Digital Realty's Ratings Upheld by Moody's Post Merger News

Data center REIT, Digital Realty Trust, Inc. DLR, and its subsidiaries' whole lot of ratings has been affirmed by the rating agency – Moody's Investors Service – following the merger announcement with DuPont Fabros Technology, Inc. DFT. Apart from this, the rating agency has placed all ratings of DuPont Fabros and its subsidiaries on review for upgrade.

Currently, Digital Realty Trust, Inc. has Issuer Rating of Baa2, while DuPont Fabros Technology, Inc.'s Corporate Family Rating is Ba1.

Notably, last week, Digital Realty Trust announced that a deal has been struck, under which DuPont Fabros will merge with Digital Realty, in an all-stock transaction for an enterprise value of about $7.6 billion, including the assumption of debt. Digital Realty already boasts 145 properties across 33 global metropolitan areas.

The company's acquisition of Washington, D.C.-based DuPont Fabros, which operates 12 data centers, is likely to enhance Digital Realty's portfolio in the top U.S. data center metro areas, across Northern Virginia, Chicago and Silicon Valley. It is also anticipated to be immediately accretive to financial metrics. (Read more: Digital Realty to Acquire DuPont Fabros in $7.6 Billion Deal)

The rating agency has cited Digital Realty's prominent position in the data center real estate market, portfolio diversification with respect to geography and tenant mix, consistent strong occupancy levels, large unencumbered asset pool, as well as the company's efficiency in integrating prior buyouts as the key reasons for the ratings affirmation. Moreover, per the rating agency, DuPont Fabros' portfolio enjoys high occupancy and has sound tenant credit quality. Also, nearly the entire portfolio is unencumbered. Though geographic and tenant concentration serve as negative attributes, the post-merger portfolio would alleviate this risk.

Additionally, Digital Realty's stable rating outlook is backed by the rating agency's expectation of the merger completion as planned. Further, the agency hopes that a prudent financing strategy would be preserved in financing current development and buyouts by Digital Realty. Also, the company's efficacious integration of the DuPont Fabros portfolio is another factor. On the other hand, if the merger transaction is accomplished as proposed, then DuPont Fabros' ratings are likely to be upgraded.

Our Take

Notably, rating affirmation reassures a company's creditworthiness in the market, as well as boosts investors' confidence in the stock. This ensures constant accessibility to the capital required for the company's growth.

With growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, data center REITs are experiencing a boom market. In fact, demand has been outpacing supply in top-tier data center markets and despite enjoying high occupancy, these are absorbing new construction at a faster pace.

Digital Realty is also anticipated to ride on the growth curve supported by its strategic acquisitions. Apart from the DuPont Fabros buyout, for which it obtained a fully committed bridge loan facility from BofA Merrill Lynch and Citigroup Inc. C that will be available, if required, to finance the transaction, the company has also made diligent acquisitions in the past, which include Telx in Oct 2015 and a portfolio of eight high-quality, carrier-neutral data centers in Europe (Amsterdam, Frankfurt and London) from Equinix Inc. EQIX in Jul 2016. Such efforts improve growth scope in attractive locations.

Currently, Digital Realty carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.