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Rating Action:

Moody's affirms Digital Realty's ratings and places DuPont Fabros' ratings on review up following merger announcement

13 Jun 2017

New York, June 13, 2017 -- Moody's Investors Service ("Moody's") affirmed all ratings of Digital Realty Trust, Inc. ("Digital Realty") and its subsidiaries and placed all ratings of DuPont Fabros Technology, Inc.("DuPont") and its subsidiaries on review for upgrade following the announcement that the REITs had reached a definitive agreement to merge. The all-stock transaction, valued at $7.6 billion, including the assumption of debt, is expected to close in the second half of 2017.

The following ratings were affirmed:

Digital Realty Trust, Inc.

Issuer Rating at Baa2

Preferred Stock at Baa3

Preferred Stock shelf at (P) Baa3

Digital Realty Trust, L.P.

Backed Senior Unsecured Rating at Baa2

Backed Senior Unsecured shelf at (P)Baa2

Digital Delta Holdings, LLC

Backed Senior Unsecured at Baa2

Digital Euro Finco, LLC

Backed Senior Unsecured at Baa2

Digital Stout Holding, LLC

Backed Senior Unsecured at Baa2

The following ratings were placed on review for upgrade:

DuPont Fabros Technology, Inc.

Corporate Family Rating at Ba1

Preferred Stock at Ba2

Preferred Stock shelf at (P) Ba2

DuPont Fabros Technology L.P.

Backed Senior Unsecured at Ba1

Backed Senior Unsecured shelf at (P)Ba1

RATINGS RATIONALE

The affirmation of Digital Realty's ratings reflects the REIT's sustained leading position in a specialized segment of the real estate market, consistently solid occupancy, diversified portfolio in terms of geography and tenant mix, large unencumbered asset pool and successful track record with integration of previous acquisitions. The DuPont portfolio has good credit characteristics with very high occupancy (4-quarter average of 98%), strong tenant credit quality and almost an entirely unencumbered asset portfolio. Geographic and tenant concentration are meaningful credit negatives for DuPont Fabros but would be mitigated in the post-merger portfolio.

As of 1Q2017, DuPont Fabros had total assets of $3.9 billion and outstanding debt of $1.4 billion. The REIT's book leverage, debt + preferred as a proportion of gross assets, was 41.5% and net debt to EBITDA was modest at 4.0x. A higher proportion of super wholesale customers, large cloud providers and social media companies, could weaken DuPont Fabros' margins, but fixed charge coverage as of 1Q2017 was strong at 4.4x. DuPont Fabros is exposed to meaningful tenant and geographic concentration risk with the largest five customers accounting for 74% of annualized base rent and assets in Ashburn constituting 57% of aggregate installed critical power load.

Digital Realty's leverage metrics are weaker with book leverage at 52.4% and net debt to EBITDA of 5.1x but the REIT's largest five customers account for only 22.4% of annual base rent, and rent contribution from the largest market, New York, is a modest 12.3%. Digital Realty's margins are slightly lower at 58-60% due to higher SG&A expenses, but fixed charge coverage is strong at 4.1x.

DuPont shareholders will receive 0.545 shares of Digital Realty for each share of DuPont Fabros owned. Digital Realty expects to assume $201 million of preferred equity and issue $1,732 million of new debt to refinance DuPont's outstanding debt and cover transaction costs. Digital Realty has obtained a bridge facility that will provide the REIT with some flexibility with respect to timing the debt issuance.

The stable rating outlook for Digital Realty reflects the expectation that the merger will be completed as planned and that the REIT will maintain a prudent financing strategy to fund ongoing development and acquisitions. The successful integration of the DuPont Fabros portfolio would be the other significant consideration. DuPont Fabros' ratings will likely be upgraded if the merger transaction is completed as proposed.

Upward rating movement for Digital Realty would require improvement in the REIT's leverage and coverage metrics with net debt / EBITDA consistently below 5.0x, fixed charge coverage close to 4.0x or higher and effective leverage approaching 40%. Other rating considerations include a development pipeline accounting for no more than 10% of gross assets on a sustained basis with material preleasing, and portfolio occupancy rate approaching 95%. Net debt / EBITDA approaching 6x, effective leverage consistently above 50%, fixed charge ratio remaining below 3.0x are some factors that could cause downward rating pressure. Furthermore, sizeable leveraged acquisitions, a sharp increase in development, meaningful near term lease expirations, or reduced liquidity could also cause the ratings to be downgraded.

DuPont Fabros' senior unsecured debt and preferred ratings will be upgraded two notches to the same level as Digital Realty's unsecured debt and preferred stock ratings if the transaction closes as planned. The rating outlook would be changed to stable if the merger is not completed and DuPont Fabros' net debt to EBITDA is close to 5.0x, EBITDA margin drops below 60% on a consistent basis and its largest market accounts for more than 40% of ABR.

As of 1Q2017, Digital Realty owned and/or operated 145 data centers, including 14 properties in unconsolidated joint ventures, covering 22.9 million square feet of space in North America, Europe and Asia Pacific.

DuPont Fabros Technology Inc, (NYSE: DFT) is a REIT that owns and operates high quality data centers in three markets in the US. The REIT had stabilized portfolio capacity of 1.6 million square feet that was 99% leased at the end of 1Q2017.

The principal methodology used in these ratings was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ranjini Venkatesan
Vice President - Senior Analyst
Commercial Real Estate Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Nick Levidy
MD - Structured Finance
Commercial Real Estate Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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