Okay, everybody can go ahead and please take their seats. We're gonna go ahead and get started with what I believe is the first session of the day. I'm Matt Niknam, comm infrastructure analyst here at Deutsche Bank, for those who don't know me. We're very pleased to host Digital Realty President and CEO, Andy Power, CFO, Matt Mercier. Guys, thanks for joining us.
Thanks for having me.
Great. So maybe just to start, set the stage, for those maybe a little bit less familiar with the company. Can you give us a brief overview of Digital Realty, some of your top priorities for the business, and any opening remarks before we get into questions?
Great, so, Digital Realty, believe it or not, is a 20-year public company now. This is our 20th anniversary. We're the largest global owner and operator of digital infrastructure, data center, and connectivity infrastructure, supporting 5,000 customers across 50+ metropolitan areas on six continents.
Catering to the digital transformation hybrid IT of enterprise customers, cloud computing, some of our top customers, and certainly the home of AI and AI infrastructure, in the last 12-18 months, if not longer.
So, we are blessed with a sector with secular tailwinds of growth. We've been investing in our platform for many years now and extending our capabilities. I think our priorities right now are probably threefold. One, really accelerate on the momentum we made in the enterprise colo space.
So we're on a string of at least three quarters north of $50+ million of new bookings in that category, entering 130 new logos last quarter to our 5,000 customer base. Selling multi-market, multi-site, multi-product to that segment. Two, we're executing in the hyperscale arena for both cloud compute and artificial intelligence.
In the last quarter, we had record signings. About 50% of those signings were for AI-related use cases. The GPUs, often talked about from the NVIDIAs, and AMDs, and others, they land within a server, and then often in a fit-for-purpose data center provided by Digital Realty, which we're owning and operating north of 300 around the world. So we're catering to both enterprise AI use cases.
We had a big announcement supporting the Novo Nordisk Foundation with NVIDIA just last quarter, and then other partnerships in AI as well. T hen last but not least, we're evolving our funding strategy. We've certainly come a long way in the last 12-18 months, now brought our leverage down to south of 5.5x a nd we're thinking about what's next to efficiently chart the funding of our growth and ultimately drive accelerating bottom-line FFO per share growth.
Great. Great, so there's lots to unpack there. Maybe if we can start around data center fundamentals. I think the industry's seen what many would call a pretty materially positive inflection in recent years, so a lot of the dynamics you referenced. Can you talk about some of the bigger factors driving this from a supply-demand perspective and how that's directly affected Digital Realty?
What you've had is a series of incremental waves of demand that have been building and continuing and not being really exhausted, whether it is still the move from on-prem uses, data centers in server closets, office buildings, not efficient, not secure, not cost-effective, to our four walls, the dawn of cloud computing, the globalization, the build of services, the cloud is offering, and now gen AI springing on the scene as an incremental use case.
T he first of those demand trends is still coming to shore, the second is still building and growing at a great clip, and the third is in its infancy, is maybe an exaggeration of its growth potential. I t's happened in a time when, numerous components to data center supply have been exhausted: power generation, power transmission, supply chains for substation components, production slots for data center components, moratoriums, sustainability concerns, NIMBYism.
That has really ground, not to a necessarily a halt, but certainly slowed and impeded on the growth of capacity. Along that way, Digital Realty is now capitalizing on major investments we've made for several years in growing our capabilities, servicing the full customer spectrum, having a greater value proposition in a time where the customers, whether it's an enterprise customer or a hyperscale customer, really are seeing tremendous value in our partnership and the services we can provide.
So power constraints, that's been a huge topic of discussion, especially amidst ramping AI investment. So how is Digital Realty positioned here across your key markets, and what are you doing to accommodate rising customer needs?
So we have our operating portfolio today is just north of 2.5 GW. So 2 DeLoreans from Back to the Future, that's what I could tour you through physically today. On top of that, we've got another 3 GW of power capacity across the 50+ metropolitan areas, ranging size and scales, whether suited to colo enterprise customers, to hyperscale large contiguous capacity blocks.
