Digital Realty Trust, Inc. (NYSE:DLR) Q1 2024 Earnings Call Transcript

Digital Realty Trust, Inc. (NYSE:DLR) Q1 2024 Earnings Call Transcript May 2, 2024

Digital Realty Trust, Inc. misses on earnings expectations. Reported EPS is $0.82 EPS, expectations were $1.63. Digital Realty Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to the Digital Realty First Quarter 2024 Earnings Call. Please note that this event is being recorded. During today’s presentation, all parties will be in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Callers will be limited to one question. I would now like to turn the call over to Jordan Sadler, Digital Realty’s Senior Vice President of Public and Private Investor Relations. Jordan, please go ahead.

Jordan Sadler: Thank you, operator, and welcome everyone to Digital Realty’s first quarter 2024 earnings conference call. Joining me on today’s call are President and CEO, Andy Power; and CFO, Matt Mercier. Chief Investment Officer, Greg Wright; Chief Technology Officer, Chris Sharp; and Chief Revenue Officer, Colin McLean are also on the call and will be available for Q&A. Management will be making forward-looking statements, including guidance and underlying assumptions of 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, see our 10-K and subsequent filings with the SEC.

This call will contain non-GAAP financial information. Reconciliations to net income 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 first quarter. First, our customer value proposition continues to resonate as reflected by an AI-driven acceleration in leasing activity that drove our overall leasing volume to a new record. First quarter leasing was more than 40% above our prior record, principally driven by an improvement in pricing. Second, our fundamental strength picked up where 2023 left off, with record cash releasing spreads and strong stabilized same capital cash NOI growth of 4.7%, reflecting continued strength in data center fundamentals combined with the benefit of the improvements that we have made to our portfolio over the past year.

And third, we’ve made meaningful progress on our 2024 funding plan already with just over $1 billion of fresh capital raised from asset sales and joint ventures to date, putting us above the low end of our guidance range for 2024, just one third of the way through the year. As a result of our efforts, reported leverage fell from 6.2 times at year end to 6.1 times at March 31 and remains at 5.8 times on a pro forma basis, reflecting completed and announced transactions. With that, I’d like to turn the call over to our President and CEO, Andy Power.

Andrew Power: Thanks, Jordan, and thanks to everyone for joining our call. Following the successful course we set in 2023, Digital Realty experienced accelerating momentum in the first quarter of 2024, headlined by a collection of multifaceted AI opportunities that drove a number of new leasing records as demand for our capacity in core markets remains elevated, while visibility surrounding competitive new supply remains cloud. At Digital, we continue to focus on our strategic priorities and on delivering on behalf of our expanding list of 5,000 plus customers across our 50 plus markets in 25 plus countries on six continents. During the first quarter, we posted record leasing results, surpassing our prior record by more than 40% and exceeding our leasing results for all of 2019 in just this one quarter.

We also delivered strong operating results as evidenced by healthy stabilized same capital growth and the highest releasing spreads in the company history. We continue to innovate and integrate the further expansion of ServiceFabric through the launch of our service Directory marketplace, which has seen the addition of over 90 members offering more than 150 services, including secure and direct connections to over 225 global cloud on ramps, creating a vibrant community for seamless interconnection and collaboration. And just last week, we launched Private AI Exchange powered by ServiceFabric, which enables enterprise data to be at the center of an AI architecture, directly adjacent and interconnected with AI capabilities. This architecture alleviates the data crafted barriers that emerge as data generated and exchanged with multiple applications across end-to-end AI-enabled digital workflows.

We also continued down the path of bolstering our balance sheet and diversifying our capital sources. With the expansion of one of our stabilized hyperscale joint ventures and the addition of a new hyperscale development JV, together with our first transaction with our perpetual capital partner, Digital Core REIT in well over a year. These transactions help to fund the development pipeline capacity that our customers are seeking, while reducing our overall leverage. Operating and financial results in the first quarter were encouraging. We posted sequential growth in our core data center revenues, while growing adjusted EBITDA and core FFO per share. Development returns also continued to improve and we further enhanced the product mix of our portfolio, while maintaining strong liquidity and lower leverage.

