Q3 2026 Earnings Call Transcript

Ladies and gentlemen, good afternoon, and welcome to Applied Digital's Fiscal Third Quarter 2026 Conference Call. My name is Abby, and I will be your operator today. Before this call, Applied Digital issued its financial results for the fiscal third quarter ended February 28, 2026, in a press release, a copy of which has been furnished in a report on Form 8-K filed with the Securities and Exchange Commission, or SEC, and will be available in the Investor Relations section of the company's website. Joining us on today's call are Applied Digital's Chairman and CEO, Wes Cummins; and CFO, Saidal Mohmand.

Following their remarks, we will open the call for questions. Before we begin, Matt Glover from Gateway Group will make a brief introductory statement. Mr. Glover, you may begin.

Thank you, Abby. Hello, everyone, and welcome to Applied Digital's Fiscal Third Quarter 2026 Conference Call. Before management begins formal remarks, we would like to remind everyone that some statements we are making today may be considered forward-looking statements under securities laws and involve a number of risks and uncertainties. As a result, we caution you that there are a number of factors, many of which are beyond our control, which could cause actual results and events to differ materially from those described in the forward-looking statements.

For more detailed risks, uncertainties and assumptions relating to our forward-looking statements, please see the disclosures in our earnings release and public filings made with the SEC. We disclaim any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made, except as required by law. We will also discuss non-GAAP financial metrics and encourage you to read our disclosures and the reconciliation tables to the applicable GAAP measures in our earnings release carefully as you consider these metrics.

We refer you to our filings with the SEC for detailed disclosures and descriptions of our business as well as uncertainties and other variable circumstances, including, but not limited to, risks and uncertainties identified under the caption Risk Factors in our annual report on Form 10-K and our quarterly reports on Form 10-Q. You may access Applied Digital's SEC filings for free by visiting the SEC website at www.sec.gov. I would like to remind everyone that this call is being recorded and will be available for replay via link available in the Investor Relations section of Applied Digital's website.

Now I'd like to turn the call over to Applied Digital's Chairman and CEO, Wes Cummins. Wes?

Thanks, Matt, and good afternoon, everyone. Thank you for joining our fiscal third quarter 2026 earnings conference call. This quarter, we continued to differentiate ourselves in the industry. Over 2 years ago, we were one of the first companies to recognize the surging demand for large-scale, high-power density AI data centers and broke ground on our first 100-megawatt facility.

This early investment is now paying off in 2 important ways. First, we now operate one of the only 100-megawatt direct-to-chip liquid cooled data centers in the world online today. This, coupled with key learnings gives us the experience and the ability to demonstrate to major hyperscalers and others that we can execute on time and deliver fully functional state-of-the-art facilities. Second, what investors are seeing today in our reported financials, including over $44 million in adjusted EBITDA for the quarter across our core businesses is just the early stages of what we expect to achieve.

In the HPC segment, this first 100-megawatt building represents only 1/10 of the total capacity we currently have under construction. While many variables and uncertainty involved in developing large-scale power infrastructure such as new power plant construction, transmission lines and regulatory approvals, we're currently -- we currently estimate that we have contracted only a small fraction of our long-term power potential. Turning to execution. All buildings under construction at PF1 and PF2 are progressing on time and on budget.

Building large-scale data centers through a North Dakota winter is no small task, but with years of experience and thousands of skilled professionals on site, along with trusted partners such as McGough, ABB, Adolfson and Peterson and BASX, we're executing effectively. At Polaris Forge 1, the 400-megawatt CoreWeave campus, the first 100-megawatt building is now operating and our 1,200 skilled craft professionals are progressing in parallel on 2 new 150-megawatt facilities. At Polaris Forge 2, the 200-megawatt investment-grade hyperscaler campus, both buildings are advancing well with foundations largely complete and work now shifting to precast direction as well as mechanical, electrical and plumbing trades mobilizing for interior fit-out.

