Fitch Rates Digital Realty Trust's $225MM 5.875% Series G Preferred Stock
'BB+'; Outlook Stable
NEW YORK -- April 4, 2013
Fitch Ratings has assigned a 'BB+' rating to the $225 million 5.875% Series G
cumulative redeemable preferred stock issued by Digital Realty Trust, Inc.
(NYSE: DLR). DLR intends to contribute the net proceeds of this offering to
its operating partnership, Digital Realty Trust, L.P., which will subsequently
use the net proceeds to temporarily repay borrowings under the global
revolving credit facility, to acquire additional properties, to fund
development opportunities, or for general corporate purposes.
Fitch currently rates Digital Realty Trust, Inc., Digital Realty Trust, L.P.,
and Digital Stout Holding, LLC (collectively, Digital Realty) as follows:
Digital Realty Trust, Inc.
--Issuer Default Rating (IDR) 'BBB';
--$678.4 million preferred stock 'BB+'.
Digital Realty Trust, L.P.
--$1.8 billion unsecured revolving credit facility 'BBB';
--$750 million senior unsecured term loan 'BBB';
--$1.7 billion senior unsecured notes 'BBB';
--$266.4 million senior unsecured exchangeable notes 'BBB'.
Digital Stout Holding, LLC
--GBP400 million unsecured guaranteed notes 'BBB'.
The Rating Outlook is Stable.
Key Rating Drivers
The 'BBB' IDR takes into account Digital Realty's credit strengths, including
a granular tenant roster that insulates the company against technology
obsolescence risk, a geographically diverse data center portfolio in
strategically important markets and a fixed-charge coverage ratio that Fitch
anticipates will remain strong for the 'BBB' rating. Digital Realty 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 IDR also reflects that broader institutional lender acceptance of data
centers as a niche property type has remained gradual. The inclusion of data
center loans in select recent CMBS transactions indicates progress towards
commercial property lenders' comfort with the asset class. However, Digital
Realty is committed to an unsecured funding profile and is less reliant on the
secured debt markets to fund its business, which is predicated on the
company's ability to access the unsecured bond, preferred stock and common
stock markets on attractive terms.
The secured debt market for data centers is not as deep as that for other
property types, weakening the contingent liquidity provided by an unencumbered
asset pool. Digital Realty's unencumbered assets (unencumbered NOI divided by
a stressed capitalization rate of 10%) covered unsecured debt by 2.1x as of
Dec. 31, 2012 pro forma for the Digital Stout Holding, LLC guaranteed notes
offering and Series G preferred stock offering, which is adequate for the
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 Dec. 31, 2012 were London (11.8% of
annualized rent), Dallas (10.4%), Silicon Valley (9.8%), Northern Virginia
(9.2%) and New York (8.5%) as the company continues to focus on high barrier
to entry markets with demand among colocation providers, corporate users and
The company continues its expansion globally as evidenced by the acquisition
of a three-property data center portfolio in Paris in a sale/leaseback
transaction with Bouygues Telecom in January 2013, purchase of a data center
in Ontario, Canada in March 2013, 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
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 Outlook).
Diverse Tenant Base
DLR's top tenants as of Dec. 31, 2012 were CenturyLink, Inc. (IDR of 'BB+'
with a Stable Outlook) at 9.1% of annualized rent, Softlayer Technologies,
Inc. at 4.0%, TelX Group, Inc. at 3.9%, Equinix Operating Company, Inc. at
3.3% and Facebook, Inc. at 3.1%.
Stable Fixed-Charge Coverage
Same-property NOI growth averaged 8.7% over the past eight 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 94.4% as of Dec. 31,
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 Dec. 31, 2012, lease expirations are laddered, with 6.5% of annualized
rent expiring in 2013 followed by 9.7% in 2014 and 9.1% in 2015. Fitch
anticipates that rent spreads on 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 2.6x for 2012 pro forma, 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'
Good Liquidity Position
Pro forma liquidity coverage assuming no additional capital raising,
calculated as liquidity sources divided by uses, is 1.6x for the period from
Jan. 1, 2013 to Dec. 31, 2014. Sources of liquidity include unrestricted cash,
availability under the company's global unsecured credit facility pro forma
for the Digital Stout Holding, LLC guaranteed notes offering and Series G
preferred stock offering, and projected retained cash flows from operating
activities after dividends and distributions. Uses of liquidity include debt
maturities, 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 2.1x.
Strong Capital Access
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 as evidenced by the GBP400 million
4.25% guaranteed notes offering and $225 million Series G preferred stock
offering. In addition, 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.
As of Dec. 31, 2012 pro forma, net debt to recurring operating EBITDA was 5.3x
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 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.
Preferred Stock Notching
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. 13,
2012, 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 (pro
forma fixed-charge coverage is 2.6x);
--Fitch's expectation of net debt to recurring operating EBITDA sustaining
below 4.5x (pro forma leverage is 5.3x).
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:
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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