Bookings and renewal results were even better with a number of metrics reaching new records, reflecting the strong demand environment and limited new capacity. Total bookings were $252 million, well ahead of our prior quarterly record of $176 million, reflecting the impact from the acceleration of AI and the improved pricing environment. Importantly, when comparing this quarter’s leasing to the prior record set in 3Q 2022, we leased an incremental 10% of IT load capacity, while rates in the greater than 1 megawatt segment were approximately 60% higher than those achieved 18 months prior. Perhaps a bit overshadowed by these record setting results was another strong quarter in our 0 to 1 megawatt plus interconnection segment, which delivered a third straight quarter over $50 million.

Demand for our connectivity oriented capacity remains healthy and pricing remains firm. Our mark-to-market renewal spreads were up by 11.8%, aided by a record 18.5% increase in our greater than 1 megawatt category. Churn remained low and well controlled at 1.7% for the quarter. Same capital cash NOI growth will also remain healthy, growing by 4.7% year-over-year in the quarter and marking our fifth consecutive quarter of positive same capital growth. A year ago, data center demand was strong, driven by the growth of cloud and digital transformation, while supply was tightening due to power transmission constraints, supply chain delays and other factors. Since then, AI has become a significant driver of demand as hyperscalers race to develop, deploy and implement the technology, while enterprise begin to explore the potential of this wave of technological evolution.

McKinsey recently forecasted data center demand growth at a double-digit CAGR through 2030. This growing secular demand is broad and deep with both enterprises and service providers need significant new data center capacity to accommodate their expanding needs, fueled by trends such as enterprise AI adoption, AI as a service, IoT and the relentless growth in data creation. Reflecting these trends, I want to highlight two highly strategic AI signs that came to fruition during the quarter. First, we were selected to host one of the world’s most powerful AI supercomputers in one of our data centers in Copenhagen in a collaboration spearheaded by the Nova Nordics Foundation and the Export and Investment Fund of Denmark, where researchers from Denmark’s public and private sectors access to a cutting edge NVIDIA powered AI supercomputer in addition to NVIDIA software platforms, training and expertise.

Second, Digital Realty further strengthened its collaboration with Oracle to accelerate the growth and adoption of AI among enterprises. Aiming to develop hybrid integrated solutions that address data gravity challenges, expedite time-to-market for enterprise deploying next generation AI services and unlock data and AI based business outcomes. Oracle will deploy critical GPU based infrastructure with Digital Realty that leverages platform Digital’s open purpose built global data center solution and caters to enterprise and AI customers’ critical NVIDIA and AMD deployments, among others. Our 01 (ph) plus interconnection customers also continue to recognize our demonishable strength and value proposition, whether that related to power dense applications, a network of globally connected data centers or other critical infrastructure requirements.

During the first quarter, we added over 128 new logos. Our wins included a leading Fortune 500 AI component maker is expanding their presence on platform digital to a new EMEA market to support their streaming service capabilities. A global cloud computing and content distribution provider leveraging the leading connectivity proposition of Platform Digital in Mombasa to support their global edge pump expansion project. A global 120 manufacturing company is building an AI HPC environment in Frankfurt to support its autonomous vehicle project. A leading French cloud service provider is deploying on platform digital to build out its edge cloud offering across the globe to support their enterprise customers’ hybrid infrastructure by delivering low latency performance while retaining local data residency.

Fortune 500 technology distributor and borrower IT service provider chose platform digital in Phoenix to support data exchange and interconnect with key partners. And a Fortune 500 health benefits provider is expanding into two additional North America metros to take advantage of cloud and network density available on platform digital. Moving over to a quick update on our largest market growth in Northern Virginia. During the first quarter, we leased approximately 80 megawatts of capacity in the supply constrained quarter in Eastern Loudon County. Demand for our capacity remains strong and while hyperscale leasing is typically lumpy, we continue to see healthy traction on our remaining capacity and we are focused on helping our customers and partners source the incremental data center infrastructure that they require.

