Industry Spotlight: DataBank’s Raul Martynek on Integration, Growth, M&A, AI

With us today for a return visit is Raul Martynek, CEO of DataBank.  In our last Q&A, we talked about the company’s purchase of zColo from Zayo during the height of the pandemic.  Now it has been a couple of years, and DataBank has had some time to digest that and other acquired assets like CyrusOne’s Houston footprint.  The company has also accelerated investments in organic new builds across multiple markets.  Most recently they sold off their footprint over in France.  Today we will explore what DataBank’s plans are and what they see on the horizon.

TR:  The last time we spoke, DataBank had just acquired zColo.  What have you been up to since then?

RM:  We did two M&A deals in pretty rapid succession: the zColo transaction and then the CyrusOne-Houston transaction.  For the last two years or so we have been focused on integrating those assets and making sure that we fully assimilate them — the systems, the customers, the people, and the processes.  Integrations are always hard and cause a lot of extra work. But ultimately, we’re really pleased with the result.   Today we have built the largest geographic footprint of data centers in North America with 65 assets in 26 markets. We have this wonderful combination of primary and secondary markets: Ashburn, New York and Dallas, but also Minneapolis, Kansas City and San Diego, for example.  We also have a really good mix of different type of data centers assets: data centers that are more focused around network interconnection with almost 20 carrier hotel assets, but also large-scale data center campuses like our Salt Lake campus where we just built our 5th data center. The net result is that last year we had a record year in terms of new sales, beating our sales forecast by 144%.  And fortunately, that momentum has continued into 2023 and we are having an even better leasing year than in 2022.

TR: Is that integration complete, or is there a long tail of projects yet to work on?

RM: We’re past that integration point. What we’re on to is what I would consider material improvements in our process, our systems, and our data.  In data center land, you have two really significant systems: your Data Center Information Management (DCIM), and your Building Management Systems (BMS).  We consolidated those systems onto a single platform in 2021.  In 2022 we improved the visibility of that platform to our internal users and to our customers by doing an in-depth audit of all our customer inventory.  Right now we are working on visualizing all our power in our customer portal, so that our customers will be able to look at their environment, see their power utilization on them, and set thresholds to monitor them with. We also completed a project where all our cross-connects are processed through our customer portal, and we fully automated the system side of that.  That’s the level of integration that we are aspiring to. We really believe that software is a key element to performance and to creating a differentiated customer experience.  We’re scheduled to be done with all that by the end of the year. But we’ll never be done improving our process or systems to make the customer experience better at Databank.

TR:  This summer, DataBank entered into an agreement to sell its French data center assets.  What was the rationale behind that deal?

RM:  The vast, vast majority of sales come from our North American platform. Ultimately when it comes to running a business one has to think about where to focus.  Where do we have the best competitive advantage? It’s just obvious that our data center footprint in the U.S. is really a machine that’s doing really well. While there was nothing wrong with the French assets, it was just a small footprint generating a couple percent of our revenue and EBITDA,.  If you think about running a business in Europe, you have a different regulatory system, a different language, a different HR, and all that stuff to  do.  It just made more sense for us to focus on the U.S.  I believe less is more sometimes in business.  Also, this deal allows these assets to be part of a platform that has much larger aspirations than what we had in Europe. We think it’s the right thing for the customers and for the people that were part of the DataBank Europe platform, and for us.

TR: You are still in London, however.  Are you looking to sell that one too?

RM: We do have a single data center there, and it is a fine facility. We will continue to run that, but I will never say never to anything. We’re not actively looking, but if the opportunity to present itself, we would evaluate it.

TR: Where are you investing your resources back here in the U.S.?

