Digital Realty Trust Inc (DLR) — Q2 2025 Earnings Call Transcript

Thank you, operator, and welcome, everyone, to Digital Realty's Second Quarter 2025 Earnings Conference Call. Joining me on today's call are President and CEO, Andy Power; CFO, Matt Mercier; Chief Investment Officer, Greg Wright; Chief Technology Officer, Chris Sharp; and Chief Revenue Officer, Colin McLean, who are also on the call and will be available for Q&A. Management will be making forward-looking statements, including guidance and underlying assumptions on today's call. Forward-looking statements are based on expectations that involve risks and uncertainties that could cause actual results to differ materially. For a further discussion of risks related to our business, please see our 10-K and subsequent filings with the SEC. This call will contain certain non-GAAP financial information. Reconciliations to the most directly comparable GAAP measure are included in the supplemental package furnished to the SEC and available on our website. Before I turn the call over to Andy, let me offer a few key takeaways from our second quarter results. First, we posted $177 million of new bookings in the quarter at 100% share, including $135 million of Digital Realty share. Record performance in the 0-1 megawatt plus interconnection product set stole the show in the quarter with $90 million of bookings. Second, core FFO surged to a record $1.87 per share, outperforming expectations for the quarter and contributing to an increase in our revenue, adjusted EBITDA and core FFO per share guidance for the full year 2025. And third, we continue to extend our runway for better long-term growth with oversubscribed LP equity commitments for our first U.S. Hyperscale Data Center Fund, additional development site acquisitions in key U.S. markets, and a robust balance sheet that is highlighted by more than $7 billion of liquidity and below-target leverage. With that, I'd like to turn the call over to our President and CEO, Andy Power.

Thanks, Jordan, and thanks to everyone for joining our call. As enterprise digital transformation, cloud computing, and AI adoption continue to accelerate, Digital Realty's global platform is uniquely positioned to meet the full spectrum of customer needs while delivering differentiated value. With our 20-year track record of execution as a data center operator, 5 gigawatts of development capacity and more than $15 billion of private capital supported, Digital Realty has the wherewithal to service its growing enterprise and hyperscale customer base for the years to come. Over the past 2.5 years, we have been focused on driving better, long-term sustainable growth in core FFO per share, and we are starting to see the fruits of our labor. A key pillar of our full-spectrum strategy is our 0-1 megawatt plus interconnection business which is anchored by connectivity-rich metro campuses. These campuses, typically located near where data is created and consumed, host mission-critical deployments that support hybrid multi-cloud IT, vital network infrastructure, industry-specific latency-sensitive applications and AI inference among other workloads. The common thread across these use cases is connectivity, and we have made it a priority to enhance our interconnection capabilities and services across the platform. Our focus on strengthening the customer value proposition is delivering results. Bookings in our 0-1 megawatt plus interconnection product set have seen consistent growth with momentum accelerating over the past year even as large AI-oriented leases have been in the spotlight. At the beginning of last year, we set an ambitious goal to double our colocation bookings, and we're well on our way to achieving it. In the second quarter, we signed $177 million of gross leases, including $135 million at share. Digital Realty's share of bookings were led by $90 million in our 0-1 megawatt plus interconnection category, a record result that is 18% higher than our prior record set only 2 quarters ago. Over the past 4 quarters, we have booked over $300 million in this category, up from approximately $200 million in 2023. This quarter's success wasn't driven by any single deal or even a dominant metro. Instead, leasing was broad-based, with equal contributions from EMEA and the Americas along with a healthy dose from APAC. Importantly, we also delivered record interconnection bookings in the quarter as the momentum we've seen in the 0-1 megawatt category is starting to pay off as customers have deployed their gear in our facilities and need to support the underlying workloads with connectivity. The bottom-line output of this success is our core FFO per share growth. We earned a record $1.87 per share this quarter, a robust 13% increase over last year's results and 6% higher than last quarter. While the rate of acceleration and bottom-line growth this quarter is notable and demonstrates the significant momentum we have in our business, our growth will be best measured in years. With our backlog at $826 million, we have strong visibility through the end of 2025 and beyond. Matt will provide details on the financials in a few minutes.

