Digital Realty

Digital Realty’s competitive advantage rests on multiple pillars. Switching costs are high: colocated workloads and cross connects create data gravity that makes migration risky and time‑consuming.

Efficient scale is strong in key metros like Northern Virginia, Chicago, Frankfurt, Dublin, and others where land, permits, and power are scarce and long lead‑time grid upgrades deter new entrants. Global scale and procurement lower unit costs for design, power, and equipment.

Interconnection‑driven network effects exist, but are moderate versus the category leader, making this pillar supportive rather than dominant. Intangibles include trusted brand, neutrality, and platform software (ServiceFabric, PDx) that standardize deployments across regions.

We also consider potential moat erosion: hyperscaler insourcing on owned campuses, next‑gen liquid cooling designs that could favor purpose‑built operators, and regulatory or community resistance to large power draws. Weighting switching costs and efficient scale most heavily, the composite moat quality is high and durable.

Renewal pricing and scarcity support pricing power. In Q3 2025, cash renewal spreads were 8.0% and management continued to report strong spreads through year‑end with 6.1% cash increases in Q4 2025 despite mix shifts.

Backlog conversion, AI‑led demand, and power scarcity in U.S. markets should underpin mid‑single to high‑single digit pricing in 2026. Counterweights include customer concentration with hyperscalers and the capital intensity of adding power at scale, which can cap near‑term operating leverage.

Overall, pricing power is solid and likely strengthening where power is the binding constraint.

Revenue is highly recurring, leases are multi‑year with staggered expirations, and the company exited 2025 with an $817 million backlog at its share, which supports visibility into commencements over the next 12 to 24 months.

Core FFO per share reached $7.39 for 2025 and initial 2026 guidance implies mid‑to‑high single digit growth, consistent with backlog conversion and embedded escalators. Key uncertainty comes from utility interconnect timing and grid constraints that can shift commencements and capex timing across quarters.

Overall predictability is favorable for a mission‑critical, subscription‑like infrastructure provider with global exposure, though it is not fully immune to macro and regulatory timing.

Leverage and liquidity are appropriate for growth. As of Q3 2025, total debt was about $18.2 billion, net debt to adjusted EBITDA improved to 4.9x, fixed‑charge coverage was 4.6x, and the company had material undrawn revolver capacity.

In Q4 2025, Digital Realty issued €1.4 billion of new Euro notes and retired €1.075 billion of 2026 notes, extending tenor and limiting near‑term refinancing risk. Private capital partnerships (e.g., U.S. Hyperscale Data Center Fund, Blackstone and Mitsubishi JVs) reduce balance sheet strain while preserving operating control and fee opportunities.

Risks include interest rate volatility, FX exposure, and continued use of ATM equity that can dilute per‑share growth.

Management is leaning on a multi‑pronged funding model: development JVs, asset sales, and the U.S. Hyperscale Fund (>3 billion of LP commitments to date) to scale capacity with less corporate leverage. This is sensible in a power‑scarce upcycle.

We note share count rose year over year (full‑year 2025 diluted weighted average ~346 million vs ~330 million in 2024), reflecting ATM issuance that partially funded growth and balance sheet actions. Dividend policy targets an AFFO payout around the mid‑70s percent, leaving internal capital for maintenance and selective growth.

We credit disciplined refinancing and pre‑leasing but deduct for equity issuance and recurring capex intensity that depresses AFFO in heavy build periods. Net, capital allocation is good, pragmatic, and improving.

CEO Andy Power and CFO Matt Mercier have deep REIT and capital markets experience and have executed through a complex period of rate volatility, power constraints, and AI‑driven demand, while advancing a private‑capital strategy and expanding global development.

Board refresh continues, including the addition of a director with extensive global power and infrastructure expertise, aligning oversight with the industry’s key bottleneck. Execution on bookings, backlog growth, leverage reduction, and sustainability milestones in 2024‑2025 support a favorable view of management quality and strategy.