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

Okay. Good afternoon, good morning. My name is Colby Synesael, and I'm the communications infrastructure and telecom services analyst here at Cowen. Welcome to day 2 of Cowen's TMT Conference. For this fireside chat, we have Digital Realty. And from Digital Realty, we have the company's CFO, Andy Power. We have 30 minutes for this discussion. I've prepared a bunch of questions, which I'm going to ask to Andy. But if you have some of your own questions, please feel free to use the chat function, and I'll see those questions come up. And as I see appropriate, I'll try to weave those in as well. But with that, Andy, thank you so much for being here. Really appreciate it.

Thanks, Colby. Pleasure to do it. Good to see you.

You too. So why don't we start off talking about demand? So starting off with demand, over the past 12 months, Digital signed an average of $120 million per quarter in leasing, including 3/4 of your strongest leasing in the company's history. Following that strength, how would you describe the current demand environment? And as part of that, how your pipeline may compare versus a year ago?

Thanks, Colby. So I mean, I think our execution in -- that kind of led to that trailing 12-month average really goes back to a culmination of work over several years, obviously, in terms of putting together the critical puzzle pieces to our platform, inventory runways, investing in our go-to-market, really a multifaceted front that, I think, it probably extends even beyond the last 12 months, several quarters of consistent quarter-over-quarter improvement in many facets. Not every quarter, it was higher than the prior, but most were higher than the prior, and the health of the quarters continue to improve in different shapes and forms. If you look at really what we kicked off the first quarter as the most recently reported, [ not ] volume in line with those trailing average at roughly 1 17. But I think it was probably our healthiest quarter in terms of performance to -- in the last string of quarters. Unlike maybe some of the records we put up in the prior year, which is a very strong 2020, which we may often heavy in 1 category of size of deal, heavy in 1 geography, different kind of, call it, hero contributors to the quarter. The first quarter was really geographically diverse, really customer segment-diverse, really had all regions, all product lines really growing in the same order. As we turn the page into the second half or -- excuse me, second quarter and then ultimately soon will be the second half of 2021, I feel like that healthiness as continue. We're still benefiting very much from our global footprint and really having that platform solution offering across more and more geos, so not having our eggs in one basket of inventory to help those customers. That being said, our U.S. market continues to be a good strong contributor. And I think we're still continuing to do better and better in that less than 1 megawatt category. So continue to diversify our offering our customer base. So please, albeit we're now, call it, 2/3 of the way through the quarter, and as often happens, a lot of signings seem to show up at our doorstep at that very last hours of any given quarter. Funny how that kind of works out. But I would say the healthiness of the band backdrop and really our steady added consistent execution is kind of continuing to play in what I'm seeing since we last reported.

Great. In the first quarter, Digital signed $70 million of greater than 1 megawatt leases, with about 40% coming from the Americas. I'm just curious, within the Americas, how much of that came from Ascenty? And I guess more broadly, can you give us an update on Ascenty? It's been a while, I think, since we've kind of gotten a strategic update on who they are and what they're doing.

Sure. Really happy to say, especially the second part of that question because I don't think we actually -- we've had so many things to talk about at Digital. Sometimes you just don't get to certain areas of our portfolio, which we're certainly pleased and proud with what we've accomplished with that platform. First quarter contribution signings -- about 10% of our total signings were from Ascenty. So good -- really good quarter for Ascenty. Again, we reported our signings are half of the signings, so that 10% on its business is double that in terms of contribution to a Ascenty lines.

Wow, really big quarter for them.

Great quarter. In terms of platform progress since we closed really at the end of 2018, brought in Brookfield at the beginning of 2019. So although we have COVID in the middle of that, it's not all that long ago that we kind of got going with that platform. Holistically, I had to check my facts to make sure I was correct, at the time of roughly when we closed, we were in service or underdeveloped. And most of it was underdeveloped, it was close to 75 megawatts. It was kind of a 50-50 type of a blend, about 90% occupied or leased -- pre-leased at that time. As of the end of the first quarter, that 75 is going up to close to 130, so pretty big step-up. And the...

Built in underdevelopment.

Correct. And the amount of pre-leased as occupied stayed roughly at that 90% territory, so really good progress. Also during a time period where as I mentioned, you threw up a global pandemic, which certainly hit Brazil very hard during that time. So really proud of our team shining through major adversity. When we bought the platform solely the market leader in Brazilian markets, Campinas, Fortaleza, Rio, Sao Paulo, expanding into Santiago, Chile, expanding into Mexico City, with anchor customers of -- different anchor customers are both and now expanding -- landing second customers in many of those locations in addition to continuing to grow the platform in Brazil as well. So certainly pleased with that platform and made great -- a lot of great progress in a short amount of time and also very pleased with our partnership with Brookfield along the way.

To that point, can you remind us if you have a prenegotiated agreement or a structure for an agreement with Brookfield in which you would buy out their stake and whether or not there's a time period associated with that type of deal arrangement? I'm just trying to get a sense, would you ever want to bring the whole thing in consolidated? And if so, is there some type of structure already kind of explain how that would work?

Sure. I would say our -- we came to that partnership, as a reminder, really trying to bring in not just a capital partner, but someone would have a deep roots and experience. And Brookfield, in this case, had 100 years of experience investing in Brazil. We also came to this partnership that this was a massive platform with massive amounts of capabilities of under construction, i.e., runway for, call it, stabilization and a, call it, wide open sea of Latin America where we wanted to tie our wagons together to go tackle that opportunity for our customers. In terms of liquidity, we tried to marry that structure to the longevity of the platform. We're essentially for, I believe it's 5 years from, let's call it, 2019, so 2024. We can transfer our interest, but we -- neither of us can force either party to exit the interest. In year 7, we kind of have a route to liquidity via IPO or buy/sell provisions, which, again, we are very focused. We're a perpetual vehicle. Brookfield is not a perpetual vehicle necessarily. We're very focused on making sure this platform has a smooth runway to ensure uninterrupted customer experiences and no volatility for the customers along the way. So we're obviously going to -- under our agreement, provide that path to liquidity, but we made sure that it's got a pretty long runway, call it, 7 years to that really anyone would have to be able to contractually have their hand forced. And there's a very equitable path to liquidity that we believe protects the platform and protects our customers.

