Conference Transcript - DLR 2026-03-03

Nick Joseph, Analyst — Citi Research

Welcome to City's 2026 Global Property CEO Conference. I'm Nick Joseph here with Mike Rollins with City Research. Pleased to have with us Digital Realty and CEO Andy Power. This session is for City clients only and disclosures have been made available at the Corporate Access Desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC26 to submit any questions. Andy, we'll turn it over to you to introduce the company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A. You have to press the button to turn it red.

Andy Power, CEO

Thank you, Nick and Mike and the city team for having us back here. With me is our head of public and private investor relations, Jordan Sadler. Digital Realty supports nearly 6,000 customers in 55-plus metropolitan areas on six continents with their digital transformation, cloud computing, and artificial needs through our data center and connectivity infrastructure. Solely focused on that for 20 plus years, and I think we're a differentiated opportunity supporting the full spectrum of our customers' needs. The three reasons I'm very bullish in long-term digital realty are, one, we are at the forefront of not just one, but numerous secular tailwinds of demand. Digital transformation, changing everything we do and how we transact and operate in life. Cloud computing, still rapidly globalizing and expanding. Half a trillion dollar market for our customers growing at nearly 30%. Some would say restrained in today's AI era. And at the very earliest innings, or maybe not even out of the dugout, on artificial intelligence and demand trends that are about to come to the market. Two, we at Digital, I believe in both the public and the private markets, are the only one uniquely positioned with the full product spectrum. So we are rapidly supporting nearly 6,000 customers which are growing at double digits year over year with our co-location connectivity enterprise needs for hybrid cloud, all the way to hundreds of megawatt buildings for our Hyperscale customers, for both their cloud computing and now AI needs. So the full spectrum is how we're doing it. And then lastly, we're coming off the heels of a called 9% constant currency compounding at our bottom line with a guidance close to 8% and a tremendous backlog records for the history of the company that we think will pretend a multi-year consistent compounder at our bottom line for our shareholders.

Mike Rollins, Analyst — Citi Research

Great. Thanks for that. As you think of delivering on the objectives for 2026, what are the key assumptions that are underpinning that in terms of the types of sales and bookings growth and participation in both your under-1 megawatt retail-centric business and then your over-1 megawatt business since that leans to the hyperscale?

Andy Power, CEO

Sure. So on the less than a megawatt or enterprise colon connectivity, we're coming off a landmark year with multiple record quarters in the year. In that category, we put up 35 percent more new signings than we did in the prior year with pretty much the same amount of quota bearing reps. So massive productivity step in that category, building on the investments we made in prior years and really taking share in that market. We're off the heels of our sales kickoff setting quota double digits higher than that for the year we're going into. We've got tremendous momentum in that category and we're off to a good start in just the first few months of this year. But that continued focus execution, that's a category where we were doing, call it 50-ish million assignments a quarter for a long time, 200 millionish a year. We're on a journey to double digital in that category, take it to 400, and we've shown we can do it in the last two years. On the larger capacity blocks, that's an area where we don't solely judge ourselves on market We pick our spots with our hyperscalers, maybe 30 out of the 55 markets where we have a competitive edge, something that our customers truly value, be it our large capacity blocks, our operational relationships, places where it's tough to do business, and that's where we deliver and deliver outsize returns on those capacity blocks fortunately we've been doing the hard work in spades to line up the capacity blocks with the large suites of megawatts and on gigawatt campuses where our customers need them lined up our supply chain pulled in our deliveries and putting those in the sweet spot and we don't have to do a tremendous a lot many in there to deliver on our 2026 plan but we are working on a big big pipeline in that category and I think it's going to fall into some very attractive capacity blocks, especially here in North America, but also some outside the U.S. as we start to see cloud continue to globalize and AI start to more rapidly globalize.

Mike Rollins, Analyst — Citi Research

So maybe starting backwards on the hyperscaler demand front, can you talk a little bit more about the pipeline and what you're seeing in the interest levels and how they're evolving both in the North America markets as well as Europe and Asia? And, you know, is there something that's, you know, as AI use cases are starting to get absorbed, you know, by enterprises, are you seeing any, you know, change in the speed or needs of your customers?