During the first quarter, we worked with Dominion Energy to help address the transmission bottleneck in Ashford by providing them with an easement to land the selling line at the Mars substation that they plan to construct on a quarter parcel of our 450 acre Digital Dulles campus. We remain cautiously optimistic about getting access to additional power with Dominion’s current forecast for completion of the Southern Line Transmission project by late 2025. Today, we have roughly 80 megawatts of remaining capacity available for lease within our first building on our Digital Dulles campus in Loudoun, known as Dulles center and we have almost 200 megawatts available for development on our [indiscernible] campus in Manassas, which was contributed to our JV with Blastone in the first quarter.

As a reminder, Manassas is currently outside of the constrained area and power remains accessible there. Before turning it over to Matt, I’d like to touch on our ESG progress during the first quarter. We will continue to make meaningful progress and be recognized for our strong ESG performance in 2024. We went live with a switch to 100% renewable energy supplies for our Texas, New Jersey and Sydney data center portfolios benefits in 30 sites and addressing more than 10% of our global electricity footprint. We were recognized by the EPA as Energy Star Partner of the Year with sustained excellence for the fourth year. And we added a new green building certification at our MRS 4 development in Marseille, France. We also announced a partnership with a leading global energy solutions provider to use our UPS systems to support Ireland’s transition to renewable energy.

And we’ve announced a significant expansion of our use of HVO diesel, a cleaner fuel made from waste, cooking oils and fats to power our backup generators. This will up our use of HVO to 20 global sites and 15% of our global portfolio by IT capacity. We remain committed to minimizing Digital Realty’s impact on the environment, while delivering sustainable growth for all of our stakeholders. With that, I’m pleased to turn the call over to our CFO, Matt Mercier.

Matthew Mercier: Thank you, Andy. Let me jump right into our first quarter results. We signed a record $252 million of new leases in the first quarter, led by $175 million of greater than a megawatt leasing in the Americas and another $53 million of 0 to 1 megawatt plus interconnection leasing with interconnection bookings remaining firm at $13 million. Turning to our backlog. Given the record leasing, the backlog of signed but not yet commenced leases swelled to a new record of $541 million at quarter end, with new leasing outstripping a record of $156 million of commencements during the quarter. Looking ahead, more than half of the record backlog is slated to commence during the remainder of 2024, indicating that commencements are likely to remain elevated.

During the first quarter, we signed a record $248 million of renewal leases and a record increase of 11.8% on a cash basis. Releasing spreads were once again positive across products and regions, with particular strength in the Americas. Releasing spreads have been increasing steadily for well over a year now and while we expect that they will remain very healthy, they are likely to moderate from this quarter’s record given the significant weighting of lease expirations in the 0 to 1 megawatt segment for the remainder of the year. In addition, we think it is important to consider a normalized view of the headline renewal spreads as two separate items skewed our reported spreads higher in the first quarter. First, there was a notable outlier in the other category that should not be considered recurring or repeatable and removing this transaction would reduce our overall reported spreads by 250 basis points to 9.3% for the quarter.

Second, there was a significant early renewal transaction in our greater than 1 megawatt segment that was part of a large package deal as we work to support this customer’s broader data center capacity needs in one of our tightest markets. While this transaction enabled us to opportunistically pull forward some of our below market expirations from the outer years, our forward year lease expiration schedule remains dominated by our 0 to 1 megawatt segment, which tends to experience spreads in the low to mid-single digits akin to what we saw in the first quarter. Excluding both the outlier transaction and the package deal renewal, releasing spreads in the quarter would have been up 3.4% on a cash basis. We feel that this is more predictable aspect of our portfolio that we will continue to see opportunities and may periodically be able to capture the growing mark-to-market opportunity in our greater than a megawatt portfolio.

In terms of earnings growth, we reported first quarter core FFO of $1.67 per share, reflecting strong organic operating results, partly balanced by dilution associated with the stabilized asset sales and JV contributions completed early in the year and the ongoing deleveraging of our balance sheet. We have been normalizing for the sale or JV of $3 billion of stabilized assets completed since the beginning of last year, total revenue growth was 7% year-over-year in the first quarter due to the benefit of improved leasing spreads along with favorable new leasing. Revenue growth in the quarter was tempered by the decline in utility expense reimbursements as electricity rates fell sharply in EMEA year-over-year. Normalized adjusted EBITDA increased 9% year-over-year, reflecting the strong revenue growth and modest increase in operating expenses.

