DuPont Fabros Technology, Inc. Reports Second Quarter 2014 Results

DUPONT FABROS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands except share and per share data)

Three months ended June 30,

Six months ended June 30,

2014

2013

2014

2013

Revenues:

Base rent

$

70,455

$

65,438

$

139,659

$

129,570

Recoveries from tenants

29,964

25,319

61,653

48,009

Other revenues

1,531

807

2,725

1,744

Total revenues

101,950

91,564

204,037

179,323

Expenses:

Property operating costs

27,782

24,767

57,877

48,279

Real estate taxes and insurance

3,411

3,673

6,878

7,314

Depreciation and amortization

23,603

23,196

46,872

46,235

General and administrative

3,868

4,332

8,108

8,882

Other expenses

1,599

585

2,472

1,357

Total expenses

60,263

56,553

122,207

112,067

Operating income

41,687

35,011

81,830

67,256

Interest income

39

16

107

53

Interest:

Expense incurred

(7,707)

(12,505)

(15,531)

(25,442)

Amortization of deferred financing costs

(723)

(775)

(1,466)

(1,693)

Loss on early extinguishment of debt

(338)

—

(338)

(1,700)

Net income

32,958

21,747

64,602

38,474

Net income attributable to redeemable noncontrolling interests
– operating partnership

(5,026)

(2,965)

(9,814)

(4,938)

Net income attributable to controlling interests

27,932

18,782

54,788

33,536

Preferred stock dividends

(6,811)

(6,811)

(13,622)

(13,622)

Net income attributable to common shares

$

21,121

$

11,971

$

41,166

$

19,914

Earnings per share – basic:

Net income attributable to common shares

$

0.32

$

0.19

$

0.63

$

0.31

Weighted average common shares outstanding

65,486,202

64,380,566

65,417,615

64,733,309

Earnings per share – diluted:

Net income attributable to common shares

$

0.32

$

0.18

$

0.63

$

0.30

Weighted average common shares outstanding

65,951,113

65,188,907

65,887,897

65,556,852

Dividends declared per common share

$

0.35

$

0.25

$

0.70

$

0.45

DUPONT FABROS TECHNOLOGY, INC.

RECONCILIATIONS OF NET INCOME TO FFO, NORMALIZED FFO AND AFFO ⁽¹⁾

(unaudited and in thousands except share and per share data)

Three months ended

June 30,

Six months ended

June 30,

2014

2013

2014

2013

Net income

$

32,958

$

21,747

$

64,602

$

38,474

Depreciation and amortization

23,603

23,196

46,872

46,235

Less: Non real estate depreciation and amortization

(185)

(229)

(357)

(471)

FFO

56,376

44,714

111,117

84,238

Preferred stock dividends

(6,811)

(6,811)

(13,622)

(13,622)

FFO attributable to common shares and OP units

49,565

37,903

97,495

70,616

Loss on early extinguishment of debt

338

—

338

1,700

Normalized FFO

$

49,903

$

37,903

$

97,833

$

72,316

Straight-line revenues, net of reserve

1,305

(2,047)

2,016

(6,654)

Amortization of lease contracts above and below market value

(598)

(597)

(1,197)

(1,195)

Compensation paid with Company common shares

1,507

1,612

3,100

3,515

Non real estate depreciation and amortization

185

229

357

471

Amortization of deferred financing costs

723

775

1,466

1,693

Improvements to real estate

(595)

(3,548)

(1,020)

(4,357)

Capitalized leasing commissions

(1,550)

(56)

(1,577)

(168)

AFFO

$

50,880

$

34,271

$

100,978

$

65,621

FFO attributable to common shares and OP units per share
- diluted

$

0.61

$

0.47

$

1.20

$

0.87

Normalized FFO per share - diluted

$

0.61

$

0.47

$

1.20

$

0.89

AFFO per share - diluted

$

0.62

$

0.42

$

1.24

$

0.80

Weighted average common shares and OP units outstanding
- diluted

81,529,141

81,119,817

81,480,797

81,605,473

(1) Funds from operations, or FFO, is used by industry analysts and investors as a supplemental operating performance measure for REITs. We calculate FFO in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT. FFO, as defined by NAREIT, represents net income determined in accordance with GAAP, excluding extraordinary items as defined under GAAP, impairment charges on depreciable real estate assets and gains or losses from sales of previously depreciated operating real estate assets, plus specified non-cash items, such as real estate asset depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We also present FFO attributable to common shares and OP units, which is FFO excluding preferred stock dividends. FFO attributable to common shares and OP units per share is calculated on a basis consistent with net income attributable to common shares and OP units and reflects adjustments to net income for preferred stock dividends.

