Morgan Stanley: Digital Realty signs record volume of leases, while expansion financing and equity dilution remain key constraints

How did third-quarter results and full-year guidance change?

Digital Realty’s third-quarter revenue was 1.902 billion dollars, up 20.6% year over year and 8.9% above Morgan Stanley’s estimate; core FFO per share was 2.10 dollars, above the bank’s estimate of 1.99 dollars.
The revenue beat did not translate proportionately into operating profit: adjusted EBITDA was 978 million dollars, 2.1% above the bank’s estimate, with a margin of 51.4%, below its estimate of 54.9%. Both utility expenses and tenant reimbursement revenue for the quarter were above the bank’s estimates.
The company raised its 2026 core FFO per-share guidance by 0.15 dollars to 8.30–8.35 dollars, implying year-over-year growth of approximately 13% excluding net excess profit sharing.

Third-quarter leasing reached a record 627 million dollars on the company’s share basis, including 474 million dollars from leases larger than 1 megawatt; leasing in the 0–1 megawatt and interconnection categories totaled 152 million dollars, up 80% year over year.
Large leases were driven by a major deal in Northern Virginia and record activity in Asia-Pacific; enterprise demand and AI inference drove smaller deployments, with 44% of 0–1 megawatt leasing related to AI.
Cash rents on renewals were 11.8% higher than on expiring leases, showing that existing assets are also benefiting from improved pricing. The company has 1.8 billion dollars in leases yet to commence, of which approximately 371 million dollars is expected to commence during the remainder of 2026.

On a total project equity basis, the company has approximately 10 gigawatts of future development capacity, including approximately 1.5 gigawatts under construction; hyperscale customer-oriented capacity scheduled for delivery in 2027–2028 is close to 1.5 gigawatts.
Projects under construction have an estimated total investment of approximately 22 billion dollars, of which the company’s share is 15.3 billion dollars; the projects are 63% pre-leased and have an expected stabilized yield of 11.6%.
Expansion costs are also rising: construction costs per megawatt are approximately 15 million dollars, up from 14.4 million dollars in the previous quarter. Whether new capacity can sustain expected returns depends on both construction costs and leasing progress.

After the quarter, the company established a permanent capital strategy for stabilized hyperscale data centers in North America, securing an initial equity commitment of 1.4 billion dollars. It plans to contribute mature assets from its balance sheet to the platform first and raised its 2026 asset disposition and contribution guidance by 500 million dollars to 1.5 billion–2 billion dollars.
Morgan Stanley believes that after selling or contributing mature assets, the company can reinvest capital in higher-yielding development projects while retaining an ownership stake and earning recurring management fees; however, the platform can only ease, not eliminate, the need for public-market equity financing.
The bank’s model assumes a further 590 million dollars of equity issuance in 2027; dilution risk is an important reason for its Equal-weight rating. Morgan Stanley maintained its year-end 2027 price target of 215 dollars and considers the company’s risks and rewards to be roughly balanced.