Dupont Fabros Technology, Inc. (DFT)

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DuPont Fabros Technology (DFT)

Q1 2013 Earnings Call

May 07, 2013 1:00 pm ET

Executives

Christopher Warnke - Manager of Investor Relations

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

Jeffrey H. Foster - Chief Accounting Officer

Analysts

Emmanuel Korchman

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Matthew Rand - Goldman Sachs Group Inc., Research Division

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Robert Stevenson - Macquarie Research

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

Young Ku - Wells Fargo Securities, LLC, Research Division

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

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

Jonathan M. Petersen - MLV & Co LLC, Research Division

Robert Gutman - Evercore Partners Inc., Research Division

Michael Bilerman - Citigroup Inc, Research Division

Presentation

Operator

Welcome to DuPont Fabros Technology's First Quarter 2013 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 First Quarter 2013 Results Conference Call. Our speakers today are: Hossein Fateh, the company's President and Chief Executive Officer; and Jeff Foster, the company's Chief Accounting Officer. Jeff will be filling today for Mark Wetzel, the company's Chief Financial Officer, as he is out sick.

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 the 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. I'm glad you could be with us today as we review DFT's first quarter results and plans for continued growth. Our strategy of developing ground up, highly efficient data centers that cater to Fortune 1000 companies continues to pay off. Our ability to execute on this strategy resulted in another quarter of solid growth.

FFO per share increased 18% and revenues increased 12% over the prior year. We also have increased the midpoint of our 2013 FFO per share guidance by $0.04 per share. We plan to continue our growth by leasing the balance of our portfolio and developing our pipeline.

First, let us talk about leasing. Our record leasing last year of 41 megawatts took down most of our available inventory. Our total 218-megawatt portfolio is now 91% leased. This leaves us with approximately 20 megawatts availability, the bulk of which is located in NJ1 and VA3.

During the first quarter, we signed one lease for 2.28 megawatts in Santa Clara with a prominent cloud-based company. Experience has shown us that as our tenant's business grow, their data center requirements also grow. This provides considerable upside for DFT's organic growth. We are optimistic that this new tenant fits into this pattern and will require additional space. They're a wonderful addition to our roster. We look forward to building our relationship with them and becoming their trusted data center provider.

With the new lease signed at Santa Clara, we're now -- we now forecast our unleveraged return on investment in Phase I will be between 9% and 9.5%. Santa Clara is currently 88% leased. We are cautiously optimistic that the remaining available space will be leased up within the next quarter. We are in discussions with tenants and providing tenant tours for space in Phase II of Santa Clara. You should expect an announcement on Phase II development once we've signed a pre-lease.

Chicago continues to be a very strong market for us. As you recall, one of our tenants surrendered a 1.3-megawatt room to us in January of 2013. This provided us with much-needed inventory within this market. Subsequent to the quarter's end, we leased the space to a current super wholesale customer, which took space last quarter in 3 of the 4 markets.

Over and beyond the 1.3-megawatt lease in Chicago, they also have pre-leased a 433-kilowatt room in Chicago, which is currently leased to another tenant and scheduled to expire at the end of the year. Due to the small size of the current tenants and their need to conserve cash early in the lease, their cash rents were significantly above the current market rates.

One of our super wholesale tenants, who leased approximately 35 megawatts of critical load from us, has released the space effective January 1, 2014. This quick turnaround enabled us forego any vacancy, capital expenditures and leasing commissions, while meeting the needs of a very valuable customer.

Given the dynamics, the cash-on-cash reduction for this individual lease is approximately 36%, which aligns with our super wholesale pricing. The new rate for this specific space only decreases the total building rent by 0.5%. The gap decline is only 1% given the fact that the back end nature of the rent in the original lease structure. This means total cash from the new lease is only 1% less than the total cash from the current lease, and we upgraded the credit quality of the tenant.

To capture future demand of this market, we need to secure lands and commence development of CH2. Land in Elk Grove is readily available. We've been looking at several sites over the last few months. Our plan is to secure a parcel of land this year. We will discuss the timing of CH2 after we have secured the site.

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