BMO reiterates Digital Realty stock Outperform on data center deal

Digital Realty (DLR) will acquire Blackstone’s 64% stake in three fully leased in-development Northern Virginia data centers for $3.5B ($1.2B cash + $2.3B stock) representing 288MW capacity, at a 6.5% initial stabilized cap rate and $7.8B gross value. The deal is expected to be accretive to Core FFO in 2027-28, with two sites stabilizing in H1 2027 and the third in H1 2028, and DLR targets transaction-driven strengthening of its hyperscaler/colocation footprint. Analysts reiterated bullish views (e.g., BMO Outperform with a $220 PT; Truist raised PT to $225) despite commentary that the stock may be overvalued vs fair value; DLR also maintains a 2.56% dividend yield and 23 consecutive years of payments.

Analysis

DLR is benefiting less from the specific asset than from what the transaction signals: access to scarce, power-constrained capacity in a market where time-to-delivery matters more than headline cap rate. That supports the broader “picks-and-shovels for AI” equity narrative, but it does not automatically justify a higher multiple today because the value creation is back-ended and capital intensive. In the next 1-3 months, the stock can still trade on scarcity-premium optics; over 6-18 months, the real test is whether funded growth beats DLR’s rising cost of capital.

The more interesting second-order effect is on peers and substitutes. A deal like this effectively raises the replacement-cost floor for public data-center landlords and may help EQIX and AMT if investors conclude that powered shells and land banks are becoming the scarce asset, not just leased square footage. The flip side is that development-heavy names can look better operationally than they do economically: buying partially built capacity can be FFO-accretive later while still diluting near-term risk-adjusted returns if the equity market assigns a lower multiple to forward capex and balance-sheet usage.

BX’s angle is more about capital recycling than direct operating upside. Monetizing a mature, de-risked stake at a strong implied valuation is supportive for fee-generating capital allocation, but it also reinforces that private capital is willing to sell into public enthusiasm. The contrarian risk is that the market is extrapolating AI demand into a perpetual re-rating; if power availability or leasing velocity slows, the current premium on DLR could compress even if reported FFO looks fine.

Key Decisions for Investors

• Avoid chasing DLR on strength; wait for post-close digestion and potential secondary-supply pressure from BX-related selling before considering entry. Best entry is on a 5-8% pullback or after management proves funding discipline in the next print.
• Pair trade: long EQIX / short DLR for the next 1-3 months. Thesis: EQIX has cleaner recurring pricing power and less development execution risk, while DLR is taking on more capex duration and financing sensitivity. Cover if DLR outperforms EQIX by >7% on renewed AI multiple expansion.
• Tactical long BX only as a low-conviction financing/liquidity beneficiary, not a core alpha idea. The stock should benefit if the market rewards monetization and capital recycling, but the upside is likely capped unless realizations accelerate across the portfolio.
• Set an alert on DLR for guidance on funding spread and lease-up timing. If management tightens 2026-2028 capital intensity or beats on incremental yield, the bearish case weakens; if cost of equity rises further or the stock fails to hold post-close, the current premium is vulnerable.