During the quarter, we also broke ground on Delta Forge 1, a 300-megawatt critical IT load AI factory campus spanning more than 600 acres in a strategic Southern U.S. market with initial operations expected in mid-2027. We have some great videos reflecting our progress on X and LinkedIn pages. Last quarter, we shared we were actively marketing 3 potential sites. During the quarter, we made the decision to delay the South Dakota site as we evaluate its long-term viability and explore opportunities to reallocate the associated power agreements. As a result, we have brought 2 additional sites into the pipeline and are now actively marketing 4 development sites in total.

These include Delta Forge 1 in the Southern U.S., an additional site in North Dakota and 2 sites in unnamed states. Subject to receiving all necessary approvals for these sites and total grid power capacity across these locations, the total grid power capacity across these locations is approximately 1 gigawatt, and the campuses are in various stages of negotiation with some in advanced stages of negotiation. While there can be no assurances we will successfully match any specific site with a customer and many variables must align to bring a new data center campus to fruition, we believe it is helpful to provide investors with visibility into our expanding development pipeline and future growth opportunities.

Turning to our data center hosting business, where we host 2 sites for Bitcoin mining. This segment has our highest return on assets, and we had another strong quarter. Many of the sites in the U.S. are being converted to data centers and thus, anyone who has high-performance powered sites is sitting on very valuable assets, especially in lower-cost regions with a great climate like the Dakotas. Now turning to cloud.

As discussed last quarter, after reviewing strategic options, the Board announced plans to separate Applied Digital Cloud and combine it with EKSO Bionic Holdings through our proposed business combination to form ChronoScale Corporation, a dedicated accelerated compute platform for GPU-optimized AI infrastructure. We believe this is an ideal time to pursue this transaction, particularly in light of the significant recent increases in demand and GPU rental rates we are observing in the market. This move positions the cloud business to raise capital independently, create differentiation and drive accelerated growth with the long-term goal of spinning the business to our shareholders.

With that, I'll turn the call over to our CFO, Saidal Mohmand, for a detailed review of financials. Saidal?

Thank you, Wes, and good afternoon, everyone. This quarter, we realized a full quarter of lease revenue from our 100-megawatt data center in the HPC hosting business. Going forward, we expect revenues to ramp significantly over the next 12 months as our 2 [ 150-megawatt ] buildings come online. We have also completed the majority of our equity and debt financing for our first 2 campuses.

Note, this past March, we disclosed a $2.15 billion private offering of 6.75% senior secured notes due 2031 to support our 200 megawatts of critical IT load at our Polaris Forge 2 campus. We now have only one remaining tranche of debt to place for the final 150-megawatt building at our Polaris Forge 1 site. We have some very positive news for our debt and equity investors. On March 30, 2026, we executed amendments and related agreements with CoreWeave that included restructuring portions of the ELN-02 and ELN-03 leases through a special purpose vehicle, or SPV, subsidiary wholly owned by CoreWeave.

This included delivering an unconditional springing parent guarantees from CoreWeave, Inc. and securing a $50 million letter of credit. These enhancements were supported by CoreWeave's SPV receiving an investment-grade A3 rating, a meaningful improvement from its previous BB rating. We believe this improved credit support not only derisk the existing 250 megawatts lease capacity, but should also help lower our cost of capital when placing the remaining 150-megawatt tranche, although there can be no guarantees on timing or pricing. Longer term, we expect these enhancements will position us well to refinance that debt at more attractive rates in the future.

We are actively working with top institutions to place that debt at the right time and at the lowest possible cost of capital. From here, we believe we have a straightforward financing model. We have access to $4.1 billion in preferred equity from Macquarie Asset Management following a mutually agreed upon executed lease with an investment-grade hyperscaler. We would then follow a similar approach for the debt financing.

This structure allows Applied Digital shareholders to retain over 85% common equity ownership of future sites while significantly reducing reliance on the public capital markets. Now let's turn to the quarter. We reported total revenues of $126.6 million, a 139% increase from the comparative prior quarter. Our HPC hosting business generated $71 million of revenue, consisting of $44.1 million related to base rents, $18.9 million related to tenant fit-out services and $8.1 million related to power pass-through arrangements and other ancillary revenue streams.

