XNYS:DFT Dupont Fabros Technology Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012.

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From             to            .

Commission file number 001-33748

 

 

DUPONT FABROS TECHNOLOGY, INC.

DUPONT FABROS TECHNOLOGY, L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland (DuPont Fabros Technology, Inc.)

Maryland (DuPont Fabros Technology, L.P.)

 

20-8718331

26-0559473

(State or other jurisdiction of

Incorporation or organization)

 

(IRS employer

identification number)

1212 New York Avenue, NW

Washington, D.C.

  20005
(Address of principal executive offices)   Zip Code

Registrant’s telephone number, including area code: (202) 728-0044

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated Filer   x    Accelerated filer   ¨

(DuPont Fabros Technology, Inc. only)

    
Non-accelerated Filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

(DuPont Fabros Technology, L.P. only)

    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at April 30, 2012

DuPont Fabros Technology, Inc. Common Stock,

$0.001 par value per share

  63,233,203

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2012 of DuPont Fabros Technology, Inc. and DuPont Fabros Technology, L.P. References to the “REIT” or “DFT” mean DuPont Fabros Technology, Inc. and its controlled subsidiaries; and references to the “Operating Partnership” or “OP” mean DuPont Fabros Technology, L.P. and its controlled subsidiaries. The term “the Company” refers to DFT and the Operating Partnership, collectively.

DFT is a real estate investment trust (“REIT”) and the general partner of the Operating Partnership. The Operating Partnership’s capital includes general and limited common operating partnership units, or “OP units.” As of March 31, 2012, DFT owned 76.9% of the common economic interest in the Operating Partnership, with the remaining interest being owned by investors. As the sole general partner of the Operating Partnership, DFT has exclusive control of the Operating Partnership’s day-to-day management.

The Company believes combining the quarterly reports on Form 10-Q of DFT and the Operating Partnership into this single report provides the following benefits:

 

   

enhances investors’ understanding of DFT and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

 

   

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure in this report applies to both DFT and the Operating Partnership; and

 

   

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

Management operates DFT and the Operating Partnership as one business. The management of DFT consists of the same members as the management of the Operating Partnership.

The Company believes it is important for investors to understand the few differences between DFT and the Operating Partnership in the context of how DFT and the Operating Partnership operate as a consolidated company. DFT is a REIT, whose only material asset is its ownership of OP units of the Operating Partnership. As a result, DFT does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing unsecured debt of the Operating Partnership. DFT has not issued any indebtedness, but has guaranteed all of the unsecured debt of the Operating Partnership. The Operating Partnership holds all the real estate assets of the Company. Except for net proceeds from public equity issuances by DFT, which are contributed to the Operating Partnership in exchange for OP units or preferred units, the Operating Partnership generates all remaining capital required by the Company’s business. These sources include the Operating Partnership’s operations, its direct or indirect incurrence of indebtedness, and the issuance of partnership units.

As general partner with control of the Operating Partnership, DFT consolidates the Operating Partnership for financial reporting purposes. The presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of DFT and those of the Operating Partnership. The Operating Partnership’s capital includes preferred units and general and limited common units that are owned by DFT and the other partners. DFT’s stockholders’ equity includes preferred stock, common stock, additional paid in capital and accumulated deficit. The common limited partnership interests held by the limited partners (other than DFT) in the Operating Partnership are presented as “redeemable partnership units” in the Operating Partnership’s consolidated financial statements and as “redeemable noncontrolling interests-operating partnership” in DFT’s consolidated financial statements. The only difference between the total assets of DFT and the Operating Partnership as of March 31, 2012 is a $4.3 million bank account held by DFT that is not part of the Operating Partnership. Net income is the same for DFT and the Operating Partnership.

In order to highlight the few differences between DFT and the Operating Partnership, there are sections in this report that discuss DFT and the Operating Partnership separately, including separate financial statements, controls and procedures sections, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure for DFT and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that enters into contracts, holds assets and issues debt, we believe that reference to the Company in this context is appropriate because the business is one enterprise and the Company operates the business through the Operating Partnership.


Table of Contents

DUPONT FABROS TECHNOLOGY, INC. / DUPONT FABROS TECHNOLOGY, L.P.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS

 

          PAGE NO.  

PART I. FINANCIAL INFORMATION

     4   

ITEM 1.

  

Consolidated Financial Statements

     4   
  

DuPont Fabros Technology, Inc.

     4   
  

DuPont Fabros Technology, L.P.

     8   
  

Notes to Consolidated Financial Statements (DuPont Fabros Technology, Inc. and DuPont Fabros Technology, L.P.)

     12   

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   

ITEM 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     41   

ITEM 4.

  

Controls and Procedures

     42   

PART II. OTHER INFORMATION

     42   

ITEM 1.

  

Legal Proceedings

     42   

ITEM 1A.

  

Risks Factors

     42   

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     42   

ITEM 3.

  

Defaults Upon Senior Securities

     42   

ITEM 4.

  

Mine Safety Disclosures

     43   

ITEM 5.

  

Other Information

     43   

ITEM 6.

  

Exhibits

     44   

Signatures

        45   


Table of Contents

PART 1—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

DUPONT FABROS TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        
ASSETS     

Income producing property:

    

Land

   $ 73,197      $ 63,393   

Buildings and improvements

     2,309,961        2,123,377   
  

 

 

   

 

 

 
     2,383,158        2,186,770   

Less: accumulated depreciation

     (262,654     (242,245
  

 

 

   

 

 

 

Net income producing property

     2,120,504        1,944,525   

Construction in progress and land held for development

     142,802        320,611   
  

 

 

   

 

 

 

Net real estate

     2,263,306        2,265,136   

Cash and cash equivalents

     55,198        14,402   

Restricted cash

     19        174   

Rents and other receivables

     4,517        1,388   

Deferred rent

     131,885        126,862   

Lease contracts above market value, net

     11,080        11,352   

Deferred costs, net

     40,487        40,349   

Prepaid expenses and other assets

     27,019        31,708   
  

 

 

   

 

 

 

Total assets

   $ 2,533,511      $ 2,491,371   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Liabilities:

    

Line of credit

   $ —        $ 20,000   

Mortgage notes payable

     143,500        144,800   

Unsecured notes payable

     550,000        550,000   

Accounts payable and accrued liabilities

     23,682        22,955   

Construction costs payable

     7,299        20,300   

Accrued interest payable

     14,186        2,528   

Dividend and distribution payable

     15,600        14,543   

Lease contracts below market value, net

     17,062        18,313   

Prepaid rents and other liabilities

     33,602        29,058   
  

 

 

   

 

 

 

Total liabilities

     804,931        822,497   

Redeemable noncontrolling interests – operating partnership

     463,740        461,739   

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 March 31, 2012 and December 31, 2011

     185,000        185,000   

Series B cumulative redeemable perpetual preferred stock, 6,650,000 issued and outstanding at March 31, 2012 and 4,050,000 shares issued and outstanding at December 31, 2011

     166,250        101,250   

Common stock, $.001 par value, 250,000,000 shares authorized, 63,098,510 shares issued and outstanding at March 31, 2012 and 62,914,987 shares issued and outstanding at December 31, 2011

     63        63   

Additional paid in capital

     915,438        927,902   

Accumulated deficit

     (1,911     (7,080
  

 

 

   

 

 

 

Total stockholders’ equity

     1,264,840        1,207,135   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,533,511      $ 2,491,371   
  

 

 

   

 

 

 

See accompanying notes

 

4


Table of Contents

DUPONT FABROS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three months ended March 31,  
     2012     2011  

Revenues:

    

Base rent

   $ 53,170      $ 47,188   

Recoveries from tenants

     24,086        20,858   

Other revenues

     1,126        453   
  

 

 

   

 

 

 

Total revenues

     78,382        68,499   

Expenses:

    

Property operating costs

     22,363        18,100   

Real estate taxes and insurance

     2,171        1,656   

Depreciation and amortization

     21,870        18,091   

General and administrative

     5,236        4,798   

Other expenses

     668        198   
  

 

 

   

 

 

 

Total expenses

     52,308        42,843   
  

 

 

   

 

 

 

Operating income

     26,074        25,656   

Interest income

     34        211   

Interest:

    

Expense incurred

     (11,863     (7,659

Amortization of deferred financing costs

     (887     (624
  

 

 

   

 

 

 

Net income

     13,358        17,584   

Net income attributable to redeemable noncontrolling interests – operating partnership

     (1,570     (3,472
  

 

 

   

 

 

 

Net income attributable to controlling interests

     11,788        14,112   

Preferred stock dividends

     (6,619     (4,157
  

 

 

   

 

 

 

Net income attributable to common shares

   $ 5,169      $ 9,955   
  

 

 

   

 

 

 

Earnings per share – basic:

    

Net income attributable to common shares

   $ 0.08      $ 0.15   
  

 

 

   

 

 

 

Weighted average common shares outstanding

     62,568,547        60,210,596   
  

 

 

   

 

 

 

Earnings per share – diluted:

    

Net income attributable to common shares

   $ 0.08      $ 0.15   
  

 

 

   

 

 

 

Weighted average common shares outstanding

     63,548,098        61,382,290   
  

 

 

   

 

 

 

Dividends declared per common share

   $ 0.12      $ 0.12   
  

 

 

   

 

 

 

See accompanying notes

 

5


Table of Contents

DUPONT FABROS TECHNOLOGY, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited and in thousands except share data)

 

            Common Shares      Additional              
     Preferred         Paid-in     Accumulated        
     Stock      Number     Amount      Capital     Deficit     Total  

Balance at December 31, 2011

   $ 286,250         62,914,987      $ 63       $ 927,902      $ (7,080   $ 1,207,135   

