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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings assigns a credit rating of 'BBB' to the $300 million aggregate principal amount 3.625% senior unsecured notes due 2022 issued by Digital Realty Trust, Inc., the operating partnership of Digital Realty Trust, Inc. (NYSE: DLR). The notes were issued at a spread of 200 basis points over the benchmark rate and priced at 98.684% of par to yield 3.784%.

Digital Realty Trust, L.P. intends to use the net proceeds from the offering to temporarily repay borrowings under its global revolving credit facility, to acquire additional properties, to fund development and redevelopment opportunities and for general working capital purposes, including potentially for the repurchase, redemption, or retirement of outstanding debt securities or preferred securities.

Fitch currently rates Digital Realty Trust, Inc. and Digital Realty Trust, L.P. (collectively Digital Realty) as follows:

Digital Realty Trust, Inc.

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

--$453.4 million redeemable preferred stock 'BB+';

--$168.4 million convertible preferred stock 'BB+'.

Digital Realty Trust, L.P.

--IDR 'BBB';

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

--$520.9 million unsecured term loan 'BBB';

--$1.7 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 colocation (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 second quarter of 2012 (2Q'12) by 9.9% and 22.9%, respectively, resulting in same store net operating income growth of 9.8% in 2Q'12. 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 increasing rents and leasing up space under construction.

Tenant concentration is limited, with the exception the top tenant CenturyLink, Inc., which has a Fitch IDR of 'BBB-' with a Stable Outlook. As of June 30, 2012, top tenants were CenturyLink at 10.8% of annualized rent, TelX Group, Inc. at 4%, Equinix Operating Company, Inc. at 3.9%, Facebook, Inc. at 3.7%, and Softlayer Technologies, Inc. at 3.5%. In addition, Digital Realty's remaining lease term was seven years and weighted average original lease term was 14 years as of June 30, 2012, providing cash flow predictability absent tenant bankruptcies. The company also has a staggered lease expiration schedule. As of June 30, 2012, 3.3%, 7.3%, and 11.7% 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 2.6 times (x) in 2012 pro forma for the bond offering, compared with 2.7x and 2.4x in 2011 and 2010, respectively. Incremental cash flow from the Sentrum acquisition coupled with higher fixed charges due to long term debt financings and the issuance of preferred stock have led to stability in coverage.

Fitch projects continued mid-to-high single same-store NOI growth, along with additional 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 to around 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 4.6x as of June 30, 2012 pro forma, compared with 4.7x and 5.5x as of Dec. 31, 2011 and Dec. 31, 2010, respectively. 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 July 11, 2012, DLR completed the acquisition of the Sentrum Portfolio in the greater London area for 715.9 million Pounds Sterling. The transaction was funded with proceeds from a common stock offering in July 2012 along with borrowings under the global revolving credit facility.

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 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. As of June 30, 2012 pro forma, base case liquidity coverage assuming no additional capital raises is 2.0x for July 1, 2012 to Dec. 31, 2014. 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 2022 notes, 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 1.3x as of June 30, 2012 pro forma. While development entails material lease-up risk, the company 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 lurk, such as the risk that Digital Realty's more successful tenants choose to develop their own datacenters, as opposed to lease space from the company.

Digital Realty's top five markets are Silicon Valley (12.6% of annualized rent as of June 30, 2012), Dallas (11.3%), Northern Virginia (10.2%), New York (9.8%), and San Francisco (9.3%). The company continues to expand in Europe and across the Asia-Pacific region, including in 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 June 30, 2012, Digital Realty's portfolio consisted of 105 properties, excluding three unconsolidated joint venture properties, of which 77% is unencumbered based upon 2Q'12 annualized base rent. Unencumbered assets (2Q'12 unencumbered NOI divided by a stressed capitalization rate of 10%) to unsecured debt was 2.2x as of June 30, 2012 pro forma, 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 to 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 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:

--Fitch's expectation of fixed charge coverage sustaining above 3.0x (fixed charge coverage ratio was 2.6x in 2Q2012 pro forma);

--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 4.5x (leverage was 4.6x as of June 30, 2012 pro forma);

--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:

--Fitch's expectation of fixed charge coverage sustaining below 2.5x;

--Fitch's expectation of 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:

--'Corporate Rating Methodology', Aug. 8, 2012;

--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012;

--'Recovery Ratings and Notching Criteria for Equity REITs', May 3, 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:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460 ]

Parent and Subsidiary Rating Linkage

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552 ]

Recovery Ratings and Notching Criteria for Equity REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677739 ]

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 ]

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