This resulted in segment operating profit of $17.6 million. The Data Center segment, which operates our crypto data centers, had another strong quarter with $37.5 million in revenue, up 7% year-over-year. We are very pleased with this business, which continues to deliver the highest return on assets in the company, generating $13.9 million in operating profit in just 1 quarter, and that's on $119.6 million in reported assets. Given that the cloud business is merging with EKSO and that we will be a majority holder, we have consolidated cloud's revenues of $18.1 million for the quarter.

We also recorded a $59.7 million noncash write-down of the business due to the reclassification from held for sale. As a result, this segment reported a loss of $52.2 million. As the cloud business is pursuing a separate strategy from our core business and will have -- and will be placed in a separately publicly traded company, we have excluded the segment from our non-GAAP results. Cost of revenues increased by $23.7 million for the quarter.

This increase was primarily driven by $18 million in tenant fit-out services, an increase of $4.8 million in personnel expenses, an increase in $4.1 million of energy costs associated with our data center hosting business and an increase of $2 million in D&A expense. These increases were partially offset by a decrease in $5.2 million in lease and lease-related expenses. SG&A expense increased $57 million to $79.7 million this quarter. The increase was primarily driven by $39.3 million in stock-based compensation due to increased headcount and performance rewards, $8.6 million in professional service expenses, mainly related to legal support for onetime transactions and business growth, $5.1 million in personnel expenses also related to the increase in headcount and $8 million in other SG&A expenses.

These increases were partially offset by a decrease of $3.9 million in lease and lease-related expenses. Net interest income was a positive $2.4 million this quarter. This was primarily driven by a $19.3 million increase in interest income from our money market accounts. Net loss attributable to common stockholders was $100.9 million or $0.36 per share.

Adjusted net income was $33.2 million or a positive $0.09 per share. Depreciation for the quarter was approximately $18.5 million and adjusted EBITDA for the quarter was $44.1 million. Turning to the balance sheet. We are exceptionally well positioned.

We ended the quarter with $2.1 billion in cash and cash equivalents against $2.7 billion in debt with no significant maturities due in the next 2 years and approximately $1.6 billion in equity. Our goal is to maintain one of the strongest balance sheets in the industry throughout the majority of the construction phase, and we believe we are achieving those goals. Now I'll turn over the call to Wes for closing remarks.

Thanks, Saidal. We are seeing a clear acceleration in demand for high-performance AI data center capacity as hyperscalers are as aggressive as we've ever seen them. While some have questioned the slower pace of new lease signings industry-wide, I want to be clear. There is significant demand for credible, well-located data center sites almost anywhere in the world.

Just 3 months ago, we referenced approximately $400 billion in annual capital expenditures from the largest U.S. hyperscalers. That figure has now been reported to have increased to nearly $700 billion. This represents one of the largest investment cycles in U.S. history compressed into an extremely short time frame. These enormous investments highlight the intense pressure on power and infrastructure.

Leaders such as Elon Musk have publicly stated that even if we utilize all available excess power on the grid, it will still not be enough to meet the demand for new data centers. This concern is so significant. It has driven major strategic moves across the industry, including efforts to develop data centers in space. We believe these trends only increase the long-term value of high-quality, low-cost sites like those that we operate today.

Recognizing this dynamic early, we are advancing our own power strategy through support of Base Electron, an independent power producer. Base Electron will work with Babcock and Wilcox to build a power plant that will supply initially roughly 1.2 gigawatts of natural gas-fired generation capacity to the grid in the Dakotas region. This power will be in front of the meter and developed in partnership with regional utilities. We are providing the support based on insights gained from discussions with some of the largest hyperscalers in the world.

We believe that if we build it, they will continue to come to our region. The objective is to add reliable power to the Dakotas and help contain electricity costs for consumers, reduces the need for utilities to raise capital and allows for the development of new large-scale sites in the region. Applied Digital is providing limited credit support through a guarantee on the project. As Base Electron successfully raises at least $50 million in financing or completes an IPO, Applied Digital's guarantee will be terminated.

