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

All right. Great. Thank you, everyone, for joining us today. I'm Sami Badri of Credit Suisse. Right now in the session, we have Andy Power, the CFO of Digital Realty. Thank you, Andy, for joining us today.

Thank you, Sami. A pleasure to be with you here.

[Operator Instructions] Shoot it over my way, I'll filter and include the question into our fireside chat today as we see fit.

So Andy, to kick it off, no soft intro questions, I guess, in our panel. I did want to jump into kind of something very topical with investors, which is the amount of bookings you guys have been able to generate and record every quarter. And when we look at the average of the trailing 12 months, we get to about $120 million of bookings per quarter coming in. Is it fair to say that the new kind of quarterly bogey that you guys are trying to shoot for or trying to hit is about $100 million? Is that the new benchmark? And if you're uncomfortable with giving us a benchmark, how should we be thinking about your bookings and as this entire kind of story starts to unfold?

I would say more is almost always better. So -- but I know that doesn't give you a lot of guidance in terms of bookings. So I would say, I think we've been working hard over not just the last several quarters or the last several years to, I think, set our platform up for more consistent, well-rounded execution. And that's from a litany of activities in terms of organic and inorganic activities, putting puzzle pieces together, growing our global platform and our product offering, reorienting our go-to-market. And I would say we're definitely pleased with the consistency in our signings velocity. And I think that barometer, you kind of -- you just look at the last 4 quarters, be it post-interaction quarters, we think that trend is something that we want to strive to continue. And I think we said $100 million was a number you threw out there, I think we're always trying to shoot past that number the best we can, but we can't always count on that. And I think last year, we had a strong year, and we had a couple of quarters well above the $100 million number. And we had a quarter -- I think 1 of 4 quarters is below it. So by and large, I think that trend is moving in the right direction. And quite honestly, albeit you have to call it, benchmark it relative to our revenue because I think the fruits of our labor here have kind of been in flight now even prior to Interxion going back probably closer to 7, 8 quarters, pretty consistent execution in our go-to-market plans and generating those signing volumes relative to the installed base of our business.

Got it. Got it. I think one thing that people try to figure out is, what gives you confidence in the bookings or in the growth share of your customers? What are some of the things that you do as a CFO or even as like a member of the management team that gives you confidence that you're going to grow with your customers? What kind of metrics or levers are you trying to pull to make sure that Digital is positioned correctly and indexed quickly for that trend?

I mean I would say a few things from the just overall financial planning lens, we do a lot of, call it, cross-checking of different data sources, some public, some proprietary in terms of building up what we think the overall market growth is, what we can address in terms of market growth and service and then look at our win rates against that. In terms of -- when that boils down to is blocking and tackling though on a market-by-market standpoint and making sure that relative to that demand outlook that we have the inventory to meet the customers' demand in a timely manner. So you got to be able to be in the game to win the game, so we're obviously going that on a very micro planning effort. We're also always looking at extending our footprint and be ahead of our customers where we think our customers are going. You saw that a fair bit in our activity in terms of new market expansions over the last, call it, 12, 18 months, both in Europe, Latin America and Asia Pacific. And then last but not least, there's nothing better than just true customer intimacy and being at the table as a long-term planning, trusted infrastructure partner for an enterprise customer up to a hyperscale customer so that we can call it program or planning to be the lockstep with their initiatives and to continue to grow those relationships to the best of our abilities. So a few fronts is how we kind of tackle that and stay ahead and make sure we deliver consistency to our growth.

Got it. Got it. Thank you for that. And when we think about 2021 and we think about the mix between hyperscale and enterprise, what have been some of the key differences in terms of how fast leasing is taking place or the types of requirements for those data center leases? Or I guess what I think I want to say is location, specification, requirements, backup powers, how have those been differing between these major customer types?

