Digital Realty reports higher rent-per-kilowatt as smaller leases take hold, signaling capacity premium for granular tenancies.
Digital Realty ended Friday trading at $188.52, down 2.4% for the day and 5.3% over the week, as U.S. markets remain closed on Sunday. A Form 10-Q filed after the market close on Friday provides the latest update on booking breakdown, capital requirements, and funding risk.
The most significant metric for investors lies in the composition of newly signed leases. Small-scale contracts and interconnection services accounted for $108.3 million in annualized rent, representing 52% of Digital Realty's total newly signed agreements. These smaller leases command a premium: $280 per kilowatt, 78% above larger lease rates. The markup varies by geography—88% in the Americas, 61% in Europe, and 73% in Asia-Pacific.
Chief Executive Andy Power highlighted this milestone: "We signed more than $100 million of 0-1 MW plus Interconnection bookings for the first time." This marks a strategic shift toward high-density, smaller-footprint customers.
Financial performance outpaced underlying metrics. Revenue increased 29% to $1.92 billion, though this figure includes a $188 million promote. Core FFO, excluding the promote but including a $27 million insurance settlement, climbed 14% to $2.13 per share. Digital Realty's share of the contracted backlog reached $1.4 billion with a weighted-average commencement lag of nine months. In July alone, hyperscale agreements contributed an additional $205 million in annualized rent.
Management raised its guidance for both revenue and FFO, though the development budget increased even more sharply. The capital expenditure midpoint stands at nearly 1.5 times the FFO midpoint of approximately $2.95 billion (based on 360.6 million diluted shares and units).
The company has financed its expansion through equity issuance. By June, Digital Realty had sold 13.5 million shares at an average price of $184.94 each, generating net proceeds of approximately $2.5 billion.
The broader data-center sector underperformed last week, with major REITs lagging both the real estate sector and the S&P 500. Equinix shares declined after projecting weaker third-quarter sales, though the company raised both its annual and longer-range forecasts. Investors await Iron Mountain's earnings report on Wednesday for the sector's next major update.
Wall Street maintains confidence in Digital Realty, with 19 buy recommendations, four holds, and zero sell ratings according to Google Finance. The consensus price target of $221 implies roughly 17% upside from Friday's close.
Two key economic indicators are scheduled for release next week: the ISM services index for July on Wednesday at 10 a.m. EDT, and U.S. payrolls data on Friday at 8:30 a.m. EDT.
The investment thesis centers on a fundamental tradeoff: higher rent per kilowatt from smaller leases must exceed the company's sharply elevated capital expenditures. Key risks include potential delays in lease commencement due to power constraints, rising development expenses, and leverage concerns—Digital Realty reported $18.6 billion in debt with net debt to EBITDA at 4.7 times. Additional equity issuance may dilute shareholder returns.