Digital Realty today announced its Q3 2021 earnings and provided updates on its colocation and hyperscale data center lease signings / pricing, development pipeline, and expansion of its portfolio into new i) geographies including India, Nigeria, and Mozambique and ii) strategies, via its investment in AtlasEdge Data Centres.

In Q3 2021, Digital Realty reported revenue of $1.13bn, a 3.7% increase quarter-over-quarter, and adjusted EBITDA of $610m, a 1.2% increase quarter-over-quarter. Therefore, the company’s EBITDA margin was 53.8% in Q3 2021, a ~130 bps decline quarter-over-quarter.

Leasing Activity in Q3 2021 – Digital Realty

In Q3 2021, new lease signings were $112.8m, down 0.5% from the $113.4m of signings during Q2 2021. In total, the new lease signings represented 73.1 megawatts of power capacity and 727k sqft.

Digital Realty – Historical Signings – as of Q3 2021 Earnings

Digital Realty Historical Signings Q3 2021
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Decomposing Digital Realty’s lease signings further by hyperscale, colocation, and interconnection:

  • Hyperscale: over 1-megawatt signings were $68.8m, equivalent to 61% of total signings
  • Colocation: under 1-megawatt signings were $32.0m, equivalent to 28% of total signings
  • Interconnection: contributed $11.6m, equivalent to 10% of total signings

Lease Pricing – New Leases

Overall, new lease rates were $115 per kilowatt, representing a 19% decline from $142 per kilowatt in the prior quarter. Digital Realty’s significant decline in lease pricing was driven in-part by a mix shift, from colocation leases to hyperscale leases. However, lease rates in both the hyperscale and colocation segments also declined quarter-over-quarter:

  • Hyperscale: Digital Realty’s pricing of $94 per kilowatt, represents a 10% decline from $105 per kilowatt in the prior quarter
  • Colocation: Digital Realty’s pricing of $218 per kilowatt, represents a 25% decline from $292 per kilowatt in the prior quarter

Notably, hyperscale lease rates in the Americas were particularly low at only $80 per kilowatt, representing a 17.5% decline quarter-over-quarter.

Geographic Breakdown – New Leases

Digital Realty’s mix of new lease signings were weighted towards the Americas during Q3 2021. Specifically, the Americas contributed 49%, while EMEA and Asia Pacific added 36% and 15%, respectively (excluding interconnection).

  • Americas: new lease signings were $49.9m, for 43.8 megawatts of power capacity and 464k sqft
  • EMEA: new lease signings were $36.2m, for 21.9 megawatts of power capacity and 197k sqft
  • Asia Pacific: new lease signings were $15.1m, for 7.4 megawatts of power capacity and 66k sqft
Ashburn and Chicago – Holistic Deals

Digital Realty had particular leasing success with Apple, who signed new leases for 15 megawatts in Ashburn (Northern Virginia) and 15 megawatts in Chicago – a total of 30 megawatts. Additionally, Apple signed ~30 megawatts of renewal leases (see below) during Q3 2021. Importantly, Apple’s lease signings were for 100% vacant or soon-to-be-vacated capacity (e.g., from Facebook).

Other Meaningful Contributions

Digital Realty also had new leasing success, with 1.5+ megawatts in signings in each of Toronto, Canada; Frankfurt, Germany; Amsterdam, Netherlands; Zürich, Switzerland; Madrid, Spain; Osaka, Japan; and Singapore.

Renewal Leases

Digital Realty signed renewal leases representing $223m of rental revenue during Q3 2021. The weighted-average lease term on renewals signed during Q3 2021 was ~3.5 years, reflecting a considerable mix of colocation deals. On a cash basis, these lease renewals were down 5.6%, and on a GAAP basis, lease renewals were down 3.3%.

Development Pipeline in Q3 2021 – Digital Realty

As of Q3 2021, Digital Realty’s data center development pipeline (excluding 20 powered shell investments) comprised $3.5bn, with 268 megawatts of power capacity under construction. Overall, these projects are 38% pre-leased and have a blended target development yield of 11.4%. Additionally, Digital Realty’s development yields by region show a notable variance:

  • North America: 9.5% development yield for 65.5 megawatts of power capacity across 845k sqft
  • EMEA (primarily Europe): 11.9% development yield for 158 megawatts of power capacity across 1.8 million sqft
  • Asia Pacific: 12.8% development yield for 44.7 megawatts of power capacity across 449k sqft

Overall, Digital Realty is allocating 55%+ of its development capital expenditures to five metros. Specifically, in order of investment, these are Frankfurt, Germany; Paris, France; Hillsboro (Portland), U.S.; New York, U.S.; and Zürich, Switzerland.

Incremental Investment

Between Q3 2021 and Q2 2021 earnings, Digital Realty added meaningful incremental expected investments in Brussels, Belgium of $89.6m; Zürich, Switzerland of $24.7m; Marseille, France of $21.0m; and Frankfurt, Germany of $17.8m.

Geographic and Strategic Expansions – Digital Realty

Digital Realty made announcements in Q3 2021 to exit certain data center assets in the United States, while expanding into the emerging markets of India and Africa. Also, through a minority investment and partnership, Digital Realty is building-out its edge data center capabilities.

Divestments

Digital Realty, Prudential Sale to Menlo Equities

In September 2021, Digital Realty and PGIM Real Estate’s joint venture completed the sale of a portfolio of 10 data centers in the United States for $581m. In terms of valuation, this represented an exit cap rate of ~4.5% on the 7 stabilized assets in the portfolio. Indeed, this implies that the whole portfolio traded at a wider cap rate, which Dgtl Infra understands to be 5%+.

Overall, the transaction generated net proceeds of $347m. For Digital Realty’s 20% minority interest in the joint venture, the company’s share is ~$85m, which includes a $19m promote fee.

Phoenix (Mesa), Arizona

In September 2021, Digital Realty closed on the sale of a 56-acre land parcel on Crismon Road in Phoenix’s suburb of Mesa, Arizona. Specifically, the land parcel was sold for $17m, equating to a valuation of ~$305k per acre. Notably, this land parcel was originally purchased by Dupont Fabros Technology in 2017.

Acquisitions, Investments, and Joint Ventures

India – Joint Venture

In September 2021, Digital Realty and Brookfield Infrastructure Partners closed their 50%/50% joint venture to develop and operate data centers in India. Indeed, this partnership will function under the brand BAM Digital Realty.

Africa Expansions – Nigeria, Mozambique

In October 2021, Digital Realty and Pembani Remgro Infrastructure Fund formed a joint venture to acquire Medallion Data Centres, a colocation and interconnection provider in Nigeria for $29m. Additionally, through Digital Realty’s subsidiary iColo, both Digital Realty and Pembani Remgro are partnering on a $10.8m data center development project in Mozambique.

AtlasEdge Data Centres

In October 2021, Digital Realty agreed to make a minority equity investment into AtlasEdge Data Centres. Subsequently, Digital Realty will use AtlasEdge as its European edge provider. Therefore, Digital Realty will be able to extend its European presence by offering AtlasEdge’s locations in the UK, Ireland, Switzerland, and Poland to its customers.

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