Okay. Great. And then just moving on a little bit here. So specific to the greater than 1 megawatt category, so still sticking with that. As enterprise deal sizes have increased over time, that's certainly been our view, could you give us a sense for the split between enterprise and hyperscale within this category? I guess are you seeing enterprise contributing at a greater percentage or maybe just pure megawatts to those greater than 1 megawatt deals maybe over the last year, the last 2 years? Just trying to get a sense of what the trend looks like there.

So you're saying in the greater than 1 megawatt category, correct?

Yes.

So in that category, the usual suspects are the hyperscale cloud service providers or platforms in general, so they are the majority of those signings, especially when you have larger signings in that bucket in isolation. But 2 things I would say. One, they're not the only type of opportunities that fall into that bucket. I -- just looking at like our top 15 or 20 deal cheat list, and we had an enterprise win into Ashburn, that was a 3-megawatt deal or so, and we had an enterprise win into Chicago that I think it was like 1 megawatt, 1.5 megawatt type deal. So there are some chunkier deals that are falling into that category. In addition to that, which doesn't fit squarely with these definitions that we've -- we created a megawatt definition. It was a lot of our -- and little science, right? We could have made it 1.5 megawatt a quarter, we could have made it 750 kilowatts, we try to pick a simple delineation to speak to granularity of deals and composition. In the less than 1 megawatt category, we are seeing deal sizes growing. We are seeing design changing. We are seeing power densities increasing. We are seeing a trend that lends itself to our diverse and flexible infrastructure that provides incremental runway for growth, incremental flexibility in terms of customer designs, incremental deal sizings that lend us to the different shapes and forms of the enterprise customer that is taking. The legacy enterprise customer, it is not just moving to the colo environment, the cage and cabinet that they would have picked 10, 15, 20 years ago, they're thinking about new problems, whether it's hybrid cloud environments, commercial Internet of Things applications, increasing power densities, high-performance compute, and they need to think about their infrastructure in new shapes and forms. And we have a portfolio that didn't necessarily come from colo routes, although we essentially worthy the landlord going way back in time to the beginnings of the colo and still are today in many shapes and form, but we're able to kind of crack the -- our colo footprint to really fit where we think the puck is going for those enterprise-type solutions.

So to my question, though, you're not necessarily seeing a notable increase in the number of greater than 1-megawatt enterprise deals, they're coming in here and there sporadically, but you're not seeing a consistent cadence of more of those, I guess?

So last quarter, having 2 that were in the 1.5- to 3-megawatt category, I don't think that is a consistent theme, but that -- if I go back in time, that was rare quite honestly. You had to go back to a pre-cloud day where the financial services buyers were taking those chunky deals for that to actually be a predominant theme.

And then sticking with enterprise, though, and I guess probably, I guess, more so from a sub-1 megawatt perspective, are you seeing an acceleration in demand from enterprises as life begins to return to normal and enterprise decision-making abilities start to grow?

I don't want to give a false positive to these trends, and this is consistent with my commentary I said throughout 2020. I was always concerned through the pandemic, through the volatility, economic uncertainty that the enterprise -- while my hyperscale customer base, the cloud service providers, often the most tech-forward, innovative went work remote, work from home, kind of plug-and-play future planners, I was always concerned that the enterprise is going to be deer-in-headlight type buyers and frozen. During that time, I think we improved our execution against the enterprise. So the question I always had looking at the data points was, is it -- are we doing better? Is the market doing better? Are we doing better? Or both those things happening? I think what we saw, and again, we're -- the data points now on a combined platform with a unified go-to-market is still only a string of quarters deep since our closing of Interxion is that: one, the enterprise demand seemed to be hanging in there quite well; two, we continue to, I think, win more than our fair share of enterprise opportunity. And I think enterprises now on the other side of a global pandemic has had to rethink everything they do digitally with their business and put the data center at the center of their digital transformation because it's about getting the data to where their customers, partners, vendors, employees are all operating. So again, enterprises are slow-moving demand wave. It's not like they wake up and make spur-of-the-moment decision-makings. They have longer buying cycle than our hyperscale buyers. But the demand in the enterprise segment does seem to remain pretty firm from our vantage point. And I do think we continue to take more than our fair share for -- as customers align to global multiproduct platforms.

Okay. So you mean firm, by no means it is not doing well, but you're not willing to call out that you're seeing an inflection coming out of the pandemic that demand is clearly accelerating from them?

My -- I'm a positive outlook on the opportunity, but I'm not ready to call the springboard for enterprise segment based on the depth or the breadth of my visibility to the data so far.

Fair enough. And then just last question here as it relates to leasing, so management on the first -- actually, one more, I got a question from the group. Management on the first quarter call noted that the channel represents about 25% of leasing. As enterprise pursue digital transformation, would you expect the contribution to leasing from the channel to grow as we go forward?

The -- and I think that was just to clarify and we can follow up offline to make sure that stat is accurately reflected. I think that Corey was referring to that stat when he answered the question. I think that maybe of our, call it, less than 1 megawatt interconnection piece of the bookings, not our total bookings in the...

That makes sense.