Andy Power, CEO

So in the hyperscale arena, we're talking well above single megawatt type transactions. I think two data points we experienced in the last year are very relevant. One, we set out tremendous diversity of hyperscale demand. So from investment-grade Hypershell customers, top three, top five Hypershell customers, those types of names were our largest given signing in, call it, five or six of the last prior quarters, not the same customer over and over again, which is part of our strategy. We want numerous customers landing with us and growing with us and thriving on our campuses. so tremendous diversity of demand. Two, we started to see the seedlings of more international growth. If you saw in the fourth quarter, EMEA had an outside contribution in the less than a megawatt, or excuse me, greater than megawatt category. So you're starting to see the seedlings of globalization of these AI trends, not to the extent of the US has to date, but moving in that direction. And I think Latin America is going to be a strong contributor to that in the first half of this year as we move into 2026 albeit we're only two months or 60 days into it i think that diversity demand theme is repeating itself and i think some of the innovation that's just been launched in preceding weeks with new releases from the likes of anthropic or open ai are spurring incremental confidence in this technology and incremental demand for our hyperscale customers to seize on capacity as we speak. So I think our conviction around the demand pipeline has only increased since we last spoke with any of you at our third quarter or fourth quarter earnings call.

Mike Rollins, Analyst — Citi Research

That's really helpful. And so as you think about that demand side of the equation, can you discuss the supply side in terms of the types of inventory that you can sell or the quantity of inventory that you can sell into the market? And when do those get delivered? Or, you know, 27, end of 26, 28, like, where are you in terms of where new leasing gets delivered?

Andy Power, CEO

So our 2026 capacity blocks are the most precious capacity blocks in the planet, on the planet. 2027 is shortly next in line. And then 2028 is, we're starting to come into vintage, but I'd say those first two years are the most sought after. In those, call it delivery time cycles, and call it the nearly 50 or larger single buildings, we're talking multiple places in northern Virginia with that in 50s and 100s type capacity blocks. We're talking same size in roughly in Dallas. We're talking 200 to 400 in Charlotte, similar kind of capacity sizes in Atlanta, closer to 50 in Santa Clara. Those are all certainly on our customers' radars with active discussions and proposals underway. Outside the U.S., as I mentioned a minute ago, Latin America is certainly getting a light shined on it in the, call it, 20s to 50s or more type capacity blocks. Asia, there's conversations around what we have in Tokyo, Osaka, and Seoul that very much lend itself to that. And then I think our Amsterdam, Frankfurt, and Paris markets, or the concentration of those larger capacity blocks, are being most actively discussed.

Mike Rollins, Analyst — Citi Research

One of the questions that we're getting from a number of clients is just how to think about growth and returns for digital realty. As some of the leasing goes directly on balance sheet, you know, 100% owned by digital realty, and some of the leasing is going into joint ventures or your, you know, fund strategy. can you share with us how you think about the contributions to profitability and returns in each of these buckets?

Andy Power, CEO

So we essentially made a strategic pivot in our funding model to tap into private capital initially through one-off joint ventures, both stabilized portfolios and also development, really with a move to bolster our ability to fund this tremendous growth in hyperscale that we saw and really allow the tremendous growth in our colo business, market markets, EBITDA, all flow to that bottom line, which we've now seen come through in 2025 and now continue on into 2026. That next step of that evolution was to evolve into building out our own strategic private capital initiatives. We closed on our inaugural data center fund, which was upsized to three and a quarter billion of equities of 10 billion of total potential spend, and we're going to build upon that arena as a funding tool for digital, but also an incremental arrow in our quiver as we think of external investment and growth, be it M&A or large portfolio acquisitions. What that does is essentially shares on the development vehicles, shares some of the non-cash producing years, and all those projects I mentioned, 26, 27, 28 deliveries, billion-dollar buildings don't show up on one day. They don't get built in one day, they don't get NOI in one day, so maybe the first megawatts of 100 megawatts. building could start in those years, but it could take the entirety of the next year if not longer for the building to be fully completed. So we're sharing the capex load with our private capital sources on the development. We're recycling stabilized assets, harvesting development profits on the stabilized versions of that as well. And then we're moving into fee models, be it development fees, asset management fees, property management fees, that's really pulling forward, call it modernization, of these asset opportunities. So, yes, in 2029, we may have a lower ownership of said project, but we've garnered a tremendous amount of nearer term called FFO to our bottom line along the way. way. These were all incremental steps onto a funding model that's gotten our virtuous cycle and our cost of capital spinning in the right way that has allowed us to grow faster and do things in a bigger fashion. And I think as we look in the future, it's going to be more of this fund management version of what we're doing and less of these episodic joint ventures.

