Digital Realty today announced its Q1 2022 earnings, reiterated its outlook for 2022, and provided updates on its colocation and hyperscale data center lease activity, a customer bankruptcy (Sungard) and certain exits (LinkedIn and Rackspace), as well as its development pipeline and expansion of its portfolio in multiple markets in Europe.

As of Q1 2022, Digital Realty operates a global footprint of 291 data centers comprising over 2 gigawatts of white space IT load and 35.8 million net rentable sqft. Additionally, these data centers serve more than 4k customers and offer 181.5k cross-connects.

Financial Performance in Q1 2022 – Digital Realty

In Q1 2022, Digital Realty reported revenue of $1.13bn, a 1.5% increase quarter-over-quarter, and adjusted EBITDA of $603m, a 3.3% increase quarter-over-quarter. Therefore, the company’s EBITDA margin was 53.5% in Q1 2022, a ~100 bps improvement quarter-over-quarter.

Outlook for 2022

Digital Realty reiterated its full-year 2022 outlook for revenue of $4.70bn to $4.80bn and adjusted EBITDA of $2.48bn to $2.53bn, implying a 52.6% EBITDA margin. As such, the mid-point of Digital Realty’s 2022 outlook infers a year-over-year increase of 7.3% and 3.7% in revenue and EBITDA, respectively.

Leasing Activity in Q1 2022 – Digital Realty

In Q1 2022, new lease signings were $166.9m, up 6.6% from the $156.5m of signings during Q4 2021. In total, the new lease signings represented 110.2 megawatts of power capacity and 1.0 million sqft.

Historical Signings – Annualized GAAP Base Rent

Decomposing Digital Realty’s lease signings further by hyperscale, colocation, and interconnection:

  • Hyperscale: over 1-megawatt signings were $117.1m, equivalent to 70% of total signings
  • Colocation: under 1-megawatt signings were $38.7m, equivalent to 23% of total signings
  • Interconnection: contributed $10.9m, equivalent to 7% of total signings

Lease Pricing – New Leases

Overall, new lease rates were $118 per kilowatt, representing a 4% decline from $123 per kilowatt in the prior quarter. Further, lease rates in both the hyperscale and colocation segments were as follows:

  • Hyperscale: pricing of $102 per kilowatt, represents a 1% increase from $101 per kilowatt in the prior quarter
  • Colocation: pricing of $216 per kilowatt, represents an 11% decrease from $243 per kilowatt in the prior quarter

In terms of capacity, Digital Realty signed 81% of its hyperscale leasing activity and 70% of its total leasing activity in the Americas hyperscale sub-segment, securing 77.3 megawatts of power capacity. Within this all-important Americas hyperscale sub-segment, Digital Realty’s pricing was $90 per kilowatt, increasing 17% from $77 per kilowatt in the prior quarter.

Within the Americas segment, Digital Realty’s CEO, Bill Stein, highlights a specific example of like-for-like new lease rates, stating that “in Northern Virginia, our average prices were about 6% higher than just last quarter, in the fourth quarter. That market is increasingly tightening”.

Finally, the weighted average lease term on Digital Realty’s new leases was 7.3 years.

Geographic Breakdown – New Leases

Digital Realty’s mix of new lease signings, in terms of base rent, were weighted towards the Americas during Q1 2022. Specifically, the Americas contributed 66.5%, while EMEA and Asia Pacific added 18% and 16%, respectively (excluding interconnection).

  • Americas: new lease signings were $103.7m, for 85.2 megawatts of power capacity and 734k sqft
  • EMEA: new lease signings were $27.6m, for 14.5 megawatts of power capacity and 178k sqft
  • Asia Pacific: new lease signings were $24.7m, for 10.6 megawatts of power capacity and 92k sqft

In terms of markets, Digital Realty had particular new leasing success, with 6+ megawatts of signings in each of Ashburn, Northern Virginia; Toronto, Canada; and Frankfurt, Germany.

Renewal Leases

Digital Realty signed renewal leases representing $177m of rental revenue during Q1 2022. Of this total, renewals were derived from the following segments: $33m of hyperscale, $121m of colocation, and $23m of powered shell, storage, and office space.

The weighted-average lease term on renewals signed during Q1 2022 was 6.9 years, reflecting a significant contribution from powered shells which had an average lease term of 12.9 years.

Re-Leasing Spreads

On a cash basis, these lease renewals were up 3.3%, and on a GAAP basis, lease renewals were up 6.1%. Focusing solely on the hyperscale segment – on a cash basis, renewals were up 5.9%, and on a GAAP basis, renewals were up 9.2%.