Net income attributable to controlling interests

               11,788        11,788   

Issuance of preferred stock

     65,000              (2,304       62,696   

Dividends declared on common stock

             (7,571       (7,571

Dividends earned on preferred stock

               (6,619     (6,619

Redemption of Operating Partnership units

        97,500        —           2,400          2,400   

Issuance of stock awards

        138,075        —           15          15   

Stock option exercises

        52,264        —           429          429   

Retirement and forfeiture of stock awards

        (104,316     —           (2,327       (2,327

Amortization of deferred compensation

             2,001          2,001   

Adjustment to redeemable noncontrolling interests – operating partnership

             (5,107       (5,107
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 351,250         63,098,510      $ 63       $ 915,438      $ (1,911   $ 1,264,840   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes

 

6


Table of Contents

DUPONT FABROS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

     Three months ended March 31,  
     2012     2011  

Cash flow from operating activities

    

Net income

   $ 13,358      $ 17,584   

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

    

Depreciation and amortization

     21,870        18,091   

Straight line rent

     (5,023     (11,868

Amortization of deferred financing costs

     887        624   

Amortization of lease contracts above and below market value

     (979     (536

Compensation paid with Company common shares

     2,034        1,406   

Changes in operating assets and liabilities

    

Restricted cash

     155        223   

Rents and other receivables

     (3,129     (95

Deferred costs

     (175     (1,300

Prepaid expenses and other assets

     (3,329     (495

Accounts payable and accrued liabilities

     727        (1,524

Accrued interest payable

     11,658        11,681   

Prepaid rents and other liabilities

     2,139        (406
  

 

 

   

 

 

 

Net cash provided by operating activities

     40,193        33,385   
  

 

 

   

 

 

 

Cash flow from investing activities

    

Investments in real estate – development

     (22,410     (110,589

Interest capitalized for real estate under development

     (1,155     (6,254

Improvements to real estate

     (179     (437

Additions to non-real estate property

     (54     (63
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,798     (117,343
  

 

 

   

 

 

 

Cash flow from financing activities

    

Issuance of preferred stock, net of offering costs

     62,696        97,482   

Line of credit:

    

Proceeds

     15,000        —     

Repayments

     (35,000     —     

Mortgage notes payable:

    

Repayments

     (1,300     (1,300

Return of escrowed proceeds

     —          1,104   

Exercises of stock options

     429        129   

Payments of financing costs

     (2,015     (155

Dividends and distributions:

    

Common shares

     (7,550     (7,179

Preferred shares

     (5,572     (3,723

Redeemable noncontrolling interests – operating partnership

     (2,287     (2,634
  

 

 

   

 

 

 

Net cash provided by financing activities

     24,401        83,724   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     40,796        (234

Cash and cash equivalents, beginning

     14,402        226,950   
  

 

 

   

 

 

 

Cash and cash equivalents, ending

   $ 55,198      $ 226,716   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid for interest

   $ 1,361      $ 2,233   
  

 

 

   

 

 

 

Deferred financing costs capitalized for real estate under development

   $ 76      $ 295   
  

 

 

   

 

 

 

Construction costs payable capitalized for real estate under development

   $ 7,299      $ 48,027   
  

 

 

   

 

 

 

Redemption of OP units for common shares

   $ 2,400      $ 21,500   
  

 

 

   

 

 

 

Adjustments to redeemable noncontrolling interests

   $ 5,107      $ 60,376   
  

 

 

   

 

 

 

See accompanying notes

 

7


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands except units)

 

     March 31,
2012
    December 31,
2011
 
     (unaudited)        
ASSETS     

Income producing property:

    

Land

   $ 73,197      $ 63,393   

Buildings and improvements

     2,309,961        2,123,377   
  

 

 

   

 

 

 
     2,383,158        2,186,770   

Less: accumulated depreciation

     (262,654     (242,245
  

 

 

   

 

 

 

Net income producing property

     2,120,504        1,944,525   

Construction in progress and land held for development

     142,802        320,611   
  

 

 

   

 

 

 

Net real estate

     2,263,306        2,265,136   

Cash and cash equivalents

     50,902        10,097   

Restricted cash

     19        174   

Rents and other receivables

     4,517        1,388   

Deferred rent

     131,885        126,862   

Lease contracts above market value, net

     11,080        11,352   

Deferred costs, net

     40,487        40,349   

Prepaid expenses and other assets

     27,019        31,708   
  

 

 

   

 

 

 

Total assets

   $ 2,529,215      $ 2,487,066   
  

 

 

   

 

 

 
LIABILITIES AND PARTNERS’ CAPITAL     

Liabilities:

    

Line of credit

   $ —        $ 20,000   

Mortgage notes payable

     143,500        144,800   

Unsecured notes payable

     550,000        550,000   

Accounts payable and accrued liabilities

     23,682        22,955   

Construction costs payable

     7,299        20,300   

Accrued interest payable

     14,186        2,528   

Dividend and distribution payable

     15,600        14,543   

Lease contracts below market value, net

     17,062        18,313   

Prepaid rents and other liabilities

     33,602        29,058   
  

 

 

   

 

 

 

Total liabilities

     804,931        822,497   

Redeemable partnership units

     463,740        461,739   

Commitments and contingencies

     —          —     

Partners’ capital:

    

Limited partners’ capital:

    

Series A cumulative redeemable perpetual preferred units, 7,400,000 issued and outstanding at March 31, 2012 and December 31, 2011

     185,000        185,000   

Series B cumulative redeemable perpetual preferred units, 6,650,000 issued and outstanding at March 31, 2012 and 4,050,000 shares issued or outstanding at December 31, 2011

     166,250        101,250   

Common units, 62,436,137 issued and outstanding at March 31, 2012 and 62,252,614 issued and outstanding at December 31, 2011

     896,062        903,917   

General partner’s capital, common units, 662,373 issued and outstanding at March 31, 2012 and December 31, 2011

     13,232        12,663   
  

 

 

   

 

 

 

Total partners’ capital

     1,260,544        1,202,830   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 2,529,215      $ 2,487,066   
  

 

 

   

 

 

 

See accompanying notes

 

8


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three months ended March 31,  
     2012     2011  

Revenues:

    

Base rent

   $ 53,170      $ 47,188   

Recoveries from tenants

     24,086        20,858   

Other revenues

     1,126        453   
  

 

 

   

 

 

 

Total revenues

     78,382        68,499   

Expenses:

    

Property operating costs

     22,363        18,100   

Real estate taxes and insurance

     2,171        1,656   

Depreciation and amortization

     21,870        18,091   

General and administrative

     5,236        4,798   

Other expenses

     668        198   
  

 

 

   

 

 

 

Total expenses

     52,308        42,843   
  

 

 

   

 

 

 

Operating income

     26,074        25,656   

Interest income

     34        211   

Interest:

    

Expense incurred

     (11,863     (7,659

Amortization of deferred financing costs

     (887     (624
  

 

 

   

 

 

 

Net income

     13,358        17,584   

Preferred unit distributions

     (6,619     (4,157
  

 

 

   

 

 

 

Net income attributable to common units

   $ 6,739      $ 13,427   
  

 

 

   

 

 

 

Earnings per unit – basic:

    

Net income attributable to common units

   $ 0.08      $ 0.16   
  

 

 

   

 

 

 

Weighted average common units outstanding

     81,573,944        81,211,317   
  

 

 

   

 

 

 

Earnings per unit – diluted:

    

Net income attributable to common units

   $ 0.08      $ 0.16   
  

 

 

   

 

 

 

Weighted average common units outstanding

     82,553,495        82,383,011   
  

 

 

   

 

 

 

Distributions declared per unit

   $ 0.12      $ 0.12   
  

 

 

   

 

 

 

See accompanying notes

 

9


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(unaudited and in thousands, except unit data)

 

     Limited Partners’ Capital     General Partner’s Capital        
     Preferred
Amount
     Common
Units
    Common
Amount
    Common
Units
     Common
Amount
    Total  

Balance at December 31, 2011

   $ 286,250         62,252,614      $ 903,917        662,373       $ 12,663      $ 1,202,830   

Net income

          13,218           140        13,358   

Issuance of OP units for preferred stock offering

     65,000           (2,304        —          62,696   

Common unit distributions

          (9,744        (103     (9,847

Preferred unit distributions

          (6,550        (69     (6,619

Issuance of OP units to REIT when redeemable partnership units redeemed

        97,500        2,400           —          2,400   

Issuance of OP units

        138,075        15           —          15   

Issuance of OP units due to option exercises

        52,264        429           —          429   

Retirement and forfeiture of OP units

        (104,316     (2,327        —          (2,327

Amortization of deferred compensation costs

          2,001           —          2,001   

Adjustment to redeemable partnership units

          (4,993        601        (4,392
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance at March 31, 2012

   $ 351,250         62,436,137      $ 896,062        662,373       $ 13,232      $ 1,260,544   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes

 

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DUPONT FABROS TECHNOLOGY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

     Three months ended March 31,  
     2012     2011  

Cash flow from operating activities

    

Net income

   $ 13,358      $ 17,584   

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

    

Depreciation and amortization

     21,870        18,091   

Straight line rent

     (5,023     (11,868

Amortization of deferred financing costs

     887        624   

Amortization of lease contracts above and below market value

     (979     (536

Compensation paid with Company common shares

     2,034        1,406   

Changes in operating assets and liabilities

    

Restricted cash

     155        223   

Rents and other receivables

     (3,129     (95

Deferred costs

     (175     (1,300

Prepaid expenses and other assets

     (3,329     (495

Accounts payable and accrued liabilities

     736        (1,325

Accrued interest payable

     11,658        11,681   

Prepaid rents and other liabilities

     2,139        (406
  

 

 

   

 

 

 

Net cash provided by operating activities

     40,202        33,584   
  

 

 

   

 

 

 

Cash flow from investing activities

    

