Dupont Fabros Technology, Inc. (DFT)

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DuPont Fabros Technology (DFT)

Q4 2012 Earnings Call

February 06, 2013 1:00 pm ET

Executives

Christopher Warnke - Manager of Investor Relations

Hossein Fateh - Co-Founder, Chief Executive Officer, President and Director

Scott A. Davis - Senior Vice President of Operations

Mark L. Wetzel - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Emmanuel Korchman

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Young Ku - Wells Fargo Securities, LLC, Research Division

William A. Crow - Raymond James & Associates, Inc., Research Division

Robert Stevenson - Macquarie Research

John Stewart - Green Street Advisors, Inc., Research Division

Jonathan Petersen - McNicoll, Lewis & Vlak LLC, Research Division

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Ross T. Nussbaum - UBS Investment Bank, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Presentation

Operator

Welcome to DuPont Fabros Technology's Fourth Quarter and Full Year 2012 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Chris Warnke, Investor Relations Manager for the company. Mr. Warnke, you may begin your conference.

Christopher Warnke

Thank you. Good morning, everyone, and thank you for joining us today for DuPont Fabros Technology's fourth quarter 2012 results conference call. Our speakers today are Hossein Fateh, the company's President and Chief Executive Officer; Scott Davis, the company's Executive Vice President of Operations; and Mark Wetzel, the company's Chief Financial Officer and Treasurer.

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to certain risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

Additionally, this call contains non-GAAP financial information, of which explanations and reconciliations to net income are contained in the company's earnings release issued this morning. The release is available in PDF format in the Investor Relations section of the company's corporate website at www.dft.com.[Operator Instructions]

I will now turn the call over to Hossein.

Hossein Fateh

Thank you, Chris, and good morning, everyone. Thank you for joining us on our fourth quarter 2012 earnings call.

As noted in today's press release, we delivered solid quarterly and full year financial results for 2012, which Mark will discuss later in the call. Leasing continues to be our primary focus. So I would like to begin with an update.

At the beginning of 2012, we stated our goal was to be 70% leased and commenced by the beginning of 2013 for our 4 non-stabilized properties. As a reminder, these properties were ACC6 Phase 1, Chicago Phase 2, Santa Clara Phase 1 and New Jersey Phase 1. I'm happy to report that these properties were 77% leased and 69% commenced as of January 1, 2013.

2012 was our best leasing year ever. During 2012, we signed 14 new leases for a total of 41 megawatts of critical load, with an average lease term of 9.9 years. These new leases represent approximately $44 million of annualized GAAP base rent.

In comparison, we signed 25 megawatts in 2011, 23 megawatts in 2010, 37 megawatts in 2009 and 4 megawatts in 2008. In addition to the 41 megawatts of new leasing, we extended 3 tenant leases by an average of over 7 years, totaling 24 megawatts.

During the year, we completed construction of 31.2 megawatts of critical load, 18.2 megawatts in Chicago back in January and 13 megawatts in Ashburn in December. This increased our capacity 17%. Those projects were 100% leased at year end.

Since going public in 2007, we increased our leasable critical load from 74 megawatts to 218 megawatts, nearly tripling our capacity. During the fourth quarter, we signed 5 new leases, totaling 13.6 megawatts. All 5 of these leases were with existing tenants. The details of the leases are disclosed in our press release.

Of our top 4 tenants, 3 have taken additional new space with us during 2012, and 1 of the 3 signed a long-term extension with us. These tenants also build their own facilities and lease with other providers. They all continue to recognize the value and the quality of our facilities and the operational expertise we provide. Because of this level of service, it is our hope that as their requirements continue to grow, they will grow with us.

Let me walk through each of our 4 markets. Northern Virginia continues to be our best market. We have had considerable leasing success here and have limited available inventory in Ashburn. We'll continue to actively market our Reston VA3 property.

Chicago continues to be our second best market. We continue to see this market providing considerable growth for its data center requirements. We are currently looking at several land parcels, as well as building acquisition opportunities in order to build another data center within this market.

Santa Clara leasing has performed as expected with an exception of a slightly lower return than planned. When we delivered the property in the fourth quarter of 2011, our goal was an 18-month lease up and achieving a 12% unlevered return. With the most recent leasing in the fourth quarter, we're now targeting a 10% unlevered return. We continue to see good demand and are optimistic about fully leasing the property by mid-2013.

Leasing New Jersey continues to take longer than we originally expected. NJ1 is now 39% leased, up 3% from our last call. The leasing pace for wholesale providers in the New Jersey market was disappointing. We're committed to this market. Hurricane Sandy created some renewed interest, and we're tracking some new prospects. We remain confident New Jersey will be a good long-term market for us. We're hopeful that we can turn some of these prospects into leases.

To be conservative, our 2013 FFO guidance excludes any New Jersey leasing. As Mark will explain, any leasing at NJ1 that commences in 2013 will provide upside to our 2013 FFO. This assumes that we achieve our leasing targets for the other properties included in our 2013 guidance.

Despite our best leasing year ever, we hit a small snag with one of our existing reseller tenants. This tenant expanded too fast. It was mutually decided that we would modify their leases by allowing them to return the small amount of space, while maintaining that all their rental rates remain unchanged. Mark will discuss this restructuring in more detail later in the call.

Also, as previously disclosed, one tenant had an option to return 2.6 megawatts in Chicago in the first quarter. That tenant elected only to return 1.3 megawatts of that capacity. We are actively marketing this new available inventory. The lease on their retained 1.3 megawatt room has commenced.

We continue to address customer concentration. We have 33 tenants with 82 lease expirations. The weighted average remaining lease term is over 7 years. Less than 5% of the expirations will occur over the next 2 years. Our goal has always been to be a global preferred provider to the Fortune 1000. As of December 31, 2012, our customers include 4 of the Fortune 20 and 17 of the Fortune 1000. This also includes prizes for foreign enterprises of equivalent size. The 17 customers provide 72% of our annualized base rent as of December 31, 2012. Additionally, as of December 31, 2012, our top 3 customers provide 48% of our annualized base rent. Our top 10 customers provide 82% of our annualized base rent.

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