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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings assigns a credit rating of 'BBB' to the $750 million U.S. dollar equivalent senior unsecured multicurrency term loan due 2017 announced by Digital Realty Trust, Inc. (NYSE: DLR). The term loan is an obligation of DLR's operating partnership, Digital Realty Trust, L.P. together with certain subsidiaries and is guaranteed by DLR (collectively, Digital Realty).

Pricing is based on the company's senior unsecured debt ratings and is currently 145 basis points over the applicable index for floating rate advances. Funds may be drawn in U.S., Singapore and Australian dollars, as well as Euro and Pound Sterling denominations with the option to add Hong Kong dollars and Yen upon an accordion exercise, up to a total of approximately $850 million U.S. dollar equivalent. The term loan provides funds for acquisitions, repayment of indebtedness, development and redevelopment, working capital and general corporate purposes. Covenants are consistent with those under the $1.5 billion global revolving credit facility.

Fitch currently rates Digital Realty as follows:

Digital Realty Trust, Inc.

--Issuer Default Rating (IDR) 'BBB';

--$452.3 million redeemable preferred stock 'BB+';

--$168.7 million convertible preferred stock 'BB+'.

Digital Realty Trust, L.P.

--IDR 'BBB';

--$1.5 billion unsecured revolving credit facility 'BBB';

--$1.4 billion senior unsecured notes 'BBB';

--$266.4 million senior unsecured exchangeable notes 'BBB'.

The Rating Outlook is Stable.

The company's 'BBB' IDR reflects the solid performance of the company's large datacenter portfolio. The portfolio benefits from favorable demand, high barriers to entry, as well as long-term leases, and contributes towards improving fixed charge coverage. Digital Realty also has a strong balance sheet, a deep bench in terms of real estate and technical expertise professionals, and a good liquidity profile.

The ratings also take into account that the company is a niche real estate investment trust (REIT) that is by definition exposed to the technology industry. Technology industry obsolescence and cycles can cause industry volatility, creating vacancy but also enable new entrants to fill empty space. In addition, the company has robust unencumbered asset coverage of unsecured debt, but its access to secured debt for contingent liquidity and financial flexibility may be more constrained than for REITs in other commercial property sectors.

Positive demand drivers for datacenters include growth in data storage and use by corporate enterprises, telecommunication companies, providers of co-location (multi-tenant datacenter product offered on the basis of individual racks or cages), and other customers such as social networking sites. Cloud computing (shared resources provided to Internet computing devices on demand) and other changes in information technology are also boosting datacenter demand, while expensive building costs limit new supply.

In this context, leasing trends remain positive for Digital Realty's Turn-Key Datacenters (TKD) that offer metered power to various customers, as well as Powered Base Building (PBB) space that enables tenants to build out their own datacenter facilities. TKD and PBB lease renewal rates increased in the fourth quarter of 2011 (4Q'11) by 2.2% and 15.3%, respectively, resulting in same store net operating income (NOI) growth of 6.4% in 4Q'11. Same store NOI increased by 9.9%, 11.1% and 9.4% in 3Q'11, 2Q'11 and 1Q'11, respectively. Tier1 Research, LLC projects that datacenter revenue growth will continue on its current trajectory during 2012-2013, which Fitch believes will provide opportunities for Digital Realty to continue to increase rents and leasing up space under construction.

Top tenants as of Dec. 31, 2011 were CenturyLink, Inc. (Fitch IDR 'BBB-' with a Stable Outlook) at 10.2% annualized rent, Equinix Operating Company, Inc. at 4.1%, Facebook, Inc. at 3.9%, TelX Group, Inc. at 3.4%, and Morgan Stanley (Fitch IDR 'A' with a Stable Outlook) at 3.4%. Exposure to top tenants is declining via acquisitions, and CenturyLink's acquisition of Savvis in July 2011 improved the credit profile of Digital Realty's top tenant, both of which Fitch views positively.

Digital Realty's remaining lease term was seven years and weighted average original lease term was 13.9 years as of Dec. 31, 2011, providing cash flow predictability absent tenant bankruptcies. The company also has a staggered lease expiration schedule. As of Dec. 31, 2011, 5.9%, 8.1%, and 12.7% of annualized rent was scheduled to expire in 2012, 2013, and 2014, respectively.

The company's fixed charge coverage ratio (recurring operating EBITDA less recurring capital expenditures less straight-line rent adjustments divided by total interest incurred and preferred dividends) was 2.8 times (x) in 2011, up from 2.4x and 2.2x in 2010 and 2009, respectively. 4Q'11 fixed charge coverage was 2.7x and coverage declines to 2.6x pro forma for the series F preferred stock transaction on March 29, 2012 and the conversion of series C preferred stock to common stock on April 17, 2012, as the company used the proceeds from the series F preferred stock to pay down a portion of lower cost obligations on the revolving credit facility.

Fitch projects continued mid-to-high single same-store NOI growth, along with acquisitions in the 8% to 9% capitalization rate range and a gradual lease-up of construction in progress, to result in fixed charge coverage approaching 3.0x over the next 12 to 24 months. In a downside case where the majority of the company's current development pipeline remains unleased, fixed charge coverage would decline from current levels but remain above 2.5x, which would be adequate for the current rating. In a more adverse case not anticipated by Fitch whereby tenant bankruptcies result in a 10% decline in NOI, fixed charge coverage would fall just below 2.5x, which would be weak for the current rating.

