When Infrastructure Can’t Keep Pace: Financial Analysis of Digital Realty Trust’s California Data Center Portfolio and Covenant Implications

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Disclaimer: This article presents analysis based solely on publicly available information, raising questions warranting investigation by journalists, regulators, and institutional investors with appropriate resources and access. It makes no representations beyond what surfaces from examination of public documents. All covenant calculations represent hypothetical scenario modeling based on Q3 2025 SEC filings, not assertions about actual asset classifications or management decisions.

This analysis is not investment advice, financial guidance, or a recommendation regarding any securities. The author holds no position in DLR and is not making investment recommendations. Readers should consult qualified financial professionals before making investment decisions.

Summary

Digital Realty Trust (DLR), one of the world’s largest data center real estate investment trusts, operates multiple facilities across California’s most competitive markets. Recent developments in Santa Clara have brought attention to a broader pattern: data center construction proceeding ahead of available electrical infrastructure in California’s grid-constrained markets.

Documents reviewed for this analysis include:

Three facilities in DLR’s four-property California portfolio face documented power delivery constraints:

The covenant analysis examines DLR’s financial structure as disclosed in SEC filings. According to Q3 2025 data, DLR maintains $26.4 billion in unencumbered assets against $17.4 billion in unsecured debt, creating a coverage ratio of 1.52x—just 2% above the required 1.50x minimum. This narrow margin raises questions about classification practices for power-constrained facilities.

Background: California’s Grid Capacity Challenge

California data centers face infrastructure constraints unprecedented in their severity and duration. These constraints reflect broader challenges in upgrading electrical systems to meet exponentially growing power demands from artificial intelligence and cloud computing workloads.

Santa Clara Municipal Utility

Silicon Valley Power (SVP), Santa Clara’s municipal utility, operates a 700 MW grid currently delivering 420 MW to data centers—60% of total capacity. The city hosts 57 active data center facilities competing for limited power. Projected demand reaches 1,300 MW, nearly double current capacity.

In November 2024, SVP Chief Electric Utility Officer Manuel Pineda stated: “We’re getting close to reaching our system operating limit. [We] currently aren’t able to deliver power to every data center that wants to come to the city.” The utility projects system upgrades completion by 2028.

These timelines represent structural constraints, not administrative delays. Upgrading electrical infrastructure requires coordination across generation, transmission, and distribution systems, along with environmental reviews and construction of substations and transmission lines.

Los Angeles Department of Water and Power

Western Los Angeles faces a different constraint: the scheduled December 31, 2029 shutdown of Scattergood Generating Station under California’s Once Through Cooling regulations. The plant currently provides 284 MW of critical in-basin generation capacity.

LADWP is constructing a 330 MW hydrogen-ready combined-cycle replacement at an estimated cost of $800 million. The NREL analysis commissioned by LADWP identifies Scattergood as “the most immediate and instrumental location in relation to the requirement for firm (i.e., dependable) in-basin generation capacity due to the projected demand for energy in areas of the City that Scattergood serves.”

This creates a 2029 transition window where western Los Angeles—including downtown and El Segundo—will face generation capacity constraints during the switchover period.

Industry-Wide Challenges

These constraints are not unique to Digital Realty. Equinix, CyrusOne (before its 2022 acquisition), and other operators have reported similar challenges securing power commitments in California markets. The fundamental issue reflects California’s position at the intersection of aggressive renewable energy mandates, data center concentration, and grid modernization requirements.

California’s electrical infrastructure was designed for traditional commercial loads, not the concentrated, 24/7 power demands of modern hyperscale data centers. Adapting this infrastructure requires multi-year construction timelines that cannot be accelerated beyond physical and regulatory constraints.

Case Study: SJC37 Santa Clara Development Timeline

Digital Realty’s SJC37 facility at 641 Walsh Avenue provides a documented example of construction preceding power availability. The timeline reconstructed from public records demonstrates the duration and complexity of these challenges.

Construction Timeline

Santa Clara building permits document the development sequence:

This creates a minimum nine-year timeline from permit application to potential energization, with six years of that period representing completed but unpowered building shell.

