Digital Realty Trust, Inc. (DLR) Earnings Call Transcript & Summary

All right. Great. Well, thanks, everybody, for being here. Really appreciate it. My name is Frank Louthan. I'm the senior telecom analyst here at Raymond James covering data centers, telco and cable names here for us. Today, very, very pleased to have Digital Realty Trust back with us. We have Matt Mercier and Bill Griffis, here with us. We're going to start off. Matt is going to run through a couple of slides about digital to get to know them a little bit better, and then we'll jump into some questions. Would love to get some questions and comments from the audience. If you have some, the upper left-hand corner of your screen, there's something as a Q&A feature. If you'll submit your questions that way, that would be great. And then they'll put them into the chat, send them to me, and we'll get to as many as we have time for. With that, we'll turn it over to Matt.

Great. Thanks, Frank. Thanks, Raymond James, for another good conference. Hopefully, this year, I'll be in a different format. In fact, actually, I'm -- I have to give a shout out to last year's gift, although you probably can't see it because I -- coffee mug that I've used, I think, every day since last year. And the last time I was on a plane, I think I was also coming back from the Raymond James conference. So what a year it's been. Yes. I just wanted to give -- go through kind of some highlights for those that I'm sure we got a mix of people that are familiar, maybe some that aren't, with Digital Realty. So I just wanted to run through a couple of things, give a quick highlights of the company. I think, first and foremost, our core strategy is really to solve the data center needs for enterprise to hyperscale customers across the globe. And that strategy is really anchored by 3 key pillars that you can kind of see here, which is be global, be connected and be sustainable. In terms of why global, well, I think that's largely because it's a business that's increasingly global and our customers require it from us. All of our top customers have deployments across multiple locations. And often, our customers are signaling to us when they're looking -- when they're looking to expand and where they're looking to expand in terms of their next location. In 2020, we nearly doubled the number of countries where Digital Realty has a presence. And EMEA accounted for more than half of our fourth quarter bookings, the first time ever a majority of our bookings had been outside the Americas. So again, kind of demonstrating the power of the global platform as well as the necessity to be global. In terms of why connected, we take a product and customer approach to this topic. It's vital more satisfying, a wide range of IT architecture the customers demand, including hybrid cloud deployment as companies seek to leverage the efficiencies of the cloud while, in some cases, also maintaining direct colocation deployments for certain workloads. Again, in 2020, as an example, we doubled the number of our cross-connect count, largely through the Interxion combination, which -- and it also reflects the growing concentration of network-dense highly connected assets as part of our platform digital as well as the -- being able to continue to prune our portfolios through some of the capital recycling efforts we've done over the last couple of years. Further, we landed a number of -- a record number of new logos in 2020, more than twice as many as our previous record, which is driving consistent growth in our enterprise colocation and interconnection business. In these vibrant communities on our campus environments are attracting a growing set of new customers, diversifying and solidifying our revenue streams, which, again, helps us be maintained connected both from a customer and a product standpoint. In terms of sustainable, we're committed to minimizing our impact on the environment while simultaneously meeting the needs of our customers. In terms of some social efforts, we've recently selected diversity equity inclusion as 1 of the 4 company-wide philanthropic areas in addition to sustainability, disaster relief and STEM education. From a financial standpoint, we've also issued over $3 billion of green bonds. We have 480 megawatts of renewable wind and solar energy product -- projects under contract. And almost half our portfolio has received 1 or more green building certifications. Just quickly hitting on, again, the importance of global with the Interxion combination as well as the western purchase that we closed last year. And through our continued development program, we have over 290 data centers across 49 markets in 24 countries. We have over 4,000 high-quality, largely multinational customers spread across a variety of industries. Our digital realty in terms of size and our overall enterprise value is approximately $55 billion, and we're part of the S&P 500. And we're -- as part of that global portfolio, we're committed to a conservative and flexible financial strategy, which includes investment-grade ratings. Just a little bit more detail in terms of the importance of interconnection, Edge, kind of network density. Again, a big effort last year, with the combination of Interxion, acquisition of our remaining distance in the Westin building, continued rollout launch of Platform Digital, all support our drive to be a top global provider of data center solutions. And again, these news significantly increased our access to an enterprise client base and strengthen the overall quality of our portfolio as roughly half our sites are network-dense performance sensitive facilities, while the other half are connected campuses, largely housing, global cloud and hyperscale customers. So moving on. Again, wrapping up sort of the sustainability. A number of efforts across the ESG. We seek to integrate ESG throughout our business activities to meet our customer needs, capture savings and generate revenue from low carbon and sustainable activities. We have a dedicated in-house team led by Aaron Binkley, who's full-time and dedicated and focused on this topic. Again, a couple of other, I think, key items, 100% renewable energy for our EMEA region and our U.S. colocation business and roughly 30% of our global portfolio is energy comes from renewable supply. We've contributed to social causes, including recently pandemic relief and other disaster recovery assistance. And we've enhanced our Board diversity and blended shareholder-friendly measures in terms of governance. And wrapping up, I think 2020 was another great year for Digital Realty. We delivered high-quality bookings, a big record in terms of our signings, so in terms of volume as well as product mix. Good geographic split, increasing number of new logos. We've continued to extend again on that global platform theme entering Greece with the acquisition of a leading colocation interconnection provider. Also entering Croatia as well. We delivered solid financial results with core FFO per share, $0.08 ahead of consensus driven by operational outperformance, referring to the fourth quarter. And again, from a financial strategy, continue to strengthen balance sheet, lowering our weighted average cost of debt with the redemption of high coupon, high coupon bonds and preferred equity while also extending our average duration with the issuance of a largely attractively priced long-term capital via access to the Eurobond market. So with that, I'll wrap up. And we can head to the Q&A portion of this.

