Digital Realty Trust, Inc. ($DLR)

All right. We are going to go ahead and get started shortly. If everyone can please take their seats. All right. Thanks so much for joining. I'm Matt Niknam, comm infrastructure analyst at Truist. Very pleased to be hosting Digital Realty President and CEO, Andy Power.

Thanks for having me.

Great. So maybe just to get started, Andy, if you can talk a little bit about what you're most focused on, top priorities for Digital Realty as we head into the second half of the year.

Sure. So I think the themes are consistent with our strategy, which is about delivering the commitments to our customers, partners and investors and really threefold. One is strengthening our customer value proposition 2 is about innovation; and three, is about evolving our capital sources. And I think what we've been doing last year and now in the first half of this year, and we'll continue on is, call it, firing on all those 3 cylinders on the capital -- or excuse the customer value prop of a great 2025 out of the gate strong with numerous records our enterprise colo business has some fabless new logo additions, record contribution to 01-megawatt across regionals. The partners were a great contributor of those wins and that velocity and fundamentals continue into the months we're working on right now. On the innovation front, I'm just coming off in the last few weeks the launch of our Digital Realty Innovation Lab in London. We now have those across Northern Virginia, Tokyo and London, more regions to open up where customers can really have a live test bed for their AI and workloads inside our facilities, see liquid cooling happening see our numerous partners and their equipment and really bring it to life. So really proud of that innovation and more to come on that front. And then lastly, on the evolving capital front, really a massive third leg dollar stool. We've been building on that for years in terms of private partnerships delighted that we had our first closed-end fund that we upsized and capped off with, call it, $10 billion of firepower in that vehicle in addition to an attractive fee component that's now flowing through our P&L and scaling for our strategic private capital business, all of which is compounding at the bottom line, 10% last year. 1 quarter reported and already raised guidance and tried to north of 9% this year with a backlog of gross $1.8 billion of revenue for multiple years of growth as well.

Excellent. So I was going to ask you about the demand backdrop. And I feel like it is -- and I hate to put words in your mouth, but firing on all cylinders across the board. But why don't we just maybe delve into that before we jump in to.

Yes. So we didn't put them on a.

That's excellent. Are there areas where maybe there's a little bit more outsized strength, whether we think about hyperscale, enterprise colo, are there geographies maybe where you're seeing a little bit more momentum, if we can talk about that a little bit?

So if you look at the 2 major categories where customer demand you have, call it, the enterprise side of the business. And we've just been able to continue to execute and put up new records quarter after quarter. That's a business that we are doing, call it, $500 million a quarter, $200 million a year, and now we're just approaching $100 million a quarter, trending towards $400 million in a year in a very short order, taking share expanding existing customer relationships, adding new customers and our value proposition, especially in these times when power densities, I and new infrastructure form factors are coming to bear. The enterprises are coming to us more and more. And it's been an unwavering commitment to digital transformation, both public and private cloud and also early days of AI for those customers across regions in terms of originating where the customers are headquarters and where they're landing with us on our platform. On the hyperscale side, we've been very fortunate to do business with numerous of the incredible hyperscale customers who have been servicing for many, many years and really not be single threat on any given 1 -- so support all of them in numerous markets. We just had the largest lease signing in the history of the company, which was a customer probably inside not big of a lease with us for many years. Quite honestly, I think there's a AA-rated hyperscaler AI inference, landing in a relatively new expansion market with that's in Charlotte, which was exciting. So you're seeing real tremendous, not just robustness of demand but real diversity of demand, whether it's different types of hyperscalers or industry verticals on the enterprise front.

Excellent. So let's maybe delve into some of those drivers. So AI, obviously, notable driver of booking strength in recent years. You've recently noted seeing this going from pilot to production. So maybe you can help us understand how meaningful AI has been as a percent of your recent bookings across hyperscale and colo and maybe as a second part of that, how does the evolution from training to inference oriented workloads impact your business?

