Digital Realty today announced its Q4 and full-year 2021 earnings and provided updates on its outlook for 2022, colocation and hyperscale data center lease signings / pricing, development pipeline, and expansion of its portfolio in South Africa, Nigeria, and Northern Virginia, with funding from its capital recycling initiatives.

Financial Performance in Q4 2021 – Digital Realty

In Q4 2021, Digital Realty reported revenue of $1.11bn, a 1.9% decrease quarter-over-quarter, and adjusted EBITDA of $584m, a 4.3% decrease quarter-over-quarter. Therefore, the company’s EBITDA margin was 52.5% in Q4 2021, a ~130 bps decline quarter-over-quarter.

Full-Year 2021

For full-year 2021, Digital Realty reported total revenue of $4.43bn, a 13.4% increase year-over-year, and adjusted EBITDA of $2.41bn, a 10.3% increase year-over-year. Therefore, Digital Realty’s EBITDA margin was 54.5% in full-year 2021, a 1.6% decline year-over-year.

Outlook for 2022

For full-year 2022, Digital Realty provides an outlook for revenue of $4.70bn to $4.80bn. Additionally, the company forecasts adjusted EBITDA of $2.48bn to $2.53bn, implying a 52.6% EBITDA margin. Finally, 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 Q4 2021 – Digital Realty

In Q4 2021, new lease signings were $156.5m, up 39% from the $112.8m of signings during Q3 2021. In total, the new lease signings represented 94.1 megawatts of power capacity and 1.15 million sqft.

Historical Signings for Digital Realty – as of Q4 2021 Earnings

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

  • Hyperscale: over 1-megawatt signings were $96.7m, equivalent to 62% of total signings
  • Colocation: under 1-megawatt signings were $41.8m, equivalent to 27% of total signings
  • Powered Shell: provided $7.4m, equivalent to 5% of total signings
  • Interconnection: contributed $10.6m, equivalent to 7% of total signings

*Note: Powered Shell includes Powered Base Building shell capacity, storage, and office space.

Lease Pricing – New Leases

Overall, new lease rates were $123 per kilowatt, representing a 7% improvement from $115 per kilowatt in the prior quarter. Further, lease rates in both the hyperscale and colocation segments recovered sequentially:

  • Hyperscale: pricing of $101 per kilowatt, represents a 7.4% increase from $94 per kilowatt in the prior quarter. However, this improvement was solely attributable to the mix of hyperscale leases shifting to EMEA, where lease rates are higher, and away from the Americas, where lease rates are lower (see below)
  • Colocation: pricing of $243 per kilowatt, represents an 11.5% increase from $218 per kilowatt in the prior quarter

Interestingly, hyperscale lease rates in the Americas and EMEA, individually, continued to grind lower in Q4 2021. At the same time, Digital Realty did not sign any hyperscale leases in Asia Pacific during Q4 2021. Below is a further breakdown of hyperscale lease rates, by region, to demonstrate this point:

  • Americas: hyperscale pricing of $77 per kilowatt, represents a 3.8% decline from $80 per kilowatt in the prior quarter
  • EMEA: hyperscale pricing of $112 per kilowatt, represents a 1.8% decline from $114 per kilowatt in the prior quarter

Geographic Breakdown – New Leases

Digital Realty’s mix of new lease signings were weighted towards EMEA during Q4 2021. Specifically, EMEA contributed 63%, while the Americas and Asia Pacific added 32% and 5%, respectively (excluding interconnection).

  • Americas: new lease signings were $46.4m, for 31.1 megawatts of power capacity and 546k sqft
  • EMEA: new lease signings were $92.1m, for 61.5 megawatts of power capacity and 589k sqft
  • Asia Pacific: new lease signings were $7.4m, for 1.5 megawatts of power capacity and 19k sqft
Hillsboro (Portland), Oregon

Digital Realty had particular leasing success with Twitter, who signed new leasing for 24 megawatts in Hillsboro (Portland), Oregon – per a recent report from NA Data Centers. To this end, Digital Realty’s CEO, Bill Stein, stated during the company’s earnings call “we continue to see strong hyperscale demand in Hillsboro”.

Other Meaningful Contributions

Digital Realty also had new leasing success, with 3+ megawatts of signings in each of Ashburn, Northern Virginia; Dallas, Texas; Frankfurt, Germany; Zürich, Switzerland; Marseille, France; Amsterdam, Netherlands; and Madrid, Spain.