We're certainly navigating new world, as are others, with certain markets having regulated and unregulated power providers saying, "I can't give you any more power till next year." We're working with these utility providers and reallocating power, and we've shifted power around that we had idle at our substations, at our suites, to make sure we can deliver on our commitments to customers and also deliver growth capacity.
A sizable amount of the leasing we just had in the famous Loudoun County, Virginia, which has been a bottleneck till 2026. That work and being a long-term partner in that part of the world has allowed us to support customer growth in these times of need. We're also looking at other ways to be innovative, to bring alternative power sources. We've done Bloom cells historically, looking at natural gas turbine options.
We're a leader in the sustainability front. This doesn't solve the power pinch, but we're 1.4 GW of PPAs for wind and solar, true additionality of sustainable power to the grid, so trying to chart this in a sustainable framework as well. We're fortunate that we didn't get into this business a day ago or a year ago. We've been in it for 20 years, and we've been making long-term investments that essentially are now certainly coming to fruition.
I mean, any handicapping in terms of when, if at all, some of these power constraints get alleviated? Maybe to dovetail on that, is the bigger problem just power generation, or is it more around the limitations of transmission and distribution infrastructure?
My opinion is this is a very, multifaceted and complicated, no easy button solution problem. Because we're dealing with numerous markets where transmission is essentially the bottleneck immediately. T hat, navigating transmission, even with eminent domain, is not easy, right? W e're talking large-scale transmission lines cutting through communities, in order to power parts of these markets. You're also facing transmission issues.
Some of them are on the ground now, like in countries like Ireland or Dublin. Some of them are gonna be around the corner because we're, as a country, de-powering, call it, non-green power sources, at the same time that we're trying to ramp this AI and innovation and technology, and that is a challenging dilemma.
T his is not... I don't see a massive federal solution, state solution. It's got municipalities involved, it's got regulated utilities involved, it's got unregulated utilities, data center providers, big customers.
So on the other hand, I don't think it's an awful outcome based on where our platform sits today that the inventory or supply of data center just comes in a little bit slower, more deliberate, more planned, more thoughtful approach versus people call it getting overaggressive and creating more volatility to the market. So now, if I didn't have 3 GW on top of 2.5 GW, I'd probably be singing a different hymn. But I think, I think this is probably not an awful thing for the natural growth of this infrastructure.
So, that's a great segue. Pricing obviously has been a pretty significant tailwind for data centers in recent periods. So can you talk about what you're seeing from a pricing perspective across the business, the outlook for this year, and whether the favorable backdrop you're seeing now represents a little bit more of a newer normal, given the dynamics we've discussed?
Do you want to hit that one, Matt?
Sure. So, you know, It's probably easiest to call out one of our largest markets with which is Northern Virginia, which has seen, you know, not only it's come off the trough, but a trough in the last couple of years, but has significantly rebounded from that. So, you know, we've seen pricing come from where it was in the $80s and $90s a kW, to now the $150, $160+ a kW.
So we've seen a substantial rebound in where pricing has come. In Northern Virginia in particular, again, because that's one of the largest markets in the world, where you've seen a lot of supply, but then now you've seen that be absorbed. You've seen some of the supply constraints leading to that pricing pickup and y ou're seeing a similar dynamic across a number of our global markets.
Now, you haven't seen quite the same level of increase, but I would say the majority of our global major markets have seen price increases anywhere from, you know, from high single digits to double digits over the last, call it, you know, 12 -1 8 months, as you've seen the confluence of supply and demand factors that Andy just mentioned, kind of work through, and, you know, we're only seeing that dynamic, I think, continue across our global portfolio.
S o where do yields, if we can talk about development yields, where do those yields on new developments sit today in light of some of these improved fundamentals a nd can we maybe talk a little bit about how that varies across your key regions?
I mean, if you look at our total portfolio, which is close to 0.5 GW, that's under construction today, we've moved those yields, which these are larger scale projects, and we've had already done significant leasing. We've moved those yields, call it hundreds of basis points in aggregate to north of 10%, and there are certainly projects in that mix that are well higher than that, given the run and the rates in some of these markets.