I mean, holistically, as we turn the corner for 2020, which is definitely a great year for the industry and for Digital, I would say it's set -- first quarter 2021 set us up for a healthier backdrop of demand in our signings. 2020, you could certainly say there was almost heroic contributors to each and every quarter, a major single customer signing in 2Q, the enterprise business being close to half of our signings in 3Q, Europe being a massive contributor in 4Q. And when we looked at the 1Q sign in, you saw a -- all the geographic regions called rolling and being equal contributors. You saw the product mix being super healthy. It wasn't dominated by a single customer. There was diversity even amongst the big CSPs in terms of their contributions, so not led by one of those big heavy names. I think that healthiness of demand really has continued into what we're seeing into the remaining 3 quarters of 2021, definitely broad-based, lots of discussions on multi-markets, multi-geo type platforms, seeing that both on the hyperscaler and the enterprise, if you call it dial a click deeper on both the hyperscalers, I would say, kind of just continued the demand trends through the COVID pandemic almost unflinchingly and really continue to push the envelope in terms of growing the new markets, replenishing capacity in existing markets. And I see that trend of them consolidating their buying behavior with global partners like Digital Realty and bundling their buying capacity with Digital. The enterprise, I always was shocked how 2020 played out. I thought the enterprise customer was going to be much more deer in headlights in the volatility and the economic uncertainty. I think that demand held in there. And I think, quite honestly, we've won more than our fair share than, relative to history, I think some -- I've mentioned how we've been investing in our platform and our go-to-market, and I think it's been paying dividends. I think that trend is now continuing into 2021. With the recovering enterprise buyer who certainly from the tops of those global enterprises are saying digital transformation, the data center is at the heart of how we architect and support our customers, our partners, our employees. And I've not seen like an enterprise bounce back with the reopening of the economy just yet, but certainly seeing some positive canaries in the coal mines, be it the financial services, fintech, private equity hedge fund industries leading the way for enterprise from a demand standpoint.

Got it. Got it. I wanted to pivot over to a very fun topic in the data center industry, which is churn. So churn was 3.2% in 1Q 2021 following 2 consecutive quarters of about 1.5% or less. So what level of churn for the business should we think as normal and expected given now that interaction is being factored into the company and this brings lease durations a little bit tighter than what the business is used to seeing, how should we be thinking about the normalized level of churn for the business given the integration of Interxion?

1Q was -- had elevated churn really to the unretained capacity on the larger footprint that we've got back in the first quarter in Ashburn, Virginia. So an anomaly based on history and also, what I would say, we look forward in our expiration schedule. I think if you looked at -- I think -- I believe the less than a megawatt capacity, our retention or -- our retention was higher than the prior quarter, our churn was lower than the prior quarter. So it wasn't like a broad-based churn event, it was really tied to one specific non-retention. I think if you look back over the last several quarters where we've been reporting churn prior to 1Q, I think that you'll see a more consistent trend. I don't see any other major pockets. I would say while we are -- our expiration schedule is much more weighted to the less than a megawatt, more colocation type contracts, obviously more fraught with the potential for churn because the customer has a chance to renew or not renew. It's also concentrated in some of our most sticky customer and network dense locations, highest pricing power locations and even broadly outside of less than a megawatt, just more international than North America. So I think we're heading into a much better territory on churn and don't see the next version of what we played out in the first quarter really repeating itself anytime soon.

Got it. A question came in while we were talking about churn, and the question was regarding customer net churn. And I think what this question is alluding to is if a customer is deployed in say, data center 1 and then -- or A and then deployed to data center B and the deployment size is the same. A, does that actually come up in the churn number? So that's like number one, the next churn concept. And then the second part of this question is, how often does that actually happen where a major customer actually completely leaves the portfolio? And then I think what this person is trying to figure out is, what's the true economic net churn of the business?