Sure. So we've been reporting on those stats, both on an aggregate and also in our enterprise segment basis. And in aggregate, it's been anywhere from, call it, 1/3 to 50% and then kind of the highest 70-ish especially when you land a big deal for AI inference like we did last quarter. On the enterprise front, for a while, I would say, is the high single digits contribution creeping into the teens and now we put up a record contribution, called 20-ish percent last quarter. So it is growing. It is certainly a topic. I don't think you can totally silo these workloads because an enterprise that is thinking about AI, it's thinking about that with hybrid cloud and its digital transformation and these workloads are certainly interconnected. On the hyperscale side, for hyperscaler to come to us to a market that has numerous cloud availability zones, numerous enterprises. It is certainly thinking about that next growth of AI inference is really why they're coming to us to actually get to real production workload environments. But I still think on both of those categories, we've got tremendous TAM or runway of opportunity but this is going to take years to fully come to fruition. And I just look at the evolution of these workloads of the term inference to answer infers to agent inference and actually getting infused in everyday life as a consumer as a business, I still think this is going to be a multiyear build-out and necessity for the industry.

Great. You talked a little bit about breadth of demand. I think it's a really interesting point you've been highlighting over the last few years. Can you talk a little bit about the diversity you're seeing across your larger customers? And whether this dynamic enables you to be a little bit more selective in terms of evaluating new builds and leases? So.

The -- I think that is more germane to our hyperscale business because in the enterprise business, we're approaching 6,000 customers, we're adding 130, 140, 150 customers every quarter, and we want all these customers to be growing our platform and we're making sure we have the runway for that growth consistently for these customers. On the hyperscale side, we have obviously some tremendous pieces of infrastructure that these customers -- numerous these customers need. And our goal is to make sure they all have a fair opportunity to get what they need, where they need it and when they need it. we're always in the business of cultivating really diverse connected campuses to make it more of a place where numerous customers can grow, expand and not really be single-threaded to 1 customer necessarily -- that doesn't always work out perfectly. Sometimes the customer wants the whole building, and we'll certainly find a way to make that happen for them. But it's -- we're at a time when you've seen pretty across-the-board commitment from all the top hyperscale customers, the likes of the Microsoft, Amazon, Google, Oracle, Meda, et cetera. You also have new AI labs in the game who have used those same companies for their infrastructure or looking at different ways of procuring capacity as well, often partnership with vendors or some type of support. But we're essentially trying to make sure these precious sizable critical capacity blocks in the markets they need them, get delivered on time, ready for these customers, and these customers have a chance to grow on our platform.

Great. Let's talk a little bit about why customers choose digital. It's a pretty competitive space, a lot of folks -- a lot of competitors that you face -- why -- what differentiates Digital Realty platform digital relative to peers? And ultimately, why do customers choose you?

So there's -- 2 major reasons based on the category, but there's a guiding light on this. We've solely as a company, only been doing this business for north of 2 decades. So we have a deep relationship, our safety ratio. We don't overcommit. We make sure we deliver. That's in how we build, how we operate, health and safety. When things when there's an issue, we make sure we show up and deliver for our customers and the customers know it. And that's for our enterprise customers, and that's for our hyperscale customers, right? If you peel the onion back on both of those segments in the enterprise category, we are a tremendous global platform, 55 market, 6 continents. We've got the connectivity these customers need. We are essentially have the form factors and sizing and power densities in liquid cooling capabilities. We were talking about AI and how to make that infrastructure come to life 2017 well before anybody was talking about this. So that's why I think enterprises are gravitating to our story more and more often. On the hyperscale side, in addition to that, call it, table stakes element, they know that we are going to be able to deliver for them where they need it most, right? That is from a location standpoint, that's from a runway of inventory growth -- that's from a -- we give you a schedule, and we delivered 6, 9 months ahead of that, not the other way around, right? And we also work with the customers. If they're thinking about they want 50% liquid cooling, 50% AR, how it modulates we're going to try to give them as much flexibility as we can until the decision for the delivery time would be impacted. And then we have the hard conversations and help them make the right decisions. So on the hyperscale side, we pick our spots. We don't just chase market share for the sake of it. We don't -- we try to figure out places where we have something that is really helpful to those customers. We have some type of angle, some type of edge, whether it's a hard-to-do business part of the world, some place where we were just so far ahead of the game in terms of our inventory runway some depth of operational on-the-ground experience where the team just loves working with our people. And that's where we excel with those hyperscale customers, and we don't try to be all things to them.