Let's dig in a little bit into the AI theme. I mean, it's been very, very topical. I know this is a real estate conference, but it, it's obviously been a big theme in the markets over the last 18 months. Can you talk a little bit about the benefits AI-related demand's driving for the business today, and how other parts of the business, you know, for example, the traditional colocation or enterprise business, could benefit over time?
I can tell you definitively, and put this in the context of our industry has certainly had a lot of thematic, buzzword bingo come through that have not been as impactful, whether it was edge computing or, some of the other technologies. But I would say AI has been an incredible driver of incremental demand, not dissimilar to cloud. It has certainly been prevalent in large, contiguous capacity blocks.
It's been the buying amongst the biggest companies on the planet. The hyperscalers have been a major piece of it. We are seeing new verticals come out as well and be buyers in addition in sizable capacity blocks a nd we're starting to see enterprise use cases, whether it's my example of Novo Nordisk or a partnership we announced with Oracle that's gonna be supporting enterprise AI use cases.
Fortunately, we are able to intercept this across the full customer spectrum. So today, it's the large language model. The next leg of this, as we move to inference, which I can't guess what the size of that's gonna be, but it's a multiple of the first leg, and that multiple keeps increasing it feels like every time you ask someone about LLM steeped in the demand. We got the move from public data sets to private data sets, the move from consumer use of AI to enterprise use of AI.
I t seems that it's gonna have long-term gravity around where the data sits, whether the data sits in our four walls, in cloud, compute, hosts sitting within Digital Realty, enterprise hybrid IT sitting with Digital Realty, or in major markets on devices that have proximity to the eyeballs and the mobility or offices or computers.
So I think we're gonna be in this first phase that's gonna be large growth, incremental to cloud, incremental to hybrid IT for a while, and the next phase is gonna be down the road, but I don't see how it's not additive.
This didn't happen overnight. I mean, you talked a lot about the work you've done, I'd say over the last decade plus, to evolve the portfolio, broadening it from both a geographical and product perspective. So can you talk a little bit about how that's helped improve Digital's competitive position and differentiation in the marketplace?
This company was built on a strategy that the strategy's evolved. It obviously started around the intersection of technology and real estate. It evolved to data centers, connectivity. It evolved to the full customer spectrum. It evolved to a global approach being very important to add value to our customers.
We've viewed having size and scale as a key differentiator, and we've had to make some near-term painful, but long-term beneficial investments along the way. T hat's where we deployed capital to grow our capabilities, and that's where we exited, and we cycled out a non-core pieces of our portfolio that we didn't see longevity or robust and diverse customer demand. I think all these things have now starting to provide incremental value.
It's certainly accruing to the customers that were growing with us, to multi-markets, to multi-countries, to multi-regions. It's accruing to us in our pricing power in both the enterprise 0 - 1 and the north of 1 MW category and it's certainly these large capacity blocks that we're helping customers with. We had to bear pain for years to accumulate these.
Yeah.
I mean, we bought a parcel of land next to the Dallas Airport for $250 million. It's produced pretty much zero FFO since we bought that in 2018. We just did an easement to help the power company deliver a substation critical to the area for $90 million a nd the first building, which is almost 100 MW, we'll probably have north of $1 billion of profit on for just one-tenth of that site.
Zero FFO since 2018, now it's coming to fruition today. So yes, we've been certainly blessed that these we were playing in a digital transformation, hybrid IT lens, cloud computing, seeing that long-term growth, and AI has just been like an incremental massive wave, wind our backs here. But it's certainly fortuitous that these long-term investments we made are now certainly coming to fruition.
Maybe if we can pivot a little bit to the colo and enterprise business. I mean, sub-1 MW leases, I think right now make up a little over 35% of your annualized rent today. It's an area obviously, you've invested in heavily in recent years. What's the value proposition you bring to customers, and is the strength in demand and pricing. How does that, how does the strength in demand pricing relate relative to the hyperscale arena?
So even with certainly, incredibly attractive backdrop serving hyperscalers in these pinch point markets. We have not changed our strategy of going after the full customer spectrum, growing our 5,000 customer bases each and every quarter, selling them more connectivity solutions. We've been incrementally investing in our ServiceFabric with Service Directory, Private AI Exchange.
