Rave Restaurant Group Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 13 speakers on the call.

Operator

Good day, and welcome to the Digital Realty Second Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr.

Operator

Jordan Sadler. Please go ahead.

Speaker 1

Thank you, operator, and welcome, everyone, to Digital Realty's Q2 2024 Earnings Conference Call. Joining me on today's call are President and CEO, Andy Power and CFO, Matt Versier 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 and 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 ks and subsequent filings with the SEC.

Speaker 1

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 Q2. First, we continue to execute within a very favorable demand environment with $164,000,000 of new leasing executed in the quarter, again marking 1 of the top quarters in our history, which together with last quarter's record leasing drove a record first half of the year. 2nd, our operating momentum continued through the 2nd quarter as a record level of commencements translated into meaningful improvement in both total and same capital occupancy, while cash releasing spreads remain firmly positive and continued growth in cross connects drove interconnection revenue to a new record in the quarter.

Speaker 1

And 3rd, through capital recycling and demand driven equity issuance in the quarter, we reduced our leverage to 5.3 times at quarter end, below our long term target level, helping to position Digital Realty for the opportunity that we continue to see in front of us. With that, I'd like to turn the call over to our President and CEO, Andy Power.

Speaker 2

Thanks, Jordan, and thanks to everyone for joining our call. Momentum we experienced in the Q1 continued in the second quarter. The first half of twenty twenty four, our new leasing was up over 100% from the activity we saw in the first half of twenty twenty three, with a strong and steady contribution from our 0 to 1 Megawatt plus Interconnection segment. Demand for data center capacity remains as strong as we've ever seen, especially for larger capacity blocks in our core markets. We are well positioned to take advantage of this favorable demand environment, given our track record of execution across 6 continents, a robust land bank and shelf capacity that could support 3 plus gigawatts of incremental development, reduce leverage and our growing and diverse array of capital partners.

Speaker 2

During the Q2, we remain focused on our key priorities. We signed 160 $4,000,000 of new leasing in the 2nd quarter, which excluded another $16,000,000 of bookings within one of our newest hyperscale private capital ventures. Our bookings in a greater than a megawatt category were once again the primary driver. There was no contribution from our largest hyperscale market, Northern Virginia, as Dallas led the way in the 2nd quarter. Importantly, we posted one of our strongest quarters ever in the 0 to 1 Megawatt Plus Interconnection segment with record new logos and near record bookings in each of the 0 to 1 Megawatt and interconnection categories.

Speaker 2

This leasing strength is a positive reflection of the value that our 5,000 and growing base of customers realize from our full spectrum product strategy. We also delivered strong operating results with 13% data center revenue growth year over year pro form a for the capital recycling activity completed over the last year. In addition, we have enjoyed healthy growth in recurring fee income associated with our new hyperscale ventures. In the first half, fee income was up 26% over the first half of twenty twenty three, primarily reflecting the formation of almost $10,000,000,000 of institutional private capital ventures over the last year. And we would expect this line item to continue to gather momentum.

Speaker 2

With the record commencements in the 2nd quarter and the healthy backlog of favorably priced leases ready to commence in the second half, we are well positioned for accelerating top line and bottom line growth for the remainder of 2024 and into 2025. Subsequent to quarter end, we also strengthened our value proposition in Europe through our entrance into the Slough submarket of London with the acquisition of a densely connected enterprise data center campus, which we expect to be highly complementary to our existing colocation capabilities in the city and the docklands. New campus supports an existing community of more than 150 customers, utilizing over 2,000 cross connects. Consistent with our key priorities, we continue to innovate and integrate as we unveiled our HD Column 2.0 offering in the 2nd quarter with advanced high density deployment support for liquid to chip cooling across 170 of our data centers globally. In addition, just last week, we announced the deployment of a new Microsoft Azure ExpressRoute cloud on ramp at our Dallas campus, along with the launch of the new Azure ExpressRoute Metro service in the Amsterdam and Zurich market.

Speaker 2

We also bolstered our balance sheet and significantly diversified our capital sources, availing Digital Realty of more than $10,000,000,000 of private capital over the past year through our new hyperscale ventures and non core dispositions. During the quarter, we expanded our existing Chicago hyperscale venture with the sale of a 75% interest in CH2, the remaining stabilized data center on our Elk Grove campus. We also sold an additional 24.9% interest in a data center in Frankfurt to Digital Coral Reef, increasing their total position in the campus to just under 50%. These two transactions together raised over $500,000,000 Finally, we raised approximately $2,000,000,000 of equity since our last earnings call, including the $1,700,000,000 follow on offering in early May and proceeds raised under our ATM. These transactions together with the others of the past year have positioned our balance sheet to capitalize on this unique environment and construct the capacity that our customers demand.

Speaker 2

Is reshaping the global data center landscape. As new applications are developed and proliferating across industries and around the world, AI is driving an incremental wave of demand for robust computing infrastructure. According to Gartner, global spending on public cloud services is projected to grow over 20% to reach $675,000,000,000 in 2024 and is forecast to grow another 22% in 2025 with AI related workloads driving a significant portion of this growth. Digital transformation, cloud and AI are fueling demand for data center capacity worldwide. Traditional data centers were already being pushed to their limits by demand for cloud and digital transformation, where demand for AI oriented data center infrastructure is being accommodated in upgraded suites in our existing facilities and in newly built facilities.