Investments in real estate – development

     (22,410     (110,589

Interest capitalized for real estate under development

     (1,155     (6,254

Improvements to real estate

     (179     (437

Additions to non-real estate property

     (54     (63
  

 

 

   

 

 

 

Net cash used in investing activities

     (23,798     (117,343
  

 

 

   

 

 

 

Cash flow from financing activities

    

Issuance of preferred units, net of offering costs

     62,696        97,482   

Line of credit:

    

Proceeds

     15,000        —     

Repayments

     (35,000     —     

Mortgage notes payable:

    

Repayments

     (1,300     (1,300

Return of escrowed proceeds

     —          1,104   

Issuance of OP units for stock option exercises

     429        129   

Payments of financing costs

     (2,015     (155

Distributions

     (15,409     (13,536
  

 

 

   

 

 

 

Net cash provided by financing activities

     24,401        83,724   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     40,805        (35

Cash and cash equivalents, beginning

     10,097        222,428   
  

 

 

   

 

 

 

Cash and cash equivalents, ending

   $ 50,902      $ 222,393   
  

 

 

   

 

 

 

Supplemental information:

    

Cash paid for interest

   $ 1,361      $ 2,233   
  

 

 

   

 

 

 

Deferred financing costs capitalized for real estate under development

   $ 76      $ 295   
  

 

 

   

 

 

 

Construction costs payable capitalized for real estate under development

   $ 7,299      $ 48,027   
  

 

 

   

 

 

 

Redemption of OP units for common shares

   $ 2,400      $ 21,500   
  

 

 

   

 

 

 

Adjustments to redeemable partnership units

   $ 4,392      $ 62,212   
  

 

 

   

 

 

 

See accompanying notes

 

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DUPONT FABROS TECHNOLOGY, INC.

DUPONT FABROS TECHNOLOGY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

(unaudited)

1. Description of Business

DuPont Fabros Technology, Inc. (the “REIT” or “DFT”), through its controlling interest in DuPont Fabros Technology, L.P. (the “Operating Partnership” or “OP” and collectively with DFT and their operating subsidiaries, the “Company”), is a fully integrated, self-administered and self-managed company that owns, acquires, develops and operates wholesale data centers. DFT is a real estate investment trust, or REIT, for federal income tax purposes and is the sole general partner of the Operating Partnership and, as of March 31, 2012, owned 76.9% of the common economic interest in the Operating Partnership, of which 1.1% is held as general partnership units. As of March 31, 2012, the Company holds a fee simple interest in the following properties:

 

   

ten operating data centers – referred to as ACC2, ACC3, ACC4, ACC5, ACC6 Phase I, VA3, VA4, CH1, NJ1 Phase I and SC1 Phase I;

 

   

data center projects available for future development – the second phases of ACC6, NJ1 and SC1; and

 

   

land that may be used to develop additional data centers – referred to as ACC7, ACC8 and SC2.

CH1 Phase II was placed in service on February 1, 2012.

2. Significant Accounting Policies

Basis of Presentation

This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2012 of DFT and the Operating Partnership. DFT is a real estate investment trust and the general partner of the Operating Partnership. The Operating Partnership’s capital includes general and limited common operating partnership units, or “OP units.” As the sole general partner of the Operating Partnership, DFT has exclusive control of the Operating Partnership’s day-to-day management.

The Company believes combining the quarterly reports on Form 10-Q of DFT and the Operating Partnership into this single report provides the following benefits:

 

   

enhances investors’ understanding of DFT and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

 

   

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure in this report applies to both DFT and the Operating Partnership; and

 

   

creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.

Management operates DFT and the Operating Partnership as one business. The management of DFT consists of the same members as the management of the Operating Partnership.

The Company believes it is important for investors to understand the few differences between DFT and the Operating Partnership in the context of how DFT and the Operating Partnership operate as a consolidated company. DFT is a REIT, whose only material asset is its ownership of OP units of the Operating Partnership. As a result, DFT does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing public equity from time to time and guaranteeing unsecured debt of the Operating Partnership. DFT has not issued any indebtedness, but has guaranteed all of the unsecured debt of the Operating Partnership. The Operating Partnership holds all the real estate assets of the Company. Except for net proceeds from public equity issuances by DFT, which are contributed to the Operating Partnership in exchange for OP units or preferred units, the Operating Partnership generates all remaining capital required by the Company’s business. These sources include the Operating Partnership’s operations, its direct or indirect incurrence of indebtedness, and the issuance of partnership units.

As general partner with control of the Operating Partnership, DFT consolidates the Operating Partnership for financial reporting purposes. The presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of DFT and those of the Operating Partnership. The Operating Partnership’s capital includes preferred units and general and limited common units that are owned by DFT and the other partners. DFT’s stockholders’ equity includes preferred stock, common stock, additional paid in capital and accumulated deficit. The common limited partnership interests held by the limited partners (other than DFT) in the Operating Partnership are presented as “redeemable partnership units” in the Operating Partnership’s consolidated financial statements and as “redeemable noncontrolling interests-operating partnership” in DFT’s consolidated financial statements. The only difference between the total assets of DFT and the Operating Partnership as of March 31, 2012 is a $4.3 million bank account held by DFT that is not part of the Operating Partnership. Net income is the same for DFT and the Operating Partnership.

 

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In order to highlight the few differences between DFT and the Operating Partnership, there are sections in this report that discuss DFT and the Operating Partnership separately, including separate financial statements, controls and procedures sections, and separate Exhibit 31 and 32 certifications. In the sections that combine disclosure for DFT and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of the Company. Although the Operating Partnership is generally the entity that enters into contracts, holds assets and issues debt, we believe that reference to the Company in this context is appropriate because the business is one enterprise and the Company operates the business through the Operating Partnership.

The accompanying unaudited consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year. These consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere in this Form 10-Q and the audited financial statements and accompanying notes for the year ended December 31, 2011 contained in the Company’s Form 10-K, which contains a complete listing of the Company’s significant accounting policies.

The Company has one reportable segment consisting of investments in data centers located in the United States. All of our properties generate similar types of revenues and expenses related to tenant rent and reimbursements and operating expenses. The delivery of our products is consistent across all properties and although services are provided to a range of customers, the types of services provided to them are limited to a few core principles. As such, the properties in our portfolio have similar economic characteristics and the nature of the products and services provided to our customers and the method to distribute such services are consistent throughout the portfolio.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Property

Depreciation on buildings is generally provided on a straight-line basis over 40 years from the date the buildings were placed in service. Building components are depreciated over the life of the respective improvement ranging from 10 to 40 years from the date the components were placed in service. Personal property is depreciated over three to seven years. Depreciation expense was $20.7 million and $16.9 million for the three months ended March 31, 2012 and 2011, respectively. Included in these amounts is amortization expense related to tenant origination costs, which was $0.8 million and $1.2 million for the three months ended March 31, 2012 and 2011, respectively. Repairs and maintenance costs are expensed as incurred.

The Company records impairment losses on long-lived assets used in operations or in development when events or changes in circumstances indicate that the assets might be impaired, and the estimated undiscounted cash flows to be generated by those assets are less than the carrying amounts. If circumstances indicating impairment of a long-lived asset are present, the Company would determine the fair value of that asset, and an impairment loss would be recognized in an amount equal to the excess of the carrying amount of the impaired asset over its fair value. Management assesses the recoverability of the carrying value of its assets on a property-by-property basis. No impairment losses were recorded during the three months ended March 31, 2012 and 2011.

Deferred Costs

Deferred costs, net on the Company’s consolidated balance sheets include both financing and leasing costs.

Financing costs, which represent fees and other costs incurred in obtaining debt, are amortized using the effective-interest rate method or a method that approximates the effective-interest method, over the term of the loan and are included in amortization of deferred financing costs. Balances, net of accumulated amortization, at March 31, 2012 and December 31, 2011 are as follows (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Financing costs

   $ 23,016      $ 21,047   

Accumulated amortization

     (7,749     (6,831
  

 

 

   

 

 

 

Financing costs, net

   $ 15,267      $ 14,216   
  

 

 

   

 

 

 

 

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Leasing costs, which are either external fees and costs incurred in the successful negotiations of leases, internal costs expended in the successful negotiations of leases or the estimated leasing commissions resulting from the allocation of the purchase price of ACC2, VA3, VA4 and ACC4, are deferred and amortized over the terms of the related leases on a straight-line basis. If an applicable lease terminates prior to the expiration of its initial term, the carrying amount of the costs are written off to amortization expense. The Company incurred leasing costs of $0.2 million and $1.3 million for the three months ended March 31, 2012 and 2011, respectively. Amortization of deferred leasing costs totaled $1.2 million and $1.1 million for the three months ended March 31, 2012 and 2011, respectively. Balances, net of accumulated amortization, at March 31, 2012 and December 31, 2011 are as follows (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Leasing costs

   $ 46,303      $ 46,128   

Accumulated amortization

     (21,083     (19,995
  

 

 

   

 

 

 

Leasing costs, net

   $ 25,220      $ 26,133   
  

 

 

   

 

 

 

Inventory

The Company maintains fuel inventory for its generators, which is recorded at the lower of cost (on a first-in, first-out basis) or market. As of March 31, 2012 and December 31, 2011, the fuel inventory was $2.5 million and $2.2 million, respectively, and is included in prepaid expenses and other assets in the accompanying consolidated balance sheets.

