Digital Realty Trust, Inc. (DLR) September 2026 Conference Transcript

If I can, Michael Funk. I cover the North American Telecom Data Center and Tower Stocks at Bank of America. Really grateful to have Andy Power, Digital Realty President and CEO here again with us. So, Andy, thank you.

Thanks for having me.

Yeah, absolutely. And we have Jordan down here as well, who heads the investor relations function. Hopefully you guys all know both these guys. So I'm going to try to rip through a bunch of these questions. And I do have some obligatory rapid-fire questions that Spectra asked at the end, so hopefully I'll get those in as well. The big news last quarter, Andy, was, in my opinion, when you talked about extending double-digit core FFO growth per share into 27 and beyond, right? And that's a higher rate of growth maybe than you previously talked about. So can you walk through the key assumptions underpinning that outlook and maybe the biggest variables also that investors should be looking for?

Sure. So it was certainly a milestone in the making. While we had the conviction to come public with it on the earnings call, I can't tell you it all crystallized in the month of July right before the call. If you look at the milestones in each of our caught legs of business, the three pillars of growth, Colo and Enterprise, we capped off the second quarter with, I think, the third straight record in a row. We were doing $50 million in that quarter for a long time and did eclipse the $100 million in the second quarter and basically had the first year on pace for over $200 million on the hyperscale development front. In roughly six months, we've taken our underdevelopment total projects from about $10 billion to $20 billion with roughly the same amount of pre-leasing and returns called 11.5%. And lastly, while it's strategic private capital slash balance sheet activities, we'd started the year with an upsized closed-end fundraise. We'd obviously gotten the balance sheet over time into a great position from a leverage liquidity standpoint. We're making progress on the next legs of those called strategic private capital raising. And I think all those things together is what brought us to a place where we see this flowing to the bottom line, not just this year, but next year. And thereafter, as I call it, double digits, 10 plus percent bottom line growth. And it helps to have a $2.3 billion backlog of revenue as well.

And I want to talk about the backlog and the bookings next. So, you know, last quarter, you had another really strong quarter of bookings, you hit the record backlog that you just mentioned. And then, obviously, FFO growth ties into, you know, more development, right, which must express greater confidence and the durability of demand, right? So what are you seeing that's giving you confidence in the durability of demand? And I'll give you an example that another executive of a private company gave me a few weeks ago at lunch. Maybe you can come up if you're seeing the same thing. What he said when I asked the same question was that he said, Mike, when we're delivering capacity today, basically the usage of power is spiking immediately, much higher than it did historically. And customers are also demanding full delivery capacity on day one. when maybe in the past they would have asked for X percent year one, Y percent year two, more scaling to the capacity. Those are the examples he gave. I don't know if you see similar indicators or if there are others that give you confidence. Sure.

I'll touch on the meat of your question in a second, but I will say not only just have three pillars of growth or a triple threat there, if you unpack that bottom online algorithm.

It's built off of a big piece of development, but other levers in that growth as well.

You look at our colo interconnection business, continually growing our platform, more customers, more locations, more cross-connects, ecosystem effects, cash market markets of 5 plus percent. Our hyperscale story that's already inked and on our expiration schedule has rates going down and has market rates going up. And we've had a great market market in that quarter and more to come on that front. And then you turn to the development where we've been able to, in a world where costs have inflated, you can see we're building $20 billion on 1.4 gigawatts, still be able to push rates to keep those returns at 11.5%. That's about 63% at least. We got probably 5%, 7% of vacancy, which is called low vacancy in the total development of products. And that 30% of vacancy, if you look at our track record, those buildings, by the time we open those doors, are full, right, especially the hyperscale buildings. And that's a product of our markets we chose to focus on are servicing robust and diverse demand, not just cloud or hyperscalers, but also enterprise and other service providers, all the hyperscalers, all the cloud availability zones, and AI landing in that would be an AI inference because it's obviously a higher price point than where you can go anywhere for a training workload. and that supply is being well outpaced by the demand. These customers have – their end customers are real businesses that need to grow on their cloud in those markets. They need to grow with adjacency, right? So – and I'm sure we'll talk about this a little bit more. The supply picture is not getting easier for anybody. So we see a lot of customers competing for the same capacity blocks. We see that on the enterprise side of our business, which is a new thing. We see that on the hyperscale business, which I would say has been part of why us picking our spots and helping the customers where they need us most has allowed us to generate the output, the rate and the returns. But we've got tremendous conviction on that. And that 1.5 is a part of a 9 gigawatts of growth on a 3 gigawatt operating base today. Yeah, that's a tremendous number.