We use FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared period over period, captures trends in occupancy rates, rental rates and operating expenses. We also believe that, as a widely recognized measure of the performance of equity REITs, FFO may be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes real estate related depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited.

While FFO is a relevant and widely used measure of operating performance of equity REITs, other equity REITs may use different methodologies for calculating FFO and, accordingly, FFO as disclosed by such other REITs may not be comparable to our FFO. Therefore, we believe that in order to facilitate a clear understanding of our historical operating results, FFO should be examined in conjunction with net income as presented in the consolidated statements of operations. FFO should not be considered as an alternative to net income or to cash flow from operating activities (each as computed in accordance with GAAP) or as an indicator of our liquidity, nor is it indicative of funds available to meet our cash needs, including our ability to pay dividends or make distributions.

We present FFO with adjustments to arrive at Normalized FFO. Normalized FFO is FFO attributable to common shares and units excluding gain or loss on early extinguishment of debt and gain or loss on derivative instruments. We also present FFO with supplemental adjustments to arrive at Adjusted FFO ("AFFO"). AFFO is Normalized FFO excluding straight-line revenue, compensation paid with Company common shares, below market lease amortization net of above market lease amortization, non real estate depreciation and amortization, amortization of deferred financing costs, improvements to real estate and capitalized leasing commissions. AFFO does not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative to net income as an indicator of our operating performance or as an alternative to cash flow provided by operations as a measure of liquidity and is not necessarily indicative of funds available to fund our cash needs including our ability to pay dividends. In addition, AFFO may not be comparable to similarly titled measurements employed by other companies. We use AFFO in management reports to provide a measure of REIT operating performance that can be compared to other companies using AFFO.

DUPONT FABROS TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

June 30,
 2014

December 31,
 2013

(unaudited)

ASSETS

Income producing property:

Land

$

81,006

$

75,956

Buildings and improvements

2,524,016

2,420,986

2,605,022

2,496,942

Less: accumulated depreciation

(457,696)

(413,394)

Net income producing property

2,147,326

2,083,548

Construction in progress and land held for development

310,935

302,068

Net real estate

2,458,261

2,385,616

Cash and cash equivalents

56,141

38,733

Rents and other receivables, net

10,443

12,674

Deferred rent, net

148,022

150,038

Lease contracts above market value, net

8,604

9,154

Deferred costs, net

40,140

39,866

Prepaid expenses and other assets

49,659

44,507

Total assets

$

2,771,270

$

2,680,588

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities:

Line of credit

$

—

$

—

Mortgage notes payable

115,000

115,000

Unsecured term loan

250,000

154,000

Unsecured notes payable

600,000

600,000

Accounts payable and accrued liabilities

24,089

23,566

Construction costs payable

25,032

45,444

Accrued interest payable

10,588

9,983

Dividend and distribution payable

34,243

25,971

Lease contracts below market value, net

8,783

10,530

Prepaid rents and other liabilities

64,058

56,576

Total liabilities

1,131,793

1,041,070

Redeemable noncontrolling interests – operating partnership

419,801

387,244

Commitments and contingencies

—

—

Stockholders' equity:

Preferred stock, $.001 par value, 50,000,000 shares authorized:

Series A cumulative redeemable perpetual preferred stock, 7,400,000 issued and outstanding at June 30, 2014 and December 31, 2013

185,000

185,000

Series B cumulative redeemable perpetual preferred stock, 6,650,000 issued and outstanding at June 30, 2014 and December 31, 2013

166,250

166,250

Common stock, $.001 par value, 250,000,000 shares authorized, 65,831,672 shares issued and outstanding at June 30, 2014 and 65,205,274 shares issued and outstanding at December 31, 2013

66

65

Additional paid in capital

868,360

900,959

Retained earnings

—

—

Total stockholders' equity

1,219,676

1,252,274

Total liabilities and stockholders' equity

$

2,771,270

$

2,680,588

DUPONT FABROS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

Six months ended June 30,

2014

2013

Cash flow from operating activities

Net income

$

64,602

$

38,474

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization

46,872

46,235

Loss on early extinguishment of debt

338

1,700

Straight line revenues, net of reserve

2,016

(6,654)