Rental Income

The Company, as a lessor, has retained substantially all the risks and benefits of ownership and accounts for its leases as operating leases. For lease agreements that provide for scheduled fixed and determinable rent increases, rental income is recognized on a straight-line basis over the non-cancellable term of the leases, which commences when control of the space and critical power have been provided to the tenant. If the lease contains an early termination clause with a penalty payment, the Company determines the lease termination date by evaluating whether the penalty reasonably assures that the lease will not be terminated early. Lease inducements, which include free rent or cash payments to tenants, are amortized as a reduction of rental income over the non-cancellable lease term. Straight-line rents receivable are included in deferred rent on the consolidated balance sheets. Lease intangible assets and liabilities that have resulted from above-market and below-market leases that were acquired are amortized on a straight-line basis as decreases and increases, respectively, to rental revenue over the remaining non-cancellable term of the underlying leases. If a lease terminates prior to the expiration of its initial term, the unamortized portion of lease intangibles associated with that lease will be written off to rental revenue. Balances, net of accumulated amortization, at March 31, 2012 and December 31, 2011 are as follows (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Lease contracts above market value

   $ 23,100      $ 23,100   

Accumulated amortization

     (12,020     (11,748
  

 

 

   

 

 

 

Lease contracts above market value, net

   $ 11,080      $ 11,352   
  

 

 

   

 

 

 

Lease contracts below market value

   $ 45,700      $ 45,700   

Accumulated amortization

     (28,638     (27,387
  

 

 

   

 

 

 

Lease contracts below market value, net

   $ 17,062      $ 18,313   
  

 

 

   

 

 

 

The Company’s policy is to record a provision for losses on accounts receivable equal to the estimated uncollectible accounts. The estimate is based on management’s historical experience and a review of the current status of the Company’s receivables. The Company will also establish, as necessary, an appropriate allowance for doubtful accounts for receivables arising from the straight-lining of rents. This receivable arises from revenue recognized in excess of amounts currently due under the lease.

Tenant leases generally contain provisions under which the tenants reimburse the Company for a portion of operating expenses and real estate taxes incurred by the property. Recoveries from tenants are included in revenue in the consolidated statements of operations in the period the applicable expenditures are incurred. Recoveries from tenants also include the property management fees that the Company earns from its tenants.

 

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Table of Contents

Other Revenue

Other revenue primarily consists of services provided to tenants on a non-recurring basis. This includes projects such as the purchase and installation of circuits, racks, breakers and other tenant requested items. Revenue is recognized on a completed contract basis. Costs of providing these services are included in other expenses in the accompanying consolidated statements of operations.

Redeemable Noncontrolling Interests – Operating Partnership / Redeemable Partnership Units

Redeemable noncontrolling interests – operating partnership, as presented on DFT’s consolidated balance sheets, represent the limited partnership interests in the Operating Partnership (“OP units”) held by individuals and entities other than DFT. These interests are also presented on the Operating Partnership’s consolidated balance sheets, referred to as “redeemable partnership units.” Accordingly, the following discussion related to redeemable noncontrolling interests – operating partnership of the REIT refers equally to redeemable partnership units of the Operating Partnership.

Redeemable noncontrolling interests – operating partnership, which require cash payment, or allow settlement in shares, but with the ability to deliver the shares outside of the control of DFT, are reported outside of the permanent equity section of the consolidated balance sheets of DFT and Operating Partnership. Redeemable noncontrolling interests – operating partnership are adjusted for income, losses and distributions allocated to OP units not held by DFT (normal noncontrolling interest accounting amount). Adjustments to redeemable noncontrolling interests – operating partnership are recorded to reflect increases or decreases in the ownership of the Operating Partnership by holders of OP units, including the redemptions of OP units for cash or in exchange for shares of DFT’s common stock. If such adjustments result in redeemable noncontrolling interests – operating partnership being recorded at less than the redemption value of the OP units, redeemable noncontrolling interests – operating partnership are further adjusted to their redemption value (see Note 6). Redeemable noncontrolling interests – operating partnership are recorded at the greater of the normal noncontrolling interest accounting amount or redemption value. The following is a summary of activity for redeemable noncontrolling interests – operating partnership for the three months ended March 31, 2012 (dollars in thousands):

 

     OP Units  
     Number     Amount  

Balance at December 31, 2011

     19,064,381      $ 461,739   

Net income attributable to redeemable noncontrolling interests – operating partnership

     —          1,570   

Distributions declared

     —          (2,276

Redemption of OP units

     (97,500     (2,400

Adjustment to redeemable noncontrolling interests – operating partnership

     —          5,107   
  

 

 

   

 

 

 

Balance at March 31, 2012

     18,966,881      $ 463,740   
  

 

 

   

 

 

 

Net income is allocated to controlling interests and redeemable noncontrolling interests – operating partnership in accordance with the limited partnership agreement of the Operating Partnership. The following is a summary of net income attributable to controlling interests and transfers to redeemable noncontrolling interests – operating partnership for the three months ended March 31, 2012 and 2011 (dollars in thousands):

 

     Three months ended March 31,  
     2012     2011  

Net income attributable to controlling interests

   $ 11,788      $ 14,112   

Transfers from noncontrolling interests:

    

Net change in the Company’s common stock and additional paid in capital due to the redemption of OP units and other adjustments to redeemable noncontrolling interests – operating partnership

     (2,707     (38,876
  

 

 

   

 

 

 
   $ 9,081      $ (24,764
  

 

 

   

 

 

 

Comprehensive Income

For the three months ended March 31, 2012 and 2011, comprehensive income attributable to controlling interests and noncontrolling interests was comprised exclusively of net income attributable to controlling interests and noncontrolling interests.

 

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Table of Contents

Earnings Per Share of the REIT

Basic earnings per share is calculated by dividing the net income attributable to common shares for the period by the weighted average number of common shares outstanding during the period using the two class method. Diluted earnings per share is calculated by dividing the net income attributable to common shares for the period by the weighted average number of common and dilutive securities outstanding during the period.

Earnings Per Unit of the Operating Partnership

Basic earnings per unit is calculated by dividing the net income attributable to common units for the period by the weighted average number of common units outstanding during the period using the two class method. Diluted earnings per unit is calculated by dividing the net income attributable to common units for the period by the weighted average number of common and dilutive securities outstanding during the period.

Stock-based Compensation

DFT awards stock-based compensation to employees and members of its Board of Directors in the form of common stock. For each stock award granted by DFT, the OP issues an equivalent common unit, which may be referred to herein as a common share, common stock, or common unit. The Company estimates the fair value of the awards and recognizes this value over the requisite vesting period. The fair value of restricted stock-based compensation is based on the market value of DFT’s common stock on the date of the grant. The fair value of options to purchase common stock is based on the Black-Scholes model. The fair value of performance units is based on a Monte Carlo simulation.

Reclassifications

Certain amounts from the prior year have been reclassified for consistency with the current year presentation.

3. Real Estate Assets

The following is a summary of properties owned by the Company at March 31, 2012 (dollars in thousands):

 

Property

  

Location

   Land      Buildings and
Improvements
     Construction
in Progress
and Land Held
for
Development
     Total Cost  

ACC2

   Ashburn, VA    $ 2,500       $ 158,910       $ —         $ 161,410   

ACC3

   Ashburn, VA      1,071         95,442         —           96,513   

ACC4

   Ashburn, VA      6,600         538,031         —           544,631   

ACC5

   Ashburn, VA      6,443         297,705         —           304,148   

ACC6 Phase I

   Ashburn, VA      2,759         114,014         —           116,773   

VA3

   Reston, VA      9,000         175,466         —           184,466   

VA4

   Bristow, VA      6,800         142,774         —           149,574   

CH1

   Elk Grove Village, IL      23,611         358,475         —           382,086   

NJ1 Phase I

   Piscataway, NJ      4,311         210,149         —           214,460   

SC1 Phase I

   Santa Clara, CA      10,102         218,995         —           229,097   
     

 

 

    

 

 

    

 

 

    

 

 

 
        73,197         2,309,961         —           2,383,158   

Construction in progress and land held for development

   (1)      —           —           142,802         142,802   
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 73,197       $ 2,309,961       $ 142,802       $ 2,525,960   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Properties located in Ashburn, VA (ACC6 Phase II, ACC7 and ACC8); Piscataway, NJ (NJ1 Phase II) and Santa Clara, CA (SC1 Phase II and SC2).

 

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Table of Contents

4. Debt

Debt Summary as of March 31, 2012 and December 31, 2011

($ in thousands)

 

     March 31, 2012      December 31, 2011  
     Amounts      % of Total     Rates (1)     Maturities
(years)
     Amounts  

Secured

   $ 143,500         21     3.2     2.7       $ 144,800   

Unsecured

     550,000         79     8.5     5.0         570,000   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 693,500         100     7.4     4.5       $ 714,800   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Fixed Rate Debt:

            

Unsecured Notes

   $ 550,000         79     8.5     5.0       $ 550,000   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Fixed Rate Debt

     550,000         79     8.5     5.0         550,000   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Floating Rate Debt:

            

Unsecured Credit Facility (2)

     —           —          —          4.0         20,000   

ACC5 Term Loan

     143,500         21     3.2     2.7         144,800   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Floating Rate Debt

     143,500         21     3.2     2.7         164,800   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 693,500         100     7.4     4.5       $ 714,800   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

Note: The Company capitalized interest and deferred financing cost amortization of $1.2 million during the three months ended March 31, 2012.

 

(1) Rates as of March 31, 2012.
(2) The Unsecured Credit Facility was amended in March 2012, decreasing the interest rate to LIBOR plus 1.85%, increasing the commitment to $225.0 million and extending the maturity date to March 2016 with a one-year extension option.

Outstanding Indebtedness

ACC5 Term Loan

On December 2, 2009, the Company entered into a $150 million term loan facility (the “ACC5 Term Loan”). The ACC5 Term Loan matures on December 2, 2014 and bears interest at LIBOR plus 3.00%. The Company is prohibited from prepaying the ACC5 Term Loan prior to July 31, 2012 and, from July 31, 2012 through November 30, 2012, the Company may prepay the loan, in whole or in part, if it pays exit fees ranging from 0.75% to 1.00% of the then-outstanding principal balance. After November 30, 2012, the Company may prepay the ACC5 Term Loan at any time, in whole or in part, without penalty or premium. The Company may increase the total loan on or before June 30, 2012 to not more than $250 million, subject to lender commitments, receipt of new appraisals of the ACC5 and ACC6 property, a minimum debt service coverage ratio of no less than 1.65 to 1, and a maximum loan-to-value of 50%.

