Digital Realty at Nareit REITweek: AI and Power Challenges

At the Nareit REITweek Conference, Digital Realty Trust (DLR) highlighted strong demand driven by digital transformation and AI, reporting a record $1 billion in bookings last year with approximately 10% related to AI. CEO Andy Power emphasized AI's potential for long-term growth, particularly in the enterprise segment, while addressing power procurement challenges and efforts to reduce leverage, which has decreased from 7x to close to 5x. The company is diversifying funding through joint ventures, including one with Blackstone potentially resulting in $3-5 billion of investment, and aims for a 6% growth in FFO per share this year, signaling a focus on consistent bottom-line growth.

Analysis

Digital Realty Trust (DLR) presented a robust outlook at the Nareit REITweek: 2025 Investor Conference, underscoring significant demand fueled by digital transformation and artificial intelligence. The company reported a record $1 billion in bookings over the past year, with AI use cases contributing approximately 10% to recent signings, a figure CEO Andy Power anticipates will grow substantially, particularly within the enterprise segment. Despite these tailwinds, DLR acknowledged persistent challenges in power procurement, attributing this to underinvestment in U.S. infrastructure, but is actively addressing these through strategic initiatives, including investments in solar power in regions like South Africa and exploring both front-of-meter and behind-the-meter solutions. Financially, Digital Realty has made considerable progress in deleveraging, reducing its leverage from 7x to approximately 5x, and is diversifying its funding sources through joint ventures, such as a notable partnership with Blackstone potentially valued at $3-5 billion, and its first fund, which has already secured over $2 billion in commitments. The company maintains a strong liquidity position of around $6 billion. Operationally, DLR supports 5,000 customers across over 300 data centers in 50 metropolitan areas, with nearly 3 gigawatts of operational capacity and an additional 4 gigawatts under development. Looking ahead, DLR is targeting a 6% growth in Funds From Operations (FFO) per share for the current year, emphasizing a strategic pivot towards consistent bottom-line growth, driven by continued hyperscale demand, the nascent but significant long-term potential of AI (including sovereign AI initiatives globally), and increasingly positive pricing dynamics across both its enterprise and hyperscale segments.

Key Decisions for Investors

• Investors should assess Digital Realty's growth trajectory in light of strong AI-driven demand and record bookings, balanced against the execution risks associated with power procurement and infrastructure development.
• Monitor the company's progress in its deleveraging strategy and the success of its diversified funding mechanisms, including joint ventures and private funds, as these are critical for sustaining development spending and achieving targeted FFO per share growth of 6% or higher.
• Consider the long-term growth potential from AI, particularly the shift to inference and the rise of sovereign AI, while noting that the bulk of AI-related demand is currently U.S.-centric and enterprise adoption is still in early stages.
• Evaluate DLR's ability to maintain positive pricing trends and manage capital expenditure effectively, especially concerning potential data center obsolescence and the evolving cooling requirements for higher-density AI workloads.