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| DFT > SEC Filings for DFT > Form 10-K on 21-Feb-2013 | All Recent SEC Filings |
21-Feb-2013
Annual Report
Overview
DuPont Fabros Technology, Inc. (the "REIT" or "DFT") was formed on March 2,
2007, is a real estate investment trust, or REIT, and is headquartered in
Washington, D.C. DFT is a fully integrated, self-administered and self-managed
company that owns, acquires, develops and operates wholesale data centers. DFT
is the sole general partner of, and, as of December 31, 2012, owned 77.1% of the
common economic interest in, DuPont Fabros Technology, L.P. (the "Operating
Partnership" or "OP" and collectively with DFT and their operating subsidiaries,
the "Company"). DFT's common stock trades on the New York Stock Exchange, or
NYSE, under the symbol "DFT". DFT's Series A Preferred Stock and Series B
preferred stock also trade on the NYSE under the symbols "DFTPrA" and "DFTPrB",
respectively.
As of December 31, 2012, the Company owned and operated ten data centers, seven
of which are located in Northern Virginia, one in suburban Chicago, Illinois,
one in Piscataway, New Jersey and one in Santa Clara, California. As discussed
below, the Company also owns certain properties for future development and
parcels of land that it intends to develop in the future, into wholesale data
centers. With this portfolio of properties, the Company believes that it is well
positioned as a fully integrated wholesale data center provider, capable of
developing, leasing, operating and managing its growing portfolio.
The following table presents a summary of the Company's operating properties as
of December 31, 2012:
Operating Properties
As of December 31, 2012
Gross Raised Critical %
Year Built/ Building Square Load % Commenced
Property Property Location Renovated Area (2) Feet (2) MW (3) Leased (4) (5)
Stabilized (1)
ACC2 Ashburn, VA 2001/2005 87,000 53,000 10.4 100 % 100 %
ACC3 Ashburn, VA 2001/2006 147,000 80,000 13.9 100 % 100 %
ACC4 Ashburn, VA 2007 347,000 172,000 36.4 100 % 100 %
ACC5 (6) Ashburn, VA 2009-2010 360,000 176,000 36.4 100 % 100 %
ACC6 Phase I Ashburn, VA 2011 131,000 65,000 13.0 100 % 100 %
CH1 Phase I Elk Grove Village, IL 2008 285,000 122,000 18.2 100 % 100 %
NJ1 Phase I Piscataway, NJ 2010 180,000 88,000 18.2 39 % 39 %
VA3 (6) Reston, VA 2003 256,000 147,000 13.0 56 % 56 %
VA4 Bristow, VA 2005 230,000 90,000 9.6 100 % 100 %
Subtotal - stabilized 2,023,000 993,000 169.1 90 % 90 %
Completed not Stabilized
CH1 Phase II (6) Elk Grove Village, IL 2,012 200,000 109,000 18.2 100 % 71 %
SC1 Phase I (7) Santa Clara, CA 2011 180,000 88,000 18.2 75 % 44 %
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(1) Stabilized operating properties are either 85% or more leased and commenced or have been in service for 24 months or greater.
(2) Gross building area is the entire building area, including raised square footage (the portion of gross building area where the tenants' computer servers are located), tenant common areas, areas controlled by the Company (such as the mechanical, telecommunications and utility rooms) and, in some facilities, individual office and storage space leased on an as available basis to the tenants.
(3) Critical load (also referred to as IT load or load used by tenants' servers or related equipment) is the power available for exclusive use by tenants expressed in terms of megawatt, or MW, or kilowatt, or kW (1 MW is equal to 1,000 kW).
(4) Percentage leased is expressed as a percentage of critical load that is subject to an executed lease totaling 184.1 MW. Leases executed as of December 31, 2012 represent $238 million of base rent on a GAAP basis over the next twelve months. Additionally, on a cash basis, leases executed as of December 31, 2012 represent $235 million of base rent over the next twelve months.
(5) Percentage commenced is expressed as a percentage of critical load where the lease has commenced under generally accepted accounting principles.
(6) In January 2013, leases at ACC5 and VA3 were restructured with a tenant and
0.55 MW was returned at ACC5 and 0.65 MW was returned at VA3. As of February
5, 2013, ACC5 is 98% leased and commenced and VA3 is 51% leased and
commenced. Additionally, an unrelated tenant at CH1 Phase II exercised their
option to return 1.30 MW before the lease had commenced. As of February 5,
2013, CH1 Phase II is 93% leased and 86% commenced.