As Andy noted earlier, stabilized same capital operating performance saw continued strength in the first quarter with year-over-year cash NOI up 4.7%, driven by 4% growth in rental plus interconnection revenues and further supported by expense control. Moving on to our investment activity. We spent $550 million on consolidated development in the first quarter, plus another $23 million for our share of managed unconsolidated JV spending, while delivering 32 megawatts of new capacity across the globe for our customers. It is worth mentioning, the approximate $300 million sequential decline in our development spending this quarter, which highlights the effects of the contributions of our three development JVs. However, seasonal and other timing related factors also contributed to less CapEx spending in the first quarter.

Turning to the balance sheet. We continued to strengthen our balance sheet in the first quarter with the closing of previously disclosed transactions, including the Cyxtera transaction, the first phase of the Blackstone Hyperscale development JV, and the sale of an additional 15% share of the two stabilized hyperscale assets in our Chicago JV to GI partners. During the quarter, we also completed a hyperscale development JV with Mitsubishi for two assets and the Dallas Metro. In terms of new news, we also sold a piece of land in Sydney, Australia for $65 million and we provided an easement to Dominion Energy to build the Mars substation on our Digital Dulles campus for $92 million, which all contributed to a reduction in our reported leverage to 6.1 times at the end of the first quarter versus 6.2 times at the end of 2023.

And then in April, we continued to recycle capital by selling 75% of CH2, the third and final stabilized hyperscale facility on our Elk Grove campus at a 6.5 cap rate to GI Partners, raising nearly $400 million. And we sold to Digital Core REIT an additional 24.9% interest in our Frankfurt site where Digital Core REIT previously owned 25%, raising another $129 million. In addition, we used some of our cash on hand to pay-off the $600 million of maturing euro notes. After adjusting for these transactions, along with the anticipated closing of Phase 2 of the Blackstone transaction later this year, pro forma leverage is 5.8 times. We continue to keep significant cash on the balance sheet with approximately $1.2 billion on hand and over $3 billion of total liquidity at March 31 to support ongoing investment opportunities.

Moving on to our debt profile. Our weighted average debt maturity is over four years and our weighted average interest rate is 2.9%. Approximately 85% of our debt is non-U.S. dollar denominated, reflecting the growth of our global platform and our FX hedging strategy. Approximately 86% of our net debt is fixed rate and 97% of our debt is unsecured, providing ample flexibility for capital recycling. Finally, after paying off the year notes in April, we have $316 million of debt maturing through year end 2024. Beyond that, our maturities remain well laddered through 2032. I’ll finish with guidance. We are maintaining our core FFO guidance range for the full year 2024 of between $6.60 and $6.75 per share, reflecting the continued improvement we are seeing in our core business.

Positive underlying operating trends are partly balanced by potential acceleration in development spending and additional capital recycling, as we move our leverage down towards the long-term target and position the company for the accelerating opportunity in front of us. We are maintaining our total revenue and adjusted EBITDA guidance ranges for 2024, so we are notching up our cash and GAAP releasing spreads along with our same capital cash NOI growth expectations, reflecting better-than-expected execution on the leasing front in the first quarter and the strength in fundamental conditions that we continue to see across our portfolio. Specifically, cash releasing spreads are now expected to increase 5% to 7% in 2024, up 100 basis points at the midpoint of the prior 4% to 6% range.

And same capital cash NOI is now expected to increase by 2.5% to 3.5%, up 50 basis points from the 2% to 3% range we provided in February. Highlighted in our investor presentations, excluding the nearly 200 basis points of power margin headwinds that we have previously discussed, our same capital cash NOI growth for 2024 would be 4.5% to 5.5%. While these improvements and the stronger core FFO per share realized in the first quarter bode well for the balance of the year, there are a few mitigating factors to consider as you’re refining your models. First, we will see a modest drag of the $500 plus million of capital recycling completed in April. Second, we are only a third of the way into the year and there is still significant potential for both development spend and asset sales guidance to reach the high end of their guidance ranges.