We've been investing in our high power, high performance compute, high density colo. We just have now 170 of our 300 data centers can go up to 150 kW per cab. So we're in a category where enterprises are looking to have global approaches to their infrastructure. We check that box.
Where we're differentiated versus a really small arena of competition is our infrastructure was not built the same way universally from data center one to data center 300, right? We came at this from the hyperscale lens, with higher power densities, more flexibility for our customers to get today's innovation and solutions.
W e're looking to continue to invest in that arena and grow that arena, but also not forsaking these hyperscale customers, where we're selling, building, and leasing 20 MW, 50 MW, 100 MW locations for. But the trick or the next leg of where, when it comes to hyperscale, is make sure you have the appropriate long-term funding model.
Yeah.
Hence, where we've harnessed private capital over the last 12+ months, and we're going to continue to evolve that to efficiently make sure we're growing our bottom line along the way.
We'll get into funding the business in a sec. I just want to follow up on the colo and enterprise front. Any pockets of macro-related softness, you know, whether it's related to higher interest rates, any effects on customers, any effects just broadly on macro that have impacted that side of the house?
So certainly in that segment, and I maybe was too bearish early on the concerns of an economic slowdown would have on the enterprise segment. But we've executed quite well for numerous quarters now in that segment, adding incremental customers, selling more products to the installed base, putting up quarter- after- quarter of great results. I think the acceleration in that category is just getting started i n terms of what we can do.
It's been very broad-based, financial services, manufacturing, healthcare, numerous segments. Even if we turn to an economic backdrop where you do see some slowdown, you do see tighter budgets, one, this is mission-critical necessity.
This has been... We are in a, a race of limited competitive set, where we had a tremendous amount of value of cost, performance, and efficiency. Y ou look at the IT surveys, today, what's number one and two on your list? Data centers and AI. Those are the priorities for any IT executive, CTO.
I'm going to loop in Matt here. If we kind of put all this together and bring it back to the financial model, can you talk about. This is probably the favorite question for you guys on any conference call. Can you talk about the longer-term growth algorithm for Digital Realty, all the way from a top-line growth perspective down to core FFO per share, looking out over a multi-year basis?
You got eight minutes to do it.
Sure. Yeah, I mean, so you know, yes, that is one of the favorite questions a nd you know, we talked a little bit about this on our last earnings call. But so I'll call out a few things. You know, first, if you look at our normalized revenue and EBITDA growth for this year, when you exclude some of the asset sales and capital recycling we've done, you know, we talked about revenue growth in the nine percent area, EBITDA growth in the seven percent area.
So I think from kind of some of those fundamental metrics, that's something that we think is repeatable from a top line down, we'll say, closer to the bottom line. You then kind of take a little bit of a different lens.
You know, the way we've talked about sort of a baseline level of growth and how you build up to that from the, you know, the way that we talk about some of our key metrics, what we talked about is, again, from a normalized kind of baseline perspective, you know, we would look to have our stabilized same capital cash NOI growth in the 4% area.
You know, that should translate roughly to GAAP, although there's going to be some differences there when you go from cash to GAAP. So that provides a solid baseline of growth from what is, call it, 80%+ of our portfolio today, that's part of that pool.
Add on top of that, you know, the call it $2+ billion of development spend that we're doing a year. Obviously, that can fluctuate, but given where we are this year, what we see in the outlook in terms of what we have and what we have already in place from some of the development JVs and other partnerships, you know, we'd expect another call it baseline of 2% growth on top of that.
T hen somewhat of an offset to that is, we do have debt maturing over the next couple of years that's obviously at rates that were at a much more favorable time, given where the cost of capital, especially on the debt side, is today. So we look at that kind of knocking off about 1%.
So that, you know, all blends to basically a point where we're at, call it a baseline of mid-single digits, which we expect, you know, should be able to go higher to as we modulate some of those items. That's kind of the baseline that we would expect sort of long term on a normalized basis is mid-plus single-digit growth.