RM: It was in 2021 that we really got aggressive and more than doubled our CAPEX budget to build new capacity. Today we have over a dozen data center builds occurring across our footprint, ranging from 40MW builds like ATL4 and IAD3 down to 2MW expansions like in San Diego.  We are investing in delivering new inventory across our platform, because over the last couple of years we have seen great demand from existing customers. More recently there’s been a surge in demand related to these new AI workloads, and fortunately we were in a position where we were already building out a lot of capacity. In this business, if you don’t have capacity, you just don’t have the ability to grow.  Customers want line of sight to raised floor.  They don’t want to wait and take the risk that someone’s not going to be able to deliver for them. Being able to stay ahead of that has been a key part of our success.

TR: That expansion requires financial resources, of course.  How have you managed that?

RM:  Obviously we’re spending a lot of capital, and earlier this year we made a couple of announcements on the financing side. We did our third securitization in the form of a $900M securitized bonds, and we followed that up with a $325M bank facility with TD Bank. And I think you’ll see us announce some more financing toward the end of the year.

TR: How robust do you think the current levels of demand are?

RM: From my perspective, the business is hitting on all cycles. We’re in a position where there is almost too much demand, which is kind of crazy. Honestly, the sector feels to me like it did during the Internet age where there’s just a lot of interest in adopting these new technologies and applying them to every existing business process. I think our sector is in for a really interesting next couple of years. The AI dynamic is going to be fundamental, widespread, and material and it just started.

TR: Where are you seeing the AI dynamic affect demand directly?

RM: Ashburn is a bit stuck right now because of the power issues that Dominion has had.  Fortunately, we built a 40MW data center in Ashburn last year and had already secured our power, which was really fortuitous. But ultimately what we’re seeing is markets like Salt Lake, Dallas, Atlanta, and Chicago start to accelerate. The AI workloads are across those types of geographies. We’re not seeing them yet in markets like Minneapolis or San Diego, but I think that’s logical outcome as AI transitions more into production.  The state of AI is that people are building these large language models and are doing what they call training.  That’s the phase where they’re actually building the product, which takes time. Over the next couple of years, as training goes to inference, which is the deployment of those models, we will see those workloads show up in a wider number of markets. That is one of the reasons we’re continuing to stay bullish in building out capacity in places like Kansas City, San Diego, Seattle, Minneapolis, and New York.

TR: Are there markets that DataBank is not yet in that you’d like to enter?

RM: There are a couple of other markets in the US that I think are attractive.  We are in about 20 of the largest MSAs in the US, but sure, it would be nice to be the top 30 or 35.  But we have never gone out and just planted a flag in a market as the new kid in town. We’ve always done an M&A transaction to get into a new market, such as with CyrusOne in Houston. I think that we will opportunistically expand into a couple more markets over the next couple of years. What we’re working on this year is a number of new land acquisitions in key existing markets that we consider fundamental and long-term markets for data center demand.

TR: What does the M&A market for data centers look like right now?

RM: It is actually very slow. Two things are going on. Number one is that in 2021 and early 2022 a ton of deals got done.  And 2022 was the year of dislocation in terms of interest rates, supply chain, and inflation. When you have such dramatic changes in the market, people become less aggressive.  So in the US in 2023 it’s been extremely quiet, but there is money that’s sitting on the sidelines.  I think buyers want a discount because that’s what buyers always want. Meanwhile sellers are still enamored with the multiples that existed in 2021. I think if the economy improves over the next six months and we get clarity on the direction of interest rates, we can expect probably more money to come off the sidelines and support more potential transactions.

TR: What types of assets might DataBank be interested in if the opportunity arises? It seems like we have seen some individual data centers changing hands out there.

RM: We haven’t been able to do too many single data center deals. Ultimately, what we see out there getting sold are data centers that are 100% stabilized. In other words, it’s really just a bond: a building with tenants that is 100% leased, and someone wants to clip that coupon. And that’s not really who we are.  We’re not a coupon clipper. We’re a value creator. We like to buy assets that are in the earlier stage of development, and then be able to create value through our operations, our sales, and our leasing.

TR: Thank you for talking with Telecom Ramblings!

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Categories: Artificial Intelligence · Datacenter · Industry Spotlight · Mergers and Acquisitions