The loan is secured by the ACC5 and ACC6 data centers and an assignment of the lease agreements between the Company and the tenants of ACC5 and ACC6. The Operating Partnership has guaranteed the outstanding principal amount of the ACC5 Term Loan, plus interest and certain costs under the loan.

The Company was in compliance with all of the covenants under the loan as of March 31, 2012.

Unsecured Notes

On December 16, 2009, the Operating Partnership completed the sale of $550 million of 8.5% senior notes due 2017 (the “Unsecured Notes”). The Unsecured Notes were issued at face value. The Company pays interest on the Unsecured Notes semi-annually, in arrears, on December 15 and June 15 of each year. On each of December 15, 2015 and December 15, 2016, $125 million in principal amount of the Unsecured Notes will become due and payable, with the remaining $300 million due on December 15, 2017.

At any time prior to December 15, 2013, the Operating Partnership may redeem the Unsecured Notes, in whole or in part, at a price equal to the sum of (i) 100% of the principal amount of the Unsecured Notes to be redeemed, plus (ii) a make-whole premium and accrued and unpaid interest. The notes will be redeemable at the option of the Operating Partnership, in whole or in part, at any time, on and after December 15, 2013 at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the 12-month period commencing December 15 of the years indicated below, in each case together with accrued and unpaid interest to the date of redemption:

 

Year

   Redemption Price  

2013

     104.250

2014

     102.125

2015 and thereafter

     100.000

 

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In addition, on or prior to December 15, 2012, the Operating Partnership may redeem up to 35% of the Unsecured Notes at 108.500% of the principal amount thereof, plus accrued and unpaid interest, with the net cash proceeds of certain equity offerings consummated by DFT or the Operating Partnership.

The Unsecured Notes are unconditionally guaranteed, jointly and severally on a senior unsecured basis by DFT and certain of the Operating Partnership’s subsidiaries, including the subsidiaries that own the ACC2, ACC3, ACC4, ACC5, ACC6, VA3, VA4, CH1 and NJ1 data centers (collectively, the “Subsidiary Guarantors”), but excluding the subsidiaries that own the SC1 data center, the ACC7, ACC8 and SC2 parcels of land, and the Company’s taxable REIT subsidiary (“TRS”), DF Technical Services, LLC.

The Company was in compliance with all covenants under the Unsecured Notes as of March 31, 2012.

Unsecured Credit Facility

On March 21, 2012, the Company amended its unsecured revolving credit facility. The second amendment increased the total commitment under the facility to $225 million, extended the maturity date to March 21, 2016, with a one-year extension option, subject to the payment of an extension fee equal to 25 basis points on the total commitment in effect on the maturity date and certain other customary conditions, and reduced the rate at which borrowings under the facility will bear interest.

Under the second amendment, the Company may elect to have borrowings under the facility bear interest at either LIBOR or a base rate, which is based on the lender’s prime rate, in each case plus an applicable margin. Prior to the Company’s Unsecured Notes receiving an investment grade credit rating, the applicable margin added to LIBOR and the base rate is based on the table below.

 

          Applicable Margin  

Pricing Level

  

Ratio of Total Indebtedness

to Gross Asset Value

   LIBOR Rate Loans     Base Rate Loans  

Level 1

   Less than or equal to 35%      1.85     0.85

Level 2

   Greater than 35% but less than or equal to 40%      2.00     1.00

Level 3

   Greater than 40% but less than or equal to 45%      2.15     1.15

Level 4

   Greater than 45% but less than or equal to 52.5%      2.30     1.30

Level 5

   Greater than 52.5%      2.50     1.50

As of March 31, 2012, the applicable margin was set at pricing level 1. The terms of the facility provide for the adjustment of the applicable margin from time to time according to the ratio of the Operating Partnership’s total indebtedness to gross asset value in effect from time to time.

The second amendment also provides that, in the event that the Company’s Unsecured Notes receive an investment grade credit rating, borrowings under the facility will bear interest based on the table below.

 

          Applicable Margin  

Credit Rating Level

  

Credit Rating

   LIBOR Rate Loans     Base Rate Loans  

Level 1

   Greater than or equal to A- by S&P or A3 by Moody’s      1.05     0.05

Level 2

   Greater than or equal to BBB+ by S&P or Baa1 by Moody’s      1.20     0.20

Level 3

   Greater than or equal to BBB by S&P or Baa2 by Moody’s      1.35     0.35

Level 4

   Greater than or equal to BBB- by S&P or Baa3 by Moody’s      1.50     0.50

Level 5

   Less than BBB- by S&P or Baa3 by Moody’s      2.10     1.10

The facility is unconditionally guaranteed, jointly and severally, on a senior unsecured basis by the Company and all of the Operating Partnership’s subsidiaries that currently guaranty the obligations under the Company’s Indenture governing the terms of the Unsecured Notes, listed above.

The amount available for borrowings under the facility is determined according to a calculation comparing the value of certain unencumbered properties designated by the Operating Partnership at such time relative to the amount of the Operating Partnership’s unsecured debt. The second amendment also increases the amount of the borrowings under the credit agreement that may be used for letters of credit to $35 million. In addition, the second amendment allows the Company to increase the total commitment under the facility to $400 million, if one or more lenders commit to being a lender for the additional amount and certain other customary conditions are met.

 

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As of March 31, 2012, no letters of credit or amounts were outstanding on the facility.

The facility requires that the Company, the Operating Partnership and their subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments, effecting mergers and/or asset sales, and certain restrictions on dividend payments. In addition, the facility, as amended, imposes financial maintenance covenants relating to, among other things, the following matters:

 

   

unsecured debt not exceeding 60% of the value of unencumbered assets;

 

   

net operating income generated from unencumbered properties divided by the amount of unsecured debt being not less than 12.5%;

 

   

total indebtedness not exceeding 60% of gross asset value;

 

   

fixed charge coverage ratio being not less than 1.70 to 1.00; and

 

   

tangible net worth being not less than $1.3 billion plus 80% of the sum of (i) net equity offering proceeds and (ii) the value of equity interests issued in connection with a contribution of assets to the Operating Partnership or its subsidiaries.

The facility includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Operating Partnership under the facility to be immediately due and payable. The Company was in compliance with all covenants under the facility as of March 31, 2012.

A summary of the Company’s debt maturity schedule as of March 31, 2012 is as follows:

Debt Maturity as of March 31, 2012

($ in thousands)

 

Year

   Fixed Rate     Floating Rate     Total      % of Total     Rates (4)  

2012

     —          3,900 (2)      3,900         0.6     3.2

2013

     —          5,200 (2)      5,200         0.7     3.2

2014

     —          134,400 (2)      134,400         19.4     3.2

2015

     125,000 (1)      —          125,000         18.0     8.5

2016

     125,000 (1)      —   (3)      125,000         18.0     8.5

2017

     300,000 (1)      —          300,000         43.3     8.5
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 550,000      $ 143,500      $ 693,500         100     7.4
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) The Unsecured Notes have mandatory amortizations of $125.0 million due in 2015, $125.0 million due in 2016 and $300.0 million due in 2017.
(2) The ACC5 Term Loan matures on December 2, 2014 with no extension option and requires quarterly principal payments of $1.3 million through maturity.
(3) The Unsecured Credit Facility was amended in March 2012, decreasing the interest rate to LIBOR plus 1.85%, increasing the commitment to $225.0 million and extending the maturity date to March 2016 with a one-year extension option.
(4) Rates as of March 31, 2012.

5. Commitments and Contingencies

The Company is involved from time to time in various legal proceedings, lawsuits, examinations by various tax authorities and claims that have arisen in the ordinary course of business. Management currently believes that the resolution of such matters will not have a material adverse effect on the Company’s financial condition or results of operations.

Concurrent with DFT’s October 2007 initial public offering, the Company entered into tax protection agreements with some of the contributors of the initial properties including DFT’s Chairman of the Board and President and CEO. Pursuant to the terms of these agreements, if the Company disposes of any interest in the initial contributed properties that generates more than a certain allowable amount of built-in gain for the contributors, as a group, in any single year through 2017, the Company will indemnify the contributors for a portion of the tax liabilities incurred with respect to the amount of built-in gain and tax liabilities incurred as a result of the reimbursement payment. The amount of initial built-in gain that can be recognized as of December 31, 2011 without triggering the tax protection provisions is approximately 44% of the initial built in gain of $667 million (unaudited). This percentage grows each year by 10%, accumulating to 100% in 2017. The Company’s estimated aggregate built-in gain attributed to the initial contributors as of December 31, 2011 was approximately $440 million (unaudited). Additionally, the Company must provide an opportunity for certain of the contributors of the initial properties to guarantee a secured loan. Any sale by the Company that requires payments to any of DFT’s executive officers or directors pursuant to these agreements requires the approval of at least 75% of the disinterested members of DFT’s Board of Directors.

 

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6. Redeemable noncontrolling interests – operating partnership / Redeemable partnership units

Redeemable noncontrolling interests – operating partnership, as presented on DFT’s consolidated balance sheets, represent the OP units held by individuals and entities other than DFT. These interests are also presented on the Operating Partnership’s consolidated balance sheets, referred to as “redeemable partnership units.” Accordingly, the following discussion related to redeemable noncontrolling interests – operating partnership of the REIT refers equally to redeemable partnership units of the Operating Partnership.

