Digital Realty Trust Rides Record AI Leasing Wave

Digital Realty Trust ((DLR)) has held its Q1 earnings call. Read on for the main highlights of the call.

Digital Realty Trust’s latest earnings call struck a distinctly upbeat tone, with management emphasizing record leasing wins, a surging development pipeline, and a meaningfully stronger balance sheet. While they acknowledged rising costs, construction bottlenecks, and permitting risks, executives argued that robust demand, high preleasing, and ample capital leave the company well positioned for the AI-driven data center cycle.

Record Leasing Underscores Market Momentum

Digital Realty reported $707 million of new leases at 100% share, or $423 million at its share, marking the second-best bookings quarter in its history and roughly 70% above the next-highest period. Management stressed that this surge reflects broad-based demand across customer segments, reinforcing confidence that the data center upcycle is durable rather than a short-lived spike.

Historic 200 MW Hyperscale AI Lease

The headline of the quarter was a 200 MW AI inference-focused hyperscale lease in Charlotte, the largest megawatt transaction in the company’s history. Executives framed the deal as validation of their hub-and-spoke strategy, arguing that scale campuses near key network hubs can efficiently serve AI workloads without relying solely on the most expensive legacy markets.

Robust Smaller Deals and Interconnection Growth

Beyond mega-deals, zero-to-one MW signings plus interconnection bookings reached a record $98 million, more than 40% above the first quarter of 2025. AI-oriented demand made up about 21% of this segment, and the company added 116 new customer logos, signaling that the growth story extends well beyond a handful of hyperscale tenants.

Record Backlog Supports Multi-Year Visibility

Total backlog swelled to a record $1.8 billion, or $1.0 billion at Digital Realty’s share, providing visibility into future revenue. Scheduled commencements include $44 million this year, $247 million for 2027, and $242 million from 2028 onward, effectively lining up a multi-year runway of contracted growth as new capacity comes online.

Development Pipeline Scales With Demand

The development pipeline expanded to about $16.5 billion in value, more than 60% higher than a year ago, with roughly 1.2 GW under construction, up more than 50% sequentially. Around 61% of that capacity is already preleased at an expected yield of approximately 11.4%, signaling that growth CapEx is being deployed against visible and profitable demand.

Beat-and-Raise Financial Performance

Core funds from operations came in at $2.04 per share for the quarter, up about 15% year over year and ahead of prior expectations. On the back of this performance, management raised 2026 core FFO per share guidance by $0.10 to $8.10, with the midpoint implying roughly 9% growth versus 2025, demonstrating confidence that current momentum can be sustained.

Solid Rental Metrics and NOI Expansion

Revenue and adjusted EBITDA both grew at strong double-digit rates, supported by improving pricing and utilization. Same-capital cash NOI rose 7.9% year over year in nominal terms, or 2.5% on a constant currency basis, while interconnection bookings climbed 24% to $186 million, highlighting the value of high-connectivity ecosystems within the portfolio.

Hyperscale Supply and Capital Strategy on Track

Management highlighted their ability to deliver hyperscale IT capacity in under 18 months, a key differentiator as AI buyers seek rapid deployment at scale. The company also closed a $3.25 billion U.S. hyperscale fund and now has over $8 billion of joint-venture and incremental private capital capacity, creating a flexible platform to fund growth without overleveraging the balance sheet.

Leverage Down, Balance Sheet Strengthened

Debt to adjusted EBITDA fell to a multi-year low of 4.7 times, while the AFFO payout ratio eased to about 64%, signaling more retained cash flow to support expansion. Even after investing $910 million of development capex net of partners, the company emphasized that liquidity remains ample to pursue additional high-return projects.

Strategic Global and Connectivity Expansion

Digital Realty continued to extend its global footprint, acquiring Telepoint in Sofia, securing land in Portugal and Milan, and entering Cyberjaya in Malaysia. Management described these moves as critical for serving latency-sensitive and interconnection-heavy workloads, positioning the platform to capture demand as AI and cloud adoption deepen across regions.

Operating Expense Growth Adds Noise

Operating expenses rose faster than trend versus the prior-year quarter, which compressed constant-currency same-capital cash NOI growth to 2.5% despite stronger nominal gains. Management cautioned that this will create some quarter-to-quarter volatility, though they framed the increase partly as a normalization following unusually low repairs and labor costs a year ago.

Energy and Supply Chain Risks in Focus

Executives flagged conflict-driven energy price volatility and broader supply chain uncertainty as ongoing industry risks, even if much of the direct utility cost is reimbursed or hedged. They noted that about 90% of utility expenses are passed through to customers and a substantial portion of power is hedged, but warned that indirect effects on customers could still influence behavior.

Longer Commencement Lags for Mega-Deals

Average lease commencement lags have stretched to around 19 months, largely because of very large, complex deals like the 200 MW lease. While this lengthens the time between signing and revenue, management argued that the scale, pricing, and precommitment associated with such transactions more than compensate for the timing delay.

Rising Development Costs per Megawatt

The cost to build in the Americas has risen to roughly $14 million per MW from about $12.5 million, reflecting higher land prices, construction inflation, and tighter supply chains. More advanced designs, including liquid-cooling capable infrastructure required for AI workloads, are also driving up per-MW costs, though management believes expected yields still justify the spend.

Construction Bottlenecks and Labor Constraints

Industry-wide challenges such as shortages of skilled labor, particularly electricians, along with complex utility power delivery and long equipment lead times, are weighing on construction timelines. Digital Realty emphasized that its scale and relationships help mitigate these issues, but admitted that some projects will require creative phasing and execution to stay on track.

Local Community Resistance Adds Permitting Risk

The company acknowledged growing local resistance to data center projects, with permitting and community pushback becoming more common in several markets. Management said they are investing more in stakeholder engagement and community benefits to smooth approvals, noting that social license is now a critical factor in delivering large campuses.

Expectations for a Slower Near-Term Pace

Following a strong first quarter, management guided to a step-down in quarterly performance, with a lighter second quarter and a rebound expected in the back half of the year. They reiterated that full-year guidance has still been raised, but investors should expect a slower average pace of core FFO growth over the remaining quarters as expense comps normalize and timing factors play through.

Forward Guidance Anchored by Backlog and CapEx Plans

Digital Realty raised its 2026 core FFO per share guidance to $8.10 and now forecasts cash renewal spreads of 6.5% to 8.5%, with power-based occupancy expected to improve 50 to 100 basis points from year-end 2025. Management projects same-capital cash NOI growth of 4% to 5% on a constant-currency basis and net development capex of $3.5 billion to $4.0 billion, supported by a $1.8 billion backlog and planned dispositions and joint-venture capital later this year.

Digital Realty’s earnings call painted a picture of a company riding powerful AI and cloud tailwinds while candidly grappling with the costs and complexity of scaling globally. For investors, the combination of record leasing, strengthened finances, and upgraded guidance suggests the growth story is intact, even as execution risks and macro uncertainties remain part of the equation.