Dupont Fabros Technology, Inc. (DFT)

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DuPont Fabros Technology (DFT)

Q4 2011 Earnings Call

February 08, 2012 10:00 am ET

Executives

Christopher Warnke - Manager of Investor Relations

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

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

Analysts

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Srikanth Nagarajan - Cantor Fitzgerald & Co., Research Division

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Michael Bilerman - Citigroup Inc, Research Division

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

Ross T. Nussbaum - UBS Investment Bank, Research Division

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

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

Robert Stevenson - Macquarie Research

David Rodgers - RBC Capital Markets, LLC, Research Division

Romeo A. Reyes - Jefferies & Company, Inc., Research Division

Christopher R. Lucas - Robert W. Baird & Co. Incorporated, Research Division

Unknown Analyst

Emmanuel Korchman

Presentation

Operator

Welcome to DuPont Fabros Technology's Fourth Quarter 2011 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 2011 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 2 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 fourth quarter 2011 earnings call. As noted in last night's press release, we again delivered solid quarterly and full year financial results for 2011, which Mark will discuss later in the call. 2011 was our fourth year as a public company. We are proud of our accomplishments, none of which could have been achieved without the hard work of our excellent team of employees. I thank each one of you for your valued contributions.

Leasing is our primary focus, so I would like to begin with an update. We placed into service 86-megawatts of critical load within the last 15 months. We have leased just over half of it. We are confident that we'll be successful in leasing the other half. For the full year 2011, we signed 14 new leases, totaling 25 megawatts of available critical load, with a contract value of over $425 million. This compares to 23 megawatts in 2010 and 37 megawatts in 2009. During the fourth quarter, we signed 3 leases, totaling 3 megawatts of available critical load. Two leases were in New Jersey, which were previously discussed on the last call. The third lease is a new lease in Chicago, with a new health care tenant. So far in the first quarter, we signed 1 lease in Santa Clara for 2.28 megawatts. This lease commenced in the first quarter. This building is now 25% leased.

On a macro level, we remain comfortable with the fundamentals and industry trends for future data center space. The amount of data stored and processed worldwide continues to double every few years. We are well-positioned to capitalize on this trend. The challenge in the short term is executing new leases. Traffic remains good. However, sometimes decision-making for larger blocks of space we offer is unpredictable and can take longer to execute.

As I have stated many times, leasing wholesale space is a lumpy business. We remain confident that we will lease the vacant space in our buildings. Nevertheless, we have pushed out the lease commencement start date by a couple of quarters. This means that the majority of the 2012 leases not executed as of today will commence in the second half of the year. This covers the vacant space in Santa Clara, Ashburn and New Jersey. The timing delay affects our original expectations and your expectations for the 2012 guidance, which Mark will walk you through. This does not affect the margins or NAV we expect to create once the buildings are leased. Returns on our invested capital remain in the 10% to 15% range.

One important point to remember is that we do not require raising new capital. Now that all new construction have finished, our challenge is to lease the remaining buildings we opened in the last 15 months. The timing and pricing of the new leases will impact our NOI, FFO and taxable income significantly over the next 2 years.

I will now give you an update by market. Chicago Phase II opened last week. This phase is 79% leased and remains a top market for us. Phase II has 1 new tenant compared to Phase I. This reconfirms our strategy of building in 2 phases. In new markets, we experience the greatest leasing risk in the first phase. Once Phase I is leased, our risk is reduced significantly because our Phase I tenants will typically grow with us. There is no secured debt on this facility and we continue to expect a 12% unlevered return once fully leased. Leasing at CH1 has done better than expected.

New Jersey has competition but we represent the majority of the available built-out inventory. Financial institutions have been and continue to be a large percentage of the demand in this market. They, however, have been thoughtful in making decisions based on overall economic environment. There is no secured debt on this property and we remain at 34% leased at NJ1 as of today. Leasing in this market has been slower than expected. On January 12, the NYSE placed in service the Safety Access Center at NJ1. This access center offers full safety network services and support and offer tenants more direct connections to the financial market and market information. We believe this will attract new financial tenants to the building.

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