The redemption value of redeemable noncontrolling interests – operating partnership at March 31, 2012 and December 31, 2011 was $463.7 million and $461.7 million based on the closing share price of DFT’s common stock of $24.45 and $24.22, respectively, on those dates.

Holders of OP units are entitled to receive distributions in a per unit amount equal to the per share dividends made with respect to each share of DFT’s common stock, if and when DFT’s Board of Directors declares such a dividend. Holders of OP units have the right to tender their units for redemption, in an amount equal to the fair market value of DFT’s common stock. DFT may elect to redeem tendered OP units for cash or for shares of DFT’s common stock. During the three months ended March 31, 2012, OP unitholders redeemed a total of 97,500 OP units in exchange for an equal number of shares of common stock. See Note 2.

7. Preferred Stock

Series A Preferred Stock

In October 2010, DFT issued 7,400,000 shares of 7.875% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) for $185.0 million in an underwritten public offering. The liquidation preference on the Series A Preferred Stock is $25 per share and dividends are scheduled quarterly. For each share of Series A Preferred Stock issued by DFT, the Operating Partnership issued a preferred unit equivalent to DFT with the same terms.

During the three months ended March 31, 2012, DFT declared a cash dividend on its Series A Preferred Stock of $0.4921875 per share payable to stockholders of record as of April 5, 2012. This dividend was paid on April 16, 2012.

Series B Preferred Stock

In March 2011, DFT issued 4,050,000 shares of 7.625% Series B Cumulative Redeemable Perpetual Preferred Stock (“Series B Preferred Stock”) for $101.3 million in an underwritten public offering. The liquidation preference on the Series B Preferred Stock is $25 per share and dividends are scheduled quarterly.

In January 2012, DFT issued an additional 2.6 million shares, or $65.0 million, of its Series B Preferred Stock in an underwritten public offering that resulted in proceeds to the Company, net of underwriting discounts, commissions, advisory fees and other offering costs, of $62.7 million. The Company used a portion of the proceeds from this offering to pay off in full the outstanding balance of its Unsecured Credit Facility.

For each share of Series B Preferred Stock issued by DFT, the Operating Partnership issued a preferred unit equivalent to DFT with the same terms.

During the three months ended March 31, 2012, DFT declared a cash dividend on its Series B Preferred Stock of $0.4765625 per share payable to stockholders of record as of April 5, 2012. This dividend was paid on April 16, 2012.

8. Stockholders’ Equity of the REIT and Partners’ Capital of the OP

During the three months ended March 31, 2012:

 

   

DFT issued an aggregate of 138,075 shares of common stock in connection with the Company’s annual grant of restricted stock to employees, the hiring of new employees and grants and retainers for its Board of Directors. The OP issued an equivalent number of units to the REIT.

 

   

OP unitholders redeemed a total of 97,500 OP units in exchange for an equal number of shares of DFT’s common stock.

 

   

DFT declared a cash dividend of $0.12 per share on its common stock to stockholders of record as of April 5, 2012. This dividend was paid on April 16, 2012. The OP paid equivalent distributions on OP units.

 

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9. Equity Compensation Plan

In May 2011, DFT’s Board of Directors adopted the 2011 Equity Incentive Plan (the “2011 Plan”) following approval from its stockholders. The 2011 Plan is administered by the Compensation Committee of the Company’s Board of Directors. The 2011 Plan allows the Company to provide equity-based compensation to its personnel in the form of stock options, stock appreciation rights, dividend equivalent rights, restricted stock, restricted stock units, performance-based awards, unrestricted stock, long term incentive units (“LTIP units”) and other awards.

The 2011 Plan authorizes a maximum aggregate of 6,300,000 share equivalents be reserved for future issuances. In addition, shares that were awarded under the Company’s 2007 Equity Compensation Plan (the “2007 Plan”) that subsequently become available due to forfeitures of such awards will be available for issuance under the 2011 Plan.

The 2011 Plan provides that awards can no longer be made under the 2007 Plan. Furthermore, under the 2011 Plan, shares of common stock that are subject to awards of options or stock appreciation rights will be counted against the 2011 Plan share limit as one share for every one share subject to the award. Any shares of stock that are subject to awards other than options or stock appreciation rights shall be counted against the 2011 Plan share limit as 2.36 shares for every one share subject to the award.

As of March 31, 2012, 822,543 share equivalents were issued under the 2011 Plan, and the maximum aggregate amount of share equivalents remaining available for future issuance was 5,477,457.

Restricted Stock

Restricted stock awards vest over specified periods of time as long as the employee remains employed with the Company. The following table sets forth the number of unvested shares of restricted stock and the weighted average fair value of these shares at the date of grant:

 

     Shares of
Restricted Stock
    Weighted Average
Fair Value at
Date of Grant
 

Unvested balance at December 31, 2011

     489,329      $ 15.31   

Granted

     137,335      $ 22.53   

Vested

     (310,200   $ 11.44   

Forfeited

     (3,039   $ 22.37   
  

 

 

   

 

 

 

Unvested balance at March 31, 2012

     313,425      $ 22.26   
  

 

 

   

 

 

 

During the three months ended March 31, 2012, the Company issued 137,335 shares of restricted stock, which had a value of $3.1 million on the grant date. This amount will be amortized to expense over a three year vesting period. Also during the three months ended March 31, 2012, 310,200 shares of restricted stock vested at a value of $7.1 million on the vesting date.

As of March 31, 2012, total unearned compensation on restricted stock was $6.6 million, and the weighted average vesting period was 1.5 years.

Stock Options

Stock option awards are granted with an exercise price equal to the closing market price of DFT’s common stock at the date of grant and vest over specified periods of time as long as the employee remains employed with the Company. All shares to be issued upon option exercises will be newly issued shares and the options have 10-year contractual terms.

A summary of the Company’s stock option activity under the Plan for the three months ended March 31, 2012 is presented in the tables below.

 

     Number of
Options
    Weighted Average
Exercise Price
 

Under option, December 31, 2011

     1,902,843      $ 13.60   

Granted

     341,541      $ 22.57   

Exercised

     (52,264   $ 8.21   
  

 

 

   

 

 

 

Under option, March 31, 2012

     2,192,120      $ 15.13   
  

 

 

   

 

 

 

 

     Shares Subject
to Option
     Total Unearned
Compensation
     Weighted Average
Vesting Period
     Weighted Average
Remaining
Contractual Term
 

As of March 31, 2012

     2,192,120       $ 5.7 million         1.6 years         8.1 years   

The following table sets forth the number of unvested options as of March 31, 2012 and the weighted average fair value of these options at the grant date.

 

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     Number of
Options
    Weighted Average
Fair Value
at Date of Grant
 

Unvested balance at December 31, 2011

     1,256,478      $ 5.63   

Granted

     341,541      $ 5.79   

Vested

     (734,380   $ 4.18   
  

 

 

   

 

 

 

Unvested balance at March 31, 2012

     863,639      $ 6.93   
  

 

 

   

 

 

 

The following table sets forth the number of exercisable options as of March 31, 2012 and the weighted average fair value and exercise price of these options at the grant date.

 

     Number of
Options
    Weighted Average
Fair Value
at Date of Grant
 

Options Exercisable at December 31, 2011

     646,365      $ 2.61   

Vested

     734,380      $ 4.18   

Exercised

     (52,264   $ 3.08   
  

 

 

   

 

 

 

Options Exercisable at March 31, 2012

     1,328,481      $ 3.46   
  

 

 

   

 

 

 

 

     Exercisable
Options
     Intrinsic Value      Weighted Average
Exercise Price
     Weighted Average
Remaining
Contractual Term
 

As of March 31, 2012

     1,328,481       $ 19.1 million       $ 10.10         7.4 years   

The intrinsic value of stock options exercised during the three months ended March 31, 2012 was $0.8 million.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. Expected volatility used in the Black-Scholes model is based on DFT’s historical volatility. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following table summarizes the assumptions used to value the stock options granted and the fair value of these options granted during the three months ended March 31, 2012.

 

     Assumption  

Number of options granted

     341,541   

Exercise price

   $ 22.57   

Expected term (in years)

     4   

Expected volatility

     39

Expected annual dividend

     2

Risk-free rate

     0.64

Fair value at date of grant

   $ 2.0 million   

Performance Units

Performance unit awards are awarded to certain executive employees and have a three-year cliff life with no dividend rights. 61,033 performance units were granted during the three months ended March 31, 2012, which will be settled in common shares on the March 1, 2015 vesting date as long as the employee remains employed with the Company. These units were valued using a Monte Carlo simulation and will be amortized over the three year vesting period from the grant date to the March 1, 2015 vesting date. The number of common shares settled could range from 0% to 300% of target, depending on DFT’s total stockholder return compared to the MSCI US REIT index over the three-year performance period beginning on January 1, 2012 and ending on January 1, 2015. Based on the closing price of the Company’s common stock at the grant date, the maximum future value that could be awarded to employees on the vesting date for all outstanding performance unit awards is $4.1 million.

