|[December 04, 2013]
Fitch Affirms Digital Realty Trust's IDR at 'BBB'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the credit ratings of Digital Realty Trust,
Inc. (NYSE: DLR) and its subsidiaries (collectively, Digital Realty) as
Digital Realty Trust, Inc.
--Issuer Default Rating (IDR) at 'BBB';
--$720 million preferred stock at 'BB+'.
Digital Realty Trust, L.P.
--IDR at 'BBB';
--$2 billion unsecured revolving credit facility 'BBB';
--$950.2 million senior unsecured term loan at 'BBB';
--$1.7 billion senior unsecured notes at 'BBB';
--$266.4 million senior unsecured exchangeable notes at 'BBB'.
Digital Stout Holding, LLC
--IDR at 'BBB';
--GBP400 million unsecured guaranteed notes at 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation of Digital Realty's IDR at 'BBB' takes into account the
company's strong access to capital evidencing increasing institutional
acceptance of the company's data center portfolio, as well as adequate
liquidity due to laddered debt maturities, moderate retained cash flow
and a less aggressive development pipeline. Credit strengths also
include a global platform, limited tenant concentration, and a seasoned
These strengths are balanced by uncertainties involving the leasing
environment following reduced occupancy rates and select rental rate
roll downs; however, fixed-charge coverage should remain appropriate for
the 'BBB' rating. Corporate leverage is low for the rating although
unencumbered asset coverage is somewhat weak for the 'BBB' level as the
company's unsecured debt incurrence has outpaced the growth of the
Leasing Environment Uncertainties
Same-property net operating income (NOI) declined by 0.6% year-over-year
in the third quarter of 2013 (3Q'13) following growth of 7.7% in 2Q'13
and 8.1% in 1Q'13, driven primarily by a non-cash straight-line rent
adjustment booked during 3Q'13 (excluding this adjustment, same-property
NOI growth would have been +4.4%). In addition, same-store occupancy
decreased to 91.8% as of Sept. 30, 2013 from 93.7% as of Dec. 31, 2012,
principally due to a sizeable non-data center asset lease expiration.
Cash rental rate roll downs on renewal were negative 5% on average for
the year-to-date period ended Sept. 30, 2013.
Rental roll downs are possible in 2014 when 9.4% of rents expire as well
as in 2015 when 8% expires. Nevertheless, the company sees an
opportunity to increase revenues from colocation i.e., providing space,
power, connectivity and outsourced IT solutions for corporate
enterprises. Colocation provides an alternative vehicle for growth that
would enhance DLR's revenue diversity to the benefit of unsecured
Tenant retention was high at 92% for the year-to-date period ended Sept.
30, 2013, indicating that only select tenants have chosen not to renew
in favor of building their own data centers, which is a secular data
center industry risk. In addition, the weighted average remaining lease
term for the portfolio is approximately 6.9 years, providing cash flow
stability absent tenant bankruptcies.
Solid Fixed-Charge Coverage
The company's fixed-charge coverage ratio was strong for the 'BBB'
rating at 3.0x for the trailing twelve months (TTM) ended Sept. 30,
2013, compared with 3.0x in 2012 and 2.9x in 2011. Fitch defines
fixed-charge coverage as recurring operating EBITDA less recurring
capital expenditures less straight-line rent adjustments divided by
total cash interest incurred and preferred stock dividends.
Fitch anticipates that a backlog of leases signed but not yet commenced
will offset potential further rent roll downs and increased capital
expenditures associated with the lease-up of vacant space. Fixed-charge
coverage should remain solid for the 'BBB' rating in the high 2.0x
range. In a stress case not anticipated by Fitch in which rental rate
roll downs result in low single digit same-store NOI declines, coverage
would decline to 2.5x, which would remain adequate for a 'BBB' rating.
Reduced Development Pipeline
Fitch views favorably DLR's reduction in development activities in
response to market conditions. DLR's direct costs to-be-spent
represented 5.2% of gross asset value as of Sept. 30, 2013 compared with
6% as of year-end 2012 and 6.9% as of year-end 2011. Total
construction-in-progress is approximately 25.1% pre-leased as of Sept.
30, 2013, indicative of elevated lease-up risk. Construction costs on a
per-square foot basis are declining as well but remain high compared
with other commercial property sectors.
Strong Access to Capital
The company continues to demonstrate strong access to multiple sources
of capital on favorable terms. In January 2013, Digital Stout Holding,
LLC issued GBP400 million of its 4.25% guaranteed notes due 2025 and in
April 2013, the company issued $250 million of 5.875% series G preferred
stock. In August 2013, the company refinanced its revolving credit
facility, increasing its total borrowing capacity to $2 billion from
$1.8 billion and also refinanced its senior unsecured multi-currency
term loan facility, increasing its total borrowing capacity to $1
billion from $750 million.
In September 2013, DLR formed a joint venture with an investment fund
managed by Prudential Real Estate Investors (PREI) and contributed nine
Powered Base Building data centers valued at approximately $366.4
million. The PREI-managed fund took an 80% interest in the joint venture
and DLR retained a 20% interest.
