Fitch Affirms Digital Realty Trust's IDR at 'BBB'; Outlook Stable
NEW YORK -- December 05, 2012
Fitch Ratings has affirmed the credit ratings of Digital Realty Trust, Inc.
(NYSE: DLR) and its operating partnership, Digital Realty Trust, L.P.
(collectively, Digital Realty) as follows:
Digital Realty Trust, Inc.
--Issuer Default Rating (IDR) at 'BBB';
--$453.4 million redeemable preferred stock at 'BB+';
--$123.3 million convertible preferred stock at 'BB+'.
Digital Realty Trust, L.P.
--IDR at 'BBB';
--$1.8 billion unsecured revolving credit facility at 'BBB';
--$750 million senior unsecured term loan at 'BBB';
--$1.7 billion senior unsecured notes at 'BBB';
--$266.4 million senior unsecured exchangeable notes at 'BBB'.
The Rating Outlook is Stable.
The affirmation of Digital Realty's IDR at 'BBB' reflects that broader
institutional lender acceptance of datacenters as a niche property type has
remained gradual, despite the company's strong credit metrics for the rating
and a deep bench in terms of real estate and technology management. Digital
Realty's credit strengths include a granular tenant roster that insulates the
company against obsolescence risk, a geographically diverse portfolio in
strategically important markets and a fixed-charge coverage ratio that Fitch
anticipates will remain strong for the 'BBB' rating. DLR also has a good
liquidity position and strong access to capital. Leverage is consistent with
the 'BBB' rating, though Fitch expects leverage to rise as the company
continues to incur debt to fund acquisitions and development.
The secured debt market for datacenters is not as deep as that for other
property types, weakening the contingent liquidity provided by an unencumbered
asset pool. The inclusion of datacenter loans in select recent CMBS
transactions indicates progress towards commercial property lenders' comfort
with the asset class. That being the case, Digital Realty is committed to an
unsecured funding profile and is less reliant on the secured debt markets to
fund its business, predicated on the company's ability to access the unsecured
bond, preferred stock and common stock markets on attractive terms. Its
unencumbered assets (unencumbered NOI divided by a stressed capitalization
rate of 10%) covered unsecured debt by 2.3x as of Sept. 30, 2012, which is
adequate for the current rating.
Digital Realty's properties span 32 markets across 10 countries and four
continents, enabling economies of scale and facilitating the offering of
Turn-Key Flex, Powered Base Building, or colocation space to both global and
local customers. Top markets as of Sept. 30, 2012 were London (12.5% of rent),
Silicon Valley (10.8%), Dallas (10.6%), Northern Virginia (9.3%) and New York
(8.8%) as the company continues to focus on high barrier to entry markets with
demand among colocation providers, corporate users and network/telecom
The company continues its expansion globally as evidenced by the July 2012
acquisition of the three-property Sentrum portfolio in the greater London area
for GBP 715.9 million and push into Singapore, Hong Kong and Australia. The
company has the real estate and technical acumen to pursue such growth while
maintaining credit metrics consistent with an investment grade rating.
Tenant concentration continues to decline, which Fitch views favorably and
which differentiates DLR from its major competitors, CoreSite Realty
Corporation, DuPont Fabros Technology, Inc. and Global Switch Holdings Ltd.
(Fitch IDR of 'BBB' with a Stable Rating Outlook). DLR's top tenants as of
Sept. 30, 2012 were CenturyLink, Inc. (IDR of 'BBB-' with a Stable Rating
Outlook) at 9.5% of rent, Softlayer Technologies, Inc. at 3.8%, TelX Group,
Inc. at 3.5%, Equinix Operating Company, Inc. at 3.4% and Facebook at 3.3%.
Fitch expects fixed-charge coverage to remain strong for the 'BBB' rating due
to favorable leasing trends, funding costs and a staggered lease expiration
schedule. Same-property NOI growth averaged 9.1% over the past nine quarters
and was positive throughout the 2008-2009 financial crisis, driven principally
by positive leasing spreads. Fitch expects same-property NOI growth to remain
in the mid-to-high single digit range over the next two years. Portfolio
occupancy has been stable in the 94% to 95% range and was 94.2% as of Sept.
The weighted average remaining lease term for the portfolio is approximately
seven years, providing cash flow stability absent tenant bankruptcies --
technological obsolescence-related or otherwise. As of Sept. 30, 2012, lease
expirations are laddered, with 2.4% of rent expiring in the fourth quarter of
2012 (4Q'12) followed by 5.9% in 2013 and 10.6% in 2014. Fitch anticipates
that lease rollovers will continue to be positive due to high replacement
costs that deter tenants from vacating and growth in data from devices such as
tablets and from cloud-based services.
