DLR Q2 2025: Record $90M Zero-to-One Bookings Drive Growth Outlook
- Record Growth in Zero to One Megawatt Plus Interconnection: The Q&A highlighted that Digital Realty delivered record bookings in this segment—about $90,000,000, which was 18% above the previous record—illustrating robust demand and a successful revamped go-to-market strategy.
- Robust Hyperscale Pipeline and Capital Funding: Management emphasized a strong runway with roughly 5 gigawatts of capacity and an oversubscribed U.S. Hyperscale fund poised to deploy up to $10,000,000,000 in investment, underlining long‑term growth opportunities.
- Expanding Global Footprint and Diverse Demand: Executives discussed growing customer traction both domestically and internationally—with tailored solutions for enterprise, hyperscale, and AI use cases—which positions the company to capitalize on digitization and cloud trends across key markets.
- Lower Re-leasing Spreads: CFO Matt Mercier indicated that after an outperformance in the first half of the year, if that uplift is stripped out, spreads could be roughly 100 basis points lower in the second half, potentially compressing future fee income and margins.
- Refinancing Headwind: The company is set to face a 3.25 basis point refinancing headwind beginning in the third quarter, which could pressure earnings by increasing financing costs.
- CapEx Ramp-Up Risk: The significant increase in CapEx—up 50% year-over-year on a gross basis—to sustain growth exposes the company to potential margin pressures if future demand does not materialize as expected.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +10% (from $1,356.75M in Q2 2024 to $1,493.15M in Q2 2025) | Total Revenue increased by roughly $136.4M (10%), building on a strong base in Q2 2024; this growth is likely driven by improved leasing activity and the completion of development projects that enhanced overall income despite mixed performance in other portfolio areas. |
Rental and Other Services | -25% (from $1,338.97M in Q2 2024 to $1,003.55M in Q2 2025) | A 25% decline in Rental and Other Services revenue suggests a significant reduction in stabilized rental income; factors such as lower utility reimbursement levels and potential asset rebalancing appear to have impacted the revenue, contrasting with the offsets seen in previous periods. |
Fee Income and Other | +94% (from $17.78M in Q2 2024 to $34.43M in Q2 2025) | Fee Income and Other nearly doubled, indicating accelerated growth in non-rental revenue streams possibly driven by higher service fees or improved fee-based contracts, in contrast to the much lower fee income levels in Q2 2024. |
Tenant Reimbursements | N/A (Q2 2025 value: $331.86M; no prior YoY comparison provided) | Tenant Reimbursements contributed $331.86M in Q2 2025; while no YoY comparison is available, the level suggests reliance on the pass-through of operating expenses to tenants, a trend consistent with past reliance on utility reimbursement recoveries. |
Geographic Revenue – Americas | Sequential increase (from $226.22M to $256.18M from prior quarter) | The Americas region experienced sequential revenue growth, likely reflecting robust leasing activity and strong operational performance compared to the previous quarter’s base, thereby supporting the overall revenue increase. |
Geographic Revenue – APAC | Sequential increase (from $75.05M to $86.25M from prior quarter) | APAC revenue improved sequentially through increased new leasing activity and strategic market expansion compared to the prior period, contributing to overall positive momentum in this region. |
Geographic Revenue – EMEA | Sequential drop (from $47.83M to $13.86M from prior quarter) | The dramatic decline in EMEA revenue suggests a significant reduction in factors such as utility reimbursements and other region-specific adjustments; this contrasts sharply with earlier periods and highlights challenges in the region during Q2 2025. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Core FFO per Share | FY 2025 | $7.05 to $7.15 per share | $7.15 to $7.25 per share | raised |
Constant Currency Core FFO per Share | FY 2025 | no prior guidance | $7.10 to $7.20 per share | no prior guidance |
Revenue ($USD Millions) | FY 2025 | increased by $25 million | increased by $100 million | raised |
Adjusted EBITDA ($USD Millions) | FY 2025 | increased by $25 million | increased by $75 million | raised |
Cash Re-leasing Spread (%) | FY 2025 | blended 5.6% increase on a cash basis | 5% to 6% (raised) | raised |
GAAP Re-leasing Spread (%) | FY 2025 | no prior guidance | 7% to 8% (raised) | no prior guidance |
General and Administrative (G&A) Expenses ($USD Millions) | FY 2025 | increased by $5 million | increased by $15 million | raised |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue YoY Growth | Q2 2025 | More than 10% year-over-year | 1,356.749In Q2 2024 to 1,493.15In Q2 2025 (≈10.05% YoY increase) | Beat |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Record Backlog and Pipeline Growth | In Q1 2025, Digital Realty reported a record backlog of signed but not commenced leases (Digital Realty's share of $919M) with strong pipeline growth driven by long‐term contracts and attractive escalators. Q4 2024 highlighted an $800M backlog with staggered commencement across 2025–2027. Q3 2024 noted a sequential backlog increase to $859M and significant new lease signings. | Q2 2025 emphasized a backlog of $826M with a broad pipeline and a four‐month book-to-bill ratio, underscoring strong demand across capacity segments. | Consistent strength in backlog and pipeline across periods, reflecting steady long-term revenue visibility despite minor numerical differences. |