In addition, it is worth pointing out that the interest rate outlook and curve have changed considerably since we provided guidance and remains another source of uncertainty for the balance of this year. Just one final reminder and update. Over the course of 2024 and 2025, we expect that our $6 billion development pipeline will become increasingly accretive as higher yielding projects are completed and stabilized. The expected yield on our stabilized pipeline ticked up another 20 basis points sequentially, reflecting the addition of higher yielding projects and the completion or contribution to joint ventures of lower yielding projects. To help provide increased transparency around this important and evolving aspect of our company, we have enhanced our development life cycle schedule on Page 25 of our supplemental to, one, reflect our proportionate share of total data center development, including our unconsolidated joint ventures; and two, to provide increased disclosure around our available developable capacity in terms of IT loading.

We hope you find this helpful. This concludes our prepared remarks. And now, we will be pleased to take your questions. Operator, could you please begin the Q&A session.

See also 15 Most Common Counterfeit Foods in the US and 25 Richest Billionaires in Technology Industry.

Q&A Session

Operator: Thank you. We will now open up the call for questions. [Operator Instructions] Today’s first question comes from John Peterson with Jefferies. Please go ahead.

John Peterson: Great. Thanks. I guess I could start with — actually, let’s start on the leasing side. So the — I was curious how much of the leasing that was done this quarter was inside of some of the joint ventures, like, maybe the Blackstone joint venture that you did. And in terms of the yield on development in Northern Virginia — or North America, I noticed that was up 200 basis points to 12.3% as your expected yield from last quarter. I guess, is that kind of a good number to think about of what new developments you’re signing today are is kind of in the 12% plus range.

Operator: Pardon me. I believe our speaker location may be muted.

Andrew Power: Sorry, can you guys hear me now?

Operator: Pardon me. Can the speaker location hear us your line may be on mute. Apologies. We can hear you now. Yes, sir. Please proceed with your answer.

Andrew Power: Sorry about that. So John, thanks for the question. So I’d say, the lion’s share of high, high percentage was not done into any of the JVs. I don’t have the exact stat, given we have now numerous strategic capital partners across our hyperscale platform, be it stabilized JVs. But I’m very confident that none of the leasing we reported this quarter went into the deal you identified with Blackstone. We are seeing great traction on those projects, but this quarter, none of that leasing went inside. On your second question in terms of improvement in ROIs, in particular on North America, I would say, we are — we’ve definitely moved the needle quite dramatically on that category from some of our build to suit projects that are call it closer to 7% that we joint ventured to now north of 12% ROIs. And we’re still working through projects that are obviously weighting that down a little bit and we have projects that are being — entering that schedule on the higher side as well given the rapid improvement in the rate environment.

Operator: Thank you. And our next question today comes from John Atkin with RBC Capital Markets. Please go ahead.

Jonathan Atkin: Thanks. So you mentioned rate environment and maybe continuing on that theme a little bit in terms of pricing. As we think about next year’s core FFO per share growth rate, you gave a little bit of commentary on that on the last call. Any updated thoughts in terms of what we should be considering around puts and takes as that number potentially goes higher, whether it’s execution of leases or pricing or renewals or whatnot? Thanks.

Andrew Power: Thanks, John. Maybe I’ll speak to market rates and where we are able to execute on new leases signed and also renewals first and then hand it over to Matt in terms of FFO trajectory into next year. As you saw from our results, we’re obviously benefiting from overall supply demand dynamic with robust demand trends, be it enterprise digital transformation, cloud computing and now AI on top of that, that’s playing out in our 0 to 1 megawatt category as well as our greater than megawatt category and that’s all having the backdrop of supply constraints from numerous sources. And we were able to continue to push rate both on the existing contracts that were coming up from renewal as well as on new contracts to higher and higher levels that obviously you see in the leasing results and believe that trend is going to remain intact for some time. Matt, why don’t you speak to the FFO trajectory, please?