Digital Realty has low leverage for a REIT with net debt to recurring operating EBITDA of 4.7x as of Dec. 31, 2011, compared with 5.5x and 4.5x as of Dec. 31, 2010 and Dec. 31, 2009, respectively. Net debt to 4Q'11 annualized recurring operating EBITDA pro forma for the series F preferred stock transaction issued in March 2012 is 4.2x. Fitch anticipates that leverage will sustain in the mid 4x to 5x range as the company continues to utilize a combination of debt and equity issuance to fund acquisitions and development. For example, on Feb. 22, 2012, the company acquired Convergence Business Park in Lewisville, TX for $123 million, which was funded with the revolving credit facility, and year-to-date through March 28, 2012, the company sold 957,000 shares under its at-the-market equity distribution program. The company's series C 4.375% preferred stock was converted to common stock on April 17, 2012 at a rate of 0.5480 common shares per converted preferred shares.

In a downside case where the majority of the company's current development pipeline remains unleased, leverage would approach 5.0x in the near term. In a more adverse case not anticipated by Fitch whereby tenant bankruptcies result in a 10% decline NOI, leverage would rise above 5.0x. Both of these downside leverage levels would remain appropriate for the rating.

Digital Realty's management team has a good track record of acquiring and developing assets with attractive returns, as well as a technical staff focused on operating efficiencies. For example, the company improved the efficiency of cooling towers in the Rockwood Capital/365 Main portfolio by providing additional IT load, which generated incremental revenue.

The company has a strong liquidity position. Its base case liquidity coverage ratio assuming no additional capital raises is 3.6x for Jan. 1, 2012 to Dec. 31, 2013 pro forma for the series F preferred stock transaction. Fitch calculates base case liquidity coverage as liquidity sources (unrestricted cash, availability under the company's $1.5 billion global unsecured credit facility pro forma for the series F preferred stock issuance, and projected operating cash flow after dividends and distributions), divided by liquidity uses (debt maturities and projected recurring capital expenditures). When including expected direct project costs to be spent for Digital Realty's construction projects in progress as a liquidity use, base case liquidity coverage remains good at 1.8x. While development entails material lease-up risk, the company has a track record of stabilizing occupancy fairly quickly.

While the company's metrics are strong for a 'BBB' IDR, the rating takes into account the company's exposure to the technology market. Digital Realty went public in 2004 several years after the dot-com bubble burst and has experienced a favorable technology environment through economic cycles. Moreover, uncertainties exist, such as the risk that Digital Realty's more successful tenants choose to develop their own datacenters, as opposed to leasing space from the company.

Digital Realty's top five markets are Silicon Valley (12% of annualized rent as of Dec. 31, 2011), Northern Virginia (10.4%), San Francisco (9.7%), the New York metropolitan region (9.3%), and Dallas (9.2%). The company continues to expand in Europe and across the Asia-Pacific region, including Singapore and Australia, to take advantage of datacenter needs. This expansion should provide a broader tenant base and the potential for above-average investment returns.

As of Dec. 31, 2011, Digital Realty's portfolio consisted of 101 properties, excluding three unconsolidated joint venture properties, of which 75% is unencumbered based upon annualized 4Q'11 NOI. Unencumbered assets (4Q'11 unencumbered NOI divided by a stressed capitalization rate of 10%) to unsecured debt was 2.2x as of Dec. 31, 2011, and 2.4x pro forma for the series F preferred stock transaction, which is solid for a 'BBB' IDR. However, the company's access to secured debt for contingent liquidity may be more constrained than for REITs in more conventional commercial property sectors given the less-proven nature of the asset class through cycles. That being said, the covenants in the company's credit agreements do not restrict Digital Realty's financial flexibility.

The Stable Outlook reflects Fitch's projection that fixed charge coverage will approach 3x, that leverage will remain approximately in the mid-4x 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 preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'. Based on Fitch research titled 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web site at '[ www.fitchratings.com ]', these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

Fitch does not anticipate positive rating momentum over the near term. However, the following factors may have a positive impact on Digital Realty's ratings and/or Outlook:

--Fixed charge coverage sustaining above 3.0x (fixed charge coverage ratio was 2.8x in 2011, 2.7x in 4Q'11 and 2.6x pro forma for the series F preferred stock offering in March 2012 and the conversion of series C preferred stock in April 2012);

--Net debt to recurring operating EBITDA sustaining below 4.5x (leverage was 4.5x as of Dec. 31, 2011 and 4.2x pro forma for the series F preferred stock offering);

--Increased mortgage lending activity in the datacenter sector;

--Broader tenant and asset diversification.

The following factors may have a negative impact on Digital Realty's ratings and/or Outlook:

--Fixed charge coverage sustaining below 2.5x;

--Net debt to recurring operating EBITDA 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, February 27, 2012.

--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, December 15, 2011.

--Corporate Rating Methodology, August 12, 2011.

--Parent and Subsidiary Rating Linkage, August 12, 2011.

--Recovery Rating and Notching Criteria for REITs, May 12, 2011.

Applicable Criteria and Related Research:

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=671869 ]

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

Parent and Subsidiary Rating Linkage

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210 ]

Recovery Rating and Notching Criteria for Equity REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]

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