Diversified Demand Across Enterprise, Hyperscale, and Global Markets | Q1 2025 outlined a record enterprise pipeline (especially in the 0–1MW segment) with significant AI contributions and diverse geographic demand. Q4 2024 and Q3 2024 emphasized robust demand from enterprise, service providers, and hyperscalers along with global market expansion. | Q2 2025 reiterated strong, broad-based demand driven by digital transformation, cloud computing, and AI, with accelerated deal deployments across key regions. | Stable and broad market appeal remains a key focus, with the current period underscoring rapid global deployment and reinforcing the diversified customer base. |
Robust Pricing and Lease Performance | Q1 2025 noted record leasing volumes with increased rates (e.g., $244/kW/month and robust renewals) with strong performance in both 0–1MW and >1MW segments. Q4 2024 and Q3 2024 confirmed strong pricing dynamics, high lease renewals, and substantial annual rent escalators. | Q2 2025 emphasized stable pricing performance with $177M of annualized rent signings, healthy renewal increases, and high proportions of leases including rent escalators. | Continued strength in pricing and lease performance with incremental improvements in renewal spreads and contract terms demonstrating consistent market momentum. |
Strong Capital Funding and Financial Flexibility | Q1 2025 showcased the formation of a U.S. hyperscale fund and low leverage (around 5.1x) with robust liquidity, while Q4 2024 highlighted enhanced liquidity (over $6B) and diversified capital options, and Q3 2024 reported nearly $5B of liquidity with solid debt profiles. | Q2 2025 reported more than $7B of liquidity, strong funding initiatives including Eurobond issuances, and continued capital expenditure initiatives, albeit with a noted refinancing headwind. | Consistent financial robustness throughout the periods, with Q2 2025 maintaining strong liquidity and funding flexibility—even as refinancing headwinds begin to emerge. |
Emerging AI and Cloud Infrastructure Demand | Q1 2025 underscored that AI-related leasing (over two-thirds of signings) was driving demand, with notable enterprise and hyperscale integration. Q4 2024 highlighted a surge in AI-related megawatt signings (38% of capacity) and supportive developments in AI inference and private AI-ready facilities. Q3 2024 discussed adaptations in design and capacity to meet high power density needs for AI, including strategic partnerships. | Q2 2025 reinforced the strong, broad-based demand driven by AI and cloud transformation, noting growing global AI deployments and strategic backing for hyperscale growth. | Growing importance of AI continues to drive demand, with evolving global integration and an increasing role of AI in long-term capacity planning across periods. |
Rising CapEx and Refinancing Headwinds | Q1 2025 referenced substantial development CapEx expenditures with new capacity deployments and refinancing activities using Eurobonds. Q4 2024 detailed CapEx levels (gross $3B) and refinancing activities (including exchangeable notes and gilts) that reduced maturing debt, while Q3 2024 provided clarity on high CapEx spend ($855M in the quarter) and noted refinancing steps. | Q2 2025 noted a 50% increase in CapEx spend—with over $900M on development—and introduced a refinancing headwind from Eurobond reissuance (325 basis points) starting in Q3. | Continued heavy investment in CapEx with emerging refinancing challenges; investment intensity remains high while managing rising cost pressures through strategic refinancing. |
Competitive Pressures and Development Yield Risks | Q4 2024 explicitly discussed competitive pressures by comparing higher development yields (several hundred basis points above competitors) and risks related to narrowing yield gaps in EMEA/APAC. Q3 2024 touched on maintaining robust yields amid market changes. | There is no mention of competitive pressures or development yield risks in Q2 2025. | De‐emphasized in Q2 2025 compared to previous periods, suggesting less focus on market competition and yield variability in the current reporting. |
Volatility in Quarterly Bookings and Macroeconomic Uncertainty | Q1 2025 acknowledged market volatility and macroeconomic uncertainty affecting booking patterns and build costs, while Q4 2024 noted lumpy quarterly bookings and Q3 2024 mentioned macroeconomic headwinds without overshadowing strong results. | Q2 2025 did not include any discussion on market volatility or macroeconomic uncertainty. | Reduced emphasis on volatility and broader economic uncertainties in Q2 2025, possibly indicating a more stable operating environment or a shift in messaging priorities. |
Reduced Emphasis on Tariff and Supply Chain Risks | Q1 2025 mentioned only a modest (less than 5%) impact on build costs from tariffs and proactive measures on supply chain management. Q4 2024 discussed supply chain tightness and potential tariff impacts while emphasizing mitigation through scale and relationships. Q3 2024 did not address this topic explicitly. | Q2 2025 does not mention tariffs or supply chain risks. | Noticeable drop in discussion of tariff and supply chain risks in Q2 2025 compared to earlier quarters, indicating a reduced emphasis on these external cost pressures. |
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Zero to One Growth
Q: What drives zero to one growth?