(7) As of February 5, 2013, SC1 Phase I is 69% commenced.
The following table presents a summary of lease expirations for commenced leases at the Company's operating properties as of December 31, 2012.
Lease Expirations
As of December 31, 2012
Raised Square Feet Total kW of
Number Expiring % of Leased Expiring % of
Year of Lease of Leases (in thousands) Raised Commenced % of Annualized
Expiration Expiring (1) (2) Square Feet Leases (2) Leased kW Base Rent (3)
2013 (4) 2 8 0.8 % 1,567 0.9 % 1.0 %
2014 6 35 3.6 % 6,287 3.6 % 3.9 %
2015 4 70 7.1 % 13,812 8.0 % 7.3 %
2016 4 32 3.3 % 4,686 2.7 % 2.7 %
2017 10 69 7.0 % 12,039 6.9 % 6.6 %
2018 11 121 12.3 % 24,944 14.4 % 14.5 %
2019 11 168 17.1 % 31,035 17.9 % 16.3 %
2020 9 96 9.8 % 15,196 8.8 % 8.8 %
2021 7 130 13.2 % 21,669 12.5 % 13.4 %
2022 6 75 7.6 % 12,812 7.4 % 7.9 %
After 2022 12 180 18.2 % 29,185 16.9 % 17.6 %
Total 82 984 100 % 173,232 100 % 100 %
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(1) Represents 33 tenants with 82 lease expiration dates. Top three tenants represent 48% of annualized base rent.
(2) Raised square footage is that portion of gross building area where the tenants locate their computer servers. One MW is equal to 1,000 kW.
(3) Annualized base rent represents the monthly contractual base rent (defined as cash base rent before abatements) multiplied by 12 for commenced leases totaling 173.2 MW as of December 31, 2012.
(4) One lease has a rolling option to terminate on six months' notice and has a scheduled maturity on September 30, 2013 with no notice received as of today. The second lease will expire on December 31, 2013, representing 2,800 raised square feet, 430 kW of critical load and 0.2% of annualized base rent as notice was provided.
The following table presents a summary of the Company's development properties
as of December 31, 2012:
Development Projects
As of December 31, 2012
($ in thousands)
Construction
Gross Raised Critical in Progress &
Building Square Load Estimated Land Held for %
Property Property Location Area (1) Feet (2) MW (3) Total Cost (4) Development (5) Pre-leased
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Current Development Projects
ACC6 Phase II (6) Ashburn, VA 131,000 65,000 13.0 $ 110,000 $ 97,819 100 %
Future Development Projects/Phases
SC1 Phase II Santa Clara, CA 180,000 88,000 18.2 61,669
NJ1 Phase II Piscataway, NJ 180,000 88,000 18.2 39,212
360,000 176,000 36.4 100,881
Land Held for Development
ACC7 Phase I /II Ashburn, VA 360,000 176,000 36.4 10,743
ACC8 Ashburn, VA 100,000 50,000 10.4 3,658
SC2 Phase I/II Santa Clara, CA 300,000 171,000 36.4 5,833
760,000 397,000 83.2 20,234
Total 1,251,000 638,000 132.6 $ 218,934
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(1) Gross building area is the entire building area, including raised square footage (the portion of gross building area where the tenants' computer servers are located), tenant common areas, areas controlled by the Company (such as the mechanical, telecommunications and utility rooms) and, in some facilities, individual office and storage space leased on an as available basis to the tenants.
(2) Raised square footage is that portion of gross building area where the tenants locate their computer servers.
(3) Critical load (also referred to as IT load or load used by tenants' servers or related equipment) is the power available for exclusive use by tenants expressed in terms of MW or kW (1 MW is equal to 1,000 kW).
(4) Current development projects include land, capitalization for construction and development, capitalized interest and capitalized operating carrying costs, as applicable, upon completion.
(5) Amount capitalized as of December 31, 2012. Future Phase II development projects include only land, shell, underground work and capitalized interest through Phase I opening.
(6) ACC6 Phase II was placed into service on January 1, 2013 and 50% of the leases commenced immediately. One-third of the remaining leases is expected to commence later in the first quarter of 2013 with the remaining leases expected to commence in the third quarter of 2013.