I want to pivot for a second to your comment about capacity. So I host the call at 11 o'clock today with Andy Littman, who is my Washington, D.C. regulatory legislative expert on everything telecom and technology. And the theme of the call was data center regulation, moratorium, executive orders. It was very topical, even more so after this weekend, and AI even kind of rising to the topic on a pushback or fear. And, you know, one study gave us was that, you know, 75 percent of all voters now are opposed to data centers. They probably know what they are, but they're opposed to them. Right. And 26 gubernatorial candidates are now for moratoriums to some degree or another. And even Trump has told Republicans that they can go their own way on data centers if it means winning the races in their own in their own states. And I don't believe moratoriums are terminal, they're temporary, right, because a permanent moratorium would be illegal, at least according to Andy Littman, you can't have one. But it's certainly going to slow development. And kind of getting back around to the question and supply, you know, can you just talk about the digital realty pipeline and, you know, what you have in place in terms of permitting, provision power, and location that gives you confidence for, you know, meeting in service dates relative to the fear effect in the broader landscape?

So a lot to unpack in there. and I'll get to the major emphasis of your question in a second, but I think it's worth speaking to what everyone probably read over the last several days. Based on everything I'm seeing in the business, albeit new, this is not a pencils-down moment on artificial intelligence and the infrastructure that is required to create this. So there may be forms of collaboration and pacing, but these are once-in-a-lifetime technological changes happening and economic drivers and capital behind these companies, and this infrastructure is needed, and they're on a race for profitability. It's also, we are at a place where we don't just do AI, we do digital transformation enterprises. We don't just do AI, we do cloud computing. Both of those two, I believe, have been restrained by the focus on the fever around AI. And if AI, the piece that I think we are most exposed to, is the interaction, the inference, the private data, That is where the economics of this are going to unfold more than anywhere. So it's the piece that these companies, if they want to survive, they cannot go pencil down as an industry. So I look at what you're saying, and I agree with you. I will wear the scar tissue of being behind the eight ball as an industry leader around this. But I will tell you, the ground game is a lot different than what you see in the national social media. And we have shown time and time again in markets where we operate for multiple decades or operates where we're just going into that our track record, our expertise, our approach, we go in there, we educate them about who we are, what we're going to do. We make sure, would you like to tour a data center? Let us tell you who our customers are, right? We find locations that are the right locations for this infrastructure. We educate them that I know you heard this thing on your TikTok or your Facebook about data centers taking water. We have 300-plus data centers. We use less water than 18, one-eight California golf courses. There are 16,000 golf courses in the United States. So if you have an issue with water, call the golf course companies. And the list goes along with electricity and other things as well. And to date, we've been very successful in navigating that as we've been scaling infrastructure like we've never seen before. So I don't think all folks are going to be as fortunate as us, are going to have the experience that we've had, and you hear the dust-ups and the bad actors and the updates happening. But I think our brand, when it comes to this, is a brand of trust, reliability, and benefit for all the community stakeholders. And I think that's going to win the day, regardless of the political football around the asset class.

And another, you know, just kind of a bank shot off of that, you know, a tighter supply market should enhance the value and even, you know, renewal rate that you're seeing in your existing portfolio, right? So I wanted to talk, you know, about that a little bit. And, you know, looking across your portfolio, you know, which markets or market represent the best or most positive repricing opportunity?

Put aside the amazing Singapore market, which we're – And I want to come to that in a minute, talking about that market.

I'll preempt you on that. 6% of the portfolio.