Speaker 2

These AI workloads are taking place on specialized hardware with massive parallel processing capabilities and light and fast data transfer speeds. Fortunately, Digital Realty's modular data center design can accommodate these evolving requirements. The growth in demand is global. We're seeing strong demand across our North American metros first, but it is spreading beyond with interest in locations like London, Amsterdam and Paris in Romania and Singapore and Tokyo and APAC. Our global footprint is well suited to capture this growing demand, whether it be for major cloud service providers adding to an availability zone, a major enterprise digitizing their business processes or an AI model being trained or being or put into production.

Speaker 2

However, this exponential growth in data center demand is not without its challenges. The environmental impact of these energy intensive facilities is growing alongside the scaling of user requirements. According to the IEA, data centers consumed almost 2% of global electricity in 2022, a figure that could double by 2026, absent significant efficiency improvements. I will touch on Digital Realty's latest sustainability highlights in a moment. As we look to the future, the interplay between AI advancements and data center evolution will continue to shape the global technology landscape.

Speaker 2

IDC predicts that by 2027, worldwide spending on digital transformation will reach nearly $4,000,000,000,000 driven by AI, further accelerating the demand for data center infrastructure. We believe that the providers who can officially scale their capacity while addressing sustainability concerns will be best positioned to benefit from these 3 key drivers: digital transformation, cloud and AI in the years to come. Customers and partners are recognizing the value that Digital Realty can bring to their applications around the world. During the Q2, we added 148 new logos, marking a new quarterly record. A growing number of these new logos are being sourced by our partners, who officially expand our sales team to reach into enterprises and around the world.

Speaker 2

The wins this quarter include a Global 2000 advanced engineering and research enterprise developing a private AI sandbox on platform digital to enable experimentation and development by federal agencies and brought to us by one of our large connectivity partners, Lumin Technologies. Another partner brought a new logo that is an AI enabled SaaS provider repatriating all public cloud to save costs and enable growth. That same partner was also assisting 2 large financial institutions to increase their capacity on platform digital in APAC and North America. And yet another example of our growing partnerships, an AI SaaS provider and recognized leader in natural language speech synthesis is growing their commitment to platform digital with an expansion of current AI workloads where proximity is the driving requirement. The Global 2000 manufacturer is re architecting their network on platform digital with a regional hub to improve efficiency, lower their network costs and implement controls while eliminating the capital costs of maintaining their own facilities.

Speaker 2

And 2 leading financial services firms are both leveraging platform digital to extend their respective virtual desktop infrastructure environments to improve performance and user experience across their North American and EMEA employee base. Before turning it over to Matt, I'd like to touch on our ESG progress during the Q2. We continue to make meaningful progress on ESG performance. We were recognized by Time and Statista as one of the world's most sustainable companies of 2024. We also released our annual ESG report in June, highlighting our ongoing efforts to develop and operate responsibly.

Speaker 2

As described in our ESG report, we further increased our renewable energy supplies with 152 data centers now matched with 100% renewable energy. We improved water efficiency and expanded the use of recycled water, which accounted for 43% of our total water consumption last year. We also launched a new supplier engagement program to drive sustainability and decarbonization through our supply chain. 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 Brashear.

Speaker 3

Thank you, Andy. Let me jump right into our 2nd quarter results. We signed $164,000,000 of new leases in the 2nd quarter with 2 thirds of that falling into the greater than megawatt category, the majority of which landed in the Americas, with healthy contributions from both EMEA and APAC. Not to be overlooked, however, was the $40,000,000 of 0 to 1 Megawatt Leasing and a standout $14,000,000 of interconnection bookings. Our 4th consecutive quarter exceeding $50,000,000 in our 0 to 1 Megawatt Plus Interconnection segment.

Speaker 3

Turning to our backlog, we commenced a record $176,000,000 of new leases this quarter, which was largely balanced by the strong 2nd quarter leasing. As such, the $527,000,000 backlog of signed and not yet commenced leases moderated by only 2% from last quarter's peak and remains robust at more than 9% of our total revenue guidance for full year 2024. Looking ahead, we have over $175,000,000 scheduled to commence through the remainder of this year with over $230,000,000 already scheduled to commence next year. During the Q2, we signed $215,000,000 of renewal leases at a 4% increase on a cash basis, driving year to date renewal spreads to 8.2%. Re leasing spreads were once again positive across products and regions.

Speaker 3

Last quarter, we noted that the underlying renewal spread after stripping out 2 outliers was 3.4%. Our cash renewal spreads in the 0 to 1 Megawatt segment were up 3.8% in the 2nd quarter, while the greater than a Megawatt segment was up 3.9%. As a reminder, the 1 Megawatt segment is the primary driver of our overall re leasing spreads, given the heavier weighting of lease expirations in this category, which predictably making them track closer to market over time, thereby reducing the outsized movements that can come with larger or longer term lease renewals. On the greater than the megawatt side, renewals reflected the strong pricing environment with leases renewed at $159 per kilowatt compared to the $133 per kilowatt achieved on greater than a megawatt renewals last quarter. The key difference between the quarters was the rate on the expiring leases.