Amortization of deferred financing costs

1,466

1,693

Amortization of lease contracts above and below market value

(1,197)

(1,195)

Compensation paid with Company common shares

3,100

3,515

Changes in operating assets and liabilities

Rents and other receivables

2,231

(3,219)

Deferred costs

(442)

(205)

Prepaid expenses and other assets

(6,229)

(10,650)

Accounts payable and accrued liabilities

(994)

2,260

Accrued interest payable

605

(254)

Prepaid rents and other liabilities

6,260

14,087

Net cash provided by operating activities

118,628

85,787

Cash flow from investing activities

Investments in real estate – development

(128,068)

(20,516)

Interest capitalized for real estate under development

(6,163)

(504)

Improvements to real estate

(1,020)

(4,357)

Additions to non-real estate property

(283)

(24)

Net cash used in investing activities

(135,534)

(25,401)

Cash flow from financing activities

Line of credit:

Proceeds

—

72,000

Repayments

—

(30,000)

Mortgage notes payable:

Proceeds

—

115,000

Lump sum payoffs

—

(138,300)

Repayments

—

(1,300)

Unsecured term loan:

Proceeds

96,000

—

Payments of financing costs

(2,816)

(3,036)

Exercises of stock options

3,457

—

Common stock repurchases

—

(37,792)

Dividends and distributions:

Common shares

(39,333)

(25,597)

Preferred shares

(13,622)

(13,622)

Redeemable noncontrolling interests – operating partnership

(9,372)

(6,944)

Net cash provided by (used in) financing activities

34,314

(69,591)

Net increase (decrease) in cash and cash equivalents

17,408

(9,205)

Cash and cash equivalents, beginning

38,733

23,578

Cash and cash equivalents, ending

$

56,141

$

14,373

Supplemental information:

Cash paid for interest

$

21,089

$

26,200

Deferred financing costs capitalized for real estate under development

$

354

$

34

Construction costs payable capitalized for real estate under development

$

25,032

$

5,762

Redemption of operating partnership units

$

2,400

$

69,900

Adjustments to redeemable noncontrolling interests - operating partnership

$

36,047

$

2,111

DUPONT FABROS TECHNOLOGY, INC.

Operating Properties

As of July 1, 2014

Property

Property Location

Year Built/
Renovated

Gross
Building Area (2)

Computer Room
Square Feet ("CRSF") (2)

CRSF %
Leased (3)

CRSF %
Commenced (4)

Critical
Load MW (5)

Critical
Load %

Leased (3)

Critical
Load % Commenced (4)

Stabilized (1)

ACC2

Ashburn, VA

2001/2005

87,000

53,000

100

%

100

%

10.4

100

%

100

%

ACC3

Ashburn, VA

2001/2006

147,000

80,000

100

%

100

%

13.9

100

%

100

%

ACC4

Ashburn, VA

2007

347,000

172,000

100

%

100

%

36.4

100

%

100

%

ACC5

Ashburn, VA

2009-2010

360,000

176,000

98

%

98

%

36.4

98

%

98

%

ACC6

Ashburn, VA

2011-2013

262,000

130,000

100

%

100

%

26.0

100

%

100

%

CH1

Elk Grove Village, IL

2008-2012

485,000

231,000

100

%

100

%

36.4

100

%

100

%

NJ1 Phase I (6)

Piscataway, NJ

2010

180,000

88,000

64

%

64

%

18.2

52

%

52

%

SC1 Phase I

Santa Clara, CA

2011

180,000

88,000

100

%

100

%

18.2

100

%

100

%

VA3

Reston, VA

2003

256,000

147,000

94

%

94

%

13.0

95

%

95

%

VA4

Bristow, VA

2005

230,000

90,000

100

%

100

%

9.6

100

%

100

%

Subtotal – stabilized

2,534,000

1,255,000

97

%

97

%

218.5

95

%

95

%

Completed, not Stabilized

SC1 Phase IIA

Santa Clara, CA

2014

90,000

44,000

75

%

75

%

9.1

77

%

77

%

Subtotal – non-stabilized

90,000

44,000

75

%

75

%

9.1

77

%

77

%

Total Operating Properties

2,624,000

1,299,000

96

%

96

%

227.6

95

%

95

%

(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 CRSF (the portion of gross building area where our customers' computer servers are located), common areas, areas controlled by us (such as the mechanical, telecommunications and utility rooms) and, in some facilities, individual office and storage space leased on an as available basis to our customers.

