Digital Realty Trust maintained at Overweight, with strong bookings and improving pricing supporting multi-year double-digit core FFOPS growth

Overview

This report is J.P. Morgan's 2Q26 earnings update on Digital Realty Trust (DLR.US). The core conclusion is that DLR's bookings, backlog, project commencements, and renewal pricing all indicate strong demand, particularly supported by tight data center capacity driven by cloud and AI computing demand. The company raised 2026 guidance for revenue, adjusted EBITDA, and core FFOPS, and expressed high confidence in achieving double-digit core FFOPS growth from 2026 to 2028.

Core views

J.P. Morgan maintains its Overweight rating on DLR and shifts its valuation anchor to a December 2027 price target of $235. The bullish thesis includes: supply-demand imbalance driving continued increases in renewal pricing; cash renewal spreads of 66.7% in the >1 MW business; continued record performance in the 0-1 MW and interconnection businesses; under-construction capacity in North America, EMEA, and APAC supporting future growth; and strategic private capital plus the Columbia Capital acquisition helping expand funding and fee income sources.

Analysis framework

The report analyzes 2Q26 operating data, bookings and backlog, renewal spreads, development pipeline, regional capacity under construction, changes in company guidance, and J.P. Morgan's financial model, and uses a DCF valuation approach to determine the price target. The report also evaluates DLR's positioning in cloud, AI, high-density data centers, and its global development portfolio.

Methodology notes

• Valuation methodsDCF

  Discounted cash flow valuation

  The $235 price target is based on DCF analysis, assuming a WACC of 6.75%, a perpetual growth rate of 4.5%, and incorporating a 10% public market discount.

• Operating analysisBookings and backlog analysis

  Bookings and backlog analysis

  Revenue visibility and growth certainty are assessed through new bookings, renewals, backlog, and the pace of future commencements.

• Industry analysisSupply-demand pricing framework

  Supply-demand and pricing framework

  The report argues that data center supply is constrained by capacity and NIMBYism, while cloud and AI demand remains strong, supporting improvement in renewal and new lease pricing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• DLR.US

  Covered company and primary investment target

  Strengths

  Benefits from cloud and AI demand, a global high-density data center portfolio, strong bookings, improving renewal spreads, and visibility into multi-year core FFOPS growth.

  Weaknesses

  High capital expenditure requirements, with part of growth dependent on stable project development and external capital arrangements.

  Comparison

  The report places it within communications infrastructure and data center REIT coverage, emphasizing its capacity advantage in Northern Virginia and major global markets.

  Risks

  FX volatility, customer concentration, weaker macro conditions leading to slower IT demand, and excess development supply pressuring pricing.

• Data center REITs

  Industry mapping

  Strengths

  Long-term demand is supported by cloud, AI, enterprise digitalization, and outsourcing trends, while supply constraints are favorable for pricing.

  Weaknesses

  The industry carries risks from long construction cycles, capital intensity, and cyclical supply expansion.

  Comparison

  DLR is viewed as well positioned in terms of global portfolio, high-density cloud-oriented assets, and new development projects.

  Risks

  If rapid construction expansion creates oversupply, industry pricing and valuations could come under pressure.

Key data

• 2Q26 new bookings$209m DLR share; $307m at 100% shareNew bookings were strong during the quarter, with the >1 MW business contributing $100m and the 0-1 MW and interconnection businesses also performing notably well.
• Backlog$1.4b DLR share; $1.9b at 100% shareThe company expects remaining 2026 commencements of $635m, $480m in 2027, and $312m in 2028 and beyond.
• Post-quarter hyperscale leases$205m annualized GAAP rent; $410m at 100% shareThe two U.S. hyperscale leases were not included in the backlog disclosed for 2Q26.
• Renewal amount and spread$261m renewals; 25.4% blended cash mark-to-marketCash renewal spreads were 66.7% in the >1 MW business and 5.2% in the 0-1 MW business.
• 2026 core FFOPS forecast$8.20 excluding promote income; $8.72 including promote incomeJ.P. Morgan expects year-over-year growth of 11.0% excluding promote income.
• 2027 core FFOPS forecast$9.07This implies year-over-year growth of 10.6% versus the 2026 figure excluding promote income.
• 2028 core FFOPS forecast$10.05Expected year-over-year growth is 11.1%.
• Global IT capacity under construction1.4 GWOf this, North America accounts for 1.1 GW, with a pre-lease rate of about 62% in North America and an expected yield of 11.8%.
• Key DCF assumptions6.75% WACC; 4.5% perpetual growth; 10% public market discountThese support the December 2027 price target of $235.

Impact & implications

The report's implication for DLR is positive: strong bookings and high renewal spreads improve visibility on revenue and FFOPS, AI and cloud demand extend the data center upcycle, and the development pipeline plus strategic private capital can support expansion. However, higher capex, international FX risk, customer concentration, and potential oversupply remain the main constraints on valuation and earnings delivery.

Risks

• FX could become a headwind, with international markets such as Europe and Asia contributing about 35% of Digital Realty's revenue.
• Customer concentration is relatively high, with the top five customers contributing about 30% of annualized rent and the top twenty contributing about 50%.
• Economic weakness, declining IT demand, or technological advances could reduce demand for third-party data center outsourcing.
• If the data center industry experiences a construction boom, it could create oversupply and depress pricing.
• Rising capital expenditures could increase financing pressure, with the midpoint of 2026 discretionary capex raised to $4.5b.

What to watch

• Whether the remaining $635m of 2026 commencements can be delivered on schedule.
• The further contribution of the two post-quarter hyperscale leases to backlog, revenue, and the pre-lease rate at Digital Dulles.
• Whether cash renewal spreads can remain within the 9.0%-11.0% guidance range or continue to move higher.
• Changes in the pre-lease rate, construction costs, and stabilized yields for the 1.1 GW of North American capacity under construction.
• Whether the Columbia Capital acquisition can close in 3Q26 and add fee income and financing relationships.
• The impact of FX, customer concentration, and potential supply expansion on valuation multiples.