Speaker 3

This quarter leases in this segment expired at 153 per kw while last quarter's leases expired at an average of 112 per kilowatt. For the quarter, churn remained low and well controlled at 1.6% and our largest termination was immediately backfilled at an improved rate. In terms of earnings growth, we reported 2nd quarter core FFO of $1.65 per share, reflecting continued healthy organic operating results, partly balanced by the impact of the meaningful deleveraging and capital raising activity executed over the course of the last year. Revenue growth in the quarter was tempered by the decline in utility expense reimbursements, a comparison that is likely to persist throughout this year given the decline in electricity rates in EMEA year over year, along with the impact of substantial capital recycling activity. Despite the deleveraging headwinds, rental revenue plus interconnection revenues were up 5% on a combined basis year over year.

Speaker 3

Adjusted EBITDA also increased 5 percent year over year through the first half and remains well on track to meet our 2024 guidance. Pro form a for the capital recycling completed since last July. Rental plus interconnection revenue and adjusted EBITDA grew by 13% 14% year over year respectively in the 2nd quarter. Stabilized same capital operating performance saw continued growth in the second quarter with year over year CAS NOI up 2% as 3.6% growth in data center revenue was offset by a catch up in rental property operating costs, which were flat last quarter. Year to date, same capital cash NOI has increased by 3.5%.

Speaker 3

We have previously highlighted same capital NOI growth is expected to be impacted by nearly 200 basis points of power margin headwinds year over year, given the elevated utility prices in EMEA in 2023. Moving on to our investment activity. We spent $532,000,000 on consolidated development in the 2nd quarter, plus another $90,000,000 for our share of unconsolidated JV spending. We delivered 72 megawatts of new capacity across the globe for our customers in the quarter, while we backfilled the pipeline with 71 megawatts of new starts. Blended average yield on our overall development pipeline moderated 20 basis points sequentially to 10.4% as a result of a market mix shift of completions and starts in North America during the quarter.

Speaker 3

In the first half of the year, we spent a bit over $1,000,000,000 in development CapEx, tracking closely towards our full year guidance as the second half should see a ramp from newly commenced projects along with the typical seasonal uplift. Turning to the balance sheet. We continue to strengthen our balance sheet in the 2nd quarter with the closing of the 2 transactions in April that we disclosed during last quarter's earnings report and was referenced earlier by Andy. Together, these two transactions raised just over $500,000,000 of gross proceeds. Additionally, since our last earnings report, we sold 14,700,000 shares, including a 12,100,000 share follow on offering in early May and incremental ATM issuance raising $2,000,000,000 of net proceeds, while using cash on hand to pay off a €600,000,000 bond that matured in April and a €250,000,000 bond that matured last Friday.

Speaker 3

At the end of the Q2, we had more than $4,000,000,000 of total liquidity and our net debt to EBITDA ratio fell to 5.3 times, which is below our long term target. Moving on to our debt profile. Our weighted average debt maturity is over 4 years and our weighted average interest rate is 2.9%. Approximately 84% of our debt is non U. S.

Speaker 3

Dollar denominated, reflecting the growth of our global platform and our FX hedging strategy. Approximately 86% of our net debt is fixed rate and 96% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, after paying off the euro notes in April and sterling notes last week, we have 0 remaining debt maturities through year end. Beyond that, our maturities remain well laddered through 2,032. Let me conclude with our guidance.

Speaker 3

We are maintaining our core FFO guidance range for the full year of 2024 of $6.60 to $6.75 per share, reflecting the continued strength in our core business, partly balanced by the front half weighted capital recycling and funding activity, which helped to reduce our reported leverage by a full turn to better position the company to fund development in 2024 and beyond. We're also maintaining our total revenue and adjusted EBITDA guidance ranges for 2024 as well as the operating, investing and financing expectations that we've previously provided. Looking forward to the balance of 2024, core FFO per share remains poised to increase in the second half as the backlog commences and the impact of prior deleveraging moderates. This concludes our prepared remarks. And now we'll be pleased to take your questions.

Speaker 3

Operator, would you please begin the Q and A session?

Operator

Thank you. We will now open the call for questions. In the interest of time and to allow a large number of people to ask questions, callers will be limited to one question. Your first question comes from Richard Choe with JPMorgan. Please go ahead.

Speaker 4

Hi. I wanted to ask about the long term pipeline you're seeing for the over 1 megawatt category. I think there's some concerns that right now we might be in a kind of pull forward or kind of elevated cycle. And just wanted to get your sense of how far out this pipeline of deals that you're looking at and the current environment could last? Thank you.

Speaker 2

Thanks, Richard. So I would say in the greater than megawatt category, we're seeing a continuation of the trends we've been playing out for the last several quarters. The biggest customers are desiring 1, contiguous capacity blocks that are very large 2, they want them right now or as soon as possible and 3, the desire of fungible markets, I. E. Markets where the consumers certainly Gen AI workloads trading and ultimately inference, but also if they missed the measure, they can support their cloud computing needs as well.

Speaker 2

So we have not seen the penalties in terms of the demand for those attributes in the market.

Operator

The next question comes from Erwin Lu with Evercore ISI. Please go ahead.

Speaker 4

Sorry, I was muted. So, I wanted to double click on renewal rates. So, I guess, a couple of items stood out. 1, in the Americas, the the $146 per kilowatt monthly rate for the greater than 1 megawatt segment that marked a sequential decline. Similarly, we've seen rates on new leases decline sequentially as well.

