chris Sharp, executive]

Yes. It's a great question and appreciate it, Erik. I think there are a couple of dynamics that you touched on. The training to inference. That's something that we've been watching for some time. And we're selective with some of the training environments just because we're looking for a long-term durable workload being deployed into the asset.

And so a lot of the customers we see today are actually doing training or inference inside of their training just because of sheer availability of the GPUs and time to market, but we definitely see the long tail of that value happening in inference and then also kind of another section of private AI. And so we're seeing customers come to market with these types of requirements where, Andy alluded to this at a high level, coming from our heritage of scale and then being able to evolve and support a colo type of capability, if you will, allows us to support a higher power density need with our versatile designs.

And so being highly focused on that with a lot of the hyperscale customers and being foundational for their cloud services has been top of mind. And then I think another element that may be overlooked is a lot of this inference is embedded in a lot of our top customers today as capabilities. So when you read about, and I think you referenced Microsoft and the work that they've been doing with Copilot, a lot of that AI is embedded in enhancing their current product capabilities.

And so we're constantly watching how that evolves, but being proximate to the AI, being proximate to the existing infrastructure and workload is absolutely something that we're very excited about because that inference benefits from the data oceans that exist within Digital Realty, their current infrastructure and how all that culminates together. So it's something you'll see play out over this year.

I think we just had a really good case study with KakaoBank where that's highlighted private AI deployment where they're able to generate and do a little bit of R&D around new product offerings for a financial vertical. So these are the things you're going to see play out in 2024 that we're very excited about.

[Operator]

The next question comes from Nick Del Deo with MoffettNathanson .

[Nicholas Del Deo, analyst]

I was wondering if you could expand a little bit on the assumptions you're making about the broader lease environment and the pricing environment to get to the 4% to 6% range for cash renewal spreads. Are you just basically taking current prices as a given? Or are you kind of assuming further increases or other changes? And can you share anything about how the expected renewal spreads look for 0 to 1 versus greater 1 categories?

[Andrew Power, executive]

Sure. Matt, why don't you take that?

[Matthew Mercier, executive]

Yes. So thanks, Nick. With regard to -- I think I'll go back to some of the comments I had, I think, from one of the first questions. So with regard to 0 to 1 megawatt, that's on both the escalation and renewals tends to be influenced by inflation where CPI is coming in. So that's going to be spread across the leases that are rolling, whether they be in North America versus EMEA. And those have come down since last year and more in that 3% to 4% range.

And now on the greater than a megawatt, as I mentioned, we're assuming, call it, current market pricing and that's more heavily influenced by where the expiring rates are versus that. So that's within the greater than the megawatt segment, which we're assuming is still positive and resulting in the 4% to 6% total that we've guided towards.

[Operator]

The next question comes from Brandon Nispel with KeyBanc Capital Markets.

[Brandon Nispel, analyst]

Just a quick question. I think in the guidance for development capital, this is the first time it's actually been guided to, net of capital contributions. Can you maybe talk about what your total capital outlay will look like in '24 versus '23 on a like-for-like basis?

[Matthew Mercier, executive]

Sure. Yes. So, I mean, obviously, the net is -- given the development joint ventures that we've established over '23, and that will also close -- that are under contract in throughout '24, in particular with the one we announced with Blackstone, Phase 1 is already closed and Phase 2 is later in the year. And if you're looking at it from a gross basis in comparison, we're expecting, in '24, on a gross basis, we'd be spending north of $3.5 billion in terms of total CapEx and it would be -- which would be roughly 15% higher than the amount that we spent in 2023.

[Operator]

That concludes the Q&A 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.

[Andrew Power, executive]

Thank you, Betsy. Digital Realty capped off a transformative 2023 with a strong fourth quarter that was highlighted by 3 key elements: first, we sourced over $12 billion of new capital and commitments from an array of hyperscale private capital partners, deleveraging our balance sheet and positioning the company for the future. Second, we posted another quarter of improving organic operating results with the best same-capital cash NOI growth in nearly a decade, and we are just on the cusp of the AI wave of demand. Third, we continue to grow our footprint and capacity around the world with record deliveries in 2023 to meet the accelerating needs of our growing customer base.

These customers look to us to help enable their IT solutions, whether that is AI, cloud or even enterprises along their digital transformation journeys. Our value proposition is resonating. I'd like to thank everyone for joining us today with a special thank you to our dedicated and exceptional team at Digital Realty, who keeps the digital world turning. Thank you.

[Operator]

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