Digital Realty Trust (NYSE:DLR) closed Friday at $188.52, down 5.3% from the prior week's close of $199.08, as investors weighed a mixed second-quarter report that highlighted strong pricing power in small-space leasing but also revealed a sharp increase in capital spending.
The data-center REIT's latest Form 10-Q, filed after the market closed Friday, confirmed that 52% of its annualized rent from newly signed contracts came from small-space (0-1 megawatt) and interconnection bookings. These smaller leases command significantly higher rates per kilowatt, a key metric for the industry.
According to the filing, small-space leases contributed $87.8 million in annualized GAAP rent on 26.1 megawatts of power, translating to $280 per kilowatt. Interconnection added another $20.5 million. In contrast, larger leases above 1 megawatt accounted for $99.8 million on 52.9 megawatts, or just $157 per kilowatt. The 78% premium for small-space rates was even more pronounced regionally: 88% in the Americas, 61% in Europe, and 73% in Asia-Pacific.
CEO Andy Power highlighted the milestone, noting, "We signed more than $100 million of 0-1 MW plus Interconnection bookings for the first time." This shift toward smaller, higher-margin leases is a strategic move to maximize revenue per unit of power, especially as power availability becomes a critical constraint in the data-center market.
Financially, Digital Realty delivered strong top-line growth. Revenue jumped 29% year-over-year to $1.92 billion, helped by a $188 million promote. Core FFO per share, excluding the promote, rose 14% to $2.13. A $27 million insurance settlement also provided a boost. Management raised its full-year 2026 guidance for both revenue and core FFO, but the development capital expenditure budget was increased even more sharply, rising 20% to a midpoint of $4.5 billion.
This capex surge is a critical point for investors. The company's core FFO midpoint of $8.175 per share, multiplied by 360.6 million diluted shares and units, implies roughly $2.95 billion in funds from operations—less than two-thirds of the planned capital spending. Digital Realty has been funding this expansion through equity issuance, having sold 13.5 million shares at an average price of $184.94 by June, raising approximately $2.5 billion.
The broader data-center sector also experienced a difficult week. Equinix (NASDAQ:EQIX) fell 6.0%, and Iron Mountain (NYSE:IRM) dropped 4.7%, while the Vanguard Real Estate ETF (NYSEARCA:VNQ) declined 1.8% and the S&P 500 gained 1.0%. Equinix's weaker third-quarter sales outlook weighed on sentiment, though it raised its long-term forecasts. Investors now look to Iron Mountain's earnings, due Wednesday, for further sector cues.
Wall Street remains bullish on Digital Realty, with 19 buy ratings, four holds, and no sells. The consensus price target is $221, roughly 17% above Friday's close. Key upcoming economic data include the ISM services index on Wednesday and U.S. July payrolls on Friday, which could influence market sentiment.
Risks remain, including potential power limitations delaying lease commencements, further development cost inflation, and the company's elevated debt of $18.6 billion (net debt to EBITDA of 4.7x). Additional equity issuance could also dilute returns. The core investment thesis hinges on whether higher rent per kilowatt can outpace the rising capital expenditure burden.