We're delighted to have just been awarded a precious 50-megawatt block of IT. Talk about NIMBYism. I'm copying Jordan. NIMBYism at its best is when the country literally says, you get a megawatt, and you get a megawatt, and you get a megawatt, and nobody else. Like, that market, our rates, our returns are off the charts. Put that one aside for a second. Let's talk U.S. for a second. Northern Virginia has been our workhorse and has now eclipsed rates that Santa Clara, which is clearly higher cost of occupancy market, put up in my time in digital. And what you're seeing is it's not just a one-strong market phenomenon. You're seeing a coalescing of all prices because demand is robust. Its diversity is growing. Right? There's more companies that have been direct users of data center capacity today than there were a year ago, three years ago, and the list is growing with this technology. Right? SpaceX is a small customer, but they're an investigative customer overnight. Right? And I think that list is going to expand, creating more competition for the traditional hyperscalers. Supply is windowing and is metered out by physical power infrastructure that takes years, not months. The nimbyism or the political football makes it harder to do, to invest, right? Having conviction around this, the stakes of entering into power contracts, the bar is getting raised dramatically. We can put half a billion dollars of letters of credit or security deposits for power that may not arrive for several years. You can't do that if you're subscale. So all of these things are, as well as an inflationary backdrop to build costs because everyone's building, are pushing rates higher and higher and higher. So luckily, we're supporting something that are the most profitable companies on the planet, right? So they can bear this occupancy cost because just like our workloads are mission-critical, this infrastructure is mission-critical to their futures.

And you mentioned a few things in there, right? So rates are going up, right? I didn't even say rates or interest rates or something. Oh, no, I mean pricing per KW that you were talking about. That's what you meant, right? I should have been more specific. Pricing per KW is going up, occupancy is high. development costs are also higher. We're seeing higher borrowing costs. I presume or expect you're probably seeing higher development yields, but are your development spreads also expanding because of those factors in there, which are, you know, just kind of the build cost movement, maybe relative projected higher borrowing costs. Are you seeing better development spreads?

We've been able to keep our development yields firmly in the double digits for a while, and I think they're going to continue there. And we are beyond just a pure spread investing game. We are, based on our strategy, when it comes to hyperscale, not alone put aside our enterprise business, we basically pick our spots and just don't just go after market share. We try to find places where we can really help these hyperscale customers and that generates alpha and extra rate, higher rates. And those workloads need to be there and there's numerous customers competing for that capacity.

At least the next question, Andy, is 80% of your development is currently in the U.S. Is that right, Jordan, by 80% roughly? So should we expect the next-legged development to remain U.S.-centric, or are those higher returns, more opportunity where customers want to go? Is that going to be outside of the U.S.?

Of course, it's not a great answer. The answer is both. We have a global platform. We have global customers. They're growing in all regions. The U.S. pre-AI was the laggard in the growth race. The U.S. has now become the leader in the growth race for infrastructure, and I think it will continue to be that way. But you're going to see a global catch-up phenomenon, and you already saw it in our first half of the year, where markets like Tokyo and Brazil in first quarter or second quarter were caught top of the list in terms of contribution. So you're going to continue to see us scaling our business both inside the U.S. and outside the U.S. In addition to adding, we've added seven, eight new markets on the enterprise cold side, including the announcement at the beginning of this week with our entry to Turkey.

Yeah, and I want to come back to the enterprise market in a minute because it probably is too much focus or ever emphasis on AI-related demand, maybe on that too. But so the inorganic growth, though, right, you acquired the full stake in the Blackstone JV in northern Virginia. You know, you had the Columbia Capital Transaction, Terrico Investment. You know, they all brought into your portfolio and profile. So how should we think about future M&A focus and scale?