Leasing Update
The Company derives substantially all of its revenue from rents received from
tenants under existing leases at each of the operating properties. Because the
Company believes that critical load is the primary factor used by tenants in
evaluating data center requirements, rents are based primarily on the amount of
power that is made available to tenants, rather than the amount of space that
they occupy. During 2012, the Company executed 14 leases and pre-leases
representing a total of 41.48 MW of critical load and 213,295 raised square feet
of space with an average lease term of 9.9 years. Four leases were at SC1 Phase
I comprising 11.38 MW of critical load and 54,795 raised square feet, three
leases were at ACC6 Phase I comprising 11.92 MW of critical load and 58,950
raised square feet, three leases were at CH1 comprising 4.33 MW of critical load
and 29,482 raised square feet and two leases were at NJ1 Phase I comprising 0.85
MW of critical load and 4,135 raised square feet. Two pre-leases were at ACC6
Phase II totaling 13.00 MW and 65,933 raised square feet. ACC6 Phase II was
placed into service on January 1, 2013.
In 2012, the Company extended the maturity of four leases totaling 23.81 MW and
148,687 raised square feet for a weighted average additional 7.5 years. One of
these leases was at ACC3 totaling 13.90 MW and 80,000 raised square feet, one
lease was at CH1 totaling 3.90 MW and 24,851 raised square feet, one lease was
at ACC5 totaling 3.41 MW and 16,400 raised square feet and one lease was at VA3
totaling 2.60 MW and 27,436 raised square feet. The base rent of the four
extended leases is approximately 5.9% lower than base rent prior to the
extensions, in the aggregate, on a straight line basis. Cash base rent of
these four leases will decline approximately 18.5% at the time the renewal rents
take effect compared to current cash rents. The original lease terms of the four
extended leases expire from 2013 to 2018 and the extended lease terms expire
from 2017 to 2026. For certain of these extensions the Company made a strategic
decision to agree to cash rent reductions in exchange for obtaining long-term
lease extensions. These cash rent reductions will not have an impact on the
Company's cash position in 2013 or 2014 compared to current rents we receive,
but there will be an impact in 2015 and future years. Despite these concessions,
the Company believes these lease extensions were in the best interest of its
business, strengthened the relationships with several key tenants, and generated
16.09 MW of additional leases from these tenants in 2012.
From January 1, 2013 to February 5, 2013, two tenants have returned space to the
Company. One of the tenants had the option to return space with 2.60 MW of
available critical load at CH1 Phase II and this tenant elected to return space
with 1.30 MW of available critical load before its lease commenced, and its
option to return the remaining space has expired. Another tenant restructured
two of its four leases with the Company and returned space with 0.65 MW of
available critical load before its lease commenced at VA3 and space with 0.55 MW
of available critical load at ACC5. See "Results of Operations" below for more
discussion on this restructuring.
Each of the Company's leases includes pass-through provisions under which
tenants are required to pay for their pro rata share of most of the
property-level operating expenses, such as real estate taxes and insurance -
commonly referred to as a triple net lease. In addition, under the Company's
triple-net lease structure, tenants pay for only the power they use to run their
servers and other computer equipment and power that is used to cool their space.
The Company intends to continue to structure future leases as triple net leases.
The Company's leases also provide it with a property management fee based on a
percentage of base rent collected and property-level operating expenses, other
than charges for power used by tenants to run their servers and cool their
space. Also, most of the Company's leases provide for annual rent increases,
generally at a rate of 2% to 3% or a function of the consumer price index.
The Company leases space on a long-term basis and the Company's weighted average
remaining lease term for commenced leases was approximately 7.1 years as of
December 31, 2012. Although less than 15% of the Company's leases - in terms of
annualized base rent - are scheduled to expire through 2016, the Company's
ability to generate rental income over time will depend on its ability to retain
tenants when their leases expire and re-lease space available from leases that
expire or are terminated at attractive rates. During the second quarter of 2012,
the Company's second largest tenant, Yahoo!, elected not to renew one of its
leases comprising 2.8% of the Company's consolidated annualized base rent as of
March 31, 2012. Additionally, as noted above, two tenants returned space with a
total of 2.5 MW of available critical load in 2013. The Company is actively
marketing this space, but it can provide no assurances regarding when the space
will be re-leased or the rates that it will be able to charge for the space,
particularly in light of some of the factors discussed below.