In exchange for the guarantee, Applied Digital shareholders will own approximately 10% of this new company. We believe we are once again ahead of the curve by supporting an IPP just as we were 2 years ago when we began building one of the first state-of-the-art liquid-cooled AI data centers. We expect to see more companies follow this model of developing dedicated power solutions in the coming years. We're not only investing in infrastructure and power, we're also investing in our communities through Applied Digital Cares where we recently awarded our first round of grants supporting important local initiatives in education, health, wellness, innovation and public safety, including upgrades for local fire departments.

In closing, we recently celebrated our 5-year anniversary. In that short time, we have successfully navigated multiple business lines, built billion state-of-the-art data centers in remote locations and secured approximately $16 billion in contracted lease revenue. Given the significant demand we are seeing, our focus is on scaling the platform, where new leases will continue to be a natural outcome as we expand across campuses in a disciplined, repeatable way. Our long-term vision is to build a dominant data center region in the Dakotas with multiple hyperscalers while also expanding into strategic locations across the United States.

Every new campus we secure is intended to create one of the most valuable annuity streams available, a 15- to 30-year revenue stream backed by some of the strongest credits in the world. Once the site is secured, we will focus on growing that site. Then from a financial perspective, we know that today, our cost of capital is higher than it should be, but we plan to refinance that down over time as we shift from project finance loans into ABS or equivalent market at lower rates. We believe that should be the key tipping point where shareholders' return on investment will significantly ramp and the majority of our shareholder value will be unlocked.

We believe our first 2 hyperscaler partnerships are just the beginning. We remain confident in our ability to exceed our long-term goal of $1 billion of NOI within 5 years. To drive accountability, we've implemented new internal targets for our leadership team at both $1 billion and $2 billion of NOI levels. With that, operator, we're happy to open the call for questions.

[Operator Instructions]. And our first question comes from the line of Mike Grondahl with Northland Securities.

Two questions. One, Saidal, could you give us a little bit maybe more insight into the restructured leases at PF1? Is -- if you had to estimate what kind of cost savings when you go to refinance do you think you could see? And then maybe secondly, Wes, drilling down a little bit on the demand environment.

How would you say it's changed over the last 90 days? And what's kind of the breadth of your discussion with various hyperscalers?

Saidal, why don't you go first?

Yes. So on the lease restructuring, so there is -- as you can see, obviously, the observable trading of the bonds that are outstanding today, there's been a significant improvement in pricing. And there's really a couple of changes that are driving that. One, the offtake for CoreWeave is a high investment-grade offtake.

So there is a look-through benefit. There is also a lockbox structure whereby operating expenses such as lease payments, which are really the fulcrum to run the GPUs, they're 100% required. We are first in the waterfall and contractually obligated to get those payments through their own financing facilities. So there is a payment benefit from that.

While at the same time, we also retain the parent or a springing parent guarantee from CoreWeave. So effectively, we have improved our positioning of the lease where we get a minimum credit enhancement. And then there's other structural protections, letter of credit, et cetera. So it's a significant improvement.

In terms of rate, we've seen that CoreWeave through their DTL, they've been able to lower their financing costs significantly. We expect, obviously, no guarantee, but we expect to continue to move our borrowing costs more in line with an investment-grade tenant under the structure as we go forward. Obviously, no assurances, but from looking at trading levels of our bonds today, it appears quite favorable.

And Mike, on the demand side, so you always see -- we always see shifts in demand quarter-to-quarter, who's super aggressive and who steps back and sometimes that will go 6 months, maybe 12 months. But we still see every hyperscaler that we target engaged pretty aggressively in the market. And it just depends also location by location. So it's hard to give a total market view.

So what I always give you is what we see, right? And so what we see is for the locations that we're marketing. But we see multiple hyperscalers at every location with interest. And when you -- when I think about how we go and contract the capacity that is available, right?