10. Earnings Per Share of the REIT

The following table sets forth the reconciliation of basic and diluted average shares outstanding used in the computation of earnings per share of common stock (in thousands except for share and per share amounts):

 

     Three months ended March 31,  
     2012      2011  

Basic and Diluted Shares Outstanding

     

Weighted average common shares – basic

     62,568,547         60,210,596   

Effect of dilutive securities

     979,551         1,171,694   
  

 

 

    

 

 

 

 

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     Three months ended March 31,  
     2012     2011  

Weighted average common shares – diluted

     63,548,098        61,382,290   
  

 

 

   

 

 

 

Calculation of Earnings per Share – Basic

    

Net income attributable to common shares

   $ 5,169      $ 9,955   

Net income allocated to unvested restricted shares

     (20     (90
  

 

 

   

 

 

 

Net income attributable to common shares, adjusted

     5,149        9,865   

Weighted average common shares – basic

     62,568,547        60,210,596   
  

 

 

   

 

 

 

Earnings per common share – basic

   $ 0.08      $ 0.15   
  

 

 

   

 

 

 

Calculation of Earnings per Share – Diluted

    

Net income attributable to common shares

   $ 5,169      $ 9,955   

Adjustments to redeemable noncontrolling interests

     19        50   
  

 

 

   

 

 

 

Adjusted net income available to common shares

     5,188        10,005   

Weighted average common shares – diluted

     63,548,098        61,382,290   
  

 

 

   

 

 

 

Earnings per common share – diluted

   $ 0.08      $ 0.15   
  

 

 

   

 

 

 

For the three months ended March 31, 2012, approximately 1.1 million stock options and less than 0.1 million performance units have been excluded from the calculations of diluted earnings per share as their effect would have been antidilutive. For the three months ended March 31, 2011, 0.5 million stock options have been excluded from the calculations of diluted earnings per share as their effect would have been antidilutive.

11. Earnings Per Unit of the Operating Partnership

The following table sets forth the reconciliation of basic and diluted average units outstanding used in the computation of earnings per unit:

 

     Three months ended March 31,  
     2012      2011  

Basic and Diluted Units Outstanding

     

Weighted average common units – basic (includes redeemable partnership units and units of general and limited partners)

     81,573,944         81,211,317   

Effect of dilutive securities

     979,551         1,171,694   
  

 

 

    

 

 

 

Weighted average common units – diluted

     82,553,495         82,383,011   
  

 

 

    

 

 

 

For the three months ended March 31, 2012, approximately 1.1 million stock options and less than 0.1 million performance units have been excluded from the calculations of diluted earnings per unit as their effect would have been antidilutive. For the three months ended March 31, 2011, 0.5 million stock options have been excluded from the calculations of diluted earnings per unit as their effect would have been antidilutive.

12. Fair Value

Assets and Liabilities Measured at Fair Value

The authoritative guidance issued by the FASB requires disclosure of the fair value of financial instruments. Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates, and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the amounts are not necessarily indicative of the amounts the Company would realize in a current market exchange.

The following methods and assumptions were used in estimating the fair value amounts and disclosures for financial instruments as of March 31, 2012:

 

   

Cash and cash equivalents: The carrying amount of cash and cash equivalents reported in the consolidated balance sheets approximates fair value because of the short maturity of these instruments (i.e., less than 90 days).

 

   

Restricted cash: The carrying amount of restricted cash reported in the consolidated balance sheets approximates fair value because of the short maturities of these instruments.

 

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Rents and other receivables, accounts payable and accrued liabilities, and prepaid rents: The carrying amount of these assets and liabilities reported in the consolidated balance sheets approximates fair value because of the short-term nature of these amounts.

 

   

Debt: As of March 31, 2012, the combined balance of the Company’s Unsecured Notes and mortgage notes payable was $693.5 million with a fair value of $750.0 million based on Level 1 and Level 3 data. The Level 1 data is for the Unsecured Notes and consisted of a quote from the market maker in the Unsecured Notes. The Level 3 data is for the ACC5 Term Loan and is based on discounted cash flows using a one-month LIBOR swap rate of 0.62% as of March 31, 2012 plus a 3.00% spread that is consistent with current market conditions.

13. Supplemental Consolidating Financial Data for Subsidiary Guarantors of the Unsecured Notes

On December 16, 2009, the Operating Partnership issued the Unsecured Notes (See Note 4). The Unsecured Notes are unconditionally guaranteed, jointly and severally on a senior unsecured basis by DFT and certain of the Company’s subsidiaries, including the subsidiaries that own the ACC2, ACC3, ACC4, ACC5, ACC6, VA3, VA4, CH1 and NJ1 data centers, but excluding the subsidiaries that own the SC1 data center and the SC2 parcel of land, the ACC7 and ACC8 parcels of land, and the TRS. The following consolidating financial information sets forth the financial position as of March 31, 2012 and December 31, 2011 and the results of operations and cash flows for the three months ended March 31, 2012 and 2011 of the Operating Partnership, Subsidiary Guarantors and the Subsidiary Non-Guarantors.

 

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DUPONT FABROS TECHNOLOGY, L.P.

SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

(in thousands)

 

     March 31, 2012  
     Operating
Partnership
     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated
Total
 
ASSETS            

Income producing property:

           

Land

   $ —         $ 63,095      $ 10,102      $ —        $ 73,197   

Buildings and improvements

     —           2,082,228        227,733          2,309,961   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     —           2,145,323        237,835        —          2,383,158   

Less: accumulated depreciation

     —           (258,970     (3,684     —          (262,654
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income producing property

     —           1,886,353        234,151        —          2,120,504   

Construction in progress and land held for development

     23         65,358        77,421        —          142,802   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net real estate

     23         1,951,711        311,572        —          2,263,306   

Cash and cash equivalents

     47,045         3,542        315        —          50,902   

Restricted cash

     —           19        —          —          19   

Rents and other receivables

     14         1,162        3,341        —          4,517   

Deferred rent

     —           129,779        2,106        —          131,885   

Lease contracts above market value, net

     —           11,080        —          —          11,080   

Deferred costs, net

     12,598         27,673        216        —          40,487   

Investment in affiliates

     2,245,007         —          —          (2,245,007     —     

Prepaid expenses and other assets

     1,608         21,827        3,584        —          27,019   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,306,295       $ 2,146,793      $ 321,134      $ (2,245,007   $ 2,529,215   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND PARTNERS’ CAPITAL            

Liabilities:

           

Line of credit

   $ —         $ —        $ —        $ —        $ —     

Mortgage notes payable

     —           143,500        —          —          143,500   

Unsecured notes payable

     550,000         —          —          —          550,000   

Accounts payable and accrued liabilities

     2,497         16,226        4,959        —          23,682   

Construction costs payable

     —           4,362        2,937        —          7,299   

Accrued interest payable

     13,863         323        —          —          14,186   

Distribution payable

     15,600         —          —          —          15,600   

Lease contracts below market value, net

     —           17,062        —          —          17,062   

Prepaid rents and other liabilities

     51         32,746        805        —          33,602   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     582,011         214,219        8,701        —          804,931   

Redeemable partnership units

     463,740         —          —          —          463,740   

Commitments and contingencies

     —           —          —          —          —     

Limited Partners’ Capital:

           

Series A cumulative redeemable perpetual preferred units, 7,400,000 issued and outstanding at March 31, 2012

     185,000         —          —          —          185,000   

Series B cumulative redeemable perpetual preferred units, 6,650,000 issued and outstanding at March 31, 2012

     166,250         —          —          —          166,250   

62,436,137 common units issued and outstanding at March 31, 2012

     896,062         1,932,574        312,433        (2,245,007     896,062   

General partner’s capital, 662,373 common units issued and outstanding at March 31, 2012

     13,232         —          —          —          13,232   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total partners’ capital

     1,260,544         1,932,574        312,433        (2,245,007     1,260,544   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities & partners’ capital

   $ 2,306,295       $ 2,146,793      $ 321,134      $ (2,245,007   $ 2,529,215   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

(in thousands)

 

     December 31, 2011  
     Operating
Partnership
     Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated
Total
 
ASSETS            

Income producing property:

           

Land

   $ —         $ 53,291      $ 10,102      $ —        $ 63,393   

Buildings and improvements

     —           1,896,379        226,998          2,123,377   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
     —           1,949,670        237,100        —          2,186,770   

Less: accumulated depreciation

     —           (240,461     (1,784     —          (242,245
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income producing property

     —           1,709,209        235,316        —          1,944,525   

Construction in progress and land held for development

     —           243,663        76,948        —          320,611   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net real estate

     —           1,952,872        312,264        —          2,265,136   

Cash and cash equivalents

     9,174         196        727        —          10,097   

Restricted cash

     —           174        —          —          174   

Rents and other receivables

     —           1,320        68        —          1,388   

Deferred rent

     —           126,171        691        —          126,862   

Lease contracts above market value, net

     —           11,352        —          —          11,352   

Deferred costs, net

     11,288         28,965        96        —          40,349   

Investment in affiliates

     2,233,148         —          —          (2,233,148     —     

Prepaid expenses and other assets

     1,538         27,539        2,631        —          31,708   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,255,148       $ 2,148,589      $ 316,477      $ (2,233,148   $ 2,487,066   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
LIABILITIES AND PARTNERS’ CAPITAL            

Liabilities:

           

Line of credit

   $ 20,000       $ —        $ —        $ —        $ 20,000   

Mortgage notes payable

     —           144,800        —          —          144,800   

Unsecured notes payable

     550,000         —          —          —          550,000   

Accounts payable and accrued liabilities

     3,788         17,782        1,385        —          22,955   

Construction costs payable

     —           12,326        7,974        —          20,300   

Accrued interest payable

     2,199         329        —          —          2,528   

Distribution payable

     14,543         —          —          —          14,543   

Lease contracts below market value, net

     —           18,313        —          —          18,313   

Prepaid rents and other liabilities

     49         28,717        292        —          29,058   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     590,579         222,267        9,651        —          822,497   

Redeemable partnership units

     461,739         —          —          —          461,739   

Commitments and contingencies

     —           —          —          —          —     

Limited Partners’ Capital:

           

Series A cumulative redeemable perpetual preferred units, 7,400,000 issued and outstanding at December 31, 2011

     185,000         —          —          —          185,000   

Series B cumulative redeemable perpetual preferred units, 4,050,000 issued and outstanding at December 31, 2011

     101,250         —          —          —          101,250   

62,252,614 common units issued and outstanding at December 31, 2011

     903,917         1,926,322        306,826        (2,233,148     903,917   

General partner’s capital, 662,373 common units issued and outstanding at December 31, 2011

