Digital Realty Earnings: Great Pricing and Good Demand With Trend Toward Interconnection Deployments

Digital Realty DLR had a solid though unspectacular quarter of new bookings across all customer types and geographies, which we expect to be typical given we see no end in sight to the growing reliance all entities have on data and connectivity. The most impressive figure this quarter was the significant pricing growth on renewal leases, and management expects the re-leasing spreads to stay elevated throughout the year, which will bode well for sales growth beyond 2023. With little surprising in the quarter, we are maintaining our $135 fair value estimate and still think the stock is mildly undervalued.

Digital Realty signed $114 million in annualized new leasing revenue during the quarter, equating to about 3% of the current rental and interconnection revenue base and replenishing the backlog after about $100 million in new leases commenced during the quarter. Scale leasing in Europe was the biggest driver at $47 million, but under-one-megawatt lease signings were strong across all regions and totaled $37 million, and interconnection signings added about $13 million. These results support our belief that Digital Realty is successfully catering to customers that need smaller deployments and connection to their cloud providers. The ability to serve these needs is what gives Digital’s data centers strong competitive advantages and support the narrow moat we assign the firm.

We believe the value and differentiation in Digital’s data centers also provide it pricing power. The firm signed over $200 million in renewal leases during the quarter, with 7% growth on the cash renewal rates. Meanwhile, churn was below 1%. While limited supply in many markets provided a boost, we believe secular trends and Digital’s ability to serve all types of customer needs—from hyperscale to small enterprise and locations to facilitate connections across all geographies—makes this quarter’s results typical of what we expect over time.