So first, you have Polaris Forge 1 and 2, now we have Delta Forge 1. We have 2 customers at those separate campuses. And thing that I think about a lot is 2 things: diversifying customers. So we have those 2 customers instead of signing additional with those customers, get a new customer at those campuses. So even if it were very easy for me, for example, to sign more with one of my current customers, my preference right now is to continue to diversify the business.

So this is, again, very Applied Digital specific. And then we also have a pretty clear goal of getting our total contracted revenue to 70% investment grade. So today, we have $16 billion of total contracted revenue, and that splits $11 billion of CoreWeave and $5 billion to an investment-grade hyperscaler. And so you can just do the math of how we get to that -- the split that I'm looking for -- and we have those campuses in play, and we're marketing those campuses, and we're in advanced stages of negotiation with some of those campuses.

But we feel good about the assets that we have, which it's important to distinguish the assets we have versus some of the other assets that we see in the market. Everything that we're marketing is grid power, and that's always top priority. So that's going to go in front of almost anything that is behind the meter on-site generation. So we feel really good about our assets.

Now it's just making sure that we get the right tenant and the right contract in place. And I know on the side of a lot of investors, it's just how quickly can you sign these and announce them. But on our side, we don't put these deadlines on ourselves. We just make sure that we end up with the right customer and the right contract, and I'm really confident that we'll end up with that at the campuses that we're marketing because they're great assets.

And our next question comes from the line of Darren Aftahi with ROTH Capital.

Congrats on all your progress. Two things, if I may. So Delta Forge 1, your commentary about potentially being operational mid-2027. I guess what does that say or infer about when a lease effectively needs to be signed? And then on your last call, you talked a fair amount about being in exclusivity with a hyperscaler, 3 sites, 900 megawatts, if my memory serves me correct.

Are you still in exclusivity with that potential tenant? And is there any update on that project in general?

Yes. So Darren, on the first question, so with Delta Forge 1, you should expect -- I expect -- I'll say that, I expect a lease in the near term on that for hitting that goal. As you -- as everyone knows, we've been working on that for a few months now. We've made a lot of great progress there.

And so feel good about getting the lease in the time frame to hit that RFS date as well. And then we had some shifting around, as I mentioned in the script, from the South Dakota campus, we didn't get the tax exemption we were looking for from the legislature this session. And so we've paused that development. We're working on 2 other sites that we had somewhat previously, and we've gotten a lot more active on those.

But we have still 3 sites in exclusivity with hyperscaler, and we'll see how all of that plays out. But we feel really good, again, about those assets and getting those leases signed at a minimum, I would say, during this year, but I'm more optimistic that it will be more near term. But I don't -- we're not going to sign a bad lease just to get an announcement on the tape. So -- but we feel really good about the progress we've made on those sites.

And our next question comes from the line of George Sutton with Craig-Hallum.

So for those of us that are nonfixed income guys, I wondered if you could just walk through what it generally means if you go from BB to single A, if you were to go into the refinance market, what kind of spread differential is there?

Yes. Great question. So right now, so for -- obviously, single A is investment grade. Spreads are anywhere from -- they're sub-300 basis points, so low 2s to mid-2s depends on obviously structure remaining, how the lease is placed, et cetera.

But generally, think about it mid-2s historically. And then for the BBs, right, they're generally -- single Bs to BBs can be anywhere from 350 to 450 basis points, once again, depending on the offtake and the structure of the contract.

Okay. So pretty significant. Wes, I'm curious, I know there are certain sites that you're working on. Some of them have the 6-month moratoriums put on by local counties.

My sense is, correct me if I'm wrong, but as time goes on, the ultimate value that you'd get from these same contracts, same properties continues to rise. Is that -- in other words, we're all waiting for the near-term deals and all of that. But to the extent that these actually extend out a little further, the value capture for you is ultimately greater. Is that a correct statement?

George, it's been the trend we've seen so far. So I think that's directionally correct. And on those -- on the moratoriums on those things, we're working through those, and we feel really good about getting through just in an education process. If you look at what we've done in North Dakota specifically, because we have a site that's operating, we went through the process that we have very specific evidence to point to on the Polaris Forge 1 campus in Ellendale, both the economic benefits, but also our impact on ratepayers on the grid.