Great. Colo and interconnect. So effectively, the enterprise business, you've invested in the business pretty consistently over the last decade to the point where you're now delivering almost $100 million a quarter in bookings. -- what's working, where are you taking share from? And are there opportunities to further scale this business. this was not necessarily an overnight success. This was a product of tremendous investment getting after this early days scale into global numerous markets, investing in our go-to-market, our systems everything that's needed to make sure that we're an easy button for the enterprise to consistently scale their infrastructure for their cloud, for their AI for their digital transformation. On top of that, it just came down to execution in the last few years, making that the guy in light of the company, making sure that we have the runway for the customers and we don't go dark for those customers. In terms of share, -- we're winning business with the customers -- people got to often focus on 1 piece of the industry and forget that we still are helping enterprises move out of data centers are closing down, servers out of office buildings, a lot of carriers. There's a massive addressable market where we and the largest provider right ahead of us are still a very small part of. So we are winning that business.

We're taking share from a list of smaller subscale regional one-off and kind of left by the wayside providers that are, call it, behind us in the competitive order. And I believe we're taking share from the competitor that's in front of us, who has a nice pricing envelope ahead of us. So I think it's across the board. I think we are doing this not as a finished product. We weren't built as a colo company 20 years ago and had everything perfect and ironed out. We did this through inorganic activities, M&A, joint ventures, bringing it all together. And we've been on this, call it, AI-ready road map for our systems and our inventory and our go-to-market and our process for several years because we had to integrate that second leg to our schools integration and innovation. So we've been winning and taking share with the wind in our face a lot of times. And I'm really excited that we're on the cusp of unlock here where we're going to be infusing that technology and unlocking in the years to come more and more to accelerate that go-to-market and take even greater share in already a massive addressable market where there's a party of opportunity for numerous providers to win.

It's growing. I think where Agentic AI is going. There's a lot more on the come. power and grid connectivity, still bigger constraints, and we read about it all the time. As we think about your 3 gigawatts of installed capacity, 6 gigawatts of future capacity. And I think within that, it's about a 1.2 gigawatt development pipeline -- how do you ensure you have adequate power availability to meet future demand? And maybe again, what sets you apart versus peers? I'd like to be framing that, but let me just give you some incremental stats. So today, we operate 3 gigawatts, live data centers. 6 you mentioned is future growth, not flowing through our P&L much of which we're building or cume building, that's $1.2 billion.

So 1.2 over 3 is a 40% expansion in our, call it, megawatts of operation, of which there's no revenue from that's a $16.5 billion gross share of data centers. That is up, call it, 60% from 12/31 -- so big acceleration in our development. The amazing part of that, the pre-leasing still up in the, call it, north of 60%. The yields are still north of 11.5%, all regions, double digits. And as you mentioned, that 1.2% is only a small part of 6%. That 6% is stuff that we've owned for many years, right, that we're activating coming online a lot coming online at 27, 28, 29 and 30. So we've been at this game early. So gave us that runway for growth -- but then we've also used our own ingenuity. And like that Charlotte transaction I mentioned on the leasing side, largely is the issue of company, we just bought that land 18 months ago. So activating finding places in markets that we see real long-term durable value. That Connected Campus strategy. We've got the downtown Charlotte, highly connected Internet hub with essentially enterprise customers. working with our utility partner in that region to essentially bring power faster to that site. That lease I just mentioned, it's only the first half of that transaction. So -- and in that playbook we've been doing in Atlanta, in Dallas, markets outside the U.S. as well. So we've been also -- be able to add to that runway of growth -- and what we've been adding is not the last megawatts we'll be delivering in that runway. We're bringing stuff in that's strategically important to our customers, and it's delivering on development into our P&L in the near future.