Speaker 4

So can you help us understand what's driving the sequential declines versus a quarter ago? Was this step down mostly a function of markets and mix? Or were there other sort of industry dynamics that we should be thinking about?

Speaker 2

Thanks, Irvin. So I think the one deal or the one market you were pointing to was just the North America greater than megawatt. Now it's just a mix of composition of deals. This quarter in particular, Dallas market really led the way. It's had outside strength.

Speaker 2

And this is actually a quarter where we didn't actually have any signings into our Northern Virginia market, with not a lack of demand for that market. And we still have some great options for customers available at large capacity blocks in two parts of that market. But we just didn't have pen anything this particular quarter. So if you look more broadly, I think almost all the other regions in both segments had an uptick in REITs. On and that's always not apples to apples because the mix in the region could be different.

Speaker 2

Metros like that one example is SKU, But that was the only outlier is the one that was discussed.

Operator

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

Speaker 5

Thanks and good afternoon. I'm curious if you could talk about some of the ideas that you shared in the past around working on ways to participate in private capital recycling, whether it's trying to establish mechanisms to be able to react to when some of your private capital partners are going to hit their kind of maturity dates of those investments, what to do with those as well as maybe other opportunities in the category where there's private investments in other data center assets?

Speaker 2

Thanks, Michael. Maybe I'll kick it off and Greg can expand upon this. So this topic is not new. I think we've embarked on this journey at least 18 or at least a year and a half ago And we had great progress, call it, accumulating more than $10,000,000,000 of call it hyperscale private ventures with numerous parties. You've seen that few places, which we called out in the prepared remarks, seeing our fee revenue having a step up of a recurring revenue basis in the P and L.

Speaker 2

2, you've seen that in the balance sheet. Those private capital initiatives have obviously certainly moved our balance sheet from a defensive posture to an offensive posture and allow us to now pull forward some of these great projects in our land bank that's north of 3 gigawatts of runway of growth for our customers. And maybe I'll have Greg just give you a slightest preview of what's next in that evolution when it comes to our private strategic product accounting initiatives. Yes. Thanks, Andy.

Speaker 2

Thanks for the question, Michael. I think first thing I would say is consistent with, as Andy said, we laid out a year ago January, we're going to continue to bolster and diversify these private capital sources and that's just what we're doing. As he said, we did a lot of transactions over the last 18 months. We're continuing to evolve that strategy. And when we have something to report, we will.

Speaker 2

I think it's important to note that the importance of that capital because if you take a look at the demand profile for the business right now, the hyperscale business in and of itself between now 2030 is expected to grow almost 3 times and that includes AI hyperscale and non AI hyperscale. So look, we think that the strategy that Andy laid out that we embarked upon was the right strategy, but we're not done yet. And as we said, it's continuing to evolve. And when we have something to report on that front, we'll tell you.

Operator

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

Speaker 6

Yes, good afternoon. I'm wondering about kind of

Speaker 5

the speed at which you can kind

Speaker 6

of deliver on your new starts that you've commenced recently, supply chain, access to energy, access to heavy equipment and so forth, any kind of color there?

Speaker 2

Thanks, John. So I mean, we are if you almost think it was like a continuous conveyor belt of trying to deliver timely product for the customers' needs. That's certainly playing out in our enterprise colocation markets and now probably more than ever on the larger capacity blocks. This quarter the book to sign and commence them was elongated to about 20 ish months. That was based on one particular customer that we serviced and they had a very location sensitive need and a radius restriction.

Speaker 2

And the only thing we'll be having that radius was literally at Land State. Luckily, it was on a campus where we own the land and we already get moving on. So that obviously elongated the call delivery time limit for that particular signing. We excluded that we were basically called signing commencing like 4.5 type months. So we're continuously obviously delivering capacity and adding new capacity, whether it's from land to sales, sell the active suites and making sure we're maintaining our production slots and vendor relationships for that timely delivery in our 15 plus metros around the world.

Operator

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

Speaker 5

Okay. Thank you. I was hoping you could talk about some of the larger greater than 1 megawatt lease expirations that are coming up in the coming quarters. How many of those have fixed renewal options and how much can be mark to market rents? And if I can sneak in a follow-up question.

Speaker 5

I think there's $168,000,000 in the income statement. Just curious what that is really into?

Speaker 3

Sure. Thanks, Jonathan. So in terms of lease operations, so what I'd say is less than half of our greater than a megawatt leases have options with fixed increases on them. But I would call that significantly less than that are typically renewed pursuant to those options. And that's generally for a few reasons.

Speaker 3

One, our customers must provide us notice of renewal within the proper period. That doesn't always happen. 2, renewals must come in essence without any changes. So if there's any additional space, term, anything changes that opens up the contract. I think as we've talked about in the past and third, some of those customers also end up churning.

Speaker 3

So that all gives us an ability to be able to bring those contracts to market for the majority of what ends up rolling within a given period. On your second point on impairment, yes, we did have impairment associated with a few of our non core assets, which are part of our disposition plans and those are all located in the secondary market. And I'd also put that in context to the fact that we've generated quite close to I think over $1,300,000,000 of gains from the capital recycling efforts that we've done over the last year.

Operator

Your next question comes from Ari Klein with BMO Capital Markets. Please go ahead.

Speaker 7

Thank you. I guess just the comments on the pipeline coming off 2 very strong quarters of leasing and with the development pipeline, 60 6% lease including 80% in the Americas. How should we expect CapEx to trend from here? And then what's your appetite to add new domestic markets given what seems like broadening of demand?