Market Conditions
The opportunity for revenue growth in the near term primarily depends on the
Company's ability to lease space in its five operating properties with
vacancies: NJ1 Phase I, SC1 Phase I, CH1, VA3 and ACC5. The Company takes into
account various factors when negotiating the terms of its leases, which can vary
among leases, including the following factors: the tenant's strategic
importance, growth prospects and credit quality, the length of the lease term,
the amount of power leased and competitive market conditions. In each of its
100% leased properties, the Company has been able to lease vacant space at rates
that provide a favorable return on its investment in these facilities. There
appears to be increased pricing pressure in some of the markets in which the
Company competes, including lower rates and concessions. It is unclear to what
extent this will adversely impact the rental rates, and, in turn, the rates of
return of its investment, that the Company can obtain as it pursues leasing
available space at the five properties listed above. The returns on the
Company's investments it has achieved to date would be impacted negatively if it
is unable to lease vacant space with rents equal to or above its historic rates.
The Company receives expense reimbursement from tenants only on space that is
leased. Vacant space results in portions of the Company's operating expenses
being unreimbursed, which in turn negatively impacts revenues and net income. It
is difficult for the Company to predict the timing for signing and commencing
leases for available space. This uncertainty is particularly true with respect
to the leasing of vacant space in data center facilities that are located in new
markets for the Company - NJ1 Phase I in Piscataway, New Jersey and SC1 Phase I
in Santa Clara, California.
The Company's three largest tenants comprised 48% of its annualized base rent as
of December 31, 2012. The Company expects these tenants to evaluate their lease
expirations in the year before expiration is scheduled to occur, taking into
account, among other factors, their anticipated need for server capacity and
economic factors. If the Company cannot renew these leases at similar rates or
attract replacement tenants on similar terms in a timely manner, the Company's
rental income could be materially adversely impacted in future periods.
The Company has only 33 different tenants with 82 different lease expirations.
The inability of a tenant to meet its rent obligations could impact us
negatively and significantly. Adverse economic and other market conditions could
impact the ability of any of the Company's tenants to fulfill their lease
commitments. For example, as discussed below in "Results of Operations - Year
Ended December 31, 2012 Compared to Year Ended December 31, 2011 - Operating
Expenses," in 2012, we established a $3.0 million receivables reserve related to
one tenant that restructured its lease obligations with us and, as part of the
restructuring, converted its outstanding accounts receivable and deferred rent
receivable related to space that this tenant returned to us into a note
receivable. The inability of this tenant to satisfy its obligations to us under
the note or its lease agreements with us could result in additional charges, the
amounts of which could be significant, which would impact our results of
operations and financial condition negatively.
The Company's taxable REIT subsidiary ("TRS"), DF Technical Services, LLC,
generates revenue by providing certain technical services to the Company's
tenants on a non-recurring contract or purchase-order basis, which the Company
refers to as "a la carte" services. Such services include the installation of
circuits, racks, breakers and other tenant requested items. The TRS will
generally charge tenants for these services on a cost-plus basis. Because the
degree of utilization of the TRS for these services varies from period to period
depending on the needs of the tenants for technical services, the Company has
limited ability to forecast future revenue from this source. Moreover, as a
taxable corporation, the TRS is subject to federal, state and local corporate
taxes and is not required to distribute its income, if any, to the Company for
purposes of making additional distributions to DFT's stockholders. Because
demand for its services is unpredictable, the Company anticipates that the TRS
may retain a significant amount of its cash to fund future operations, and
therefore the Company does not expect to receive distributions from the TRS on a
regular basis.
In the current economic environment, certain types of real estate have
experienced declines in value. If this trend were to be experienced by any of
the Company's data centers, the Company may have to write down the value of that
data center, which would result in the Company recording a charge against
earnings.