We hit a little bit on power in terms of a constraint. There's also, I think, a growing conversation around nimbyism labor shortages, ultimately contributing to more delays in projects. Are you seeing these dynamics affecting your business at all?

The facts on the ground is that the this has become a tremendously hot button issue unfortunately and unfairly, in my opinion. I can't help myself on my public service announcement around data centers. When you really look at the facts about our energy use, where energy prices are increasing versus staying flat or decreasing data centers are actually value-add to these grids. We just went through a hot week on the Northeast -- and I can tell you, we are doing demand response in Northern Virginia. And given the greater break, which is additive to all the electricity folks consuming in that market. we are making massive investments in substations and transmission. We are essentially helping the grid all along the way. Water is 1 of my favorite ones that is being bandied about. I can tell you, digital has got 300-plus data centers around the world. that's less than 18 California golf courses worth of water. There are 16,000 golf horses in the United States alone, that's less than half the or in the world. The jobs for every data center is 4.5 jobs outside the data center. And if you ever go to a data center market like Loudon County, you'll notice they've got the best roads, schools, teachers, sports fields, it's because the tax dollars were contributing to make that happen. And people in those markets are very appreciative. And what we're doing is helping on the national campaign, the PR campaign, but making sure our people are on the ground connected to the communities and showing up with transparency in the town halls going there and telling what we're about before we do anything, right? Making sure that our story of how we do it the right way, where we build, is it the right locations, how we're helping on the grid how we're helping with the community. And that's paid us dividends. Our work in growing in Charlotte or growing in Atlanta or growing in these other markets where we're newer to the market we would never have -- the runway of inventory we have today if we weren't call it, on the ground, winning the hearts and minds of those folks.

Let's pivot to pricing. It's been a bigger tailwind for the industry the last several years. How would you classify the current pricing backdrop across key markets. And we're seeing a little bit more in the way of cost inflation particularly around IT and the supply chain. Is that driving any maybe incremental pushback you're seeing as it relates to pricing updates on lease renewals?

We are in a territory where prices are continuing to grind higher, and it's well founded based on the cost to build this infrastructure, obvious and very clear supply/demand dynamics. There's markets where -- including the factors we just talked about, the supply is being curtailed and it's going to be curtailed for long durations of time. And we've seen -- I mean, we've had some record rates along the way in our greater than megawatt category. You've seen most of the leaders in the market, whether you're in Northern Virginia or Silicon Valley, call it, 200 or north of 200 rates in some of those markets. Other markets are coalescing higher -- and the customers understand that for their business to get their infrastructure online to make sure they're winning their cloud customers, which is a tremendously profitable business call it, $0.5 trillion growing at 30-plus percent. I believe being curtailed. Its growth being stifled by AI, quite honestly, that they need that infrastructure, and that's the cost for -- to make it happen. So I don't see the pushback. And when you have a list of customers, I just rattled off earlier, all needing this stuff, it's obvious that this is what it costs to operate and to scale global technology.

We talked a little bit about inflation. But broadly speaking, if we think about inflation into labor materials, how has that impacted your cost to build on a dollar per megawatt basis. And combined with that dynamic of higher for longer rates, how is that changing the way you evaluate new opportunities in target development yields?

We are going to the latter part of your question, we are very focused on ensuring that our yield objectives are being met in a obviously inflationary backdrop. There is tremendous tightness -- land values are inflated there's tightness in supply chains, there's tightness for labor. And when these customers have tremendous urgency there's no slack in the system to drive cost or beat patient, quite honestly. And you can look in our financial supplement. That development pipeline going back several quarters, was however and call it closer to $10 million, $11 million a megawatt. And now it's certainly closer to 14 million a megawatt, right? And that is a known factor. I think we've probably done better than most of our competition. The you just got there to be a scale. We've got tremendous partner relationships on the vendor side. We're consistent with our GCs and subs we're consistently building. We're not here today and going tomorrow. And -- the funny part is people thought, well, if I go find a cheaper cost of living market, maybe that will be a way. The opposite is happening because these projects that we are not entertaining that are in the middle of nowhere, they had to bring all the labor into that town and made it much harder to staff and operationalize. So there's no free lunch in scaling this type of infrastructure at this velocity.