Thank you, Andy. Digital Realty posted double-digit growth in revenue, adjusted EBITDA and core FFO this quarter, reflecting the momentum that we've built up over the past year. These results were driven by record lease commencements, low churn, and higher fee income. We achieved these results while substantially increasing our liquidity, maintaining below-target leverage, and also preserving a large backlog and development capacity that provides strong visibility through the second half of the year and beyond. In the second quarter, core FFO jumped by 13% year-over-year to a new quarterly record, while leasing results were highlighted by a notable new record in our 0-1 megawatt plus interconnection category. Looking ahead, we've increased our guidance for 2025, and we expect to exit the year with significant momentum and a sizable backlog. Digging a bit deeper on leasing. We signed leases representing $177 million of annualized rent in the second quarter, bringing the year-to-date leasing to $575 million at 100% share. At Digital Realty's share, we signed $135 million of new leases in the second quarter. Of this, $90 million fell within our 0-1 megawatt plus interconnection product set, which exceeded our prior quarterly record by 18%. Relative to the prior 4-quarter average, quarterly leasing in this product set was up by 36%. We signed $45 million within the greater than a megawatt category at our share with leasing spread across our regions. Our top five leases in this segment range from 2 to 12 megawatts and saw steady to improved pricing. Notably, average pricing in this segment was skewed lower in the quarter by the exercise of an expansion option by a large enterprise customer in North America, which was committed to more than 3 years ago. Consistent with our objective of improving Digital Realty's long-term sustainable growth, more than 70% of bookings included fixed rent escalators of at least 4% or were linked to CPI. Our backlog at Digital Realty share totaled $826 million at quarter end, as a record $228 million of commencements was only partially offset by our new bookings. Looking ahead to the second half of 2025, we expect another $241 million of leases to commence, which are more heavily weighted towards the fourth quarter. For 2026, we currently have $461 million scheduled to commence while an incremental $124 million is already slated to commence in 2027 and beyond, providing strong visibility for multiyear growth.

Yes, I appreciate it, Jonathan. So I think there's three key factors that underpin the growth, the record growth that you see here today. The sustained 0-1 megawatt bookings that we've had past year, those customers are on a journey, right? So they deploy new deployments, then they go to bookings and that bookings come in as revenue as they start to activate more and more services across the platform. So I think that's the critical one that we keep seeing that build momentum over time. I think the second piece is just the global pricing standardization. So aligning our interconnection value provides clarity and scale to a lot of our customers. And so you see a lot of that starting to mature into the overall portfolio as well around the globe, so not just the single market, but all the critical environments that we operate in. And I think the third is just the comprehensive interconnection suite. That's beyond what just Colin talked about as the physical cross-connects, but those virtual services.

Thanks, Jon. Maybe I'll tag team this with Colin here. Listen, I think this has been a priority for the company that we've doubled down on over the last several years. And now, it took a long way to get here. We had to put the puzzle pieces together in terms of a global footprint, have the highly connected destinations, revamp our go-to-market, and a whole host of activities that led up to this. And then I'd say it's been a growing market where we've executed and taken some share over the last several quarters, accelerating with records upon records. And then this quarter is certainly a milestone up, I think, 18% over the prior record at nearly $90 million. I know Colin and his team have continued to not rest on their laurels coming off a strong 2024 and put some incremental changes through the program.

Thanks, Andy. Jon, I appreciate the question and recognizing the progress here. Yes, we were really pleased with the quarter overall. Nearly $90 million in bookings across the platform, strong interconnection, which really speaks to the value of the platform, really strong export quarter across the globe, and a strong number of customers participating. So you asked the kind of why factor of this. I think our platform itself continues to resonate with clients. So the global reach across core markets, enterprises very much value that core market nature of our portfolio. The fact that we offer the full spectrum of offerings, cabinet-cage suite, building both central as well as up in the suburbs, large capacity blocks, which really matter.