Customer Bankruptcy and Exits – Digital Realty

Customer Bankruptcy

In April 2022, Sungard Availability Services, a data center operator focused on retail colocation, disaster recovery solutions, and managed services, filed for Chapter 11 bankruptcy protection. Sungard leases nearly all of its facilities, in large part, from wholesale data center operators, with Digital Realty and Digital Core REIT (SGX: DCRU) being two of Sungard’s notable landlords:

  • Digital Realty: Sungard is Digital Realty’s 23rd largest customer and leases ~10.5 megawatts directly from Digital Realty across six facilities in four markets, totaling ~$22m of annualized revenue, or 0.7% of Digital Realty’s total revenue. In Q1 2022, Digital Realty absorbed an almost $4m impact from Sungard’s pre-petition receivables and the company’s outlook contemplates an incremental $6m impact, from Sungard, for the remainder of 2022
  • Digital Core REIT: Sungard is a tenant at Digital Core REIT’s 371 Gough Road facility in Markham, Ontario, where it occupies 2.7 megawatts of power capacity. Specifically, Sungard represents ~$5m of annualized revenue, equivalent to 7.1% of Digital Core REIT’s total revenue

Customer Exits

Based on Digital Realty’s top 20 customers, two changes stand out between the rent roll at Q1 2022 versus Q4 2021:

  • LinkedIn: reduced its annualized rent by $9.5m, from $78.3m as of Q4 2021 to $68.8m as of Q1 2022, while exiting one Digital Realty location
  • Rackspace: reduced its annualized rent by $7.3m, from $61.9m as of Q4 2021 to $54.6m as of Q1 2022, while expanding its presence by one Digital Realty location. In-part, the revenue reduction can be explained because Digital Realty sold its data center at 150 South 1st Street in San Jose, California, where Rackspace was the primary data center tenant. However, this does not explain why Rackspace increased its number of data center locations with Digital Realty quarter-over-quarter

Development Pipeline in Q1 2022 – Digital Realty

As of Q1 2022, Digital Realty’s data center development pipeline (excluding 20 powered shell investments) comprised $3.86bn, with 321 megawatts of power capacity under construction. Overall, these projects are 54% pre-leased and have a blended target development yield of 10.4%.

Geographically, Digital Realty’s development yields, power capacity, and building area, by region are as follows:

  • North America: 9.2% development yield on 141.5 megawatts of power capacity across 1.5 million sqft
  • EMEA (primarily Europe): 11.1% development yield on 154 megawatts of power capacity across 1.9 million sqft
  • Asia Pacific: 9.9% development yield on 25.2 megawatts of power capacity across 297k sqft

Overall, Digital Realty is allocating 50%+ of its development capital expenditures to five metros. Particularly, in order of investment, these are Northern Virginia, U.S.; Frankfurt, Germany; Paris, France; Zürich, Switzerland; and New York, U.S.

Incremental Investment

Between Q1 2022 and Q4 2021 earnings, Digital Realty added significant incremental expected investments in Northern Virginia, U.S. of $318m; Toronto, Canada of $149m; Zürich, Switzerland of $101m; Vienna, Austria of $98.7m; and Paris, France of $63.7m.

Acquisitions and Investments – Digital Realty

In Q1 2022, Digital Realty progressed towards closing its acquisition of Teraco in South Africa and made investments to expand in multiple markets in Europe, as well as in India. Collectively, the company’s land purchases in Europe and India support 385 megawatts of total developable capacity.

Teraco Data Environments

In April 2022, Digital Realty received approval from the Competition Commission of South Africa (CCSA) for its acquisition of a 55% equity interest in Teraco Data Environments, a carrier-neutral colocation data center operator in South Africa. Recall that Digital Realty is purchasing this stake in Teraco for consideration of $1.7bn, which implies an enterprise value for 100% of Teraco of $3.5bn.

Finally, Digital Realty states that it plans to close its investment in Teraco during Q2 2022.

Zürich, Switzerland

In February 2022, Digital Realty closed on the purchase of a 2.6-acre land parcel in Zürich, Switzerland. Specifically, the land parcel was acquired for $20.7m, equating to a valuation of $8.0m per acre. Further, this site is expected to support the development of ~14 megawatts of IT load.

Paris, France

In February 2022, Digital Realty signed a long-term lease with a purchase option on a 24-acre land parcel in Paris, France, known as Canton de la Courneuve. Particularly, the total expected investment to rent and acquire the land is $132m, equating to a valuation of $5.5m per acre. Also, this site is expected to support the development of ~144 megawatts of IT load.

Chennai, India

In February 2022, Digital Realty closed on the purchase of a 10-acre land parcel in Chennai, India, known as Ambattur Estate. Specifically, the land parcel was acquired for $33.6m, equating to a valuation of $3.4m per acre. Further, this site is expected to support the development of ~100 megawatts of IT load.

The site was acquired by BAM Digital Realty, a 50%/50% joint venture between Digital Realty and Brookfield Infrastructure Partners. Therefore, Digital Realty’s pro rata share of the purchase price was ~$17m.

Land in Europe

Subsequent to quarter-end, Digital Realty acquired the following land parcels:

  • Dublin, Ireland: 8-acre land parcel for $7m, implying a valuation of $875k per acre
  • Barcelona, Spain: 2.4-acre land parcel for $12m, implying a valuation of $5.0m per acre. This investment marks Digital Realty’s entry into the market of Barcelona, Spain
  • Frankfurt, Germany: 34-acre land parcel for $64m, implying a valuation of $1.9m per acre

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