All right. Great. Well, thanks, Matt. I appreciate it. It's a good overview for folks, can get a lay of the landscape where digital sits relative to some of the peers. Want to dig into a few questions here. And again, folks, if you want to jump in, please use the Q&A feature. So we've been asking a few questions in light of the Texas power crisis recently making some headlines. Give us an idea of some of the -- of how that affected your markets in the operation or maybe how it didn't. And how does that figure into your business going forward?

So yes. I'll sum in on that one. So just to give an overview. So Digital has roughly 28 data centers across 3 cities in Texas, totaling about 120 megawatts of capacity. And those sites contributed about 7% of our annualized rent, so I'll just give some context. I think we were, again, fortunate to -- during the recent crisis, we maintained 100% uptime largely by switching to generator power, so we had no data center outages. And by switching to generator power, that also lightened the load on the existing grid given everything that was going on. So where there was energy helping to provide more energy for other customers and uses. We had constant communication with our customers, in some cases, helping them solve some of their problems directly or indirectly. And I guess the other thing to note, the majority of our power is pass through, meaning it comes from our customers reimbursing us, whether that's, typically speaking, from utility power or from our generators, that cost is largely reimbursed by our customers is the way our contracts are structured. Therefore, while we're still assessing the overall financial impacts, given the fact that we maintain 100% uptime, the way our contracts are structured, we don't expect any material impact from that situation as unfortunate as it was.

All right. Great. So we've talked to a lot of folks here at the conference and a lot of public and private players in the last few weeks. Leasing outlook, both for enterprise and hyperscale seems to be a little more favorable this year than even than last year. Would you -- it's kind of what we've been hearing. Would you agree with that? And what do you think are some of the biggest drivers in the space over the next 12 months?

Why don't I tackle that one, Frank. I'd say demand, from our perspective, remains healthy. We had a strong 2020, and we expect those trends to continue into 2021. Regarding hyperscale, I'd say that we expect much of this demand to come in non-U.S. markets. We do expect non-U.S. markets to outgrow the U.S. markets in 2021. And I think if you were to look at our external disclosure with regard to our development platform, you'd see a higher concentration of new investment in those non-U.S. markets. EMEA we kind of view as the largest growth market currently. The markets where we're most concentrated there are Frankfurt, London, Amsterdam, Paris. We expect to see lot -- a good amount of demand there but also beyond those markets, into some of the smaller markets that we are expanding. Latin America is similar, continued growth in Brazil, but also expect to see growth in newer markets like Chile or Mexico and in Asia Pac, again, a similar theme with, I'd say, maybe Singapore being the strongest market. From an enterprise perspective, we view that demand as really, what you call, strong to very strong. We're seeing an increased need for the enterprise to embrace digital transformation. But we do see this segment as really in its early stages or early innings. If you look at third-party forecast, many of those forecasts predict high levels of growth out of the segment. And we're aiming to leverage our platform to support and win much of that demand. We do expect these trends to continue over time. We do expect that this churn will continue for both enterprise and hyperscale into the longer term.