Thanks, Eric. So maybe I'll kick it off and Colin can touch on what he shared last quarter and the update on what we're seeing now from the hyperscale customer base. So we, at total share, did $177 million of leasing this quarter, which was our sixth largest quarter in the history of the company. The pro-rata share is less than that, but that's a strategic pivot in our funding model. Building a private capital business around hyperscale means that some of the leases are falling into ventures that we do not own 100%, but obviously, are operating on behalf of our customers and garner fees and other economics for doing so.

Thanks, Michael. A significant factor for our results in the first half of the year is the outperformance in our other category, which contributed around 100 basis points to our overall performance. If we exclude that, we would be approximately 100 basis points lower. For the second half, we don't expect the same level of performance in that other category, typically related to the shell or PBB space. However, we anticipate continued strength in our 0-1 category, which has shown over 4% growth in the past few quarters, along with improved results in our greater than a megawatt segment. Historically, the second half of the year tends to be more focused on the 0-1 category, which is why we're still within that range, but we've raised the lower end of our expectations.

Thanks, David. Listen, I view that as a maturing of the broader industry around data center infrastructure and power. I mean it's on the back of these utility companies, especially those who are not quite used to seeing prevalent data center demand, carrying numerous inbounds from numerous shops. In my opinion, what they needed to do and have now done is raise the bar for entry, i.e., they made real counterparties that own land, have real commitments to building the infrastructure for their customers and that often requires security deposits or counterparties of substance. I think that's a net positive to rationalization and stabilization of the industry. Given Digital's track record, I think we show up in front of these utilities as a really good partner. We never were an issue on this. And now we can, call it, flush out folks that were maybe in the land-flipping game and really try to get to folks that are really dedicated for the long haul in scaling data center infrastructure.

What do you think is driving the growth in the 0-1 megawatt category? Are we seeing overall growth in that market, or is it primarily DLR gaining market share? If it is market share, could you explain two or three changes that DLR has made in its go-to-market strategy to capture more market share?

Thanks, Jon. Maybe I'll tag team this with Colin here. Listen, I think this has been a priority for the company that we've doubled down on over the last several years. And now, it took a long way to get here. We had to put the puzzle pieces together in terms of a global footprint, have the highly connected destinations, revamp our go-to-market, a whole host of activities that led up to this. And then I'd say it's been a growing market where we've executed and taken some share over the last several quarters, accelerating with records upon records. And then this quarter is certainly a milestone up, I think, 18% over the prior record at nearly $90 million.

Thanks, Andy. Jon, I appreciate the question and recognizing the progress here. Yes, we were really pleased with the quarter overall. Nearly $90 million in bookings across the platform, strong interconnection, which really speaks to the value of the platform, and really strong export quarter across the globe and strong number of customers participating. So you asked the kind of why factor of this. I think our platform itself continues to resonate with clients. So the global reach across core markets, enterprises very much value that core market nature of our portfolio. The fact that we offer the full spectrum of offerings, cabinet-cage suite, building both central as well as up in the suburbs, large capacity blocks, which really matter.

During the second quarter, we spent over $900 million on development CapEx on a gross basis, which includes our partner share and approximately $700 million on a net basis to Digital Realty. During the quarter, we delivered a record 96 megawatts of new capacity, 98% of which was pre-leased while 16 megawatts of new data center projects started construction, leaving 734 megawatts under construction.

Thank you, Chuck. First off, as a Texas-headquartered company, we want to acknowledge the devastating flooding in Central Texas earlier this month. Our hearts go out to all those impacted, including the family and friends of our former colleague, Mark Walker. Mark played a key role in our investments team and was admired for his pursuit of high standards, intelligence, devotion to his family, and dedication to his work. He left a lasting impact on many of us. Wrapping it up, Digital Realty delivered another strong quarter, building on the momentum from earlier this year. We saw record performance in our 0-1 megawatt plus interconnection business, underscoring the strength of our global full spectrum platform and the demand for data center infrastructure. Our core FFO per share results were at record levels, and our backlog remains strong and well supported by a deep and diverse pipeline that reflects the global demand for data center capacity.