So this goes back to what I said at the outset. We're really trying to drive at three pillars of growth, triple threat. So making sure all this growth then flows to our bottom line, but not be single-threaded in any opportunity. And that's because we think that these businesses go better together. Our Hypershell customers are offering the destinations, the on-ramps, the ecosystem that our enterprise consume. Our networks obviously monetize those connection points. And the production facility for that compute and or the AI inference goes back to those same four walls we're building on our expansive campuses. Those three transactions you mentioned hit each one of those sleeves. Terrico, the most highly connected destination, I was going to say Africa, but you could say worldwide. It's a top ten location here. We were able to take up our stake pursuant to the contractual agreements we had and do so in an accretive fashion to our bottom line. That is one market where we actually have a higher growth in our Terrico business than we have at the Mothership Digital Realty. Part of that's due to sizing and timing of capacity coming online. But that was a win in terms of taking us up about 77% ownership. Kansas City was, and I'll give you a two-for-one hyperscale.

Yeah, please.

Kansas City was a new market where we are not only getting a two-gigawatt campus, but 600 megawatts in 2028. my view is Kansas City is going to be a top 7, top 5 hyperscale market in the next several years. I believe when it comes to digital infrastructure in the United States a lot of the west is moving east due to it's very challenging due to regulation political climate and environment to build on western parts of the country and Kansas City is smack in the middle with tremendous fiber optics expansive runway growth We've had a great partnership with the energy company there, and I think you're going to see some exciting things with what we're doing in that market shortly. Our Blackstone transaction somewhat straddles hyperscale and also private capital. We're able to work with a great partner to basically take on balance sheet what I believe are probably the best hyperscale assets built in the last several years in terms of markets. still below market rates, 15-year contracts, triple net lease structures, strong investment-grade rated, a double-A average rating roughly, at an attractive valuation and make it accretive to our bottom line and also create a pipeline of product for the incremental private capital we're building and scaling as we speak. And Columbia Capital was a way to essentially further accelerate our push into private capital with a partner that we believe can keep us ahead of the game on the AI ecosystem, but also brings an amazing track record from numerous decades, $9 billion of assets under management at the forefront of Collogix, partners with us on Teraco, partners with us on other businesses, major investor in one of the largest power land bankers in the U.S. So all three of these things hit each one of those legs of growth we're operating under.

Yeah, I know it's early days with Columbia, but to your point, it's adding intelligence, expertise, knowledge, maybe additional visibility. What have you learned so far that might affect strategic decision-making at digital realty?

Now, we just literally closed very recently, but what we learned, I think our thesis has grown conviction around it based on we're seeing the synergies of where we work of, wait, this is something we learned, they learned from this investment in this type of company that digital realty would never invest in, right? It's not a data center, but it may be an adjunct to AI, an adjunct to cloud, an adjunct to networking, places where I think we can collaborate, invest together as well. Opportunities where maybe we don't, digital realty, want to invest that much of investment because it's a longer buildup to return. But Columbia is in a more total return-oriented private capital vehicle and on the LP front. So they've got hundreds of sophisticated institutional investors that we've already stepped into the RIA, Registered Investment Advisor, status. So I think it's already made us a more attractive provider to the private capital world.

Okay. That's really helpful. Now, I don't know if I caught in there or not, but then your thought process on incremental M&A and size.

And we've been – if you look at our story over the last several years, it's been a lot about operationalizing. It's a lot of been about executing when it comes to our co-location enterprise interconnection. It's been a lot about scaling development and capital. But at the same time, we've been making moves that have not been the biggest, the splatiest degrees, And I would call them versions of M&A, where we've entered through that pursuit, Indonesia, Malaysia, Lisbon, organically Barcelona, Rome, Crete, Bulgaria, just now Turkey. So we've expanded our addressable market of our platform now to, I think, 57, 58 markets for enterprises, neither infrastructure to be. That's been a big piece of that. we've not done any M&A just to get bigger. We don't want to get bigger. We want to get our bottom line growing faster and our stock price higher. That's how we operate.

It's been very deliberate. I think you've also made the argument that your global portfolio is particularly well-suited for AI inference. And there's been a lot of debate over the years where AI inference has actually got to live. And we project inference from go from, call it, 25% of demand to 45% demand for the next several years. So a very meaningful component. I'd love to hear more details on why your portfolio is so well-suited to attract and to capture inference demand.