All right. Great. As we got into the COVID crisis, heard some about sales cycles along gating and so forth, particularly on the enterprise side. Are you seeing any of that? I'm getting kind of some mixed messages from some of the peers. What are you seeing on the sales cycle today? Any kind of appreciable elongation of the sales cycle currently?

Yes. You know what, I'll tackle this one, too. What we saw, I think, maybe at the outset of some of the quarantines maybe about a year ago was maybe some rumblings of delays and delayed decision making. But frankly, it didn't really play out. When you look at our 2020 performance, really, our bookings were largely immune from -- to the impact of COVID. So we really haven't seen that become a hindrance with regard to our ability to win some of that demand that we were just talking about. I think on the enterprise side, again, this need to call it embrace digital transformation maybe has, in some ways, accelerated for companies that haven't -- that maybe weren't properly positioned going into the pandemic. So we're really not seeing any real volatility around bookings that's, we'll say, associated with COVID. For hyperscale, again, there's definitely a longer time horizon around those sales cycles. But again, we're seeing those customers continue to deploy and [indiscernible]

That's not really new, right? I mean the longer sales cycles on hyperscale has kind of been standard.

Right. Exactly. Exactly. Right. So I think that's not really a change. That's just normalized. So I'd say, overall, what we maybe were concerned -- I mean I don't want to say concern but had some thoughts around the potential for the late decision making at the outset of the crisis had never really played out as we ended up finishing 2020 with our strongest year ever.

All right. Great. So yes, Matt, you mentioned the bookings being majority overseas last quarter. How long can we expect that to continue? It seems like most of the industry is seeing mid-single or low single-digit growth in the Americas. How much longer do you see that strong growth out of EMEA and Asia Pacific?

Well, I mean we're pretty confident we're going to see it for at least another year or so. I guess I could say that. As you noted, we've got the -- I think the majority or slightly over half of our current development is outside the U.S. again, even -- I know we talk a lot about the fourth quarter. But even for full year 2020, trade under half of our overall bookings were outside the U.S. So we're continuing to see pretty strong growth for us in EMEA and APAC and even Latin America. Obviously, with the Interxion combination or the number of markets and countries and coverage for digital has expanded pretty significantly, but I think even when we look at performance from kind of a stand-alone Interxion, we're still seeing growth in EMEA. And we expect that to continue into 2021. And EMEA is, again, the largest growth country for us outside the U.S. with a, call it, the flat markets and expanding beyond with some of the additional acquisitions we've had. So we continue to see strength in EMEA and broadly, internationally in '21.

All right. Great. Well, with that, give us a little bit of update on Interxion. How is that process going with integrating that? And in particular, Dave Ruberg is a good asset. What -- how have you utilized his strategic expertise and with some other areas of your business?

Sure. Yes. I've actually spent quite a bit of my time on a day-to-day with Interxion as part of the integration team. So we've made, I think, an enormous amount of progress, especially in light of not being able to travel an overseas acquisition. Lot of early morning calls. I can tell you at least from a personal standpoint. So the -- we kind of like to break it down from kind of the proverbial people process and systems kind of standpoint. The majority of the people integration is complete, and we're now kind of focused on -- and we started streamlining the process side as well. Systems always take a little bit longer, but we're looking at kind of hopefully being almost through all of our system, major system-related work by the end of this year. And we're on track to meet our synergy targets at around $15 million for this year and $22 million into -- or sorry, $20 million into 2022. We've had great collaboration with the sales team across both, call it, our global accounts and the in-country teams winning deals. I think that's kind of, again, noted by the strong performance we had not only in 2020 but in the fourth quarter. Continued improvement in our new logos. So overall, it's been, I think, a pretty fantastic combination and amount of work that the team has done. In terms of -- I think you mentioned David Ruberg. And or it sounds like someone's selling concrete outside, so you can never predict what's happening at home. But -- so in terms of Ruberg, he turned over day-to-day management of EMEA around year-end to his very capable and experienced team. He's now in kind of a role as a strategic adviser, helping evaluate I think new markets. He was pretty heavily involved already with some of the new deals we did, like Croatia and Greece and continuing to explore other areas to expand and enhance the platform and the capabilities we have, not only in EMEA but I think and beyond, and that's where I think a big part of David's keen insights will play benefits, not only continuing the strength in Europe but also seeing where we can take what he's been able to do and his team in Europe and also just bring that to the rest of our portfolio, whether that be in the U.S. or Asia. And so for -- David is still heavily involved for those that know him or don't know him. He's pretty consumed with this. He's obviously pretty supportive as he's got, I think, a pretty good personal stake in making sure that this business continues to succeed.

