Earnings Call Transcript - DLR Q4 2023

Operator, Operator

Good afternoon and welcome to the Digital Realty Fourth Quarter 2023 Earnings Call. Please note, this event is being recorded. During today's presentation, all parties will be placed in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question and we will aim to conclude at the bottom of the hour. 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, SVP of Investor Relations

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 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, President and CEO

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 revered 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 service fabric 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 composes 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 three 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, spanning all three regions is equipped to handle three times 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. 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 a plan to bolster and diversify our capital sources. Our goals were to reduce our leverage towards six times 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 5.8 times when adjusted for transactions that have been announced or closed since year-end. We also ended the year with five new JV partners and expanded some of our existing relationships. To round out the year, we announced three significant transactions in the fourth quarter, including two 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 three existing leases and amended three 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 Slough Trading Estate adding one of London's highly sought-after submarkets to Platform Digital's connectivity and enterprise colo offering. This transaction remains subject to customer closing conditions and is expected to close towards the end of the first quarter. In November, Realty Income purchased an 80% interest in 400 million 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 three-plus gigawatt land bank. This JV involves the sale of an 80% interest in nearly 500 megawatts of capacity across four campuses in Paris, Frankfurt, and Northern Virginia and enables us to better support our hyperscale customers' needs. Approximately 20% of ventures total potential data center capacity is expected to be delivered through 2025. We will retain a 20% interest in the 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 three quarters of 2023 with continued strength in our operating performance KPIs and an 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 logos 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 as our growing value proposition is increasing interest in our existing inventory and the new development that we have underway. Ongoing conversations with customers predict 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 Platform Digital 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 Platform Digital's broad and open structure. An AI service provider leveraged Platform Digital'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 enterprises and customers added more connectivity for their hybrid offerings on Platform Digital, 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 chose Platform Digital 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 Platform Digital and utilizing service fabric to improve sustainability, resiliency, scalability, security, and carrier diversity. And a leading Global 2000 consumer goods manufacturer grew their presence on Platform Digital by adding two 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 Loudon 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 Loudon, 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 DigitalDose, 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 number eight on the US 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, CFO

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 yet-to-commence 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 two-thirds 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 one market. For the full year, cash renewal spreads were up 6.8% and 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 one-time 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 six times and finishing the year at 6.2 times. 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 two stabilized assets in our Chicago JV, bringing their stake to 80%. Pro forma for these activities, year-end leverage was 5.8 times. 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 to support ongoing development spending. 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-US 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 one-third 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

We will now open the call for questions. The first question today comes from Michael Rollins with Citi. Please go ahead.

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, President and CEO

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

Matthew Mercier, CFO

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 each 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 renewals 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 as '23 results for same-store portfolio in '24.

Operator, Operator

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

David Barden, Analyst

Thank you for taking my question. I wanted to ask about something I heard from one of your competitors regarding how higher power prices in 2023 might be affecting budgeting and decision-making. Could you share your observations related to this, particularly in your colo business? Additionally, Matt, could you explain the breakdown of the $1.25 billion that is closing this year and provide some details on its timing? Thank you.

Andrew Power, President and CEO

Thanks, Dave. This is Andy. I don't think we're experiencing the same dynamics regarding power as what you heard last night. What Matt mentioned reflects that the comparisons in growth for the same-store pool are not as favorable. We benefited from power in 2023, but we aren't expecting that advantage to continue into 2024, assuming the current conditions remain stable and we don't enter another volatile power environment. It seems to be more of a one-time situation. I don't believe this affects buyer behavior, and our performance isn't directly influenced by the same factors that were previously described. This may be due to the overall market and business mix, as well as our hedging strategy, which are not the same. From a business perspective, we finished a very strong year, particularly in the enterprise colo connectivity segment. We achieved record new logos, exceeding 500, and had strong new signings. Additionally, we experienced a solid quarter in interconnection, both in new contracts and in financial performance, which has been increasing, along with significant net absorption in that area during the fourth quarter and throughout the year. I don't see power impacting our results in that way. Now, if we’re aiming for one question at a time and then rotating, Greg, could you discuss the components of the $1.25 billion in our guidance for data?

Gregory Wright, Chief Investment Officer

Sure. Thanks, Andy. Hey, David. How are you? I think there are two main components to consider. One is the stabilized joint ventures and the other is the disposal of our noncore assets. When you look at that range of $1 billion to $1.5 billion, it's important to note that over one-third of that has already been announced and is either closed or pending closure. We feel optimistic about that figure, and it's significantly lower compared to last year.

Operator, Operator

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

Michael Elias, Analyst

Thank you for taking the question. Andy, we are currently experiencing one of the strongest demands in hyperscale environments that we have seen in recent history. Could you discuss the demand pipeline moving forward and how it compares to last year? Additionally, can you address the pricing opportunities for new leasing and whether you anticipate any constraints on pricing due to the current supply-demand situation? Thank you.

