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

My name is Jon Atkin. I cover the communications infrastructure center at RBC. And then with me for the next several minutes of Q&A is the Chief Financial Officer of Digital Realty Trust, Matt Mercier. Matt, welcome.

Thank you, John.

Appreciate it being here. So we're going to cover a lot of topics and see how many we get through. Maybe starting with agenetic AI and what you're seeing there. It sounds like there are some early diminish signals. When do you start to kind of see that show up in bookings, things like cross connect, service fabric and when do we get from pre-season to early innings to maybe kind of the bulk of the demand?

Yes. In terms of agentic, I would say we are still in the real earnings, but we are -- I think we've seen, especially -- I mean, even over the last couple of quarters, definitely an uptick in what we're seeing around diverse deployments, call it within our 01 that are taking up interconnection as well. So maybe to frame it, I mean, I think you're seeing demand is and diverse today across our product set. So -- which I'm sure we'll get into in terms of hyperscale, but also in our tone, which I would say more of the agentic, although some of those cases, I think, are starting to see greater than or larger than 1 megawatt deployments. We've seen an increase in demand across our enterprise and service provider segment deploying diverse work-oriented deployments across multiple markets, globally. And I think we're actually starting to see that pick up in terms of discussions we're having across our global portfolio. So we've -- and I think some of the ways that are -- the last 3 quarters where we've set records in our 0 to 1 megawatt business. That includes records within our interconnection as well to your question. Just last quarter, I think, was our a record quarter in terms of interconnections. And we're seeing that show up not only in cross-connects, but also in service cytric demand, which still -- we still see a lot of opportunities as we add partners and capabilities across that product. But also in our -- what we call our bulk fiber type product, which allows customers to be able to bring fiber across not only our campus, but also to other campus is even outside in some cases, the Digital Realty portfolio. And that's part of stitching together what has been training, more train related deployments that are outside that, bringing them into more of our interconnected assets in campuses, one of them being here in Chicago, but across our broader global portfolio as well.

So the infrastructure requirement to support that growth? How does that look like versus, say, traditional co-location.

I would -- the 1 thing I think we've seen are -- like our portfolio, I would call out 2 things at least that I've seen. One, I think you're seeing larger space and power requirements in some of these core markets needed to ultimately support infants and more agentic AI-type workflows. So what would typically have been a standard kind of average 300 kW or below deployment within our 0 to 1 megawatt, which would be landing in some of our most interconnected assets across our portfolio. We're now seeing greater than 500 kW a megawatt and in some cases, 1 to 5 megawatts is now starting to become more of a standard in terms of what we're seeing. Some of our enterprises as well as our service provider type customers take in order to support what is becoming a more diversified inference oriented type architecture across our platform. And two, is back to what I was mentioning before. I think in addition to seeing an increase in cross connects -- we're also seeing an increase in bulk fiber as the bandwidth needs increase to be able to connect to training facilities into these more dense interconnected carrier Telco heavy facilities that we have in multiple markets across the globe.

So moratoria and pipeline risk, is it just a broad topic area and there's many U.S. metros. And then globally, I think you probably see this as well and it gets a little bit less attention from investors, but they've all tightened or many have tightened data center permitting. Your current pipeline is not at risk, but you did flag concern about replenishing capacity in roughly the 2029 to 2032 period how many years of pipeline visibility do you have before these constraints materially affect delivery?

I mean, look, I think we've gotten ahead of I would say we've gotten ahead of the game in terms of what we've done, especially over the last several years, both from a capital as well as a land and power perspective in order to put ourselves in a great position to extend what we see as a great opportunity set for several years to come. So you mentioned we have maybe to set context too, as well, we have 3 gigawatts of operating capacity today. Behind that, we've got 1.4 gigawatts under development. So right there, that's a 50% increase in what the portfolio could look like within the next, call it, 2 years, after that, we've got 7 gigawatts of land capacity that we'll be able to bring online over the next, call it 2 to 5-plus years in order to continue our pathway of growth across our global portfolio. We have that 7 gigawatts of land is in various stages of power procurement. There's probably almost 4, 3.5 to 4 gigawatts that we have in hand today in terms of like ESAs ready in hand, and then we're working through the rest of that. So again, that's already another doubling of our overall capacity that we could bring online over that call it, 2- to 5-year time horizon. Yes, I mean, there's never -- I would say there's never been a better time to be in this industry, but there's also been a never -- it's never been probably harder in terms of bringing on power and related capacity. But again, that's where we've been, I think, well ahead in bringing wind capacity online, broadening our capital sources and putting us in a great position to be able to continue our momentum of delivering what we've recently talked about, which is, call it, 10% bottom line growth, which we done last year. We expect to do this year and expect to continue that for several years to come.

So with the moratoria topic work its way into any of your re-leasing discussions and even indirectly affect things like renewal spreads, do you expect that or not?

I mean, look, there's -- I think there's a -- probably the short answer is yes, in some regards. But look, I think there's a few things that are happening right now, 1 of which is just -- there's just a broad supply to me a balance, right? And so we've seen pricing continue to pick up across the majority of our global markets. I mean it started a few years ago with Virginia, which was kind of the initial foray, although I would say we're -- we've seen -- last week, I was in Europe, I was in Zurich and London. We did a couple of property tours, including some customers that actually reminded me. I mean Europe has seen a level of constraints well ahead of what we're seeing in the U.S., maybe different degrees digital, we've been operating in 50 markets. We've seen where constraints have come up over the last several years. Europe from 1 place, Singapore is another I think 1 thing that we've seen, which probably goes to where your point is as demand continues to improve and supply becomes constrained, pricing is what tends to move -- so we've seen that in terms of our and our development yields, which have picked up over the last, call it, year to 2 years. We're seeing that in terms of renewal spreads. Just this last quarter, I think we set a record in terms of where our renewal spreads were which were over 60% or greater than a megawatt categories and very healthy within our 0 to 1. We're seeing -- on top of that, we're seeing an environment at least in our portfolio, where over the next couple of years, our expiring rents are on a downward trajectory versus market that I expect will continue to increase as a result of where inflation is heading, where interest rates are going and again to what has been a very favorable supply-demand backdrop to think all brings itself to a better pricing environment.

Maybe talk about Neo Cloud. So I think all $1.4 billion of your signings in first half 26 were IG-rated traditional hyperscalers and now you've got IG project-level ratings, hyperscale credit backstops for NeoClouds? And how does that kind of factor into your underwriting framework?

Yes. I mean, we've -- I would say we've probably taken a fairly -- we've taken a cautious approach in terms of our exposure to NeoCloud excluding -- I'll say that from the perspective of excluding any sort of back-up arrangements. And look, I think that's partly been because of -- we've also had an ability given where our supply is and where demand is. We've been able to be, call it, choosy in terms of the customers that we bring on. And so we've been able to pick some of the more investment grade, high credit quality customers to bring in our portfolio. We do have -- again, we do have some neo cloud. We do have some neo-cloud exposure. We've actually seen more of that recently in smaller deployments where we've somewhat back to your first question where we've helped them connect some of their training workloads through some of our more interconnected facilities as part of a bromine and diversity of workloads that we're seeing across that -- across the neo cloud, but is also the overall hyperscale set. So that's why we've more recently, I think, picked and choose in terms of where we think we can best satisfy their needs in terms of our portfolio, which is more smaller, more connected workloads than some of our more gateway type facilities.