As you've seen, there's been some news on that recently. So since that site has been operational, we've saved ratepayers about $31 million because of the use of the infrastructure there and how we site our campuses and where we take these and then the work with the community, you get -- we get a lot of great reviews. So it's easier for us to continue to do things in that state and educate people and get through those, the moratoriums and the zoning and all of those pieces. So we feel really good about doing that in North Dakota and continuing to expand there.

But -- but George, back to the big picture on these, again, the sites that we have, I think, are premium in that their utility power that's available in '27. And we see a lot of demand for those types of assets. And the goal for us this year, as I stated, the one goal was total contract value, getting 70% investment grade and 30% other over that number. So you can imagine the type of growth in total contracted value we would need to hit that. But then the goal is really get to -- we're marketing 4 new campuses, we can get to 5 total campuses or 6 total campuses and all of those campuses grow over time.

Some of them grow immensely over time. And so it gives us a really good path to 5-plus gigawatts of critical IT load across all of our campuses over time. And for us, I think it's easier once you've landed a customer at a campus, it's an established location to either expand that customer at the campus or bring other customers on that campus. So when I look to the future, I look at not only new sites, but expansion in our current campuses.

And if we can put ourselves in a position where we have a clear view to 5 or 6 gigawatts just across the campuses that we have already contracted and are looking to contract here this year, it's going to be a really great growth runway for the company and fairly locked in and probably easier for us to do than just continue to add new campuses.

And our next question comes from the line of Nick Giles with B. Riley.

Nice job, guys. So Wes, I think you mentioned you're marketing 4 sites, one of which is Delta Forge 1, 2 unnamed sites. And I think other than maybe Garden City way back when this is new geographic exposure for you. So what drew you to the south? And what kind of contrast would you draw between it in your Dakota sites? And was this really a result of customer indications or more applied led?

So Nick, what always drives us first is where power is available. So that's always first when we find our sites. And then it goes to fiber. And then there's a lot of other variables that we look at.

And those variables include how crowded is that market. That's one we definitely look at. So -- why do you want to look at how crowded the market is? One aspect that's good because the more density you have, it's easier to get more customers there.

There's a lot more infrastructure. Right now, it's hard to be in crowded markets because of labor force. So we look at markets where we think we can definitely secure the labor force to go and build these. So like for example, on these, like we're not looking at something in West Texas right now.

We're in states that are outside of that so that we can attract a different labor force and make sure that we can build these. We look at states that are definitely pro-business and business-friendly, have governors and legislatures that want data centers in their state. They're looking to expand business. So it's a lot of different variables, but it's always first driven by power and power availability and when it's available.

And we're still very focused on grid power. We've looked at a lot of projects where people have what they call powered land, what they really have is they have land and then they have a gas pipeline that runs nearby where you can do offtake for gas and then you need to figure out power generation and you typically do off-grid. We're seeing some of those projects happen. I think that -- but what we see is the preference by far for the hyperscalers that we're looking to work with is that the grid power is definitely still the preferred solution.

And so those are the kind of sites we keep developing, and that's what we continue to market.

Got it. Makes sense. I appreciate that, Wes. And then it sounds like things are on track, but just would be nice to get an update on the next building at PF1. Can you just remind us when we would first see revenue recognition? I think the guide is sometime 2026.

Yes. RFS date for PF1 is July 1, I believe. And so -- and Nick, just to remind you how these buildings energize -- so they have 6 data halls in each building. You don't energize all 6 at the same time.

So in July, you'll energize some of the data halls, and I believe they're all energized, so it goes July, August, September, and then they'll be fully energized. And then later in the year, the first building at PF2 comes online. And so you'll get the same type of energization ramp on that building. And so you'll see some revenue step-up in the August quarter from the new building and then you should get basically close to a full quarter of it in the November quarter and then a partial from the Polaris Forge 2 building and then getting close to full quarters in the February quarter of fiscal '27. So that's how those will start to ramp up.