Andrew Power, President and CEO

Thank you, Michael. I would say that on a year-over-year basis, the dynamics have changed significantly on many fronts. Overall, the pipeline for hyperscale continues to grow to new heights. I see AI demand as a new wave of growth, and the combination of enterprise and hybrid IT has certainly contributed to hyperscale cloud computing. This has unfolded against a backdrop of tightening supply-demand dynamics that have increasingly shifted pricing in favor of providers like Digital Realty. Is there a limit? I believe we've seen rates escalate substantially. Recently, we reported our highest GAAP rate ever at $145 million for segments above a megawatt. We're seeing that customers, who often align with calendar fiscal years like Digital Realty, have completed one budget cycle and returned in 2024 with a heightened demand appetite. These customers are looking for similar solutions. Our large-scale hyperscale campuses in major markets, particularly those with larger contiguous capacity blocks, are highly sought after. Those rates continue to rise based on what we've signed and where we have issued quotes, and I think we are very well positioned. If you examine our footprint, it's evident that we're developing capacity, especially in Northern Virginia but also in other key markets, to capture more than our fair share of this demand. Lastly, there's a broader acknowledgment that whether in hyperscale computing or AI workloads, customers need to reduce their time to market, often seeking precious GPUs that present massive business opportunities. Historically, our rent plays a very small role in their overall economic equation compared to their ability to launch services and achieve first-to-market advantages.

Operator, Operator

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

Jonathan Atkin, Analyst

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

Matthew Mercier, CFO

Thank you, Jonathan. I believe you've observed the results of our efforts in 2023, particularly aiming to reduce our leverage to the six times range. The execution by Greg's team on the recent transaction, alongside our early-year sales on the ATM, has contributed significantly. On a pro forma basis, we're currently at 5.8 times, and we're aiming to reach the 5.5 times range, which aligns with our consistent messaging since the beginning of 2023. We've been making progress towards this goal, and we believe our guidance will help us achieve it, supported by our diverse capital sources. Our strategy will maintain our focus on moving towards the 5.5 times target, which we view as a more manageable objective compared to what we accomplished in 2023.

Operator, Operator

The next question comes from Irvin Liu with Evercore ISI. Please go ahead.

Irvin Liu, Analyst

Hi. Thank you for the question. 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 one megawatt signings performance?

Andrew Power, President and CEO

Thank you, Irvin. We have a significant opportunity to meet the large capacity block needs of our customers, whether it's for AI or hyperscale. I believe what we can provide in Northern Virginia today, especially with the market shut down for new power until 2026, is potentially unmatched. Beyond that, we have prospects in Dallas, Santa Clara, Paris, Frankfurt, Amsterdam, Seoul, and parts of Japan, as well as in our joint ventures in Latin America and South Africa. We've taken an honest approach where many of these capacity blocks were in the early stages of development, with land becoming pad-ready and initial suites being prepared. Throughout 2023, we chose not to rush into the first deal for some of these customers, understanding that we weren't losing revenue opportunities since the capacity couldn't be activated yet. In hindsight, this has proven beneficial, as this year has progressed, especially with 2024 starting strong. We're seeing our offerings become increasingly attractive to a broader range of customers. We anticipate that we won't be delayed much longer in 2024, as we currently have some capacity blocks that are live and ready for rental. Our patience and cautious approach have paid off, and sometimes it's better to be lucky than smart. If I had known Ashford would run out of power years ago, we might not have sold all that capacity we had at the time. This time, the luck was on our side.

Operator, Operator

The next question comes from David Guarino with Green Street. Please go ahead.

David Guarino, Analyst

Thanks. Hey, 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 one 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, President and CEO

Thanks, David. I think I've clearly communicated the trends in rates, including their historical context and potential future movements. Some markets haven't even reached their peak historical rates when considering the overall data center capacity. I don't believe we're experiencing a rent bubble; rather, the increases are driven by genuine constraints and rising build costs. As a result, these rental changes seem justified. We expect to see continued positive cash mark-to-market results. Last year and in this quarter's script, we noted that some one-time short-term renewals inflated our cash mark-to-market, but we believe being in the 4% to 6% range overall is advantageous for us. Regarding larger deals with potential roll-ups, we do have sections in our contracts that favor our customers. In the past, when the market was different and there was excess capacity, we had to honor some of those clauses. However, they are usually very specific regarding the duration of renewal timeframes and other parameters. When customers want to negotiate beyond those terms, it leads to contract renegotiations. We strive to work with our customers to reach a mutually beneficial agreement. In summary, I don't anticipate being able to directly roll every sub 100-plus megawatt lease up to the higher rates, but I do believe there will be positive mark-to-market adjustments in that area for the coming years.