A: Management has doubled down on a refined global strategy and go-to-market approach, delivering a record $90M in bookings—about 18% above the previous record—demonstrating both market share gains and robust demand. -
Interconnection Bookings
Q: What about interconnection bookings?
A: They attribute the record interconnection bookings to sustained customer journeys, global pricing standardization, and a comprehensive interconnection suite across regions, setting a strong pace into Q3. -
Sustainable Growth Outlook
Q: What is the long-term growth outlook?
A: Management expects to maintain consistent, compound growth—targeting around 7% core FFO growth this year—with further acceleration into 2027 and beyond, driven by both hyperscale and zero to one initiatives. -
Hyperscale Fund Impact
Q: How will the hyperscale fund affect earnings?
A: The fund, which may deploy up to $10B, is structured to gradually boost fee income and contribute to core FFO per share growth over the next few years as development ramps up. -
Releasing Spreads
Q: Why would releasing spreads lower?
A: Management explained that early outperformance added roughly 100 basis points to spreads, but they expect normalization in the second half as the focus shifts more strongly to the zero to one segment. -
CapEx Range Outlook
Q: How long will the $3B–$3.5B CapEx spend persist?
A: They anticipate a lighter first half with a pick-up later, as their ample funding and disciplined, step-up approach support ongoing demand through a steady CapEx cycle. -
Hyperscale Market Opportunities
Q: What about the large capacity market timing?
A: The company is seeing robust demand with record leasing of $177M in the quarter and active discussions for capacity blocks from late 2026 through 2027 in leading U.S. markets. -
Permitting Impact
Q: How will permitting reforms affect bookings?
A: Recent regulatory moves to streamline data center permitting and expand the power grid are expected to expedite infrastructure buildouts and help bring customer deployments online more quickly. -
Charlotte & Pipeline
Q: What’s the update on Charlotte and pipeline?
A: Charlotte is on track with power build and permitting, supported by dense network architecture; it remains a key market with growing enterprise and hyperscale pipelines across its connected campuses. -
Global AI Adoption
Q: Why is AI adoption slower in EMEA/APAC?
A: Management attributes the lag outside the U.S. to customer home base tendencies and anticipates that as global infrastructure matures, the demand for AI workloads will accelerate internationally. -
Utility & Construction Costs
Q: How do utility commitments impact construction costs?
A: Stricter utility requirements ultimately raise the bar for committed developers, which management views as a positive for industry stabilization and ensuring rationalized, long-term construction costs. -
2026 Capacity Availability
Q: Can 2026 installations absorb more bookings?
A: Yes, existing installations in over 50 metros are well positioned to take on more zero to one bookings in 2026, providing a solid runway to further boost financial performance. -
Zero to One TAM & CapEx
Q: Is the zero to one market expanding?
A: The addressable market is very large, and Digital Realty is capturing increasing share while planning incremental CapEx investments to consistently support the expanding opportunities. -
Tier One AI Markets
Q: When will Tier one markets see AI surges?
A: While enterprise AI testing remains modest today, management expects a surge in distributed AI inferencing needs as hybrid and private IT gradually evolve, positioning Tier one markets for future expansion.
Research analysts covering DIGITAL REALTY TRUST.