Nick Joseph, Analyst — Citi Research

We had a question come in through LiveQA. What's the opportunity to aggregate capacity in well-located data centers upon tenant renewal and get a much higher return on the bigger blocks?

Andy Power, CEO

We don't have a lot of churn is the issue. So I don't think there's a tremendous opportunity to essentially kick our customers out. We are obviously moving folks to much higher cash market markets or market rates as you've seen flow through our markets. But even as these customers are not saying I don't want this capacity if I have to pay the higher rate, they are saying this capacity is precious and I am more than happy to pay the higher rate to keep in that capacity. Now what we are doing is when we look at strategically growing the business when it comes to Hyperscale, which I think is the root of this question, we are not buying land or powered sites that are the last to be developed in our portfolio. I look at what we did in Charlotte with this 400 megawatt site adjacent to the airport, worked with our utility partner, got creative, and I think we were talking about Charlotte in maybe 12 months or less years time and now talking about 2027 deliveries of that capacity. So really rapidly seized upon hard to deliver capacity markets. I think that's an important nuance. We don't pick these harder markets, be it Atlanta, be it Charlotte, be it Northern Virginia, be it Dallas proper, because we like to frustrate ourselves. We do that with a view that in our business, location does truly matter for the longevity of the infrastructure, the customer base, and the cash flows that we're driving. We're talking about the cloud that doesn't live everywhere. It lives in availability zones with radius restrictions in set metropolitan areas. Hence, our strategy has been widening out to new versions of that and adjacencies, but we stuck to where it's harder to do business, places where we deliver a lot more value for our customers and helps us drive those outsized returns for our investors.

Mike Rollins, Analyst — Citi Research

So building on that point, in your latest investor presentation, it looks like you've once again updated the capacity that you're planning on in the future in terms of gigawatts. Can you share with us the update of, you know, what's evolving in terms of the capacity that you have a pipeline to? You know, how much of that might be secured or committed from the utilities? And how much can come online on an annual basis, like on average? Like, you know, is it all available or is it, you know, in chunks? Like, how should investors just think about that?

Andy Power, CEO

So I think it totals roughly – we operate three gigawatts today. We've got another 5 gigawatts from nearing delivery, under construction, shells, pad ready to land. All of that is owned on our balance sheet. All of that has a path to power and I think the tail end of that, the last projects in that 5 gigawatts I can think of, maybe 500 megawatts of that is a 2030, 2031 type timeline. So this is not field of dreams, speculation and throw out a gigawatt that may never manifest itself here. These are real type deliveries of capacity.

Mike Rollins, Analyst — Citi Research

And does that mean that you are going to take additional steps to accelerate capital availability to try to fulfill this supply with demand sooner?

Andy Power, CEO

We are the farthest thing from capital constraint. We are constrained by finding good opportunities and the timelines our customers need it because of the markets we focus on. And I am not saying we are not capital strained in just or in a reckless fashion between a very under-levered balance sheet versus our leverage targets, tremendous liquidity, and a deep well of capital we have from private capital sources. We're able to activate more of our development pipeline and also keep replenishing it. In an arena where the stakes are getting bigger and bigger and bigger, I mean, land parcels by themselves could be $250, $500 million for the land. And listen, that scaling laws that we're seeing accrues to our benefit, right? Because our utility partners are realizing they want real partners across the table that can deliver, that have the financial wherewithal, that are committed to the projects, that have done this before. And that lends itself to our 20-plus year track record and the size and caliber of business we are.