Speaker 2

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

Speaker 8

Thanks, Ari. I appreciate the question. But easy highlight is strong performance over 1 megawatt. Pipeline overall for 1 megawatt trending positively below 1 megawatt, which we deem as important as heading in the right direction as well. Record pipeline driven from digital transformation, cloud and AI.

Speaker 8

You saw that trending positively in our results on both directly and indirectly. Indirect executions has picked up last quarter and we're now 23% of our pipeline being indirect, which we think is a positive sign

Speaker 2

to value proposition there. One of

Speaker 8

the things that Angie highlighted is the key value of metros with the demand cycle. We're seeing enterprises and hyperscalers alike see real value in proximity and the metro play that we have in key metrics across the globe being particularly important. Finally, the ability both for enterprises and hyperscalers to grow and scale and capacities of key value really across the spectrum of low and above a megawatt.

Speaker 2

Then Ari, on the second part of your question, honestly, we remain very focused on our core markets, north of 50 of them around the world, nearly 30 countries on 6 continents. Those markets we continuously see robust and diverse customer demand. I'm talking cloud compute from numerous CSPs, enterprise, hybrid IT and service providers, in markets where we see really long term barriers. And to be speaking to our actions on those, a sizable piece of our activation in shelves moving from our 3 plus gigawatt land bank into Shell's and ultimately to be delivered in suites is all in those same core markets.

Operator

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

Speaker 5

Hey guys, thanks. So I guess 2 if I could. Andy, I guess last quarter you talked about how 50% of these record bookings were roughly 50% were AI related. It obviously stepped down sequentially. But to your point about the lengthening of the delivery period, it seems like there's still some very large customers in what was the new leasing number this quarter.

Speaker 5

Could you kind of revisit on an apples and apples basis how 2Q unfolded versus 1Q from an AI versus non AI type of new leasing pattern? And how do we think about this? Is there going to be a seasonality to this sort of thing? That would be kind of my first question. And then second question is, I was just going back to 2019, you guys generated $6.65 of core FFO, which is kind of what you're guiding to for 2024.

Speaker 5

And I know that you've laid out a hope that there will be growth, more meaningful growth in the forward looking periods. Also, you said that your balance sheet is now less than a defensive and more in an offensive position. And historically, when you've been offensive, it's meant dilution to secure future growth opportunities. So I was wondering if you could kind of, Andy, revisit the bull case for growth to take all these great things that are happening at the top line and turn them into bottom line growth? Thank you.

Speaker 2

Thanks, Dave. So I would say close to apples to apples from a 50% contribution last quarter to this quarter is probably closer to a quarter of our size, we would say we really pin on AI use cases. But I would caveat that in a few ways. 1, that's in a quarter, that's not our record quarter, but I think the top 4 quarter overall signings, great contribution at both 0 to 1 and plus 1 megawatt as well as a near record in interconnection signings. And that means we're still winning with the traditional demand drivers, digital transformation, cloud computing and the like, that demand is not nearly exhausted, so it will play down.

Speaker 2

I would also say that there was certainly a deal that I didn't count in the category of AI that is certainly pushing the envelope on power density and posting trying already thinking about evolving that capacity block or sign with them in towards what will ultimately be supporting AI down the road is my guess, which I think speaks to the modularity of design and how we're able to scale infrastructure to the demands of our customers

Speaker 3

as they need

Speaker 2

it. The second part

Speaker 9

of your

Speaker 2

question, let first off, I don't want to confuse the word offense with M and A. I think we've not done any real M and A or external growth for several years now. You can maybe say the resolution of the 6th tier relationship, but that was, I think, making lemonade out of lemons more than anything. And when I use the word offensive, I mean that's converting this 3 plus gig wild land bank, which we've assembled over the years, I. E.

Speaker 2

We didn't just go buy that yesterday and turning that into a great product for our customers to land and expand in great returns on our investment. And you've been seeing that play out now with our ROIs and development schedule crescendoing into the double digits. You've seen that in the pricing power. You've seen our value proposition really resonate in all of our customer segments across our core markets. And lastly, our eye on the prize of accelerating bottom line, that's where we reoriented our strategy 18 months ago, about our value proposition, integrated, innovating, bolstering, diversified our capital sources.

Speaker 2

And all those things were about, call it, making sure we're driving per share FFO per share growth that is accelerating and it's going to be continuously compounding for years to come. So there's been no divergence in that conviction of what comes next for the rest of 2024 and what we've said about 2025 next year.

Operator

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

Speaker 4

I appreciate it. Thanks for taking the question. So Andy, could you maybe comment on what type of market rent growth you're seeing right now in some of your key metros on an apples to apples basis relative to last year and whether that's continued to evolve as this year has progressed? And then as you look out into the future, do you see an opportunity for market rent growth to continue to outstrip your development costs and we can see the 10% to 12% development yields you have in your pipeline move even higher? Thank you.

Speaker 3

Thanks, Eric. I mean,

Speaker 2

I would couch that market rent growth is continuing to move in our favor. You've seen 2 elements happening. The most precious capacity blocks in the key markets like Northern Virginia continue to set new records in terms of rates. And you've also seen a catch up phenomenon where other markets in North America or outside of the U. S.