Physical Specifications

News coverage describes SJC37 as a 430,000 square foot, four-story structure designed for 48 MW critical IT load capacity according to DLR marketing materials. The facility represents substantial capital deployment in a market where power delivery remains uncertain.

Official Statements

In November 2025, DLR spokesman Jordan Sadler told Fortune magazine: “Sometimes we’re a little early. But we’re typically not late.” This statement acknowledges DLR’s practice of constructing facilities ahead of confirmed power availability.

The statement raises questions about development risk management. Typical real estate development practice involves securing utility commitments before beginning construction. The phrase “a little early” requires context: whether this refers to months, years, or—in SJC37’s case—a potential nine-year gap between permit and energization.

DLR VP of Data Center Portfolio Management Crystal Delany told Fortune that the facility could potentially be relocated, though the article notes this would be “expensive” and “is not typically done.” The technical feasibility and economic viability of relocating a completed four-story data center shell warrants further investigation.

News Coverage Context

Bloomberg reported in November 2025 that SJC37 has stood empty for six years, calculating from the 2019 permit date. The Mercury News noted that Silicon Valley Power cannot commit to power delivery timelines beyond “2028 at the earliest.”

These reports consistently cite the structural grid capacity constraints documented by Silicon Valley Power, not administrative delays or permitting issues. The utility’s statements make clear that power delivery awaits completion of system-wide infrastructure upgrades requiring multi-year construction timelines.

Covenant Analysis: Financial Structure and Scenario Modeling

DLR’s Q3 2025 10-Q filing discloses the company’s financial position and debt covenant requirements. This section presents objective scenario modeling based on those disclosures, examining how potential asset reclassifications would affect covenant compliance.

Current Financial Position (Q3 2025)

From the 10-Q filing:

Unencumbered Asset Pool Calculation

DLR’s credit agreements require maintaining unencumbered assets at 150% of unsecured debt. The unencumbered asset pool represents total assets minus:

This calculation produces an estimated unencumbered asset pool of $26.4 billion. The required minimum (150% of $17.4 billion unsecured debt) is $26.1 billion.

Covenant Margin Analysis

Current position:

This narrow margin means a $300 million reduction in unencumbered assets would trigger covenant breach. The company also maintains leverage covenants requiring total debt not exceed 60% of total assets and secured debt not exceed 40% of total assets. The Q3 2025 position shows substantial headroom in these covenants.

Scenario Modeling

The following scenarios model potential impacts if power-constrained California facilities required asset reclassification or impairment recognition:

Scenario 1: Conservative ($500M reclassification)

Scenario 2: Moderate ($1.0B reclassification)

Scenario 3: Severe ($2.0B reclassification)

Cross-Default Provisions

DLR’s 8-K filing from September 30, 2024 documents cross-default provisions. A breach of the credit facility’s unencumbered asset covenant would trigger acceleration rights under the company’s senior notes, potentially requiring immediate repayment of the entire unsecured debt balance.

Classification Dynamics

The analysis raises questions about asset classification practices:

  1. Operating vs. Development Status: How does DLR classify completed but unpowered facilities? If SJC37 remains in “development in progress” status, it excludes from occupancy calculations but stays in the unencumbered asset pool at full carrying value.

  2. Impairment Recognition: At what point does extended power delay require impairment recognition? GAAP requires impairment when carrying value exceeds recoverable amount. For a facility with no power delivery commitment, determining recoverable amount presents challenges.

  3. Market Value vs. Cost: Development in progress assets carry at cost. If market participants discount power-constrained facilities, should carrying values reflect this? The accounting framework provides flexibility in timing recognition.

Geographic Pattern: California Portfolio Composition

Digital Realty maintains four confirmed California facilities across two metropolitan areas, with three demonstrating power delivery constraints.