So -- and I'll do my best displacing this question together. So in your example of suite A and suite B, if suite B goes vacant, that would be counted in that churn statistic on Page 26 or something, call it, the back half of our financial sup. We'd demise it to the actual suite or the revenue loss. And we don't wait for a full customer exit of all of its capacity to count that loss of revenue or leased square footage of power. I think what this -- the origin of that question, I may be guessing, is, I think what you need to do is you take our new signings and our churn plus any escalations in rate, and that's called the full net economic package time period aside. Because not all new sign, we give you -- call it a book to commence time period as well, but you have to put the new signs with the churn to really the full net picture because our churn number is really just degradation of existing contracts. And that same customer could have grown with us elsewhere, and that would not be picked up as an offset in that churn calculation.

Got it. Got it. I wanted to pivot to pricing. And on the most recent earnings call, you and the management team noted that renewals should be heading into to better territory given just supply and demand dynamics. Now it would be great if you could just provide some color or an updated view on this idea that the pricing dynamics you're going to improve, especially for the greater than 1 megawatt plus sizes, what's the latest on that front?

I think there's a few things in play here. One, just market general sentiment, I think you're seeing even the weakest markets seeing stabilization. So a bottoming out of the toughest markets being Ashburn, Virginia, case in point. Two, when we look at our expiration schedules and look at the data of what we've gone through the last couple of years relative to what we see in front of us, we see a much improved picture ahead of us relative to what we've navigated. That's in the size of the bars, that's in the concentration of major customers, top customers, multi-market expirations that, obviously, those customers that often bucket new business, at the same time, get advantageous terms on their renewals. That's also based on the concentrations of more North America in the rearview mirror, more international in the front few mirror. That's also in the mix we were talking about a second ago in terms of much more less than a megawatt, higher pricing power, stickier interaction, Westin Building, Altus IT, Lamda Hellix. So those -- all those things baked together in addition to just the face rates, which makes it a little hard to compare apples-to-apples because when you throw a Singapore expiration in there, it's going to bump up those face rates relative to an Ashburn expiration. But based on our cutting and slicing of all the data, we do see a better picture in the front view mirror. We're not saying we're out of the woods yet. I'd say it's improving. We've went -- we had -- I think we guided for high negative single digits mark-to-market last year, we came into the low single digits. Our outlook this year was better than the prior year. We had a positive quarter in the fourth quarter, so not every quarter has been negative. We still use the renewal of customer contracts as an arrow in our quiver to marry with bundling with other customers that want to -- for those customers who want to grow with us at the same time and come to the table in a holistic picture. But we do think that we're heading into a firmer pricing period due to those confluence of events.

Got it. Got it. Thank you for that update. I wanted to kind of pivot on more -- another item that you guys work on in release, which is the Data Gravity Index. I think the big question is you guys have been very vocal, very visual. And what -- maybe I guess the way I want to put it is it's been front and center in a lot of your marketing efforts. Has this translated in a lot of new logos or at least existing customers thinking of expanding to address the Data Gravity proposition?

I would say a couple of things there. One, Data Gravity is one of a few things that go to the credit, I would say, to our success, not only broad-based on Digital, but particularly at penetrating the enterprise colocation customer. It started with making sure that we had the coverage across the map and the global scale to support those customers, and then it was complemented by having a critical assets along the way with the most connectivity-dense and communities of interest that those customers need to be in. And then it also required and investment in reiteration of our go-to-market and making sure that we are front and center on the CTOs, CIOs, executives, IT leadership teams of the Global 2000 enterprise customers and that list beyond and making sure we'll come into the table with a thought leadership about how we can improve their performance, their cost, their efficiency, how we can think about all our learnings about bringing the data center to be not just a back-office type tool, but the center of improving their performance to the IT architecture table and really thinking differently of the legacy models and where we think data is going to continue to compound upon itself, and that these types of customers need to think about putting their data at the heart of transforming their business. So I would say the Data Gravity Index has been sucking in the customers to Digital, sucking in those new logos, using my best gravity pun I could think of on the fly here. I think it's definitely a key tool in our toolkit along with our MarketplaceLIVE, along with PlatformDIGITAL, along with our recognition from the IDCs, the Gartners of the world in terms of what we've done in terms of new signings in the less than 1 megawatt and international category, in terms of 2 quarters in 2020 of record new logos, now adding, call it, 100-plus to the 4,000 -- 100-plus per quarter to the 4,000 customers we have at Digital. So I think that definitely deserves a lot of credit to advancing the ball and really rising up to being the only real second alternative or alternative in general to the existing global colocation or connection provider.