Speaker 2

Are catching up a fair bit in terms of their trajectory of growth. Listen, I look at this, you've got waves of demand, cloud computing, digital transformation, hybrid IT and now AI that are just getting going in some of these. They're large and dynamic and it's happening in a supply constraint backdrop from numerous avenues of supply constraint. And those elements are ultimately resulting in the increases in rates that we've been able to execute on for several quarters and I believe will be quarters to come. And I also believe they will likely outstrip the whatever inflationary costs we see in terms of build costs and at least maintain these ROIs, if not continue to notch them up slightly higher.

Operator

The next question comes from Jim Snyder with Goldman Sachs. Please go ahead.

Speaker 10

Good afternoon and thanks for taking my question. On the topic of power constraints and supply environment you see relative to transmission, With the time horizon, let's say, 12 to 18 months, do you think the outlook for power availability is getting more constrained, less constrained or staying about the same relative to new projects you have either under development or contemplating?

Speaker 2

Jim, I think that there's a few phenomenons happening. 1, we're getting close I mean, some of these constraints popped up now year or years in a rearview mirror. And we're obviously inching our way close to destinations of resolutions, be it in Northern Virginia, which I think 2026 is supposedly a bogey, or in Santa Clara and there's other non U. S. Markets as well.

Speaker 2

At the same time, as we approach the power constraints, there's obviously a good potential that the delivery dates may not deliver on time. These are multifaceted projects that require easement, substations, construction projects. At the same time, the demand can stand still while the power was constrained. The second phenomenon I think you're seeing is the this is becoming a more pervasive topic. It was very focused on one called Center of the Universe market with Northern Virginia.

Speaker 2

And we're hearing more and more about other markets. And lastly, I wouldn't pin it just on power. Yes, the power has got broader generation issues in an economy that we're trying to green. It's got transmission issues that navigate municipalities and substation deliveries and transmission lines coming through the backyards of folks that rather not have them not there. But there are also other elements of sustainability concerns, moratoriums in certain parts of the world.

Speaker 2

And so I think that this is a multifaceted supply constraint, which I would also mention that even if it does get fixed, has propensity that could history could repeat itself here. So I think this is going to make our value proposition with what we deliver to our customers even more compelling and valuable at the end of the day.

Operator

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

Speaker 11

Good afternoon or evening. Thanks for taking the question. I guess just bigger picture, you've talked about leasing spreads in greater than 1 megamot improving over time, given the differential of what's expiring versus, I guess, market. But you also referenced market rent growth improving quite a bit. So with that and just some recent comments from hyperscalers just talking about the risk of oversupply or just too much CapEx.

Speaker 11

Can you sort of just frame the near term opportunities that in the greater than 1 megawatt from a maybe bookings, but more so pricing standpoint versus the puts and takes over time just from a demand supply? Like I'm just wondering, is there a risk that you see the spreads theoretically improve, but there's a lot of supply coming down the pike?

Speaker 2

I'll take the maybe the second part of your question. I guess Matt can comment on our outlook on leasing Sprint, but really kind of talk about the stair step in our exploration schedule, which does become even more attractive in this coming years. I think, Vikram, I think the heart of your second question is the broader AIC question you're hearing more on in the mainstream media of is AI overdone, is this a bubble, what could come next. I think some of that is not unnecessarily 100% to remain to what we're seeing. And the reason I say that is in our business when it comes to AI, we are signing long term contracts on 5th 15 years with some of the largest most established technology companies ever.

Speaker 2

2, and I mentioned before, we're doing that we're not chasing this out to unproven territories. We're focused on core markets with robust and diverse customer demand, where traditional use cases be it cloud computing from numerous CSPs, enterprise, hybrid IT and service provider demand are continuing to grow over time even if the AI has peaks and valleys. And we're doing it in markets that we believe are real term real and long term supply constraints. And lastly, all this is happening probably in the most supply constrained moment in the last 20 years data centers. So I don't I'm not sure or convinced that even if AI takes a breather on its long term innovation trajectory, I think that volatility, we are somewhat insulated in our sector from that volatility based on how we're pursuing it.

Speaker 2

But Matt, why don't you hit on the leasing expedition?

Speaker 3

Sure. So what I call it is, if you look at the greater than a megawatt leases that are expiring call it in the next 18 months, the average rate on that's in the 140 to 145 area. But then it steps down pretty gradually to as low as 111 by the time you hit to 2029. And so I think you're going to see a continued positive trajectory on our releasing spreads, not only in the greater than a Maywall grant category, but I think also across all categories. So I think you'd also recall within our 0 to 1 spreads have been positive.

Speaker 3

I think throughout our history, those are typically more regular steady inflationary type increases are better. So I think this puts us in a a good position considering where market rates are, where some of the supply constraints are to where we'll see market rates now continue to remain positive and grow and continue to accrue benefits to our releasing spreads as we go through time.

Operator

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

Speaker 10

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

Speaker 10

How should we think about that trend going forward?

Speaker 2

Collin, why don't you that's a great question because we're obviously spending a lot of time on the bigger deals right now. But Paul, why don't you give a walk through on the highlights of the quarter? Sure.