And then as you start into '27, you'll have those buildings continue to ramp the third building, the Polaris Forge 1 and then Delta Forge and then whatever else we start contracting as well. So you kind of have those pretty clear step-ups. And this was -- I think this was a really great quarter for us from a revenue results perspective because you start to see the earnings power of what we're building. We're still -- it's still subscale versus all of the people that we employ because we're building so much, right?

We have almost a gigawatt under construction, 900 megawatts under construction. So it's still a little bit top heavy from that perspective, but you going to start to see the flow-through and then easier for you guys to model out what the earnings power of the platform looks like.

And our next question comes from the line of Rob Brown with Lake Street.

Congratulations on all the progress. Just wanted to follow up on the power availability commentary and I guess, the base electron strategy. Just a sense of when you think you start to run into constraints in, I guess, the North Dakota market and how you see that -- maybe when you see constraints and how you see that playing out?

Sure. So we have the Polaris Forge 1, Polaris Forge 2 and another site in North Dakota. So we have the 3 sites that we'll be building through '28 on all of those. And that's going to take up the significant amount of the excess power that we see right now in North Dakota.

And then towards the end of '28, we'll start to commission some of these. Base Electron will start to commission some of these new power generation assets. And so what that's really designed to do is to meet when we feel like we start to tap out of the available grid power and then we're adding -- Base Electron is adding more power to the grid. And we said this, Rob, in the prepared remarks, but I think it's worth reiterating the Base Electron business model is actually adding grid power.

It's not building on-site generation specifically for the Applied Digital data centers, but it's strategically adding it in places on the grid in North Dakota that will definitely feed the Applied Digital sites, but it's meant to make the grid overall better and more resilient and be a benefit to all of the stakeholders and the ratepayers in the state and not just putting it on site to generate electricity for Applied Digital. But that's really the timing and what we've spaced out is, okay, here's when we start to run out of what we think is available grid power for us. And so we need to add more to the grid to continue to expand these campuses.

And as we've mentioned previously, the Ellendale, the Players 4:1 campus and the new campus in North Dakota, they all have the ability to expand significantly from an electrical infrastructure delivery perspective, and we just want to make sure that we enable that.

And our next question comes from the line of John Todaro with Needham & Company.

Congrats on all the progress. First question, Wes, you made a couple of comments about not just signing any deal, you want the right terms. And also, it's taken maybe a little bit longer than you had hoped or expected. While appreciating that the demand is quite strong, has there just been any aspect, whether terms or rates that have changed that have maybe made conversations a little bit more difficult in getting the leases done?

Is there any kind of like sticking point that is coming up?

Every lease is different, John. And so there's always different parties in the lease and what needs to happen. And in some instances, there's a lot of stuff that needs to happen for the utility as far as guarantees and what gets negotiated in the entire package, and that's been newer for us. So that's definitely one aspect.

But it's not in every lease. It's just in certain ones. But it's -- I can't say that the entire landscape has changed because it's just every campus when you're dealing with a different utility and a different counterparty, they all have their own nuances. And of course, I would -- if you ask my team, I would say every lease takes longer than I would like.

I just wish we get to the terms that were great for us and we would sign it. But I feel like these are all on track for us. And I would just say that I think we feel really good about where they are and signing a lot of these campuses up this year. But we will make sure that we get these right and with the right tenant and the right structure.

But it's hard to say market-wide if there's anything different, but there's always different details and nuances in every single site.

Understood. Appreciate that. And then maybe one for Saidal. Just trying to maybe reconfirm the cadence of the fit-out service revenue. Has all that been recognized now? Or should we expect some more in the coming quarter to contribute?

Yes. So for ELN-02, a majority of the fit-out revenue has been recognized. There will be a small amount remaining for the first building. And then towards the end, you'll see some ramp on ELN-03 or the second building in PF1 start to ramp up. Once again, timing, right, timing can be lumpy from quarter-to-quarter, and it's a low-margin line item that's nonrecurring.

Correct, around like 5% or so, right?

That's fair. Yes, correct.

And our next question comes from the line of Michael Donovan with Compass Point.