     12,663         —          —          —          12,663   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total partners’ capital

     1,202,830         1,926,322        306,826        (2,233,148     1,202,830   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities & partners’ capital

   $ 2,255,148       $ 2,148,589      $ 316,477      $ (2,233,148   $ 2,487,066   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS

(in thousands)

 

     Three months ended March 31, 2012  
   Operating
Partnership
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated
Total
 

Revenues:

          

Base rent

   $ —        $ 51,792      $ 1,421      $ (43   $ 53,170   

Recoveries from tenants

     3,332        23,719        367        (3,332     24,086   

Other revenues

     —          338        804        (16     1,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     3,332        75,849        2,592        (3,391     78,382   

Expenses:

          

Property operating costs

     —          24,400        1,311        (3,348     22,363   

Real estate taxes and insurance

     —          1,747        424        —          2,171   

Depreciation and amortization

     30        19,806        2,034        —          21,870   

General and administrative

     4,531        28        677        —          5,236   

Other expenses

     —          —          711        (43     668   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     4,561        45,981        5,157        (3,391     52,308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     (1,229     29,868        (2,565     —          26,074   

Interest income

     74        —          —          (40     34   

Interest:

          

Expense incurred

     (11,832     (31     (40     40        (11,863

Amortization of deferred financing costs

     (707     (180     —          —          (887

Equity in earnings

     27,052        —          —          (27,052     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     13,358        29,657        (2,605     (27,052     13,358   

Preferred unit distributions

     (6,619     —          —          —          (6,619
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common units

   $ 6,739      $ 29,657      $ (2,605   $ (27,052   $ 6,739   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS

(in thousands)

 

     Three months ended March 31, 2011  
   Operating
Partnership
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations     Consolidated
Total
 

Revenues:

          

Base rent

   $ —        $ 47,188      $ —        $ —        $ 47,188   

Recoveries from tenants

     2,882        20,858        —          (2,882     20,858   

Other revenues

     —          228        225        —          453   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,882        68,274        225        (2,882     68,499   

Expenses:

          

Property operating costs

     —          20,982        —          (2,882     18,100   

Real estate taxes and insurance

     —          1,634        22        —          1,656   

Depreciation and amortization

     27        18,063        1        —          18,091   

General and administrative

     4,118        30        650        —          4,798   

Other expenses

     21        —          177        —          198   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     4,166        40,709        850        (2,882     42,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     (1,284     27,565        (625     —          25,656   

Interest income

     210        1        —          —          211   

Interest:

          

Expense incurred

     (11,775     (204     4,320        —          (7,659

Amortization of deferred financing costs

     (745     (71     192        —          (624

Equity in earnings

     31,178        —          —          (31,178     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     17,584        27,291        3,887        (31,178     17,584   

Preferred unit distributions

     (4,157     —          —          —          (4,157
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to common units

   $ 13,427      $ 27,291      $ 3,887      $ (31,178   $ 13,427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three months ended March 31, 2012  
     Operating
Partnership
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations      Consolidated
Total
 

Cash flow from operating activities

           

Net cash (used in) provided by operating activities

   $ (14,422   $ 54,255      $ 369      $ —         $ 40,202   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flow from investing activities

           

Investments in real estate – development

     (14     (16,380     (6,016     —           (22,410

Investments in affiliates

     26,622        (31,890     5,268        —           —     

Interest capitalized for real estate under development

     —          (1,155     —          —           (1,155

Improvements to real estate

     —          (164     (15     —           (179

Additions to non-real estate property

     (16     (20     (18     —           (54
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     26,592        (49,609     (781     —           (23,798
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flow from financing activities

           

Issuance of preferred units, net of offering costs

     62,696        —          —          —           62,696   

Line of credit:

           

Proceeds

     15,000        —          —          —           15,000   

Repayments

     (35,000     —          —          —           (35,000

Repayments of mortgage notes payable

     —          (1,300     —          —           (1,300

Exercises of stock options

     429        —          —          —           429   

Payments of financing costs

     (2,015     —          —          —           (2,015

Distributions

     (15,409     —          —          —           (15,409
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     25,701        (1,300     —          —           24,401   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net increase in cash and cash equivalents

     37,871        3,346        (412     —           40,805   

Cash and cash equivalents, beginning

     9,174        196        727        —           10,097   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, ending

   $ 47,045      $ 3,542      $ 315      $ —         $ 50,902   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

29


Table of Contents

DUPONT FABROS TECHNOLOGY, L.P.

SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three months ended March 31, 2011  
     Operating
Partnership
    Subsidiary
Guarantors
    Subsidiary
Non-Guarantors
    Eliminations      Consolidated
Total
 

Cash flow from operating activities

           

Net cash (used in) provided by operating activities

   $ (14,663   $ 44,340      $ 3,907      $ —         $ 33,584   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flow from investing activities

           

Investments in real estate – development

     —          (42,242     (68,347     —           (110,589

Investments in affiliates

     (69,460     692        68,768        —           —     

Interest capitalized for real estate under development

     —          (1,934     (4,320     —           (6,254

Improvements to real estate

     —          (437     —          —           (437

Additions to non-real estate property

     (62     (1     —          —           (63
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash used in investing activities

     (69,522     (43,922     (3,899     —           (117,343
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash flow from financing activities

           

Issuance of preferred units, net of offering costs

     97,482        —          —          —           97,482   

Mortgage notes payable:

           

Repayments

     —          (1,300     —          —           (1,300

Return of escrowed proceeds

     —          1,104        —          —           1,104   

Exercises of stock options

     129        —          —          —           129   

Payments of financing costs

     (155     —          —          —           (155

Distributions

     (13,536     —          —          —           (13,536
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net cash provided by (used in) financing activities

     83,920        (196     —          —           83,724   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net decrease in cash and cash equivalents

     (265     222        8        —           (35

Cash and cash equivalents, beginning

     221,055        669        704        —           222,428   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash and cash equivalents, ending

   $ 220,790      $ 891      $ 712      $ —         $ 222,393   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

30


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Statements

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This report contains forward-looking statements within the meaning of the federal securities laws. The Company cautions investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond the Company’s control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The Company cautions you that while forward-looking statements reflect its good faith beliefs when the Company makes them, they are not guarantees of future performance and are impacted by actual events when they occur after the Company makes such statements. The Company expressly disclaims any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

For a detailed discussion of certain risks and uncertainties that could cause the Company’s future results to differ materially from any forward-looking statements, see Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. You should also review the risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents that the Company files from time to time with the Securities and Exchange Commission (“SEC”). The risks and uncertainties discussed in these reports are not exhaustive. The Company operates in a very competitive and rapidly changing environment and new risk factors may emerge from time to time. It is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

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 March 31, 2012, owned 76.9% 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 and Series B preferred stock also trade on the NYSE under the symbols “DFTPrA” and “DFTPrB”, respectively.

As of March 31, 2012, the Company owns and operates 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. On February 1, 2012, the Company placed into service the second phase of its CH1 data center in Elk Grove Village, Illinois. 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. As of the date of this report, ACC6 Phase II is under development, with completion expected in late 2012. 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 the its growing portfolio.

 

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Table of Contents

The following tables present certain data of the operating properties and development projects as of March 31, 2012:

Operating Properties

As of March 31, 2012

 

Property

  

Property Location

  

Year Built/
Renovated

   Gross
Building
Area (2)
     Raised
Square
Feet (3)
     Critical
Load
MW (4)
     %
Leased (5)
    %
Commenced (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

   Ashburn, VA    2009-2010      360,000         176,000         36.4         100     100

CH1 Phase I

   Elk Grove Village, IL    2008      285,000         122,000         18.2         98     98

VA3

   Reston, VA    2003      256,000         147,000         13.0         100     100

VA4

   Bristow, VA    2005      230,000         90,000         9.6         100     100
        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal – stabilized

           1,712,000         840,000         137.9         99     99

Completed not Stabilized

                

NJ1 Phase I

   Piscataway, NJ    2010      180,000         88,000         18.2         36     36

ACC6 Phase I (6)

   Ashburn, VA    2011      131,000         66,000         13.0         8     8

SC1 Phase I

   Santa Clara, CA    2011      180,000         88,000         18.2         38     38

CH1 Phase II

   Elk Grove Village, IL    2012      200,000         109,000         18.2         79     57
        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Subtotal – non-stabilized

           691,000         351,000         67.6         43     37
        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Properties

           2,403,000         1,191,000         205.5         81     79
        

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Stabilized operating properties are either 85% or more leased 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) Raised square footage is that portion of gross building area where the tenants locate their computer servers. The Company considers raised square footage to be the net rentable square footage in each of its facilities.
(4) 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).
(5) Percentage leased is expressed as a percentage of critical load that is subject to an executed lease. Percentage commenced is expressed as a percentage of critical load where the lease has commenced under generally accepted accounting principles. Leases executed as of March 31, 2012 represent $213 million of base rent on a straight-line basis and $202 million on a cash basis over the next twelve months.
(6) As of April 26, 2012, ACC6 Phase I is 83% leased and 75% commenced.

 

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Table of Contents

Lease Expirations

As of March 31, 2012

The following table sets forth a summary schedule of lease expirations of the operating properties for each of the ten calendar years beginning with 2012. The information set forth in the table below assumes that tenants exercise no renewal options and takes into account tenants’ early termination options.

 

Year of Lease Expiration

   Number
of Leases
Expiring (1)
     Raised
Square Feet
Expiring
(in thousands) (2)
     % of Leased
Raised
Square Feet
    Total kW
of Expiring
Leases (3)
     % of
Leased kW
    % of
Annualized
Base Rent
 

2012(4)

     2         72         7.3     6,878         4.1     3.6

2013

     2