All right. Great. So along those lines, you made some other acquisitions besides Interxion. Talk to us a little bit about the deals you've done in Greece and Croatia and so forth. And what do you see the opportunities in those markets? And why are you just -- what do you see there that maybe your peers aren't? There's not necessarily the household names of data center expansion, but what exactly are you trying to grasp there?

Sorry. Let me take myself off -- yes. So again, I think we've been very pleased with the acquisitions in both Croatia and Greece. Both are highly connected, interconnected destinations, where we expect to see opportunity to support our global customer growth. I think we've got very solid management teams from both of those businesses that have agreed to continue. And again, kind of I think seeing a continuation of somewhat of the playbook that David had and Interxion had from when they were margin kind of on their own. I think we just -- we see that as just continued expansion of the EMEA platform and our global platform, both Lambda Helix and Altus IT. They're, again, leading connectivity market positions in their respective markets. I think we see further opportunities to grow subsea cable landings, kind of expanding on I think the success that we've seen in Marseille in France. And I think in the next wave, they've had a great inroads kind of locally to the enterprise market with those specific companies. But I think we're going to start to see and seeing the market start to evolve with cloud providers entering those markets as well, which is kind of the sequencing that we've seen, I think, throughout a number of our global markets with Microsoft and AWS in-house plans for Greece since last October as an example.

All right. So I mean, a few other markets, where else would you look to expand? And would it be more organic? Or do you look for inorganic as you pick out some of those other markets?

Yes. I think this is me. But again, Bill can feel free to chime in. I think our expectation is that our growth will be primarily organic, that we'll consider various tuck-in acquisitions, kind of some of the things you've seen again with a couple of topics we just talked about with Greece and Croatia. I think if there was anywhere -- and I think we've said this before. Asia right now is a region where we have the least scale. So that would be an obvious place to seek market expansion. We are expected to open the first carrier-neutral colocation connectivity offering for Korea later this year. And we're seeing a lot of global customer interest from both CSPs and enterprises. And we're also evaluating other markets in APAC. But Brazil is continuing to -- or LATAM overall is growing as well. Had a pretty successful fourth quarter and appears to be a pretty solid start to the year. So I think that's kind of how we largely continue to focus on the platform we have and the development that we have underway and the organic growth through there, but potentially some opportunities in APAC, although it's a bit -- there's not really 1 great -- there's not something that's quite as comparable that we're aware of today, like an Interxion in APAC. It's a bit more segmented in that region.

Sure. All right. Well let's talk about supply and demand a little bit. And folks, if you -- again, if you want to ask a question, use the Q&A feature, and then we'll get to that. So let's talk a little bit about the supply demand dynamics across your markets. Let's start with Northern Virginia. How is that faring? Where do you see the -- how do you see the supply-demand dynamic in that market currently, relative to the last 12 months? And anything you see that's going to really change that dramatically coming up.

