Market Overview

A New CEO And 2015 Guidance Are Knocking This Data Center REIT Down

A New CEO And 2015 Guidance Are Knocking This Data Center REIT Down
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The management change at the top for data center REIT DuPont Fabros Technology, Inc. (NYSE: DFT) has been in the works for quite a while.

However, based on the information revealed during the February 5, DFT earnings call, it appears that incoming CEO Christopher P. Eldridge will face some challenges right off the bat.

He formerly takes the reins from co-founder and CEO Hossein Fateh on February 17. Fateh will be receiving a sizable severance package in recognition of past service, and willalso continue to be available to Eldridge for guidance as Vice Chairman of the board.


On February 6, UBS downgraded DuPont Fabros from Neutral to Sell, and lowered its price target to $29 from $29.50.

Related Link: How Facebook Is Becoming A Real Estate Tycoon

The stock traded down another 3.9 percent on Friday, closing at $32.67. Shares are down about 3 percent on Monday.

Tale Of The Tape

The data center REIT sector as a whole has started out 2015 with strong gains, led by QTS Realty Trust (NYSE: QTS), CoreSite Realty (NYSE: COR) and Digital Realty (NYSE: DLR).

Notably, both CoreSite Realty and QTS Realty hit new 52-week highs during last Thursdays trading, $45.43 and $40.54, respectively.


CyrusOne (NASDAQ: CONE) has trailed the pack YTD, partially due to concerns regarding 30 percent of revenue coming from the oil and gas vertical.

However, the recent drop in oil prices could actually become a leasing tailwind if customers in that market segment reduce capital budgets, and look to outsource more to third-party providers.

Banner Year For Data Centers - 2014

The strong 2015 YTD performance comes on top of a very strong year for REITs in general, and data centers in particular.


Overall, DuPont Fabros has performed quite well for shareholders during the past year.

It is also notable that the company has increased dividends five times over the past 11 quarters, and currently yields ~5 percent.

Key Takeaways - DFT Q4 Earnings Call

FFO Guidance: Normalized FFO for FY 2015 was expected to come in between $2.27 to $2.47, compared to $2.39 in 2014.

Here are three ways DuPont Fabros could achieve the higher guidance:

1. Notification of non-payment: A 6.26 MW tenant, wholesale co-location provider Net Data Centers (f/k/a net2EZ) gave notice in early January that "they would withhold base rent under our leases until they are sold or new financing sources are secured."

A conservative $0.16 per share reduction was discussed in detail.

The tenant is still paying operating expenses, electricity and management fees, and DFT feels that it is very likely to recoup up to $0.11 per share. The aggregate annual rent in question is $13 million.

2. Yahoo sub-lease ACC2 update: Yahoo is now prepared to vacate ACC2 on 30 day notice, making it much easier for DFT to find a replacement tenant for the 10.4 MW facility.


Additional progress regarding the DFT and Yahoo relationship was also noted in a January 2015 company presentation slide.

3. New Leasing Activity: New developments coming online in 2015, such as SC1 Phase IIB and CH2 Phase I in Chicago, could contribute to the high-end of guidance depending upon the timing of new lease commencement dates.


Big Picture

DuPont Fabros also discussed the signing of its first mini-Wholesale customer, (100kW to 500kW), which is another step forward in expanding the number of its tenant logos.

Currently, DuPont is heavily concentrated both geographically (just four U.S. markets) and has only 38 tenants (77 percent with investment grade credit).

DuPont Fabros has just hired a new CEO with notable experience in facility acquisition, building sales organizations, as well as the data center retail customer market segment.

While development of large data centers is "part of the DuPont Fabros DNA," it remains to be seen if Eldridge will spearhead new strategic growth initiatives to expand beyond the current DuPont Fabros wholesale-focused business model.

Image credit: Fleshas, Wikimedia

Posted-In: Christopher P. Eldridge Hossein FatehNews REIT Short Ideas Events Trading Ideas Real Estate Best of Benzinga


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