Digital Realty (DLR) Q2 2025: Zero-to-One Megawatt Bookings Surge 18%, Powering Multi-Year Growth Visibility
Digital Realty’s record zero-to-one megawatt plus interconnection bookings signal a strategic inflection in enterprise and hybrid cloud demand, broadening the company’s growth runway well into 2027. Management’s pivot to a diversified funding model, robust backlog, and global campus strategy positions DLR to capitalize on secular AI and digital transformation tailwinds. Investors will need to watch for capital intensity, evolving regional AI adoption, and the impact of rising utility requirements on future margins.
Summary
- Enterprise and Interconnection Momentum: Record zero-to-one megawatt bookings underscore the strength of DLR’s hybrid, connectivity-rich platform.
- Funding Model Evolution: Private capital partnerships and a $3B hyperscale fund extend DLR’s capacity to meet surging demand without overleveraging.
- Multi-Year Visibility: Backlog and pipeline support sustained growth, but capital deployment and regional adoption trends remain key watchpoints.
Performance Analysis
Digital Realty delivered double-digit growth across revenue, adjusted EBITDA, and core FFO, with leasing activity led by a record-setting $90 million in zero-to-one megawatt plus interconnection bookings. This segment, which targets enterprise and hybrid cloud deployments, saw bookings rise 18% over the previous record and now represents a growing share of DLR’s leasing mix. Geographic breadth was a highlight, with balanced contributions from the Americas, EMEA (Europe, Middle East, and Africa), and APAC (Asia-Pacific), reflecting the platform’s global reach.
The company’s backlog of $826 million at share provides strong revenue visibility through 2025 and into 2027, with record commencements and low churn (1%) bolstering recurring revenue streams. Renewal spreads were robust, particularly in the greater-than-one megawatt category, though average pricing was skewed by legacy expansion options. Capital deployment remains aggressive, with over $900 million in gross development CapEx and a development pipeline of $9 billion, supporting a record 5 gigawatts of runway.
- Colocation and Interconnection Outperformance: Zero-to-one megawatt bookings up 36% versus the trailing four-quarter average, driving margin expansion.
- Backlog and Commencements: $826 million backlog and $220 million of commencements in Q2 strengthen forward visibility.
- Capital Intensity and Leverage: CapEx up 50% YoY, but leverage remains below target at 5.1x, aided by private capital inflows.
Fee income from fund management and a shift toward CPI-linked escalators (over 70% of new bookings) support long-term FFO growth, though refinancing headwinds and increased operating expenses are expected to weigh on margins in the back half of the year.
Executive Commentary
"Bookings in our zero to one megawatt plus interconnection product set have seen consistent growth, with momentum accelerating over the past year, even as large AI-oriented leases have been in the spotlight."
Andy Power, President and Chief Executive Officer
"Core FFO jumped by 13% year-over-year to a new quarterly record while leasing results were highlighted by a notable new record in our 0 to 1 megawatt plus interconnection category."
Matt Mercier, Chief Financial Officer
Strategic Positioning
1. Full-Spectrum Platform and Connectivity Focus
DLR’s commitment to its “full spectrum” strategy—serving both hyperscale and enterprise customers—anchors its competitive edge. The company’s connectivity-rich metro campuses and interconnection suite, including both physical and virtual services, are increasingly critical as hybrid cloud and AI workloads proliferate. PlatformDIGITAL, DLR’s integrated global data center ecosystem, enables customers to scale deployments and interconnect across 50+ metros, driving deeper wallet share and lower churn.
2. Funding Model Innovation and Capital Flexibility
The launch of DLR’s U.S. Hyperscale Data Center Fund, with over $3 billion in LP commitments, marks a strategic shift. By bringing in institutional partners, DLR can develop hyperscale capacity without overburdening its balance sheet, while generating asset management fees and retaining a minority equity stake. This model supports up to $15 billion of incremental development and provides a template for future capital recycling.
3. Backlog Depth and Multi-Year Growth Visibility
DLR’s $826 million backlog and 5 gigawatt development runway position the company for sustained growth through 2027 and beyond. Near-term commencements are heavily weighted to Q4, while hyperscale bookings are increasingly structured for late 2026 and 2027 deliveries. Over 70% of new bookings include CPI-linked or 4%+ escalators, locking in inflation-protected revenue streams.