Matthew Mercier: Sure. Thanks, John. So what I would say is, I think we’re based on our first quarter results, we — our optimism is improved — has improved in terms of our — what we expect to see and what we talked about last quarter in terms of improving growth as we look to 2025. And a big part of that, I would say is driven by the successful leasing execution that we saw this quarter, $250 million and the shorter sign to commenced lag, which is at seven months. So it really sets us up for accelerating revenue and therefore bottom line growth as we exit this year and into next year. But from boiling all that down, I would say that the growth algorithm is generally similar to what I discussed last quarter, which is, we’d expect to see, call it plus 4% related to our stabilized same-store portfolio.

On top of that, you’d add another, call it, 2% plus as we deliver developments into our operating portfolio at yields that are continuing to improve. There’ll be some offset, call it in the 1% area given higher rates and the debt refinancing that we have over the next couple of years. And I think that kind of sets us up for mid-single digit and greater growth going forward.

Operator: Thank you. And our next question today comes from Eric Luebchow with Wells Fargo. Please go ahead.

Eric Luebchow: Great. Thanks for taking the question. I wanted to dive into Northern Virginia a little bit. Could you maybe just provide an update on the timing of the Dominion transmission upgrades and when you think you can get even more capacity into that market? And then, on rental rates in Northern Virginia, I think that probably had a big influence on the 170 plus you reported in North America. Could you just talk about where you’re seeing rental rates in that very supply constrained market and what that kind of, how that influences your yields, your underwriting and your development table. Thanks.

Andrew Power: Sure. Thanks, Eric. So Northern Virginia has obviously has been a highly dynamic market for some time here. We were very pleased to come together and support our partner at Dominion with a very strategic easement to be the landing of the Mars substation, which we are — it is our understanding, they are on track to be delivering power and bringing power back online by beginning of 2026 from that Southern line. So there’s not been a divergence what — in terms of timing was previously expressed to us. We definitely benefited from the increase in rates in that market. Our largest signing was in that market as well as a few other sizes — decent sized signings. Although, we also had some very great signings in the London market and north of a megawatt signings also in Copenhagen.

So they were not the only contributors in the plus and megawatt category. The rates, I would say the market rates in general are call it continue to improve in that market and as the precious capacity becomes more and more finite. As you saw on that slide, we now have or turning our attention to really 80 megawatts remaining at Digital Dulles, as well as the Manassas campus, which is not impacted by the power delays. And I’d say rates in both Manassas and Loudoun County are converging right at this moment called in the 165, call it to almost 180 type area on a market basis. That would be the cash rate, not a GAAP rate that we report.

Operator: Thank you. And our next question today comes from David Barden with Bank of America. Please go ahead.

David Barden: Hey, guys. Thanks so much for taking the questions. I guess, if I could just explore, Andy, the commentary around how AI is contributing already to your business. A lot of the retail data center — centric companies have kind of said that’s not really a thing for them yet. So could you kind of elaborate a little bit on — within that greater than 1 megawatt category, how much of that is the hyperscale? Is it really hyperscale or is it these maybe more bespoke Copenhagen Nordic foundation engines that are coming online? And what are these builds look like in what way are they different than maybe what you’ve been doing historically? And how is that informing how your development is evolving? Thanks.

Andrew Power: Sure. Thanks. Thanks, David. So let me just give you the tops of the ways and I’m going to turn it to Chris on how we’re tapping in our infrastructure capabilities to really excel in this category. Obviously, the data points are smaller in the more enterprise oriented wins, but they are there. We’ve — I would say call it, less than half a megawatt supported through a partner, a global manufacturing company on its AI journey in Europe. You noted the slightly larger than that, but still not certainly not hyperscale. The great win we had with Nova Nordics supporting them in their NVIDIA backed chips with a really landmark win with supercomputer in their market. And then for some time, we’ve seen the emergence of the hyperscalers with larger capacity block needs.

And the largest of our wins in the quarter, I would characterize as an AI win as well. And all-in-all, it’s probably close to 50% of this quarter signs, which is up relative to prior quarters. And I think there’s a lot about what our platform offers that really allows us to capture this demand, maybe even earlier in the evolution of AI than some others, but Chris can speak to that as well.

