Dupont Fabros Technology, Inc. (DFT)

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DuPont Fabros Technology (DFT)

Q3 2012 Earnings Call

October 25, 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

Michael Bilerman - Citigroup Inc, Research Division

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Evan Smith - Cantor Fitzgerald & Co., Research Division

Ross T. Nussbaum - UBS Investment Bank, Research Division

Robert Gutman - Evercore Partners Inc., Research Division

David Shamis - Jefferies & Company, Inc., Research Division

Chandler Spears - Davis Selected Advisers - NY, Inc.

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

Presentation

Operator

Welcome to the DuPont Fabros Technology's Third Quarter 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, please begin your conference.

Christopher Warnke

Thank you. Good morning, everyone, and thank you for joining us today for DuPont Fabros Technology's Third Quarter 2012 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 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, 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 third quarter 2012 earnings call. As noted in our press release, we again delivered solid financial results, as Mark will discuss later in the call. Leasing remains our first priority, so I'd like to begin with an update.

During the third quarter, we signed 2 new leases with 1 existing Internet hub. One lease was for 2.2 megawatts in Phase I of ACC6. This phase is now 100% leased within 1 year of delivering the property. The second lease was for 1.3 megawatts in Phase II of Chicago, increasing it to 86% leased after delivering the property 8 months ago. As we have seen in the past, our tenant requirements grow. It's taken down additional space within our facilities.

Over 50% of our 33 existing tenants have expanded with us. In terms of megawatts, this expansion represents approximately 70% of our operating portfolio. In addition to the new leasing this quarter, we have extended full leases with 3 tenants, totaling approximately 24 megawatts. This represents an additional 7.5 years on a weighted average basis.

The first tenant extended their lease for 13.9 megawatts in ACC3. This extends their weighted average remaining lease term for 4.4 years to 12.6 years. The second tenant extended 2 leases, one for 3.9 megawatts in CH1 and the second tenant for 3.4 megawatts in ACC5. These extended the weighted average remaining term for 4.1 years to 11.1 years. The third tenant extended their lease for 2.6 megawatts at VA3. This extends their weighted average remaining lease term from 9 months to 6.3 years.

On average, the current extensions for these 3 tenants have reduced gap rent by 6% as compared to the existing base rents in place. This equates to only $0.02 per share reduction in FFO on an annualized basis. The reduction in cash rents only kicks in when the original leases expire.

All of these tenants have the capital and the size to build their own data centers. A big part of our business proposition is having our tenants utilize our buildings, scale and efficiency to reduce our overall operating capacity. We have consistently worked with our tenants to provide them with exceptional outsourcing solutions and have significant success in the past year in extending their leases.

Santa Clara remains well in line with our leasing expectations. Decision-making in New Jersey is taking longer than expected for most enterprise companies. Even though some are taking up significant cash reserves, we're still tracking more than that supply in New Jersey. Chicago and Northern Virginia continue to be very strong markets. We have some available supply in each, which we are actively working on filling up. Safety of ACC6 is currently 67% pre-leased. It remains on time and under budget for the December 2012 delivery. We have already began commissioning this site [ph].

As previously stated on our February earnings call, our goal was to have NJ1, SC1, ACC6 Phase I and Chicago Phase II to be 70% pre-leased on average by year end. To date, these 4 properties are on average 64% leased and 60% commenced. We remain comfortable our target of 70% is achievable. This represents about 4 megawatts leased and 7 megawatts to commence. Year-to-date, we have leasing of 28 megawatts at lease extensions of 24 megawatts. These account for approximately 25% of our total portfolio. We have pushed out lease expansions. Now 85% of our leases expire after January 2017. Our overall portfolio weighted average remaining lease term is now 7.5 years compared to 6.7 years at June 30. Our top 3 tenants' weighted average remaining lease term is now 7.9 years compared to 6.8 years at June 30. This has been our best leasing year since we have began.

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