You talked a lot about balance sheet delevering -- adding a lot of arrows in the quiver as it relates to funding mechanisms -- can you talk a little bit about some of the recent success you've had here and maybe how you evaluate and prioritize the various funding sources? So.

I look at the financial formula around digital is really like a triple threat or a 3-legged stool. We got this amazing colo interconnect business, service enterprise, taking market share, adding new customers, growing relationships. We have a hyperscale business that has an installed base with a very attractive mark-to-market that is actually growing as we speak. And obviously, the lion's share of our $6.5 billion of development at 11.5% is a lot of hyperscale in there. But that third leg that you touched on is we had to build over time, evolve our capital structure and really have numerous arrows in our quiver. And that was a backdrop that everything kept getting bigger and bigger and bigger and I don't think that's going to stop. There's no small data center projects anymore. The utilities, when we go to procure power are requiring hundreds and hundreds of billions of dollars if not $0.5 billion or more of letters of credit to security deposits for an electrical service agreement to deliver power years in the future -- the the proverbial 2 guys in a pickup truck that tied up dirt are done. That they're getting shaken out in this industry. And it's a good thing because we are in AI armrest technology arms race here where we can't mess around and we need real folks that can deliver like Digital Realty. We had evolving the capital structure side. We've obviously done that on our balance sheet now at call it, 4.7x lowest AFFO payout in the history of the company. but also having these private capital arms and now in a fund format where we are the strategic private capital business, we are the asset manager that essentially when we look at these master projects, we can invest with the balance sheet, we can invest with joint venture partner we have, or we invest with funds under our management. And we're looking on continuing to scale that business, which makes us more efficient in our capital deployment, driving more revenue earlier into our P&L, be it development fees, asset management fees, property management fees and allows that all that good stuff I'd mentioned on the 3 legs of that stool flow to our bottom line faster.

In terms of leverage, I got to sneak in a CFO question or 2, just given your prior role. How do you think about optimal leverage for the business? Is there an appetite to go higher? Is the business sees improved returns at all?

I don't think we've changed our stripes on being committed to a fairly conservative leverage and whether it's 5%, 5.5% or even sub-5%. I think that we are very focused on positioning ourselves for growth. right now. And we -- all these things can exist. We can be raising billions of dollars of our first fund that could spend $10 billion, and we could have $30 billion of assets under management for private capital, be it joint ventures and funds. And we can also use our currency along the way to build that $6.5 billion and take that development even higher. I mean, if you look at how that development has ramped and maintain rate returns, high preleasing supporting our enterprise colo business, supporting our hyperscale customer business. and have a balance sheet right now that can continue to play offense when it comes to those development opportunities. We're kind of trying to make sure we can eat our cake and have to in this backdrop of demand.

I'm going to skip to just in the interest of time because I really want to hit the core FFO per share. You guys have done really an amazing job, I'd say, sort of delivering both top line but bottom line growth the last several years. How do you think about Digital's core FFO per share growth prospects in upcoming years with the strong supply/demand and pricing backdrop we discussed?

We are we've inflected and that inflection is continuing, and we are essentially coming off a year of 10% bottom line growth. We are 1 quarter reported, already increased our guidance north of 9% for the year. trending towards the high end of that feels like. So again, feeling closer to that double digits with a $1.8 billion revenue backlog with inventory blocks that are going to -- yes, colo is going to continue to fill the front end of that, call it growth algorithm. But these big inventory blocks that we're signing now is going to make that 1 putting go higher, make that development go higher and also make that derisking of 27, 28, 29 happened sooner and sooner and sooner. So we're about to be a consistent compounder because we want to drive our per share growth and our stock price higher.

Excellent. Anything we didn't ask about that you would want to own part on the audience before we end.

I don't think so.

Excellent. All right. Andy, thank you so much.

Thank you, appreciate it.