Congrats on the progress. Saidal, could you walk us through what still needs to happen between now and June 30 for the PF2 financing escrow tied to the $2.15 billion of 2031 notes to be released?

Yes, exactly. Great question. Effectively, the ESA needs to be finalized between the utility and the counterparties involved, and that has been progressing as scheduled. For instance, there was recently on the substation construction.

So the longest pole in the tent has been the substation construction items. So -- and we had a [indiscernible] signed a construction agreement to build that last October, and we're in a good -- really great shape on the substation progress there.

Appreciate that, Saidal. And I guess for Wes, what was the strategic rationale for structuring base Electron outside of Applied rather than owning the generation directly?

Yes. So we thought a lot about this. It's a great question. And what we landed on with this was that the power generation aspect, the power generation business is fundamentally different than the data center business.

And so we did not think that it was the right thing to take a lot of risk inside of Applied Digital to go and build the power generating assets that will help expand the data center capacity for Applied Digital. But -- and when you think about the different risk profiles, so on Applied Digital, we signed long-term data center leases. We get 15 years of lease payments. And if our customer doesn't use the facility, they still owe us the lease payments.

But when you look on the power side of the business, the power will feed into the data center. But if the customer is not using the data center, they still pay the lease payments to the data center, but there's no power being drawn into the data center. So it's fundamentally different risk and return profiles for those. So it's been created as a separate company.

Applied Digital have ownership in that company. So the Applied Digital shareholders get upside of the success in Base Electron but take no risk on the downside of any catastrophe that happens inside of that. So we expect it to eventually trade publicly as well, so people can choose if they want to have power generation exposure, if they want to have data center exposure and now as ChronoScale spins out, do you want to have GPU cloud exposure. So you really get those choices instead of us just forcing it into Applied Digital where there could be some upside to shareholders, but it creates a totally different risk profile for the company in our opinion.

And so I think it was the right choice to put it outside, let it create its own capital stack. Investors come in and put capital into the business. It will need to raise its own capital to go build these assets. But that was really the fundamental choice as to why it's not just folded as another unit inside of Applied Digital.

And our next question comes from the line of Paul Meeks with Freedom Capital Markets.

Excuse me if this was asked and answered, but do we still have 100 megawatts at PF2 that is still uncontracted?

That's correct.

And going forward, you'll make an announcement, not to who the hyperscaler may or may not be. Those are always easy to figure out, but you will make an announcement when it is contracted.

Yes. And we do expect that to be contracted in the near term.

Next question is for both PF1 and PF2. Are you sticking with the site NOI margins that I think you last showed in the presentation last fall?

That is correct. Yes, that is correct. So high 80s to 90s is the range that we've been operating at on a cash basis.

Right. And last quick one. When you meet this 5-year NOI target, you're going to start with the project financing and then switch over time. But once we get there, 5 years out, what is your firm's capital structure look like?

So this is Saidal. So there's a couple of different ways. So one, as you complete the construction period and construction risk is removed from the overall financing, your cost of capital comes down. If you look at some of the private peers, leverage tends to be very high in excess of 10x NOI.

We feel it's a prudent way to be in that 5 to 6x NOI leverage, which when you're against, call it, high investment grade and investment-grade credits for long-term leases with escalators, that's very prudent. So I think as you get to that 5-year mark, once our platform is fully humming. And as we surpass our NRI goals of $1 billion and $2 billion of NOI, that, call it, 5 to 6 turns of leverage is prudent. Now once again, the caveat being there's always going to be new potential opportunities that we're building out, and we are also opportunistic across the spectrum for financing with the view of always having paper that is constructive both for shareholders and obviously, for other stakeholders in the company as well.

And ladies and gentlemen, that concludes our question-and-answer session. I will now turn the conference back over to Wes Cummins for closing remarks.

Thanks, everyone, for joining us today, and I want to make sure that I thank all of our employees who are working over time to make all of this a reality for the company and its shareholders and look forward to speaking with you in July.

Ladies and gentlemen, that concludes today's call, and we thank you for your participation. You may now disconnect.