Mike Rollins, Analyst — Citi Research

You mentioned the evolution of stabilizing assets and recycling capital, and as there is more private capital partners involved with these assets as well, does something need to evolve in terms of the ownership of data center assets to find homes in the future for more of the stabilized assets, to free up even more capital and keep this cycle going?

Andy Power, CEO

I'm not losing a lot of sleep that there's going to be homes for what I value as an attractive asset class if you prosecute the execution the way we're doing it. Now, that goes back to not all data centers are created equal, and I don't think all data centers are going to be treated equally in this. What we've done and shown with our strategy is tremendous resiliency in the markets and customer diversity we've gone through cycles and data centers we've we've had churn in our data centers and release capacity right we've done this multiple times and we've proven successful due to our strategy of where we invest in our platform a lot of folks in data center land today are not doing that right and those i believe will be at the end of the queue for the valuations and the access to the capital they need to recapitalize But where we are essentially investing, and others are investing, we're not solely in this strategy. There's many others doing the same for hyperscalers. I think there's going to be numerous homes as capital, quite honestly, probably rotates into this category, given the growth trends, not only stability, but growth that we're seeing in it. We think we're going to be at the forefront of that in our private capital initiatives.

Nick Joseph, Analyst — Citi Research

There are clearly more headlines from federal and state participants about utility costs and the impact on households, and so we had a question come in specific to that on your views of any potential policy or changes just requiring data centers to build their own power plants or bring your own power broadly.

Andy Power, CEO

So at the risk of doing a public service announcement, I would like to bust a few myths for the industry, which is important. We at Digital are actively strengthening the grid, providing resiliency to power. Those hot summer days or those cold winter nights, we can turn on our generators as our prime power source and provide needed relief where other constituents or customers of the grid can use it. The studies from Berkeley could show that states with data centers have had better power outcomes than those without it. When it comes to water, I think the data center uses the same amount of water as McDonald's. We have 300 plus data centers around the world. That's less water usage than 18 California golf courses. There's 16,000 golf courses in just the United States. That's half there are in the world. For every job we're creating in our data centers, building our data centers, plumbers, electricians, construction workers, after all that, there's six more jobs being created somewhere in the community. And I think I pride digital as being a leader in that category. Not everyone's doing it, but a lot of us are doing it the right way, and we're going to continue to do it the right way. Now, we're living in a world where folks don't let the facts get in the way of a good story when it comes to political vibes, and we are working on making making sure our voice is heard, but I put this as it's getting harder to do our business, and that means our value to our customers is increasing, and that continues to strengthen our moat in our business. How much can temporary power solutions, bridge solutions, or behind-the-meter solutions accelerate your ability to bring inventory to market? we we we are actively working on numerous projects but the key to that is bridge so the duration of that bridge could be a couple years to several years but it's always getting back to that grid is the end state for the infrastructure and that's a product of the markets we operate in and where we see the long-term customer preference in the resiliency of our workloads we're supporting mission-critical workloads supporting hospitals pharmaceutical medical research health and safety financial buying your coffee your Charles Schwab account everything that's running society today and for your grandchildren so the mission critical element I cannot stress enough and hence the having resiliency in our infrastructure pressure, and the grid is a piece of that resiliency in the long run.

Mike Rollins, Analyst — Citi Research

You discuss the differentiation in markets and the customers that you are pursuing. What does that mean in terms of pricing and development yields that you are achieving maybe relative to what you see in the industry? And are those getting better, staying the same, or maybe coming in a bit?