Got it. Got it. I wanted to pivot to Interxion a little bit. So it's been a little bit over a year since you guys closed the deal and integrated. And I think the important thing is when we see your bookings come in Europe, what percentage of those are from Interxion customers signing bigger deals with you guys versus how much business is actually coming in and being exported from the U.S. into Europe? Could you just kind of give us a breakdown of what's moving the needle in the bookings and where it's originating from?

So I mean we picked up close to 2,000 customers with this combination of Interxion, and I think we expanded in about 10 European countries, critical destinations, not only becoming being provided in the flat markets, but also some other burgeoning markets where we're seeing both hyperscale and enterprise demand. I think just last quarter, we had 2 different CSPs signed with us in Zurich. We've talked about our success in the markets like Madrid and Belgium and Austria. So numerous different markets outside of FLAP as well. Definitely pleased with the progress on our -- coming together as the one company during a pandemic. I think we've done a nice job of bringing -- unifying the teams. We still have work to do in our processes and systems. This first -- the beginning of this year was the first sales kickoff where we brought out the entire global organization together. Now you have those -- all those sellers of 150-plus sales representatives, all selling a global offering, but also at the same time, providing incredible local support, which we think is an incredible important blend you need. We're certainly doing a lot of business from our U.S. customers. You think of the top DSPs in our record fourth quarter contribution for landing in Europe. Those are heavy CSP orientation, U.S. multinationals landing in Europe. We're also exporting our Asia Pacific customers into Europe. And what probably makes me even more excited, just in the first quarter, about 40% of the signing is done by the European-based sales rep were exported back into North America. And just on the fact of where you see the big CSPs country of origin, that is mostly an enterprise outbound sale for those European customers back into North America, so definitely excited of the cross-pollinization that coming together. And as a reminder, we've been doing all this via Zooms or BlueJeans or Microsoft Teams. I think that we continue to upload our success here when we get these teams back together and build upon with a strong foundation we already started.

Got it. Got it. Thank you for touching on that. People usually don't think of the whole European to U.S. export process, but that's probably a factor people haven't really crossed that often. One thing that did change quite a bit in the financial model is your margin, right, and the combined company. So what is the margin enhancement opportunity going forward with Interxion integrated into the Digital -- the broader Digital model?

So a few things. One, we've been investing in our platform by -- through this inorganic activity, i.e. buying or combining with platforms that have heavier investments in product, in sales and marketing and not wringing out every last expense synergy along the way because we wanted to invest for future growth. We do have some synergies which I would call more corporate redundancies with Interxion that were ahead of our target for the second full year, and I have all the confidence in the world wherein we eclipsed the $20 million for year 3 in terms of those expense synergies. But by and large, I don't view that we are wringing out all the cost efficiencies that we could at this time because we think that these investments in those growth engines, in that new innovation, in our go-to-market in general, will allow us to accelerate our growth and capitalize on the opportunity that lies ahead of us. So we certainly have ability to scale this platform at a higher margin over time. You just look at the amount of infrastructure and personnel. We do not need to replicate when we added incremental country in APAC or Latin America or Europe when we bring on the incremental project that has tremendous scale and revenue contribution, but we don't need to repeat the corporate infrastructure, the regional management infrastructure, design and construction talent and a whole host of, call it, supported global infrastructure. So -- but for right now, I would say we're not focused on driving those margins up necessarily. We'd rather generate incremental growth and reinvest in that growth for longer-term success. But I do think that's not going to be the case forever. And at some point in the future, we will certainly be able to continue to get margin improvement. And I think this platform can generate the highest margins of anybody in this space by a long shot at the end of the day.