Great. Great. I want to dig into leverage for a little bit. One of the points we didn't talk about, but I think the company's done a great job of, is successfully lowering leverage. I think you were sitting north of 7x at the start of last year. You're now sub 5.5x. Can you talk about some of the milestones achieved to- date that helped get you here, and where you see optimal leverage for the business in a currently sort of higher for longer rate backdrop?
Sure. So yeah, I mean, it's... I mean, we've had sort of an incredible journey in a relatively short period of time on this front. So, and that's, you know, a broad team effort, started with Greg and the investments team, really kicking into gear last year, closing a number of joint ventures, not only of stabilized assets, but also into our foray into development JVs that we, you know, that we talked about and were able to execute on.
So through that, I think we raised all in last year, 2023, I think close to $5 billion of capital. Roughly, I think $3 billion of that from capital recycling efforts from the investment side. On top of that, we kinda supplemented that with roughly $2 billion of equity capital last year as well. We've kind of continued that march early into this year.
You know, whereas a lot of that activity in 2023 was done call it post-second half, we've now already been in a position where we're at the low end of guidance on our capital recycling, call it roughly $1 billion, a little north. We've then also supplemented that with additional equity raise that we did just recently, call it a little over $1.6 billion, so call it overall $2.6 billion of capital raised year to date.
I think that's really put us now in a solid position where we've—I don't wanna say achieved our leverage goals, but we're... I mean, we have, on a pro forma basis, achieved what we've talked about in terms of being at 5.5x leverage. I think it's really put us in the position we wanna be able to capitalize on what we see as an opportune time and opportune place within our investment horizon to be able to capitalize on what we see as a growing and higher yielding, higher return opportunity in our, you know, global marketplace.
I think there's something unique here. This wasn't just a mission to get the balance sheet back to the target leverage. It was evolving the funding model to make sure we can have a mousetrap that can generate per share growth for multiple years.
So including in that was partnering on the development side, large scale campuses, with a great partner, b ut what that allowed us to do is, that partnership is developing capacity that won't come online till 2026, 2027, 2028.
We obviously are maintaining a minority stake in that. We're getting fee economics along the way, and we also are maintaining on our balance sheet that 3 GW I told you about, including the soonest delivering projects that are delivering the 2025s, 2026s. So, all this was thematically about when it comes to hyperscale, which is so capital intensive, so large, that we can essentially harness public and private capital and chart a continuous organic growth story.
So with that in place, with leverage now in a little bit more of a comfortable place in the mid-fives, how do you prioritize uses of excess cash from here? Is there an opportunity for more M&A? It sounds like you're pretty bullish on reinvesting in the business. Just maybe if we can walk through some of the cap allocation priorities.
Fortunately, we believe that we've assembled the most critical strategic puzzle pieces to our global footprint, and by and large, that we've exhausted the landscape. So we don't see anything like we've added to our fold out there anymore.
So yes, we're adding incremental land capacity adjacent to some of our campuses, which are just logical additions to multi-megawatt campuses where we have installed customers. They wanna grow with adjacency. We're investing and bringing online that multi-billion dollar development in those 3 GW. But I think that is by far our best use of capital is driving returns, and growing our customers' footprint than what we have today.
Excellent, excellent. So if we sort of tie this all together, just to wrap up here, if we're sitting here a year from now, what are some key milestones you would have liked to achieved, looking back, sitting here in June of 2025?
I think the three things: One, demonstrate acceleration in our enterprise colo 0-1 MW. So if we're talking 50s today, I wanna be talking a material higher number of productivity in a year's time. On a roadmap that is gonna really bring that number to a much higher number of customers, connectivity, and signings to that category and growth.
Two, this is an environment where we're seizing upon these hyperscale AI and cloud compute opportunities. So, I would imagine a backlog, that is much higher than what we sit on today, at very attractive risk-adjusted returns. H onestly, just not even risk-adjusted, just very high attractive returns.
T hree, an evolved funding model even further into the future when it comes to our hyperscale business, so that we can keep developing for these customers, we keep growing these customers, and then obviously having the right funding sources that doesn't slow our growth to our bottom line.
Great. I think it's a great place to end it. Andy, Matt, thank you.
Thank you.