Coverage was 2.8x for the trailing 12 months (TTM) ended Sept. 30, 2012,
compared with 2.7x in 2011 and 2.4x in 2010. Organic growth and
development-driven EBITDA led to improvements in coverage. Fitch defines
fixed-charge coverage as recurring operating EBITDA less recurring capital
expenditures less straight-line rent adjustments divided by total interest
incurred and preferred stock dividends.
Under Fitch's base case, coverage would remain in the high 2x to low 3x range
over the next 12-to-24 months, positively impacted by expected high
single-digit same-store NOI growth and EBITDA from development, offset by
increased fixed charges as the company continues to access the unsecured bond
market and preferred stock market to fund acquisitions and development.
Coverage sustaining above 3.0x would be strong for a 'BBB' rating.
In a stress case not anticipated by Fitch in which the company experiences
tenant bankruptcies leading to low single digit same-store NOI declines,
coverage would decline to 2.5x, which would remain adequate for a 'BBB'
DLR has a good liquidity position. Liquidity coverage assuming no additional
capital raising, calculated as liquidity sources divided by uses, is 1.3x for
the period from Oct. 1, 2012 to Dec. 31, 2014. Sources of liquidity include
unrestricted cash, availability under the company's global unsecured credit
facility, and projected retained cash flows from operating activities after
dividends and distributions. Uses of liquidity include debt maturities and
projected recurring capital expenditures and development costs. Assuming 80%
of the company's secured debt is refinanced with new secured debt--a scenario
not likely as the company continues to unencumber the portfolio with corporate
liquidity sources--liquidity coverage would be 1.8x.
The company continues to demonstrate strong access to multiple sources of
capital on favorable terms, and Fitch expects the company will continue to
have good access to the capital markets. In September 2012, Digital Realty
Trust, L.P. issued $300 million 3.625% senior unsecured notes due 2022 at a
spread of 200 basis points over the benchmark rate and priced to yield 3.784%.
In August 2012, the company expanded its global revolving credit facility to
$1.8 billion from $1.5 billion pursuant to the accordion feature under the
facility. Other recent transactions include the issuance of $830.9 million of
follow-on common equity to fund a portion of the Sentrum acquisition in July
2012, the issuance of $175 million 6.625% series F preferred stock in April
2012 and the closing of a $750 million senior unsecured multicurrency term
loan also in April 2012.
Leverage is consistent with the 'BBB' rating, with net debt as of Sept. 30,
2012 to latest 12 months (LTM) annualized recurring operating EBITDA at 5.6x
compared with 4.7x as of Dec. 31, 2011 and 5.5x as of Dec. 31, 2010. The
incurrence of debt to fund a portion of acquisitions and development
contributed towards the recent increase in leverage.
Fitch anticipates that the company will continue to manage to leverage in the
low-to-mid 5x range, which is appropriate for a 'BBB' rating. In a stress case
not anticipated by Fitch in which the company experiences tenant bankruptcies
leading to low single digit same-store NOI declines, leverage could sustain
above 6.0x, which would be more consistent with a 'BBB-' rating.
The Stable Outlook reflects Fitch's projection that fixed charge coverage will
remain in the high 2x to low 3x range, that leverage will remain in the
low-to-mid 5x range, and that the company will continue its gradual tenant and
asset diversification via acquisitions and development.
The two-notch differential between Digital Realty's IDR and its preferred
stock rating is consistent with Fitch's criteria for corporate entities with
an IDR of 'BBB'. Based on Fitch's criteria report, 'Treatment and Notching of
Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' dated Dec. 15,
2011, the company's preferred stock is deeply subordinated and has loss
absorption elements that would likely result in poor recoveries in the event
of a corporate default.
The following factors may have a positive impact on Digital Realty's ratings
-- Increased mortgage lending activity in the datacenter sector;
-- Fitch's expectation of fixed-charge coverage sustaining above 3.0x (fixed
charge coverage was 2.8x for the TTM ended Sept. 30, 2012);
-- Fitch's expectation of net debt to recurring operating EBITDA sustaining
below 4.5x (leverage was 5.6x for the TTM ended Sept. 30, 2012).
The following factors may have a negative impact on Digital Realty's ratings
-- Fitch's expectation of fixed charge coverage sustaining below 2.5x;
-- Fitch's expectation of leverage sustaining above 6.0x;
-- Base case liquidity coverage sustaining below 1.0x.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
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