So I just look at the options of what this is going to be used for and how it's going to be physically deployed and what I hear from our customers. And things I hear are important, power densities, how you cool it, form factors, footprint sizes, connectivity, proximity to data points, all IoT things around that. And when I look at our global portfolio, 57 markets, 6,000 customers, and I know where the cloud actually lives, I know where the networks are homed, I know where the enterprises want to put their infrastructure. I know where we were doing liquid cooling years before people were talking about GPUs. When we were talking about AI, investor days, three investor days ago, whatever it was, years ago, where we came at this business from higher power densities, from larger footprints, from serving the most technologically savvy customers out there, I think we have the sweet spot for inference by service providers, inference by hyperscalers, inference by enterprises, and whatever vector around this AI ecosystem to come. Now, I'm not going to tell you this is going to all show up on our doorstep tomorrow. This is going to be a long build. But when we're operating three gigawatts and we have nine gigawatts runway for growth, and it all fits that, it's not nine gigawatts on the moon or in the middle of nowhere. Right. Maybe I shouldn't have said that.

Are you making a reference?

I was not intentionally making a reference to anyone.

I think my X is blowing up now.

Nine gigawatts in the right markets where the enterprise lives, where the cloud lives, where the networks live, where compute lives. I think we are extremely well positioned for this.

I mean, to come to your point, I think you're already seeing some rising demand in inference. I mean, you're seeing very strong zero-to-one that you've talked about. I think you've talked about some increase or stronger demand. If you identify as inference-related, we're already seeing the early stages, I believe.

And we're always seeing the early stages. It's been creeping up in our zero-to-one bookings, not telling you X or Y number of signings. I'm telling you 22% of those signings, which was a very granular list, was in that category of AI. And if you're signing with us, you're not putting training in the most expensive markets for data owners. The other thing I'd mention, like global one-stop platform, global businesses, just like the cloud, are deploying in multiple countries. And I don't think inference is going to take a different view on private data sets. And I would say maybe we're living in a world where AI and private versus public is even more important than your cloud.

And I don't want to go down the rabbit hole, but to make the point, enterprises, large global enterprises generally do want to deal with one provider for as few as possible, right? Right, so that is a difference as well when dealing with a Bank of America or somebody else.

There's thousands of enterprise customers that want one-stop shop for their infrastructure. They want that for their private workloads, they want that for their clouds, and they want that for their AI.

Okay, and I'm keeping us on time here, Andy, so I'm running good with the questions. TAPEX guidance increased pretty materially last quarter. And, you know, one fear I hear from investors is that we're moving from a, you know, from a bookings headline-driven data center marketplace to a development deliverable marketplace, right, actually meeting that RFS stage. So if you're thinking about delivering capacity, what are the greatest constraints? So what is the greatest constraint today, right? I mean, power has been out there. Labor has been talked about. Access to capital, I guess, could be one. Or is it one that I haven't listed that you worry about?

To me, it's supply chain. It's component supply chain. It could be power equipment. It could be transformers. That's the physical that needs to show up.

And what have you done to address? I know we talked about it in the past, Andy, about how you address the supply chain.

It's been about scaling. It's about diversifying and going deeper with vendors, with vendor-managed inventory programs. We've got warehouses where equipment can sit if it arrives early if we need to. We've standardized our designs so we can swing capacity to different markets within country or region. And it's been about being consistent, not here today, going tomorrow, but consistently building with these organizations for years and years and years. and it was making sure we're ready for this moment well before we needed to be.

And I want to get to labor in a second, but you just made me think about modular, which we're talking a lot about recently. We hosted a call with a data center construction expert who used to lead that for Google or something years ago. One thing she was saying was that an obvious way to address labor shortages, rising equipment costs, is basically a standardized or production line data center construction, everything from modularization on a pallet level, right, all the way down to a fully modular containerized data center that you roll on in the back of a semi, you plop down, you have X number of KW or whatever in place. What is digital realty doing with modularization and how far do you think that you can take into your build process to help you reduce cost of, well, cost of build?

