Dupont Fabros Technology, Inc. (DFT)

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DuPont Fabros Technology, Inc. (DFT)

Q3 2010 Earnings Call

November 04, 2010 10:00 am ET

Executives

Chris Warnke - IR Manager

Hossein Fateh - President & CEO

Mark Wetzel - EVP, CFO & Treasurer

Analysts

Michael Bilerman - Citi

Jordan Sadler - KeyBanc Capital Markets

Brendan Maiorana - Wells Fargo

Sri Anantha - Oppenheimer

Jonathan Schildkraut - Evercore

Chris Lucas - Robert Baird

Dave Rodgers - RBC Capital Markets

Rob Salisbury with UBS

Sri Nagarajan - FBR Capital Markets

Todd Weller of Stifel, Nicolaus

Jonathan Atkin - RBC Capital Markets

John Stewart - Green Street Advisors

Nick Yulico - Macquarie

Presentation

Operator

Good day, everyone and welcome to the DuPont Fabros Technology Third Quarter 2010 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Chris Warnke, Investor Relations Manager of DuPont Fabros. Please go ahead, sir.

Chris Warnke

Thank you. Good morning, everyone, and thank you for joining us for DuPont Fabros Technology's third quarter 2010 results conference call. Our speakers today are Hossein Fateh, the company's President and Chief Executive Officer, 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 last night, which is available in PDF format in the Investor Relations section of the company's corporate website at www.dft.com.

To manage the call in a timely manner, questions will be limited to two per caller. If you have additional questions, please feel free to return to the queue.

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 third quarter earnings call. Leasing remained our primary focus, so let me begin with an update. We remain 100% leased at our stabilized operating properties. Currently, we are 75% leased at ACC5 Phase II and 22% leased at NJ1 Phase I. Four days ago, we placed both of these developments into service.

Focusing on New Jersey, high quality assets recently delivered in our newest market. We have executed three leases in NJ1, one in the third quarter and two to date in the fourth quarter. Two of the leases are with existing Northern Virginia tenants and the third is a new tenant in the financial services industry. The existing tenants include an enterprise tenant and a reseller. This reseller is in several of our Virginia properties, VA3, ACC4 and ACC5 Phase I. This tenant has grown with us and we have a very good working relationship with it. This tenant has a computer room in both Phase I and Phase II of ACC5.

Today we are interested in expanding their presence in the New Jersey market; we mutually agreed to take back into inventory this tenant's computer room in Phase II of ACC5. We need a small amount of available space in Virginia until ACC5 Phase I is delivered. Otherwise we could possibly miss out on a high-growth tenant that has an immediate need for space. Moving this tenant into NJ1 allows us to keep an extra 2.275 megawatt in ACC5 Phase II.

Some tenant opportunities begin with one or two megawatt of critical load but grow significantly in the future. This strategic move is great for us. This transaction also furthers our strategy in New Jersey. As I have said in the past, we would like to have one or two computer rooms leased to a reseller in all our multi-tenanted facilities. Not only does it offer organic growth, but also enables smaller tenants to benefit from efficiency, a large data center provides.

To finish up on NJ1, one lease commenced on November 1st, the second lease expected to commence later in the fourth quarter of this year, and the third is expected to commence in the second quarter of 2011. The three leases have an average lease term of 11.6 years. These lease commencements are in line with our pro forma, and we continue to expect NJ1 to be fully leased within 24 months of opening.

Traffic and tours remained solid, we continue to expect the 12% un-levered return on our invested capital. The Virginia market remains solid. We're selective on the tenants for this remaining 25% of available space. With additional space available in Phase II of ACC5, we expect to be 100% leased by the first half of 2011. When looking at the entire 36.4 megawatt, ACC5 is now 87.5% leased. We continue to expect a 15% un-levered return on both phases of ACC5.

All executed leases at ACC5 Phase II have commenced as of November 1st. No leases commenced during the third quarter, and we have only one 2011 lease expiration. This represents only 1% of our critical load.

Our top three tenants Microsoft, Yahoo!, and Facebook continue to represent 59% of our annualized base rent as of the end of the third quarter. Our top two tenants Microsoft and Yahoo! represent 44% of our annualized base rent compared to 86% at the IPO. The average combined remaining lease term with our top three tenants is 6.5 years, with the two top tenants at 5.6 years.

The average remaining lease term for our entire operating portfolio at September 30 is 6.5 years. Through our development efforts, we're happy to announce the opening of both ACC5 Phase II at Ashburn, Virginia; and New Jersey Phase I in Piscataway, New Jersey, which occurred on November 1, 2010, both on time and on budget within the range we provided. We're very pleased with the efforts of our development team, our employees, our general contractor and all our subcontractors. All have been an integral part and value component to the success of DFT.

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