Silicon Valley (Santa Clara)

SJC37 (641 Walsh Avenue)

SJC10 (1100 Space Park Drive)

Los Angeles Metro

LAC10 (600 West 7th Street, Downtown Los Angeles)

LAX12 (2260 E El Segundo Blvd, El Segundo)

Pattern Observations

Three of four California facilities face documented power constraints:

This geographic concentration—75% of the California portfolio—in the state’s two most capacity-constrained utility service areas is statistically notable. Site selection targeting Santa Clara (where SVP explicitly states inability to deliver power to new facilities) and western Los Angeles (facing scheduled 2029 generation shutdown), followed by construction proceeding ahead of confirmed power availability, suggests either systematic due diligence failure or calculated acceptance of development risk that has materially manifested.

Neither explanation is fully consistent with the sophistication level expected of a major REIT operator. If due diligence identified these power constraints before construction, proceeding regardless requires economic justification not evident in public filings. If due diligence failed to identify these constraints, the failure occurred across multiple facilities in multiple markets over multiple years. Alternative explanations:

  1. Timing factors: Facilities may have been developed before grid constraints became apparent
  2. Market positioning: California markets command premium pricing that justifies development risk
  3. Future planning: DLR may anticipate grid improvements before operational impacts materialize
  4. Portfolio strategy: Company may accept California constraints as industry-wide challenge affecting all operators

None of these alternatives fully reconcile the timeline evidence (SJC37 permit filed December 2019, six years later still no power, utility stating 2028 “at earliest”) with standard real estate development practice of securing utility commitments before construction. The pattern warrants further investigation by parties with access to internal planning documents and decision-making records.

Disclosure Analysis: Public Information Availability

This section examines what information DLR has publicly disclosed about power-constrained facilities versus what remains undisclosed.

Disclosed Information

SEC Filings:

Corporate Communications:

Third-Party Sources:

Information Gaps

Several key pieces of information remain undisclosed or unclear:

  1. Facility-Level Carrying Values: The $5.4 billion development portfolio includes properties across multiple markets. SJC37’s specific carrying value does not appear in public filings. At 430,000 sq ft from a 6.5 million sq ft portfolio (6.6%), proportional allocation suggests approximately $336 million, but actual capitalized costs may differ significantly.

  2. Power Delivery Contracts: Whether DLR holds contractual commitments from Silicon Valley Power for future power delivery, or whether 2028 represents an estimate without binding agreement, remains unclear from public documents.

  3. Impairment Assessments: SEC filings do not disclose specific assets under impairment review or management’s assessment of recoverability for power-constrained facilities.

  4. Alternative Plans: Whether DLR is actively pursuing facility relocation, sale, or other alternatives for SJC37 and what costs such alternatives would entail.

  5. LA Transition Planning: How DLR plans to address the 2029 Scattergood transition for LAC10 and LAX12, including backup power, alternative grid connections, or customer notification procedures.

Disclosure Requirements

Public companies must disclose material information that reasonable investors would consider important in making investment decisions. Questions arising from this analysis:

These represent areas where additional disclosure could provide investors with information useful for assessing risk and valuation.

Industry Context: Regulatory Framework and Peer Practices

Data center development faces increasingly complex regulatory and infrastructure challenges across all markets, not just California. Understanding industry-wide practices provides context for DLR’s situation.

Regulatory Requirements

CPUC Rule 21 establishes interconnection procedures for facilities connecting to California’s electrical grid. The rule provides process but cannot override physical capacity constraints. When utilities reach system limits, interconnection timelines extend regardless of regulatory framework.

Environmental Review: California Environmental Quality Act (CEQA) requirements apply to major utility infrastructure projects. Grid expansion projects require environmental impact reports, public comment periods, and regulatory approvals before construction begins.

Once Through Cooling Regulations: State policy requiring shutdown of coastal power plants using ocean water cooling drives the 2029 Scattergood transition affecting western Los Angeles.

Peer Company Approaches

Most data center REITs that were previously public have been acquired by private equity firms:

These acquisitions remove peer comparison data from public view. Equinix (EQIX) remains the primary publicly-traded peer, though with different business model focus on interconnection facilities rather than hyperscale wholesale properties.