4. Regional and Product Mix Dynamics
AI and hyperscale demand remains concentrated in the U.S., with EMEA and APAC trailing in large-scale AI adoption. However, DLR’s global platform is capturing export-driven growth, and management expects international AI workloads to accelerate as regulatory and infrastructure catalysts emerge. Colocation and interconnection products are driving near-term margin and FFO growth, while hyperscale capacity supports longer-term upside.
5. Sustainability and Regulatory Tailwinds
DLR continues to lead on sustainability, with 185 data centers now matched to 100% renewable energy and a 14% YoY reduction in water usage intensity in North America. Recent U.S. executive actions to streamline data center permitting and modernize the power grid are expected to further ease supply constraints and accelerate project timelines.
Key Considerations
This quarter marks a strategic inflection for DLR, as the company leverages its platform scale, funding innovation, and operational discipline to convert secular demand into durable growth. However, the pace and mix of capital deployment, regional AI adoption, and evolving utility requirements will shape the risk-reward calculus for investors.
Key Considerations:
- Interconnection Flywheel: Sustained growth in zero-to-one megawatt and interconnection bookings is driving higher-margin, recurring revenue streams.
- Funding Model Diversification: The $3B+ hyperscale fund reduces balance sheet risk and enables capital-efficient development, but introduces minority ownership complexity.
- Capital Intensity and Execution: CapEx ramp and utility requirements raise execution risk, with 5 GW of runway requiring disciplined allocation and project management.
- Regional AI Adoption Lag: EMEA and APAC remain behind the U.S. in AI-driven hyperscale demand, potentially limiting near-term upside outside core U.S. markets.
- Inflation-Linked Escalators: Over 70% of new bookings are CPI-linked or above 4%, supporting FFO durability in an uncertain macro environment.
Risks
Key risks include rising development CapEx and utility-driven upfront commitments, which could pressure margins if not matched by sustained pricing power. Geopolitical and macroeconomic uncertainties, particularly in EMEA and APAC, may impact leasing velocity or bad debt reserves. Refinancing headwinds and a heavier Q4-weighted commencement schedule could introduce earnings volatility if project timelines slip.
Forward Outlook
For Q3 2025, Digital Realty guided to:
- Continued strength in zero-to-one megawatt bookings and interconnection commencements
- Operating expense ramp in line with business growth and seasonal repair and maintenance
For full-year 2025, management raised guidance:
- Core FFO per share: $7.15 to $7.25 (midpoint up 10 cents)
- Revenue and adjusted EBITDA ranges each increased by $100 million and $75 million, respectively
- Cash releasing spreads now 5% to 6%, GAAP releasing spreads 7% to 8%
Management highlighted:
- Backlog and pipeline support multi-year growth visibility
- Upside potential from outperformance in colocation and interconnection segments
Takeaways
Digital Realty’s record-setting interconnection and colocation performance affirms its platform’s competitive strength and the stickiness of hybrid cloud and enterprise demand. Funding model innovation and a robust backlog extend the growth runway, but investors must monitor capital deployment discipline and regional demand evolution.
- Platform Leverage: DLR’s global campus and connectivity suite are driving margin-rich, recurring revenue streams across geographies and customer segments.
- Capital Allocation Discipline: The pivot to private capital partnerships supports growth without overleveraging, but execution and timing risks remain as CapEx ramps.
- Watch AI Adoption and Utility Trends: Regional AI demand and utility requirements will determine the pace and profitability of future growth, especially outside the U.S.
Conclusion
DLR’s Q2 results mark a clear acceleration in enterprise and interconnection growth, underpinned by strategic capital partnerships and operational outperformance. While multi-year visibility is strong, investors should remain focused on execution risks tied to capital intensity and regional demand shifts.
Industry Read-Through
Digital Realty’s results reinforce the secular tailwinds driving global data center demand, particularly for hybrid cloud, AI, and interconnection-rich deployments. Competitors will face heightened barriers to entry as utility companies raise upfront requirements and permitting becomes a differentiator. The shift toward CPI-linked escalators and capital recycling models is likely to become standard practice across the sector, while the lag in EMEA and APAC AI adoption suggests further upside for global operators as regulatory and infrastructure catalysts emerge. Investors should watch for increased capital intensity and the impact of private capital partnerships on industry structure and returns.