Operator, Operator

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

Ari Klein, Analyst

Thanks, 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, President and CEO

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

Matthew Mercier, CFO

Sure, thank you. There are a few points to cover. As previously mentioned, on a normalized basis for 2024, we are anticipating significant transactional activity that occurred in 2023 and looking forward to 2024. I want to emphasize that we are targeting normalized growth of 7% in revenue and 10% in EBITDA. The 2024 results will be influenced by the timing of these transactions, particularly those that closed in the latter half of 2023. We expect a notable portion of these transactions to be finalized in the early part of 2024, which will affect the bottom line for that year. At the same time, we are also reducing our debt load. If we break this down into two categories regarding our growth strategy, we anticipate that our stabilized same-store portfolio will achieve growth in the range of 3% to 4%. Additionally, with ongoing development projects and favorable pricing, we expect to see another 1% to 2% increase as these come online in 2024 and 2025. Overall, this positions us for mid- to high single-digit growth expectations for 2025 and beyond.

Operator, 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 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, President and CEO

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

Colin McLean, Chief Revenue Officer

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 one megawatt. And 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 the 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 it's 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 by-product 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.

Christopher Sharp, Chief Technology Officer

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 deployment coming to market. A part of that program is not only that the 32 markets and three 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, Operator

The next question comes from Matt Niknam with Deutsche Bank. Please go ahead.

Matthew Niknam, Analyst

Hey, thank you for taking the question. Financial question. So with leverage now back under six 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? Thanks.

Andrew Power, President and CEO

Thanks, Matt. So multi-faceted, 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 the 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 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 key gems out there that would be really additive to our global platform at this peak. Matt, why don't you hit on the dividend, Matt, if you want that.

Matthew Mercier, CFO

Sure. I mean, similar to what we've talked about in '23, I mean, there's two 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 of the '23. Now we're looking at less transaction size in '24, but as you saw in the guidance, you 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, Operator

The next question comes from Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery, Analyst

Thank you very much. Good evening. I would like to discuss the distribution between the 0 to 1 and over 1 megawatt segments. It appears that nearly 50% is coming from the 0 to 1 segment plus interconnection, which has been steadily increasing over the past few quarters. How should we approach this moving forward? Do you anticipate that this mix will tend to favor the 0 to 1 segment more than a 50-50 split, or will it continue to fluctuate as it has in the past? Thank you.

Andrew Power, President and CEO

Thanks, Simon. So one of our top, top, top priorities is to continue to focus on delivering acceleration in that 0 to 1 megawatt interconnection cohort, enterprise connectivity in order to 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 baking 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 and long-term and durably. There will be episodic quarters where that will be a lower percentage. But that's likely enough because we've filtered our execution. That's likely because we 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 AZs 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 are we quarters where we saw 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, Operator

The next question comes from Erik Rasmussen with Stifel. Please go ahead.

Erik Rasmussen, Analyst

Thanks for taking the question. 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. Thanks.

Andrew Power, President and CEO

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 built 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 nine years ago. We've done retrofits on existing deployments just to fit up for customers needing AI just this year. At the end of last year, I went to one of our Paris facilities. We're one of our partner customers have fitted out 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?

Christopher Sharp, Chief Technology Officer

Yes. it's a great question and appreciate it, Eric. I think there's 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 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, 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, Operator

The next question comes from Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo, Analyst

Hey, thanks for squeezing me in. 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 zero to one versus greater one categories? Thanks.

Andrew Power, President and CEO

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

Matthew Mercier, CFO

Thank you, Nick. To address some earlier comments, regarding the 0 to 1 megawatt category, both escalation and renewals are generally impacted by inflation as reflected by the CPI. This will be distributed across leases that are expiring, whether in North America or EMEA. These rates have decreased since last year and are now in the 3% to 4% range. For the greater than 1 megawatt segment, we are assuming current market pricing, which is more affected by where the expiring rates stand. We still expect this segment to be positive, contributing to the total guidance of 4% to 6%.

Operator, Operator

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

Brandon Nispel, Analyst

Hey, thanks. 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? Thanks.

Matthew Mercier, CFO

Certainly. In 2024, we expect to spend over $3.5 billion in total capital expenditures, which represents an increase of roughly 15% compared to what we spent in 2023. This is in light of the development joint ventures we've established in 2023 and those that are set to close throughout 2024, including the one we announced with Blackstone. Phase I of that project has already closed, and Phase II is scheduled for later this year.

Operator, 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, President and CEO

Thank you, Betsy. Digital Realty capped off a transformative 2023 with a strong fourth quarter that was highlighted by three 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, Operator

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