Industry practice generally involves securing utility commitments before beginning construction, but California’s unprecedented demand growth has challenged traditional approaches. The question is whether DLR’s development-ahead-of-power model represents calculated risk-taking or departure from industry norms.

Timeline Observation

A notable pattern emerges in peer acquisition timing: QTS, CyrusOne, and CoreSite all went private between August 2021 and March 2022—removing three of four major publicly-traded data center REITs from public disclosure requirements. This consolidation preceded the period when California power constraints became widely documented in 2024-2025. Whether this timing reflects private equity recognition of emerging infrastructure risks or unrelated investment thesis is unclear from public information. Equinix remains the primary public comparable.

Research Questions for Further Investigation

The questions below are directed to journalists with investigative resources, securities regulators, and institutional investors with access to non-public information. Each question identifies specific information that would clarify whether observed patterns represent industry-wide infrastructure challenges or company-specific classification and disclosure issues:

Asset Classification and Valuation

  1. How does DLR classify SJC37 for financial reporting purposes: operating property, development in progress, or land held for development?
  2. What is the specific carrying value for SJC37 and other California power-constrained facilities?
  3. Has management performed impairment assessments on power-constrained facilities, and what were the results?
  4. How does DLR determine “recoverable amount” for facilities without confirmed power delivery dates?

Power Delivery and Risk Management

  1. Does DLR hold binding contractual commitments from Silicon Valley Power for SJC37 power delivery, or are 2028 timelines estimates?
  2. What due diligence procedures did DLR follow regarding power availability before beginning SJC37 construction?
  3. Has DLR secured backup power, alternative grid connections, or other contingency plans for LA facilities during the 2029 Scattergood transition?
  4. What economic analysis supports building facilities before power availability confirmation?

Disclosure and Investor Communication

  1. Has management discussed power-constrained facilities in earnings calls or investor presentations?
  2. What internal risk assessments exist regarding covenant compliance sensitivity to California power constraints?
  3. Has DLR conducted stress testing on covenant compliance under scenarios where power-constrained facilities require impairment recognition, and have results been shared with credit rating agencies and major institutional holders?
  4. What disclosure obligations apply when covenant margins reach the narrow levels documented here?

Industry Comparison

  1. How do other data center operators approach development in power-constrained markets?
  2. Are there industry benchmarks for acceptable timelines between construction completion and power delivery?
  3. What alternatives exist for monetizing or disposing of unpowered data center shells?
  4. How do lenders and credit rating agencies view facilities built ahead of power availability?

Conclusion

This analysis examines Digital Realty Trust’s California data center portfolio through publicly available documents, focusing on power delivery constraints and financial covenant implications. Three key findings emerge:

First, three of DLR’s four California facilities face documented power constraints, with SJC37 representing a completed building awaiting power for 6+ years and two Los Angeles facilities exposed to 2029 grid transition risks.

Second, scenario modeling based on Q3 2025 SEC filings shows DLR maintains only $300 million (1.1%) cushion above its unencumbered asset covenant requirement. Asset reclassifications or impairments affecting power-constrained facilities could trigger covenant breach.

Third, substantial information gaps exist regarding facility-level carrying values, power delivery contracts, impairment assessments, and alternative plans for affected properties.

The situation reflects broader infrastructure challenges facing California’s data center industry, where demand growth has outpaced grid capacity expansion. Additional investigation through detailed financial analysis, management inquiry, and comparison to peer practices would provide further insight into these issues.

The intersection of power-constrained facilities and minimal covenant cushion creates measurable financial risk that current disclosure practices may not adequately communicate to market participants.

Sources and References

All factual assertions in this analysis trace to the following primary sources:

SEC Filings:

Municipal Records:

Utility Documentation:

News Coverage:

Industry Resources:

Research Materials and Data

This analysis drew from extensive primary source research and the material is available (research document, spreadsheet) for verification, additional investigation, and programmatic analysis. Corrections can be sent to the email address below.

— Free to share, translate, use with attribution: D.T. Frankly (dtfrankly.com)

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