Andy Power, CEO

So I think your question is more towards the hyperscale piece of the equation. Yes. Which I would say we've led the way on yields, but that's a product of our strategy, where we didn't just chase volume for the sake of volume and accept price, and we didn't just go to where it's easy to offer customers a business and have commodity-like competition, and we're able to drive our outsized outcomes for our customers that came with outsized returns for our shareholders, numbers, which you can see on our development schedule. We're living in a world where supply chains are tremendously tight, people are moving at the speed of light to build infrastructure, and there is inflation hitting our category. I think digital stands shoulders above many of our competitors, given our track record consistency, our supply chains, who we are, our say-do ratio. So we're probably leading the way in shielding those cost impacts, but they're not. We are also absorbing them. And at that same time, we've been able to activate rate outcomes that have maintained, grown our rates last 24 months, surely, but in the current backdrop, maintained our returns that are hundreds of basis points above many private competitors.

Mike Rollins, Analyst — Citi Research

Pivoting over to the under-one-megawatt business, how does digital view this business strategically in terms of the value that it contributes to the overall company? And what are the ways, in addition to the organic growth that you talked about earlier and the sales momentum, that you're trying to make this a bigger part of the company?

Andy Power, CEO

So we are long-term believers in the durability, platform effects, necessity of hybrid IT for cloud, private-public cloud, and the same will unfold for artificial intelligence. And that has been our guiding light over the last several years. That's what our double digital and our co-lover enterprise bookings has been about. That's what brought our customer count to nearly 6,000 compounding double digits, and we see that as a virtuous cycle with our major hyperscale customers. Because whether you're a major financial institution, pharmaceutical company, manufacturing company, retail company, your architectures are going to have workloads with CPUs and GPUs that sit inside one of our 300 plus data centers that are rapidly growing, and you're going to be consuming numerous cloud service providers and likely AI solutions as well we've had tremendous success in not that long of time with I would say the wind in our face still despite the odds and there's three things that I think are going to propel us the wind in our back and take us well above the goals we're seeking one is partners we ended the year on a fantastic note on partners You heard some of the anecdotes in our prepared remarks throughout the year, but we can grow that to a much bigger sales force enabler for our customers. And we made some moves in our partner organization this past year in terms of leadership and And I think that's going to be a big lever of growth for us that's going to allow us to continue to accelerate our bookings in that category, deepen our relationships, multi-site, multi-geo, multi-product, in a category where the partner has been yearning for another option. Two is our technology. We are very fortunate or serendipitously blessed that in the days of AI, we started getting ready for this many years ago. Because many years ago, we had a fragile IT house because we came from more of a traditional real estate called business processes and technology stack. And then we stacked upon it acquisition, acquisition, acquisition, globalization, scale. and then we didn't have the time until the last few years to go back and streamline our business process drive consistency set up data governance and cleanliness so in our digital one journey we're essentially getting ai ready and we're going to be removing friction from our sellers friction from our internal customers friction from our external customers and partners so technology is going to certainly infuse that and be incremental uh called gas on our fire here to go faster and do more uh and scale our resources and lastly um it's about growing what we can do for our customers and it's not just doing more of the same and building faster it's not just saying we're going to do our day jobs which we should have been doing already because we're already doing that great job of that we're expanding our addressable market we're expanding into Colo into more, Colo into Atlanta, Charlotte. Just this week, the most highly connected business in Sofia, Bulgaria. We are bringing on capacity in Crete, Rome, Barcelona, Lisbon. Just recently entered Malaysia, last year entered Indonesia. So we are incrementally helping our enterprise customers in more places they need to be, so expanding our addressable market at the same time.

Mike Rollins, Analyst — Citi Research

When you think about the momentum that you have been generating in the under one megawatt category, at times I think you refer to it as taking share. Where are you taking share from, and how should investors think about the growth of this overall TAM in the under one megawatt category that you are going after?