Liquidity coverage assuming no additional capital raising, calculated as
liquidity sources divided by uses, is 1.1x for the period Oct. 1, 2013
to Dec. 31, 2015. Sources of liquidity include unrestricted cash,
availability under the company's global 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--a scenario not
likely as the company continues to unencumber the portfolio--liquidity
coverage would be 1.3x. Debt maturities are laddered in the coming years
with 3.3% of debt maturing in 4Q'13 followed by 9.3% in 2014 and 10.8%
in 2015. In addition, the company's adjusted funds from operations
(AFFO) payout ratio was 83.4% in 3Q'13 after averaging 81.5% in 2012 and
77.8%, reflective of good internally-generated liquidity.
Digital Realty offers Turn-Key Flex, Powered Base Building, and
colocation space and its 130 properties span 33 markets across 10
countries and four continents. This significant market presence gives
the company strong tenant relationships; approximately 58% of the
company's customers occupancy space in DLR data centers across multiple
markets. Top markets as of Sept. 30, 2013 were London (11.7% of rent),
Northern Virginia (9.7%), Dallas (9.2%), New York (8.8%), and Silicon
Limited Tenant Concentration
Tenant concentration continues to decline, which Fitch views favorably
and which differentiates DLR from its major competitors, CoreSite (News - Alert) Realty
Corporation, DuPont Fabros Technology, Inc. and Global Switch Holdings
Ltd. (Fitch IDR of 'BBB' with a Stable Rating Outlook). DLR's top five
tenants comprise 23.3% of total base rent, compared with 23.1% to 61%
for its primary competitors. DLR's top tenants as of Sept. 30, 2013 were
CenturyLink, Inc. (IDR of 'BB+' with a Stable Rating Outlook) at 8.1% of
rent, IBM (IDR of 'A+' with a Stable Rating Outlook) at 4.9%, TelX
Group, Inc. at 4.4%, Equinix (News - Alert) Operating Company, Inc. at 3.2% and Morgan
Stanley (IDR of 'A' with a Stable Rating Outlook) at 2.7%.
Technical Team Focused on New Initiatives
The company offers customized solutions to its tenants; recent
initiatives in 2013 include the launch of EnVision, a comprehensive data
center infrastructure management (DCIM) solution that provides increased
visibility into data center operations, and the launch of Digital Open
Internet Exchange (Digital Open-IX), a neutral and member-governed
internet exchanges self-regulatory body in North America, similar to the
system in Europe. The initial rollout for Digital Open-IX will take
place in the New York metro area and Northern Virginia, followed by
deployment in several other U.S. markets.
Low Corporate Leverage for 'BBB'
Leverage is low for the 'BBB' rating, with net debt as of Sept. 30, 2013
to latest 12 months (LTM) recurring operating EBITDA at 5.6x compared
with 5.6x as of Dec. 31, 2012 and 4.7x as of Dec. 31, 2011. The
incurrence of debt to fund a portion of acquisitions and development
contributed towards the trend. Fitch's base case anticipates that the
company's same-property NOI will be flat over the next 12-to-24 months,
which will result in leverage in the low-to-mid 5x range. In a stress
case not anticipated by Fitch in which the company experiences low
single digit same-store NOI declines, leverage would approach 6.0x,
which would be weak for a 'BBB' rating. Separately, in October 2013,
DLR's board of directors authorized a $500 million share repurchase
program although the company has yet to utilize the program. Fitch does
not expect the company to access this program heavily; should the
company do so, it would weaken the position of unsecured bondholders.
Slightly Weak Unencumbered Asset Coverage
Digital Realty is committed to an unsecured funding profile. However,
the company's unsecured debt incurrence has outpaced the growth of the
unencumbered pool. Unencumbered assets (3Q'13 unencumbered NOI pro forma
for redevelopment and development NOI divided by a stressed
capitalization rate of 10%) covered unsecured debt by 1.9x as of Sept.
30, 2013. Third quarter 2013 actual unencumbered asset coverage was
1.7x, down from 2.0x as of Sept. 30, 2012 and Fitch anticipates that
unencumbered asset coverage will be 1.8x based on cost remaining to be
spent on 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 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
The following factors may result in positive momentum in the rating
--Increased mortgage lending activity in the datacenter sector;
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x
(fixed-charge coverage for the TTM ended Sept. 30, 2013 was 3.0x);
--Fitch's expectation of net debt to recurring operating EBITDA
sustaining below 4.5x (Sept. 30, 2013 leverage was 5.6x).
The following factors may result in negative momentum in the rating
--Sustained declines in rental rates and same-property NOI;
--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.
Applicable Criteria and Related Research:
--Recovery Ratings and Notching Criteria for Equity REITs (Nov. 19,
--Corporate Rating Methodology (Aug. 5, 2013);
--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).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
[ InfoTech Spotlight's Homepage ]