Renewal Leases

Digital Realty signed renewal leases representing $151m of rental revenue during Q4 2021. The weighted-average lease term on renewals signed during Q4 2021 was 3.9 years, reflecting a considerable mix of colocation deals.

On a cash basis, these lease renewals were down 3.9%, and on a GAAP basis, lease renewals were down 2.6%. Focusing solely on hyperscale (i.e., over 1-megawatt), on a cash basis, renewals were down 14.0%, and on a GAAP basis, hyperscale lease renewals were down 11.8%.

Analyzing Digital Realty’s top 20 customers, two changes stand out between the rent roll at Q4 2021 versus Q3 2021:

  • Facebook: reduced its annualized rent by $7.4m, from $114.0m as of Q3 2021 to $106.6m as of Q4 2021, while maintaining the same 38-location presence with Digital Realty
  • IBM: reduced its annualized rent by $14.5m, from $152.5m as of Q3 2021 to $138.1m as of Q4 2021, while exiting six Digital Realty locations

Note: Facebook and IBM were customers of the data centers within the Digital Core REIT portfolio, which Digital Realty IPO’d in Singapore (see below). However, this detail only partly explains the reduction of Facebook and IBM’s presence with Digital Realty in Q4 2021.

Development Pipeline in Q4 2021 – Digital Realty

As of Q4 2021, Digital Realty’s data center development pipeline (excluding 20 powered shell investments) comprised $3.2bn, with 255 megawatts of power capacity under construction. Overall, these projects are 46% pre-leased and have a blended target development yield of 10.5%.

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

  • North America: 9.5% development yield on 87.1 megawatts of power capacity across 968k sqft
  • EMEA (primarily Europe): 11.0% development yield on 142 megawatts of power capacity across 1.7 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 Frankfurt, Germany; Paris, France; Northern Virginia, U.S.; Zürich, Switzerland; and Hillsboro (Portland), U.S.

Incremental Investment

Between Q4 2021 and Q3 2021 earnings, Digital Realty added meaningful incremental expected investments in Northern Virginia, U.S. of $170m; Zürich, Switzerland of $101m; Dallas, Texas of $87.8m; Dublin, Ireland of $70.5m; and Seoul, South Korea of $61.4m.

Geographic and Strategic Initiatives – Digital Realty

Digital Realty made announcements in Q4 2021 to exit certain data center assets in the United States and Canada, while expanding into multiple markets in Africa.

Acquisitions, Investments, and Joint Ventures

Teraco Data Environments

Subsequent to full-year 2021, Digital Realty agreed to acquire a 55% equity interest in Teraco Data Environments, a carrier-neutral colocation data center operator in South Africa, for consideration of $1.7bn, which implies an enterprise value for 100% of Teraco of $3.5bn.

Africa Expansions – Nigeria

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. Through Medallion, two land parcels in Lagos, Nigeria were acquired, with Digital Realty’s share of the total consideration being $22m.

Northern Virginia

In December 2021, Digital Realty closed on the purchase of a 16-acre land parcel in Northern Virginia’s sub-market of Sterling, Virginia. Specifically, the land parcel was acquired for $22.9m, equating to a valuation of $1.4m per acre.

AtlasEdge Data Centres

In November 2021, Digital Realty made a minority equity investment of $22m into AtlasEdge Data Centres. Subsequently, Digital Realty’s future outlook contemplates using AtlasEdge as its European edge provider in 2022 and beyond.

Divestments – Capital Recycling

Digital Core REIT

In December 2021, Digital Realty successfully listed Digital Core REIT on the Singapore Stock Exchange, which comprises 10 data centers in the U.S. and Canada. Digital Core REIT, which has an enterprise value of $1.4bn, generated net proceeds of $960m for Digital Realty upon listing.

San Jose, California – 150 South 1st Street

In December 2021, Digital Realty sold its data center at 150 South 1st Street in San Jose, California to Hines, a real estate investor and developer, for $59.6m, equivalent to a 10.2% cap rate. Notably, this mixed-use retail and data center property is expected to be redeveloped by Hines for residential use upon the near-term departure of the primary data center tenant, Rackspace Technology (NASDAQ: RXT).

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