Christopher Sharp: Yeah. No, I appreciate it, David. This is Chris Sharp. And so a couple of elements. I think you’re thinking about it correctly in that there’s two lenses, right? There’s kind of that hyperscale lens that has AI built within it. And then there’s this other pocket that we kind of look at that’s definitely emerging with private AI. And so these are these larger deployments that we’re seeing come out from multiple types of enterprises. And I think it’s important to understand from a design perspective, it kind of starts with a little bit broader in how we master plan our campuses. And so I think the work that we’ve been doing around building out substations and doing a long-term plan within the market has allowed us to then bring a very large capacity block design to market, which is very modular.

And I think in that modularity, it’s something that we continue to ideate with our customers to be able to support the varying power densities. And I think we talked last call about HD Colo and being able to do what we’re very proud about with 70 kilowatts, but then you’ll see us start to evolve over the next quarter here, the ability to even support 150 kilowatts. And so being able to support these densities, which is representative of the AI workload is absolutely paramount to our modular designs and be able to do that very efficiently. And then I think the last piece is the heritage, the heritage of the team on a global basis, being able to really meet and ideate with these customer bases is what’s really building a distinct differentiator for us to not only capture that hyperscale AI, which we see growing and burgeoning, which you see in the prepared remarks with Oracle and some of those customers, but then I think directly to your point, David , these smaller, if you will, from a hyperscale perspective, private AI around Novo Nordis Foundation and just we really are at the cusp of a lot of this AI demand coming into the platform digital globally.

Operator: Thank you. And our next question today comes from Irvin Liu with Evercore ISI. Please go ahead.

Irvin Liu: Hi. Thank you for the question. So maybe to piggyback on the prior question related to retail and enterprise, do you see potential for AI tailwinds to perhaps drive meaningful acceleration to your 0 to 1 megawatt segment similar to what you saw in the greater than 1 megawatt segment this quarter, just as AI workloads begin to evolve towards private AI and inferencing?

Andrew Power: Sure, Irvin. So I mean the here and now, I think AI is having a numerous positive implications for the sector. And I’ll have Chris speak into what’s next because I don’t think we’re really at what’s next, be it inference, private datasets, enterprise consumption. But the here and now, you have a backdrop of big existing customers with desires to have immediate see around their capacity. There’s still — we’re winning that in our core markets where we see robust and diverse demand. We are not falling or chasing this demand into unproven locations. We’re intersecting it where we’re supporting availability zones or on ramps where there’s network density and not in unproven markets. You’re also seeing new players pop up that obviously are not front of queue for those larger capacity blocks who are going to try to get their hands on what we have and are often able to fit in some of the more challenging places in our portfolio to sell, but they’re going to take it because they have urgency around their business models and bringing their AI models on.

That’s right now the last quarter, the next quarter, but there’s more to come here in this AI story. I’ll let Chris expand upon them in terms of the next chapter.

Christopher Sharp: Yeah. Thanks, Irvin. Absolutely. And I think one of the things that we really have thought about for some time now is the data is at the core of a lot of these AI kind of capabilities coming to market. So being able to place that algorithm right next to the data in that market, I think is everything that we’ve been looking at and doing that algorithm in proximities of the data is absolutely paramount for a lot of these kind of 0 to 1 megawatt offerings. And so what we’ve been thinking about with HD Colo and why I talk about on a rack-by-rack basis is allowing our customers to leverage a lot of their existing kind of inventory and architecture to bring AI in proximity to that capability. And I think that’s where even recently, we talked about private AI exchange.

That’s really focused on removing that technical barrier. So customers can get the right state-of-the-art infrastructure, be it NVIDIA, be it AMD and being able to support those power densities in an existing environment. So we do see the future of that coming to market in that fashion. I will tell you that you brought up inference. Inference is being done within training today just because of time to market, but we do see inference picking up and being a longer-term demand cycle over the years, which I think Platform Digital is well positioned to continue to support.

Operator: Thank you. Our next question today comes from Richard Choe with J.P. Morgan. Please go ahead.

Richard Choe: Hi. You noted a pull forward of leases in Northern Virginia. Do you have other — are you having other conversations and should we expect to see more of those?