Speaker 8

Thanks for the question. I'm not sure how to use the word prioritize. We definitely want to emphasize a full platform to have an offering set. So as highlighted in Andy's opening remarks, performance in Q2 was particularly strong on 0 to 1, 4th consecutive quarter over $50,000,000 which I think was a which is also 3rd highest ever from 0 to 1. We think this consistency is really driven from our ability to serve the full spectrum of requirements for our enterprises and service providers across the Global 5,000 focus of customers.

Speaker 8

New logos are also pretty strong as well. Most solid ever in terms of 148 with 40% of that coming from the indirect side. Channel also which I had earlier was a particular strong point with over 20% booking contribution from the indirect side overall. So we view this segment as continuing our value proposition out to our client set. And a lot of the drivers Amy talked about around digital transformation, cloud and AI are also playing out in the 0 to 1 segment across enterprises and service providers.

Speaker 8

And Amy highlighted a couple of those key wins on opening remarks, namely Fortune 500 clients Fortune 5,000 clients, excuse me, offering their virtual desktop requirements in the global manufacturing win we have on the enterprise side. I also want to highlight the particular highlight of the Microsoft ExpressRoute launch into Dallas, which we feel like is presumably strong representation of our platform.

Operator

Your next question comes from Michael Elias with TD Cowen. Please go ahead.

Speaker 12

Great. Thanks for taking the questions guys. Andy, in the past you've talked about CapEx being an accordion that you expand and contract to the end of solving for consistent bottom line growth. So as I'm thinking about it, given the leasing success that you've had over the last two quarters and also as part of that, like the market opportunity in both hyperscale and enterprise, Is now the time to be expanding that accordion and really hitting the gas on CapEx? And if so, I just want to be clear, what is the explicit FFO per share growth that you guys are solving for as part of that algorithm?

Speaker 12

Thank you.

Speaker 2

Thanks, Michael. So the just to clarify, I would say CapEx is the core. I think that's how we fund it, which I think the same concept you're outlining in your question. The CapEx intensity, is being pulled forward, right? We talked about this of greenlining more shell capacity and ultimately suites in a highly leased pre leased development pipeline at very attractive returns.

Speaker 2

So we're seeing the CapEx intensity increase. We're intersecting at great rates, great returns for our business, supporting great customers in numerous markets. And we've now positioned ourselves at a balance sheet position of greater strength, not only just from our leverage standpoint, but from our liquidity and our diverse sources of capital. And what we're trying to do is essentially use the levers of using our public capital and our private capital to get back to a call it mid single digits call it 4 to our growth next year and then it's further acceleration on top of that and do that in a consistent year method of compounding that growth for numerous years to come. So it's really those levers of using public and private capital to drive that bottom line to new levels and on a consistent framework.

Operator

Your next question comes from David Greener with Green Street. Please go ahead.

Speaker 5

Thanks. I appreciate the industry statistics you guys included in your investor presentation. And I wanted to ask specifically about the declining global vacancy you highlighted, which is around 6%. But when I look at your stabilized portfolio, the vacancy level is about 3 times higher than that. So I guess, first, why is it so much higher?

Speaker 5

And then second, given the record demand we're seeing across the industry, how long do you think it's going to take before digital's portfolio resembles more like the industry is?

Speaker 2

I think the you got to remember that our portfolio is not all just called hyper scale and the hyper scale portion of this business can literally be 100% leased in many buildings or markets, right? And my gut is that chart, which I think data center block, which to do the best they can, is very much about more of a hyperscale lens. I was actually pretty pleased on the occupancy front. We're up 100 basis points in the same store occupancy quarter over quarter. And we have a big same store pool.

Speaker 2

It's not nothing. We're also actively taking it one step backwards sometimes on occupancy to take 2, 3, 4 steps forward. When vacant suites come back and scale and we convert those to colo and be able to support our customers colo growth as well. So this was the year we said that occupancy we're going to be moving the needle and we have been moving the needle. We got more to do in that arena.

Speaker 3

So I think you're going to

Speaker 2

see it move up. And if you look at you can also look to get a number of apples to apples. If you look at their occupancy show by markets. There are certain markets that will weigh less than 6% to a half percent vacancy that are just very much heavily weighted towards our hyperscale business. They just have a much smaller coal footprint like Northern Virginia.

Speaker 2

If you parse through it, especially on a megawatt basis, I wish I had that type of vacancy to sell right now, but we just don't.

Operator

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

Speaker 6

ahead. Hey guys, thanks for getting me on. I have 2 follow ups. First, on the colo side, so you cited the record new logo is 148 this quarter. I'm just wondering, from a macro perspective, any change in terms of macro impacts across different customer sizes within that sub-one megawatt base?

Speaker 6

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

Speaker 2

Matt, you hit the dividend question first and Colin, and I can hit a little bit on what we're seeing in the enterprise demand piece of the puzzle. Yes, sure.

Speaker 3

So thanks, Matt. So in terms of the dividend, look, I think it's back to kind of what we've said historically. I think we've got a unique opportunity here to take advantage of what we see as tremendous growth opportunity throughout our global portfolio. And one of the easiest and cheapest forms of capital within that is internally generated funds. And so we continue to look to try to maximize our cash flow as part of our funding strategy on that front.

Speaker 3

And on top of that, we're also I think as we've also mentioned throughout this call, we're keenly focused on growing the bottom line and accelerating that growth in outer years. So as we grow the bottom line, which is going to benefit and accrue benefits to not only core FFO, but then down to AFFO, we then look to keep our dividend growth in line with that bottom line per share growth as well.