Andy Power, CEO

The TAM in that market is very, very large, but it is growing high single digits as a market today. I would say it's still yet to be infused by supercharging of AI growth, although we're coming off two consecutive quarters with the data points we're pointing to the beginning of an inflection. But it is a massive addressable market. If you add ourselves up and the company ahead of us, we're, I would say, less than 30% of the market. So there's a long tail of competitors. Enterprise customers, global businesses are consolidating. They're moving from legacy, system integrators, telcos, a whole host of places, and other regional, smaller-scale platforms. And the good thing is they want to not put all their eggs in one basket. So we are one of two in that category, and I believe in that category we are taking share from everyone behind us and the one group ahead of us. And you can see that in our numbers. Look at our bookings, acceleration up 35%. On a base in that category, just the zero-mega interconnection, that is much smaller. So we're essentially accelerating in that category and taking share from both.

Mike Rollins, Analyst — Citi Research

Another question that we get in this under-one-megawatt realm is the role of inference. What you're seeing in terms of AI as a percentage of bookings, how it contrasts with your hyperscale business, and, you know, any predictions or things that investors should look for to kind of, you know, better appreciate the inflection that may be coming for your business from that?

Andy Power, CEO

So it's a category where we're up 35%, adding 500 or 600 new customers to nearly 6,000 in total. And then the last two quarters, we did see the starts of data points of that inflection. we'll call it 18 to 19 percent of that category of all the leases we signed it in that the nearly 100 million dollars of leases inside all the leases 18 to 19 percent ai related so we assess that via power density liquid cooling we see the gpus we know what they're using it for so now i wouldn't say two quarters makes a long track record but we're starting to see it move that way I think there's going to be a long, long tale of this because I know how hard it is as enterprises move to cloud, move to multi-cloud adopt AI, think about privacy think about data sovereignty so I just I think we're very much benefited from that we're playing this across the entire spectrum training is landing in our facilities for sure but it's in our facilities in northern Virginia that has all the clouds and enterprises and service providers there as well. Inference is going to happen in those facilities. Enterprise cloud is going to happen in those facilities. Enterprise digital transformation and enterprise AI are going to all happen in these facilities. And I think it's going to come back to the latency and location is going to matter at the end of the day. As just like cloud, the service level agreements that nobody's going to want their AI to go down. When the hospital room surgery is going on and AI is being part of it, You can't have the AI go down just like you can't have the cloud go down. And I think that's going to take – it's going to be a large address on market. And you're starting to see an inflection, but I think we're setting up for a multiple-year growth in that category.

Mike Rollins, Analyst — Citi Research

And can you give us an update what you're seeing in terms of renewal spreads in the under 1 megawatt versus what you're seeing in the over 1 megawatt? And for the hyperscale, are there any significant constraints because of the contract languages from maybe older dated contracts?

Andy Power, CEO

So in the less than a megawatt category, which we've done a great job growing, and it's consistently in the front end of our expiration curve. So one, two, three, four, five-year type, they're always coming up. We've been consistently pushing that toward the four, four and a half, five percent mark-to-markets consistently and pushing rate. The pricing on that is very focused on where we are in the market, where we are with the customer. We're trying to grow wallet share, we're trying to get them stickier to our platform, are we in a market where someone is ahead of us in price and we're peer on capabilities so we've got we narrow that gap right away or is it a market where they're ahead of us on price and they're a nice moat to stay a little bit further behind as we try to scale and build more customers to build better ecosystem in that market, but consistently 4 or 5 percent type growth. On the greater than a megawatt, you can look at our lease expirations, and the market rates have inflected tremendously, continue to go up, and the expirations keep going down. I think we're at $130-ish or something weighted average in total, lower than that in some of the nearer years. We did have legacy agreements that were signed prior to this time of supply-demand fundamentals that had some renewal caps and I think as we first started estimating what was going to actually be activated versus not I think we're seeing more and more of those caps not being activated because the infrastructure is changing the customers are mixing up GPUs and CPUs in the same data halls they're pushing power densities they're moving to liquid cooling the need to change service level agreements and all those things open up a contract and essentially have renegotiated the opportunity on the caps very quick rapid-fire same story no i growth for data centers overall sector-wide next year in 27 go ahead

Nick Joseph, Analyst — Citi Research

to 5% market rank did you say okay same story yeah yep and then same number of public data center companies a year from now more fewer the same more thank you Thank you.