(3)

Percentage leased is expressed as a percentage of CRSF or critical load, as applicable, that is subject to an executed lease. Leases executed as of July 1, 2014 represent $286 million of base rent on a GAAP basis and $300 million of base rent on a cash basis over the next twelve months. Both amounts include $18 million of revenue from management fees over the next twelve months.

(4)

Percentage commenced is expressed as a percentage of CRSF or critical load, as applicable, where the lease has commenced under generally accepted accounting principles.

(5)

Critical load (also referred to as IT load or load used by customers' servers or related equipment) is the power available for exclusive use by customers expressed in terms of megawatt, or MW, or kilowatt, or kW (1 MW is equal to 1,000 kW).

(6)

As of July 23, 2014, NJ1 Phase I was 59% leased on a critical load basis and 70% leased on a CRSF basis.

DUPONT FABROS TECHNOLOGY, INC.

Lease Expirations

As of July 1, 2014

The following table sets forth a summary schedule of lease expirations at our operating properties for each of the ten calendar years beginning with 2014. The information set forth in the table below assumes that customers exercise no renewal options and takes into account customers' early termination options in determining the life of their leases under GAAP.

Year of Lease Expiration

Number
of Leases
Expiring (1)

CRSF of
Expiring
Commenced
Leases
(in thousands) (2)

% of
Leased
CRSF

Total kW
of Expiring Commenced Leases (2)

% of
Leased kW

% of
Annualized Base Rent (3)

2014 (4)

1

5

0.4

%

1,137

0.5

%

0.7

%

2015

4

70

5.6

%

13,812

6.4

%

6.4

%

2016

4

32

2.6

%

4,686

2.2

%

2.4

%

2017

14

102

8.2

%

18,106

8.5

%

8.4

%

2018

20

203

16.3

%

38,566

17.9

%

17.8

%

2019

16

247

19.9

%

42,287

19.6

%

18.1

%

2020

10

106

8.5

%

16,496

7.7

%

8.4

%

2021

9

159

12.8

%

27,682

12.8

%

13.2

%

2022

6

75

6.0

%

12,812

5.9

%

6.9

%

2023

4

48

3.9

%

6,475

3.0

%

2.7

%

After 2023

12

196

15.8

%

33,425

15.5

%

15.0

%

Total

100

1,243

100

%

215,484

100

%

100

%

(1)

Represents 34 customers with 100 lease expiration dates. Top four customers represent 62% of annualized base rent.

(2)

CRSF is that portion of gross building area where customers 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 as of July 1, 2014.

(4)

In July 2014, this lease was renewed for two years and now expires in 2016.

DUPONT FABROS TECHNOLOGY, INC.

Development Projects

As of June 30, 2014

($ in thousands)

Property

Property
Location

Gross
Building Area (1)

CRSF (2)

Critical
Load MW (3)

Estimated
Total Cost (4)

Construction
in Progress & Land Held for Development (5)

CRSF %
Pre- leased

Critical
Load % Pre- leased

Current Development Projects

ACC7 Phase I (6)

Ashburn, VA

126,000

70,000

11.9

 $90,000 -  $95,000

$

90,589

12

%

17

%

SC1 Phase IIB

Santa Clara, CA

90,000

44,000

9.1

 107,000 -  113,000

63,636

—

%

—

%

CH2 Phase I

Elk Grove Village, IL

93,000

46,000

7.1

   70,000 -    80,000

6,853

—

%

—

%

309,000

160,000

28.1

 267,000 -  288,000

161,078

Future Development Projects/Phases

ACC7 Phases II to IV

Ashburn, VA

320,000

176,000

29.7

  87,000 -   93,000

86,544

CH2 Phases II to III

Elk Grove Village, IL

243,000

120,000

18.5

120,000 - 130,000

14,542

NJ1 Phase II

Piscataway, NJ

180,000

88,000

18.2

39,212

39,212

743,000

384,000

66.4

$246,212 - $262,212

140,298

Land Held for Development

ACC8

Ashburn, VA

100,000

50,000

10.4

4,069

SC2

Santa Clara, CA

200,000

125,000

26.0

5,490

300,000

175,000

36.4

9,559

Total

1,352,000

719,000

130.9

$

310,935