Speaker 8

Great. On the new logo question, a couple of trends just maybe to highlight in that question. So first, we really believe it's in the hybrid world. So we're seeing that continued trend in the new logo base, hybrid work, cloud, data, that our new logo requirements really served well across our global platform. Number 2 is the mix of that 148 was very much split between commercial and Global 5,000 accounts.

Speaker 8

So we're seeing continued interest in the platform across the larger customers who buy with more frequency in the smaller of the spectrum. Not sure that we can necessarily point to a growing density in that particular base of client share or capacity, but I can tell you this particular base of clients sees real value, as I mentioned, in our global platform, which really serves well across their requirements.

Speaker 2

And just one Chris, why don't you just chime in on the early reads on

Speaker 9

the HD 1202, I don't know, and some of the and I would say

Speaker 2

an uptick in the enterprise segment. Yes. So I think

Speaker 3

I agree with Andy on the macro trend of what we're doing with HDcolo. It's just really aligning the right capability to cool some of these higher tower density requirements coming into the market. And so you see a lot of the capabilities that we brought in across the 100 and 70 facilities. We can execute these higher density solutions in 12 weeks or less. And I think what's interesting about that is the capacity blocks are getting larger, but like the capabilities that customers are trying to bring to market are definitely challenging for a lot of your traditional colo offerings where we've really started to see that come to market about 6 to 7 months ago.

Speaker 3

And so we've been able to procure a lot of these capabilities to get ahead of that challenge. But just kind of current rack densities in the market today are 6 to 8 kilowatts. And I think one of the things I think you're really hitting on is like what are some of these new requirements coming in. And so healthcare, we're seeing 10 kilowatts of RAC. I mean gaming, you're seeing 15 kilowatts erect this last quarter.

Speaker 3

And then some of the AI software capabilities, 40 kilowatts. But at the end of the day, we can meet a customer requirement of 150 kilowatts. So we have a lot of runway with that. And to put a little context to it, in the most recent state of the art NVIDIA GV200, we can support that requirement in an under 12 week fashion with our current HD colo offering. So definitely seeing a lot of growth in that market.

Operator

The next question comes from Anthony Ho with Truist Securities. Please go ahead.

Speaker 1

Great. Thanks for taking my question. I noticed that the weighted average commencement period for new leases is 20 months away. I'm assuming most of these leases are probably for 2026 deliveries, but are customers looking to sign leases for 2027? If they are, what type of customers are looking to pick up space this far out?

Speaker 2

I think so. I mean, customers are especially when it comes to larger capacity blocks, they're really trying to future proof and that's where our 3 gigawatts of growth comes in handy. So they certainly the nearest term deliveries are precious, but they're thinking years ahead. Now that particular example, as I mentioned, the 20 months was elongated because that customer, one particular customer had very much their eyesight on a particular market and they had radius restrictions about where they could grow and where we could support that growth. We're literally at land capacity.

Speaker 2

So that we were able to do deliver as fast as we could, but it certainly elongates it. Excluding that one outlier, we're close to 4.5 months. And I think I wouldn't count on those outliers consistently popping up, there'll be more sporadic.

Operator

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

Speaker 9

Great. Thanks for taking the question. A question for Matt. Can you talk about not updating the guidance at all? Maybe there's some moving pieces from FX and the recent acquisition that you call out.

Speaker 9

Just as I was looking at it, if you look at the first half of the year and realize it, revenues really need to accelerate while adjusted EBITDA would need to move backwards actually to hit the midpoint of your guide. So the question is, is the EBITDA FFO guide just conservative? Are there some uncertainty in terms of timing of commencement, unusual expenses? Hoping you could just unpack that for us. Thanks.

Speaker 3

Sure. I don't look, there's I would again I'd probably focus kind of on the bottom line. If you look at where we are halfway through the year, we're a little less than halfway through the midpoint of our core FFO guidance. And we talked about we expected this quarter would be would have a little bit of pressure because of the capital recycling efforts that we've concluded with closing CH2 and having the related income from that come out this quarter. And so, look, what we're going to see is in the second half growth will get growth we're expecting to improve and accelerate as the backlog of deals and signings come online as we expect as we haven't changed the guidance, we've obviously given a wide range.

Speaker 3

But if you look at, I think, where we are this year and the very nicely for 2025. We feel pretty good about the midpoint of guidance and being able to achieve that.

Operator

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

Speaker 2

Thank you. Digital Realty posted another strong quarter in 2Q with record leasing in the first half, demonstrating how Digital Realty is positioned to support the elevated level of demand we continue to see for data center infrastructure. Fundamental strength continued through the Q2 with robust leasing volume, healthy pricing and record commencements poised to drive an acceleration in bottom line growth. We continue to innovate and integrate with the rollout of HD Colo 2.0 and the addition of new cloud on ramps to platform digital in the quarter. And we have repositioned the balance sheet by recycling capital out of stabilized assets, diversifying our capital sources and reducing our leverage.

Speaker 2

All this was done with an eye towards improving our growth profile while supporting our customers' growing needs. We are excited about this quarter's results and remain optimistic about the outlook for data center demand and our position in the market. I'd like to thank everyone for joining us today and would like to thank our dedicated and exceptional team at Digital Realty who keep the digital world turning. Thank you.

Operator

The conference has now concluded.

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