Fitch Ratings has affirmed the ratings of
Fitch has also affirmed the unsecured debt at
The affirmation and Stable Outlook reflect the issuer's historical compliance with its financial policy, global scale, predictable cash flow profile, and diversified and consistent access to capital. The Stable Outlook also considers the issuer's public commitment to reducing leverage from its current elevated levels through EBITDA growth, meaningful dispositions and moderated investment spend.
Key Rating Drivers
Deleveraging Through Rating Horizon: Fitch expects DLR to have reduced its leverage (net debt before preferred to recurring operating EBITDA after distributions to/from associates and minorities) below 6x by the end of 2024 through a combination of EBITDA growth, asset sales, joint ventures, moderated investment activity and proceeds from equity sales. The company has been successful at raising non-recourse debt at joint ventures as well as issuing meaningful amounts of equity (more than
Relatively Resilient Amid Economic Uncertainty: Fitch expects data center fundamentals and contributions from development will support operating cash flow growth through the rating horizon.
Fitch's Global Economic Outlook does not assume a recession in the
Multi-year secular tailwinds such as workflow migration to the cloud are likely to continue, albeit potentially at a decelerated pace if weaker economic conditions persist. Higher energy prices and moderating demand tied to multi-year infrastructure spend could also pose headwinds. Nonetheless, the demand for data center space is expected to expand with the growth of the AI industry.
Secular Tailwinds Balanced by Long-Term Risks: Secular tailwinds such as increased internet utilization and the migration to cloud services support DLR's credit profile. However, data center competition is intense with pricing and market share dynamics constantly evolving. Cloud service providers such as
Globally Diversified Portfolio: DLR owns, leases and operates a global network of 300+ facilities in 50+ metros across 25+ countries on six continents across the globe with non-
Fitch views global operating scale as an important competitive factor for data center REITs. DLR has a strong competitive position through its global network of data centers, which should result in continued growth given high barriers to entry and switching costs, as well as network effects.
Derivation Summary
DLR's ratings reflect its global platform, stable cash flow and liquidity profiles, diversified access to capital, and conservative financial policies. Fitch rates peer
Fitch rates the IDRs of the parent and its subsidiaries on a consolidated basis, using the weak parent/strong subsidiary approach and open access and control factors, based on the entities operating as a single enterprise with strong legal and operational ties. Although the senior unsecured notes issued and guaranteed by
The two-notch differential between DLR's IDR and preferred stock rating is consistent with Fitch's Corporates Hybrids Treatment and Notching Criteria. The 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 applies 50% equity credit to the company's perpetual preferred securities given the cumulative nature of coupon deferral. Fitch includes preferred stock when calculating certain metrics.
Key Assumptions
Low single-digit annual same-store NOI growth through 2025, driven by positive cash re-leasing spreads and annual rent escalators, offset in part by growth in operating expenses;
Mid-to-high single-digit revenue growth primarily due to the company's large active development pipeline with a ramp up of new facilities;
Material dispositions in 2024 cover roughly 1/2 of spending on acquisitions and development, based on company guidance. Normalized net investments in acquisitions and development thereafter funded with incremental debt and equity;
Term loans and notes maturing through 2027 are refinanced prior to maturity;
The company has roughly
Leverage returns below 6x by the end of 2024 and DLR manages leverage such that it remains below 6x over the course of the forecast.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade
Fitch's expectation of REIT leverage (defined as net debt before preferred shares to recurring operating EBITDA after distributions to / from associates and minorities) sustaining below 5x in conjunction with increased mortgage-lending activity in the data-center sector, demonstrating contingent liquidity for the property type;
Fitch's expectation of REIT fixed-charge coverage (recurring operating EBITDA adjusted for straight-line rents and maintenance capex relative to interest and preferred dividends) sustaining above 3x.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Fitch's expectation of REIT leverage (defined as net debt before preferred shares to recurring operating EBITDA after distributions to / from associates and minorities) sustaining above 6x;
Fitch's expectation of REIT fixed-charge coverage (recurring operating EBITDA adjusted for straight-line rents and maintenance capex relative to interest and preferred dividends) sustaining below 2.5x;
Fitch's expectation of UA/UD, at a stressed 9% capitalization rate, sustaining below 2.0x;
Sustained declines in rental rates and same-property net operating income.
Liquidity and Debt Structure
Liquidity Weakened by
Although this is the case, Fitch believes that risk is mitigated by the company's access to capital as well as its ability to flex its development pipeline. DLR maintained approximately
Diversified Access to Capital Markets: DLR has demonstrated strong access to equity and debt-capital markets. DLR has issued bonds in the
Data center REIT equities have seen strong performance relative to the REIT indices since the start of the pandemic, and the sector is one of the few that trades at a premium to underlying value today. As well, data center REITs have also generated additional capital through
In recent years, DLR has entered into several joint ventures with sizable domestic and foreign partners, including
Additionally, Fitch expects DLR will continue to sell stabilized assets into Digital Core REIT (SGX: DCRU), a standalone publicly traded vehicle on the
Improving Secured Mortgage Access: DLR owns the vast majority of its data center assets, which is a credit positive that provides some asset-level protection in a downturn. DLR's ratings are balanced, however, by its data center portfolio focus. The availability of mortgage capital for data centers is improving, but Fitch believes contingent liquidity is still weaker relative to other commercial real estate property types during periods of potential financial stress.
Below-Average Net UA/UD Coverage: Fitch estimates DLR's unencumbered assets would cover net unsecured debt (UA/ UD) by roughly 1.9x assuming a 9% stressed cap rate as of
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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