I can tackle this one, Matt. I'd say, I mean, Ashburn, as a market, I'd say, continues to heal and is moving in the right direction. Digital has managed pretty well in this market where we sold out of all of our new construction capacity. And now we're selling into some recently vacated space. Our customers that are currently on our campuses are looking to grow with adjacency where there's opportunity, and there certainly have indicated some interest into some of the space we've more recently gotten back. And with regards to some of the inventory that we have coming on later in the year, we're already in discussions on -- with regard to helping to solve some of our -- those customers' intermediate needs. So all in all, I'd say Ashburn, although maybe it was a bit challenged more recently, I think it's certainly moving in the right direction, and that's certainly been in our experience. Other markets, I'd say, that are a focus of ours, I'd say Santa Clara continues to be a strong market, obviously, supply-constrained. And Chicago, I'd say, is improving. And Toronto and Dallas are probably somewhere in between. I'd say, Santa Clara, overall, domestically within the U.S. is the tightest market. Outside the U.S., we hit on a couple of these a little bit earlier. There's strength across EMEA, both the flat and non-flat markets. Frankfurt continues to be strong as well. APAC, the 1 market I would call out there is Singapore, which remains, I'd say, very strong from our perspective. So I think again, the non-U.S. markets, I think, is where we're seeing maybe a bit more strength with some bright spots in the US and I'd say some improvements in Northern Virginia and Chicago.

So how do you respond to that when you see the supply get overheated in a market? What is sort of your competitive response there? Do you just let others take the business? Or how do you respond when the pricing pressure hits in those -- in a market?

I think one thing we do is we do try to leverage our customer relationships. I think having a global platform with customers that, again, have locations across the globe, puts that gives us a bit of a competitive advantage. So it allows us to, in some ways, position our offering in a way that allows us to mitigate some of that pricing risk. But it's really dependent case-by-case and really the -- on the dynamics of the individual market and the space that we have available.

Yes. I mean I'd say also, Frank, we don't seek to compete on price alone. We want to have the portfolio and our product offering also speak highly for what we think we're offering. I think ability to provide adjacent expansion is, I think, something that comes up pretty regularly in terms of the ability for a lot of these large providers to be able to grow with us. So whether that's on the campus, nearby campus or right next door into the next suite, I think that also helps provide some advantages -- some advantage to not have to compete on price alone as well as just a continued expansion of our capabilities, interconnection products and other ways that we're able to, I think, provide a competitive or more competitive offering.

Is it mostly privates that are -- that caused a lot of this oversupply when these sort of things happen in the market? Or do you see other public companies being a little less rational sometimes?

Look, I mean, I'll let Bill chime in there, too. I mean I think if you're talking about Northern Virginia, it's kind of just feels like everyone -- everyone's got a little bit of -- at least a little bit of supply. So it's not just privates. I think across privates and publics, there's people who bring on supply, and it's a top market globally. So it's hard to argue against some of it. I think it's actually probably from the public is a bit more rational than I remember a few years back. But I think it's just the fact that everybody wants to be in that market. There's a lot of demand in that market. So it's hard for people to hold back when they see kind of the success that we've had as well as some others in not trying to capture some of that.

Okay. All right. Great. Let's walk through the guidance a little bit. And if we sit here a year from now and you've come in more in the higher end of the range, what kind of has to happen to hit those targets?

Sure. I mean there's a number of factors. I mean we try to give some pretty, pretty decent detail on the call, some of the key variables, assumptions in the guidance information we lay out in our supplemental. But I mean some of the -- and I would say we're -- I think the good thing is we're coming into the year with a pretty healthy backlog. So kind of that -- we've got a pretty strong foundation coming into '21 in terms of the amount of leasing we did in '20 that carries over into '21. But with that comes -- we have to get those leases commence, deliver on our construction program. I'd say that's a variable that we've been pretty successful on being able to achieve that on time on budget over many years. But that is 1 factor. And then continuing to do new leasing as well. That's another factor that continue to execute on what we've seen is a pretty healthy demand environment in '20, what we expect '21. Exchange rates now would be even a more global company. That's out of our control, but that does have an influence on ultimately where our USD results come in. And then probably 1 of the other ones that is variability around, call it, timing and execution of some of our capital recycling activities in terms of asset sales and dispositions would be [indiscernible]. And then I think lastly...

All right. Yes -- go ahead.

Sorry.

No. Go ahead.