That standardization I mentioned includes the size of the amount of standardization around modular builds, ship drop-type construction, wherever we can to de-risk, call it onsite assembly, weather risk, you name it, including labor risk. But this is not a one or all or the other type of scenario. We're not removing the human beings. We're not removing the great construction jobs and engineers and electricians that will be building our campuses for years, and then operating them and spurring other jobs. But we are also trying to make sure that our supply chain can be as conveyor belt-like as possible, right? So make sure these things are purchased, procured, secured before we need them, pulling towards us with fungibility. Northern Virginia, go to Kansas City. Go to Chicago. We can swing wherever we need to and try to de-risk deliveries. And I pride the company's heritage on being able to always continue to push the envelope on that.

I mean, you sound more confident than I would say confident, but, you know, you mentioned equipment before you mentioned labor. And I've been hearing labor actually first from most other developers. And so how is digital realty managing the labor shortage that we hear about where skilled labor doesn't want to travel more than an hour and a half to a construction site? What are you doing and what are your relationships allowed you to maybe rank that second if you did?

Sure. So we have a structural advantage here, right? Our markets, based on locational sensitive workloads, are much more often appealing for workforces, right? You're not necessarily having to leave your loved ones and fly across the country to camp out and build this infrastructure. Even as we've grown out, it's a drive. It's not a plane to get to our locations. Two, we've been doing business with our GCs and our subs for years and years, and they know and trust us. We don't change on a dime. We've been getting out ahead on the training front and the hiring front. We've got tremendous, call it early career programs, community colleges, veteran programs, a whole host of activity for both operational and corporate. I think about of our new hires on the operational side, we're probably at like 12% our early career type jobs. We think we can get that over to 20% of the thousands we're hiring coming from no previous job experience. We also, when you're building a campus with numerous buildings and numerous infrastructure already operating, you're able to de-risk that because you don't send all the newbies to the new building at the same time. You spread them out with people that have a lot of expertise, right? And you can only do that if you've got 20 buildings in a market, right? So that's been helpful. We've invested in actually our facilities for our training programs where you can actually come on to a campus, train on the infrastructure in a test environment, then spend the rest of your day on the line. So I'm not saying labor is an issue. We are growing outstripping the pace of talent in the industry. We need to bring more folks into this industry. But I'm very pleased with where we've been excelling on this category.

This is not your first data center build.

Exactly.

So I promise to keep you on time. And so I have the three rapid-fire questions that I promised to get in. I think most are yes or no, Andy. So if long-term rates stay higher for longer, which has the biggest impact on your sector, higher refinancing costs, lower transaction activity, or less new supply?

This is the supply element, I think, because the supply. Okay, perfect. Perfect. I'm not saying it's going to demonstrably reduce supply, but it's going to be another, call it, arrow in the quiver of pricing power.

Perfect. Over the next three years, will third-party capital become a more important source of growth for public REITs than balance sheet capital? Yes or no?

For our sector, it has to be.

We need a bigger boat. and i've heard that in other conversations not even doing the rapid fire um are your sector but it's important we're doing this in a long-term format yeah that is is the best thing for our public shareholders at the same time and i guess kind of yeah i want to get that for a second related to that like what other sources of capital are you looking at like we've seen some of the recent data center debt deals price wide of of price talk and there's some talk of this kind of indigestion and credit capital markets today to absorb more data-centered debt. What other sources are you looking at? We're scaling into private equity capital.

So LPs, sophisticated institutions, pension funds, sovereign wealth funds, insurance companies that want to invest alongside us as an owner-operator, asset manager.

You mentioned Blackstone earlier. For years, they've been partnering.

We have great partnership with them, and that partnership's not – we've had some great milestones, has not fully run its course. But this next leg of growth for us is about also building out our strategic private capital.

I have one more leg quickly. So will 2027 same-store NOI growth for your sector be higher, the same, or lower than 26? And that's for your sector, not for digital realty.

Great.

Andy, thank you so much. I appreciate it. Thank you.