Results of Operations
This Annual Report on Form 10-K contains stand-alone audited financial
statements and other financial data for each of DFT and the Operating
Partnership. DFT is the sole general partner of the Operating Partnership and,
as of December 31, 2012, owned 77.1% of the common economic interests in the
Operating Partnership, of which approximately 1.0% is held as general
partnership units. All of the Company's operations are conducted by the
Operating Partnership which is consolidated by DFT, and therefore the following
information is the same for DFT and the Operating Partnership, except for net
income attributable to common shares is not a line item in the Operating
Partnership's consolidated statement of operations.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Operating Revenue. Operating revenue for the year ended December 31, 2012 was
$332.4 million. This includes base rent of $223.0 million, tenant recoveries of
$104.8 million, which includes the Company's property management fee, and other
revenue of $4.6 million, partially from a la carte projects for the Company's
tenants performed by its TRS. This compares to revenue of $287.4 million for the
year ended December 31, 2011. The increase of $45.0 million, or 15.7%, was
primarily due to leases commencing at CH1 Phase II, NJ1 Phase I, SC1 Phase I and
ACC6 Phase I partially offset by one lease that expired on April 30, 2012.
Operating Expenses. Operating expenses for the year ended December 31, 2012 were
$220.5 million, compared to $178.9 million for the year ended December 31, 2011.
The increase of $41.6 million, or 23.3%, was primarily due to the following:
$20.6 million of increased operating costs, real estate taxes and insurance as
ACC6 Phase I and SC1 Phase I were opened in the second half of 2011 and CH1
Phase II was opened in February 2012 and real estate taxes increased at NJ1 and
SC1, $14.2 million increase from depreciation and amortization from the opening
of these new data centers and a $5.8 million increase in other expenses. The
percentage increase in operating expenses was greater than the increase in
operating revenue, described above, primarily due to the operating expenses at
ACC6 Phase I, SC1 Phase I and CH1 Phase II not being fully recoverable for all
or part of 2012, as follows:
• SC1 Phase I was not fully leased in 2012, and had been in service for
only three months of 2011;
• ACC6 Phase I did not become fully leased until September 2012, and it
was only partially leased prior to that time; and
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• Only a portion of the CH1 Phase II leases had commenced by December 31, 2012.
The $5.8 million increase in other expenses was primarily due to a receivables
reserve of $3.0 million, the write-off of deal pursuit costs of $1.3 million and
an increase in a la carte project expense in conjunction with an increase in a
la carte project revenues. The receivables reserve was set up for one tenant
that restructured its lease obligations with us. The tenant leases approximately
7.45 MW in four different locations and the Company has agreed to relinquish a
total of approximately
16%, or 1.2 MW, at two locations, ACC5 and VA3. Also, under this restructuring,
this tenant's outstanding accounts receivable and deferred rent receivable
related to the returned space has been converted into a note receivable, the
terms of which require the payment of principal and interest over the next four
years. Additionally, under this restructuring this tenant has the right to defer
up to two-thirds of base rent due over the next 18 months (approximately $3
million) at NJ1 in Piscataway, New Jersey. If deferred, the base rent would be
added to the note.
Interest Expense. Interest expense, including amortization of deferred financing
costs, for the year ended December 31, 2012 was $51.3 million compared to
interest expense of $29.5 million for the year ended December 31, 2011. Total
interest incurred for the year ended December 31, 2012 was $56.0 million, of
which $4.7 million was capitalized, as compared to $57.9 million in 2011, of
which $28.4 million was capitalized. The decrease in total interest incurred
period over period was primarily due to negotiating a lower interest rate on the
ACC5 Term Loan in July 2011. Interest capitalized decreased period over period
as the Company had three projects under development in 2011 but had, at most,
only one project under current development at any one time in 2012.
Net Income Attributable to Redeemable Noncontrolling interests - Operating
Partnership (DFT only). Net income attributable to redeemable noncontrolling
interests - operating partnership for the year ended December 31, 2012 was $7.8
million as compared to $14.5 million for the year ended December 31, 2011. The
decrease of $6.7 million was primarily due to the Operating Partnership
receiving its allocation of higher interest expense.
Net Income Attributable to Common Shares. Net income attributable to common
shares for the year ended December 31, 2012 was $26.0 million as compared to
$44.1 million for the year ended December 31, 2011. The decrease of $18.1
million was primarily due to higher interest expense and a $6.2 million increase
in preferred stock dividends.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Operating Revenue. Operating revenue for the year ended December 31, 2011 was $287.4 million. This includes base rent of $193.9 million, tenant recoveries of $91.2 million, which includes the Company's property management fee, and other . . .
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