Andrew Power: Yeah. Thanks, Richard. Maybe I’ll hand it to Colin here in a second to talk about the broader backdrop of both the enterprise and also the hyperscale AI side. But I wouldn’t call our Northern Virginia activity as a pull forward. As you can see, our signed commence time materially step down. There is urgency around the capacity blocks. We still have significant runway of precious capacity in the Northern Virginia market between now and 2026 that our customers — numerous customers have desires for and we’re in various stages of negotiation. And it’s not just a Northern Virginia story. We have the similar types of opportunities in other parts of the North America portfolio, be it Santa Clara, Dallas, on New Jersey.

And we also have the equivalent in the major flat markets in Europe and in parts of Asia Pacific. So — and I think this trend is going to continue for some time. Now, again, you can’t predict some of these large capacity blocks executing on consecutive quarters necessarily, but I believe it’s going to continue. But Colin, why don’t you speak a little bit about the pipeline both sides.

Colin McLean: Thanks, Andy. I appreciate the question. Yeah. I mean, overall, I would say our pipeline kind of reflects some of the same characteristics or bookings this quarter. So I’m pretty AI heavy. As Andy highlighted, about 50% of our bookings this quarter were AI. I would say our pipeline is representative of that. But honestly, it’s a pretty diverse characterization overall between enterprise namely hybrid IT, cloud compute, and then AI. So I think it’s a pretty robust platform across the globe. And you saw that in some of our bookings, in particular, London really jumped up this quarter. If you look at the sub-1 megawatt and really what’s going on, the digital transformation story, the explosion of data and really the IT spend, you’re seeing a pretty pervasive enterprise activation going on where that is really taking place really across the globe in a big way.

That’s in our view enabled by channel, which this quarter we had about 22% of our business go through channel, which was I think, substantive and those channel partners are really helping us tap into new logos, which you might have seen was 128 this quarter, which I think was fourth highest on record. So I think that’s substantial. So overall, I’m pretty pleased with the balance we’re seeing across the portfolio and the pipeline, and hope to see that continue in the future.

Operator: Thank you. And our next question comes from Michael Rollins with Citi. Please go ahead.

Michael Rollins: Thanks, and good afternoon. Just curious if you take a step back, where does the overall mark-to-market fit for the portfolio and the anticipated duration over which you could achieve that if pricing were to stay at current levels?

Andrew Power: So I think the overall mark-to-market on the portfolio, Mike? Is that —

Michael Rollins: Yes.

Andrew Power: Yeah. So as I think you can get the — obviously, you look at the in-place rates even pro forma for our recent a positive cash mark-to-market on our schedule. I think that question probably more focuses on the greater than megawatt category, which we’ve seen the greatest resurgence or uptick that it does tick down, call it lower for the next few years, call it down to the 130s and then even hits 100 upon expiration as the low watermark in a few years’ time. And I just commented on the Northern Virginia rates, they’ll call it 165 to 180. Not all markets are at Northern Virginia. There are some markets that are ahead of Northern Virginia, but it does feel like big deals are gravitating towards that mid-100s type area pretty quickly and universally. And it does not seem like that trend is taking any cessation or pause.

Operator: Thank you. And our next question today comes from Frank Louthan with Raymond James. Please go ahead.

Frank Louthan: Great. Thank you. And kind of to that point, when you’re looking at new investment and expansion, how much are you focused on retail Colo expansion versus wholesale? And what’s kind of pushing you in one direction or the other?

Gregory Wright: Hey, Frank. It’s Greg Wright here. Look, I think consistent with past practice, we continue to play across the product spectrum and it’s going to vary by market, right? I mean, as we’ve mentioned, we’re using our third-party capital model to continue to support our hyperscale customers and grow that element of the business. As you know, demand for that business is — that is projected to increase 2.7 times between now and 2030. And then when you look over at the co-location in the enterprise segment of the product spectrum, that’s still supposed to grow. It’s still a very large market. People forget about how large that market is and the solid growth in that market too, it’s still like 2.3 times. So I mean, we’re not sitting here today saying, hey, it’s a zero some game.