How BMO Capital's Top Pick Endorsement Could Shape Digital Realty Trust's (DLR) AI-Driven Growth Story

The recent reaffirmation of BMO Capital's Outperform rating for Digital Realty Trust (DLR) has reignited discussions about the REIT's role in the AI-driven data center boom. With a price target of $195—upgraded from $190—BMO analysts are betting on DLR's ability to capitalize on surging demand for AI infrastructure, despite rising interest rates and sector-specific risks. This endorsement, coupled with broader analyst optimism, raises a critical question: Is DLR's current valuation a compelling entry point for investors, or do supply-side challenges and insider selling activity temper the bullish case?

Sector Tailwinds: AI as the Catalyst for Growth

The data center industry is undergoing a seismic shift, driven by the insatiable demand for AI computing. By 2026, global investments in data center infrastructure are projected to reach $550 billion, with AI workloads expected to dominate 70% of total demand. Digital Realty, a leader in colocation services, is uniquely positioned to benefit from this trend. Its portfolio includes high-availability facilities in key AI hubs like the U.S., Europe, and Asia, and its 7.7% Core FFO growth projection for 2025 aligns with the sector's upward trajectory.

BMO Capital's analysis highlights DLR's strong backlog and potential lease mark-to-market gains as key drivers of growth. The firm also notes that DLR's strategic partnerships with hyperscalers and its focus on AI-optimized infrastructure—such as liquid cooling and modular edge deployments—position it to outperform peers. This is further supported by the broader analyst community, with 23 of 28 recent ratings (including upgrades from Evercore ISI and Citigroup) leaning bullish.

Supply Risks: Construction Delays and Regulatory Hurdles

Despite the sector's momentum, DLR faces headwinds. Supply chain bottlenecks for advanced hardware (e.g., GPUs, cooling systems) and construction delays in primary markets are slowing expansion. Land scarcity in high-demand regions like Northern Virginia and Dallas is forcing operators to pivot to secondary markets, where infrastructure and workforce readiness lag.

Regulatory pressures add another layer of complexity. Stricter energy efficiency standards and community resistance to water-intensive projects (e.g., the Mesa, Arizona case) could delay approvals and inflate costs. For DLR, which relies on rapid deployment to meet client needs, these risks could erode margins if not mitigated through long-term partnerships or sustainable design.

Insider Selling: A Cause for Concern?

A single insider sale by Director Mark R. Patterson—175 shares totaling $30,887 in Q2 2025—has sparked debate about management confidence. While this represents a minor reduction in his holdings (2.61%), it contrasts with the broader analyst optimism. However, insider selling is not uncommon for REITs, often tied to personal financial planning rather than strategic pessimism. DLR's 14% total return over the past 12 months and recent dividend announcements suggest management remains committed to shareholder value.

Valuation and Entry Point Analysis

DLR's current valuation appears attractive relative to its growth prospects. At $176.50 (as of June 2025), the stock trades at a price-to-Core FFO multiple of 16.5x, below the sector average of 18x. BMO's $195 target implies a 10% upside, while the broader analyst consensus of $184.50 suggests a more conservative 5% potential. Given the projected 7.7–7.9% Core FFO growth and the AI tailwinds, the stock's intrinsic value may be underestimated.

Investment Thesis: Balancing Risks and Rewards

For long-term investors, DLR offers a compelling mix of defensive REIT characteristics and high-growth AI exposure. The company's strong backlog, strategic positioning in AI hubs, and robust dividend yield (6.56%) make it a resilient play in a sector poised for multiyear expansion. However, near-term volatility from supply risks and interest rate uncertainty should be factored into the risk-reward equation.

Key considerations for entry:
1. Diversification: DLR should complement a broader portfolio of AI-driven tech and infrastructure plays (e.g., NVIDIA, Microsoft).
2. Time Horizon: Investors should target a 12–24 month horizon to ride out construction delays and regulatory hurdles.
3. Price Targets: A pullback to $170–$175 could offer a more attractive entry point, aligning with BMO's $195 target and 10% annualized returns.

Conclusion: A Buy for the AI-Centric Investor

BMO Capital's upgrade underscores DLR's strategic alignment with the AI revolution, a trend that is reshaping global infrastructure. While supply risks and insider selling warrant caution, the REIT's fundamentals—strong backlog, AI-optimized assets, and a disciplined capital structure—justify a bullish stance. For investors seeking exposure to the AI-driven data center boom, DLR represents a high-conviction buy, provided they are prepared to navigate near-term volatility in pursuit of long-term growth.