Got it. Got it. I wanted to pivot to the topic of asset recycling on your balance sheet, and you guys have been very active. And this is probably something that most people look over when it comes to valuing Digital Realty. But could you just go over the asset recycling philosophy of the company? And maybe just recap the 1 or 2 last few deals that you guys have done because every quarter if people read close enough, there is stuff that's going into those disclosures, and some of them are at very attractive cap rates. So it would be great if you could touch on that.

Sure. Sami, I think this really ties back to our philosophy from day 1 is that we've thought that owning the fee simple ownership of the real estate from the ground up was a really strategic decision that need to be made because it future-proofs our customers' growth. We never have to go to our customers and saying, "The doors are shutting on this lease whole property, you have to leave." It's in our DNA. And quite honestly, it dovetails incredibly, importantly with how you think about monetizing portfolio and recycling capital into higher growth opportunities. So our Chief Investment Officer kind of articulated this a year or 2 ago, saying our plan was, over multiple years, some multiple billions, really exiting noncore markets, noncore assets, slower growing types of our portfolio and reinvesting it to higher pricing power, higher growth and higher return parts of our portfolio. We've been prudent, I believe, to not just rush the market with one big sale. And we tried to find the right buyers for the right portions of the portfolio at the right time. Going back to 2019, we did a 2-part transaction with one Singaporean REIT called Mapletree, where we sold outright a portion of our single customer power-based shells. And we also raised a joint venture capital in a core portfolio at an attractive, call it, 6 cap rate at the time. Fast forward to beginning this year to a different Singaporean REIT, we sold out, right, some noncore assets in Europe. So again, whether all these transactions have the similar elements of shrinking the balance sheet away from slower-growing noncore places where we don't see continued investment in a robust and diverse customer opportunity, and our path to doing that has much been accelerated by the fact that we own these businesses from the ground up, beholden to no one. And I think you'll continue to see us maybe this year, probably more on the margin, selling some land, selling on one-off or building our 2 since we've already, call it, generated nearly $700 million of proceeds from the sale I mentioned a minute ago. But I think you'll see us continue to tap into those private capital sources at the right time and really strengthen the denominator when it comes to slower growing parts of our business and reinvest in accelerating the numerator of growth to along of the lines I just described.

Got it. Got it. I did want to -- we were coming close to the end of time, but maybe very quickly is how much capacity does Digital Realty have left as far as interest expense savings, right? When you guys think about capacity and the ability to keep that flywheel going, I know that there is no real capital markets activity from an interest expense revision down factored into guidance. But is there capacity or are you very optimized at this point?

I would say we keep a very close eye on that. We are -- over time, I think we'll have a continued ability to shrink out incremental interest savings. The big competitive advantage or change that would really open the door for this was the Interxion combination because it shifted the exposure to north of 30% in EMEA, largely an equity-funded business at the time, and we've been able to migrate our U.S. dollar financing and the euro financings, which allows us to take advantage of the natural currency hedge, but also, at the same time, finance and interest rate market that's closer to 1% for Digital versus whether we're at 2% or 3% depending on the base rates in the U.S. So I don't see an opportunity to really to activate at this very minute. But if you just look at our maturity schedule and look at the weighted average interest rates, they're still expiring in nice even tranches over the next few years. I think over time, we will be able to continue to squeeze out some incremental savings.

Got it. Got it. Well, Andy, thank you very much for joining us and tuning in with us at the Communications Conference. Really appreciate your participation, and thank you again for taking the time to...

Thanks so much, Sami. Really appreciate it. Hope everyone's staying safe. Take care.

Absolutely. Thank you.