I was just going to say that we've -- yes. And then on the cost or expense side, we are seeing or anticipating an increase in, call it, G&A and maintenance costs compared to last year, which is obviously a sort of a trickier with COVID coming on and having a tough period of time where it was a little bit harder to execute on overall maintenance programs. And obviously, corporate travel and other things were down. We are expecting some pick back up in the second half of the year with some of those more on the corporate side. But those are kind of some of the flavors of things that could have some variability that could move us up or down within the range.

All right. Well, along with that, talk to us a little bit about your use of equity over the next 12 months and how you're going to achieve your capital goals. How should we think about that?

Sure. Yes. We feel pretty good about our balance sheet. We think it's in good shape. We don't see a need for any additional near-term equity. We ended the year with pretty good -- pretty strong liquidity as we -- sorry, settled our -- the last equity forward that we had kind of, what was that around, September, I think, late September 2020. We issued additional stocks through the ATM last year. And we've been terming out and recycling, call it, debt as well. Even as early as this year, I think in January, we continue to tap the euro bond market, issued about $1 billion in debt, some to retire some of our higher cost debt, kind of clear the runway as part of risk mitigation as well. And I think any additional equity that we may need, we're looking to -- that could come from capital recycling efforts and other smaller dispositions in '21. That's kind of in line with some of the guidance ranges that we provided.

All right. Great. I want to switch gears now. You mentioned ESG in the slide presentation and talk about a couple of things there. One of the things that digital has done is sort of lead with some of the green bonds and sustainability-linked instruments. Talk to us a little bit about that, your -- how you think about that as part of your capital structure, what you see as some of the advantages of that. And at what point does that become kind of table stakes, you think, for folks in the industry to have some amount of that in their capital structure?

I mean I would say we're kind of there in terms of some form of tail space, again, depending on -- it's a bit -- I guess I would say it's a bit easier if you're still building buildings or -- because it's a bit harder to do some retrofited existing buildings, although that's still possible. But I mean we've I guess maybe to start -- we've been obviously a advocate of, again, sustainability for quite some time. In fact, I think we were the first -- as I recall, I think we were 1 of the first REITS, definitely 1 of the first data center REITS. Our first green bond we issued back in 2015. We've issued 5 green bonds at this point and well north of, I think, $4 billion in total in terms of what we've issued. We believe it's a -- again, it kind of fits our overall strategy in terms of not only does it -- is it prudent from our ability to deploy those proceeds in a manner that's fitting a kind of the green bond framework in terms of we're already building to a sustainable level via the certifications that we seek to get not only in the U.S. but in EMEA and APAC under, call it, different regimes and guidelines that we have. But it also helps -- I think from a financing standpoint, it helps diversify kind of our investor base. You have different pockets of capital that are looking to invest in these types of green bonds. So I think that's also a positive. And then again, rounding back to just our customer base, a lot of our customers, large customers, these large global -- large cloud providers, they are also looking for partners, vendors such as us that have that sustainability goals and are driving towards that. So I think it's just kind of mutually beneficial not only for us and our business but also for our financing and capital structure in our customers as well.

Any cost savings advantages on those kinds of financings? Or I mean I know you have -- they're fairly popular in Europe and you have the ability to issue debt and with the -- over there as well. Does that help?

I mean I think it's really hard to quantify. I mean it's -- we're talking -- I think we're talking basis points of savings. So I do think there is some savings. But granted, I mean even if -- I mean you can ask banks, and maybe they'll give their view. I would say it's -- there is some just given that additional -- you're pulling from additional pool of capital. Is it a marketable amount of savings? No. But I think it is basis points, which, again, in terms of size that we're issuing, that's real money. But I think it's again about just expanding the investor base, putting the capital to work in the right place. And I think there is some savings, but it's not huge. But I think it's worth the -- helps cover -- there is -- it does help cover, I think, some of the additional costs because we do have reporting and other needs that come with it, again, not substantial. But I think overall, it just is a prudent way for us to do business and to finance our business.

All right. Great. Well, hey, Matt and Bill, I really appreciate you all being here. Thank you very much for taking the time to talk with us. We're out of time here. So I'll let everybody move on to your next set of meetings, but I really appreciate you all being here again next year -- this year and look forward to hopefully seeing everybody live next year, if not, sooner. So with that, we'll let everybody sign off.

All right. Thank you very much.

Thanks, Frank. Thanks, everybody.

Thanks.