Digital Realty stock drops 4%, but here's why market may be wrong

Digital Realty stock NYSE:DLR fell about 5% in premarket trading on Tuesday after the data-centre landlord announced a $3.5 billion (approx. Rs 978.6 billion) deal to buy out Blackstone’s interests in three Northern Virginia assets.

At first glance, the reaction looks expected as the transaction is large, part-funded with stock, and comes after several other capital moves.

But the selloff also raises a fair question: is the market focusing too much on near-term dilution and not enough on the quality of what Digital Realty is buying?

Digital Realty stock: Deal that spooked investors

Digital Realty is paying $1.2 billion (approx. Rs 335.5 billion) to acquire Blackstone’s blended 64% equity interest in three hyperscale data centres in Northern Virginia.

The consideration includes $400 million (approx. Rs 111.8 billion) in cash and $2.3 billion (approx. Rs 643.1 billion) in Digital Realty shares. The assets have a gross value of $7.8 billion (approx. Rs 2.2 trillion), including debt and remaining development capital expenditure.

The properties include Blackstone’s 80% interest in two 96-megawatt data centres in Manassas, Virginia, and its 50% interest in a 96-megawatt facility in Sterling.

The investors clearly didn't like the move and the obvious reason is dilution.

Paying $2.3 billion (approx. Rs 643.1 billion) in stock means more shares in circulation, which can weigh on per-share metrics in the short term.

The $1.2 billion (approx. Rs 335.5 billion) cash component also adds to investor concerns about capital intensity at a time when data-centre development is already expensive.

The timing is also a factor as Digital Realty recently raised about $1.2 billion (approx. Rs 335.5 billion) through an at-the-market share sale and bought roughly 1,440 acres near Kansas City for future hyperscale development.

The company is also increasing its stake in Teraco and buying Columbia Capital.

Why the fundamentals tell a different story

The assets themselves look strong as the three data centres are fully leased to investment-grade hyperscale customers under 15-year leases.

They carry a blended average customer credit rating of AA- and include 3.6% annual rent escalators.

That is valuable in the data-centre world. Long leases with high-quality customers can provide predictable cash flow, while built-in rent increases help protect returns over time.

The analysts noted that the deal also carries an initial stabilised cap rate above 6.5%. For fully leased hyperscale assets in Northern Virginia, that is not a weak number.

If cap rates continue to compress because AI and cloud demand remain strong, Digital Realty may be buying into a very attractive long-term cash-flow stream.

“This transaction is expected to be accretive to Core FFO per share in each of 2027 and 2028, as development is completed and rents commence,” Digital Realty CFO Matt Mercier said.

That is the key line for investors. The deal may pressure the stock today because of dilution and funding concerns, but the company expects it to add to core funds from operations per share once the assets stabilise.

Greg Wright, Digital Realty’s chief investment officer, also framed the acquisition as the next stage of an existing Blackstone partnership, saying it allows the company to increase ownership in “fully leased, high-quality hyperscale assets.”