XNYS:DFT Dupont Fabros Technology Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:DFT Fair Value Estimate
Premium
XNYS:DFT Consider Buying
Premium
XNYS:DFT Consider Selling
Premium
XNYS:DFT Fair Value Uncertainty
Premium
XNYS:DFT Economic Moat
Premium
XNYS:DFT Stewardship
Premium
 

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 June 30, 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 July 20, 2012
DuPont Fabros Technology, Inc. Common Stock,
$0.001 par value per share
 
63,296,658


1


EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 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 June 30, 2012, DFT owned 77.1% 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 employees 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 retained earnings (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 June 30, 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 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.


2


DUPONT FABROS TECHNOLOGY, INC. / DUPONT FABROS TECHNOLOGY, L.P.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2012
TABLE OF CONTENTS


3


PART 1—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
ASSETS
 
 
 
Income producing property:
 
 
 
Land
$
73,197

 
$
63,393

Buildings and improvements
2,312,187

 
2,123,377

 
2,385,384

 
2,186,770

Less: accumulated depreciation
(283,673
)
 
(242,245
)
Net income producing property
2,101,711

 
1,944,525

Construction in progress and land held for development
161,245

 
320,611

Net real estate
2,262,956

 
2,265,136

Cash and cash equivalents
40,777

 
14,402

Restricted cash
19

 
174

Rents and other receivables
1,954

 
1,388

Deferred rent
138,088

 
126,862

Lease contracts above market value, net
10,805

 
11,352

Deferred costs, net
39,134

 
40,349

Prepaid expenses and other assets
28,709

 
31,708

Total assets
$
2,522,442

 
$
2,491,371

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Line of credit
$

 
$
20,000

Mortgage notes payable
142,200

 
144,800

Unsecured notes payable
550,000

 
550,000

Accounts payable and accrued liabilities
20,910

 
22,955

Construction costs payable
14,048

 
20,300

Accrued interest payable
2,584

 
2,528

Dividend and distribution payable
18,071

 
14,543

Lease contracts below market value, net
15,934

 
18,313

Prepaid rents and other liabilities
31,364

 
29,058

Total liabilities
795,111

 
822,497


4


CONSOLIDATED BALANCE SHEETS
(Continued)
(in thousands except share data)
 
June 30,
2012
 
December 31,
2011
Redeemable noncontrolling interests – operating partnership
537,847

 
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 June 30, 2012 and December 31, 2011
185,000

 
185,000

Series B cumulative redeemable perpetual preferred stock, 6,650,000 issued and outstanding at June 30, 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, 63,297,595 shares issued and outstanding at June 30, 2012 and 62,914,987 shares issued and outstanding at December 31, 2011
63

 
63

Additional paid in capital
838,171

 
927,902

Retained earnings (accumulated deficit)

 
(7,080
)
Total stockholders’ equity
1,189,484

 
1,207,135

Total liabilities and stockholders’ equity
$
2,522,442

 
$
2,491,371

See accompanying notes

5


DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except share and per share data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Base rent
$
55,773

 
$
48,515

 
$
108,943

 
$
95,703

Recoveries from tenants
25,728

 
21,609

 
49,814

 
42,467

Other revenues
1,157

 
632

 
2,283

 
1,085

Total revenues
82,658

 
70,756

 
161,040

 
139,255

Expenses:
 
 
 
 
 
 
 
Property operating costs
23,473

 
18,746

 
45,836

 
36,846

Real estate taxes and insurance
2,413

 
1,523

 
4,584

 
3,179

Depreciation and amortization
22,484

 
18,113

 
44,354

 
36,204

General and administrative
4,505

 
3,884

 
9,741

 
8,682

Other expenses
744

 
319

 
1,412

 
517

Total expenses
53,619

 
42,585

 
105,927

 
85,428

Operating income
29,039

 
28,171

 
55,113

 
53,827

Interest income
45

 
192

 
79

 
403

Interest:
 
 
 
 
 
 
 
Expense incurred
(12,674
)
 
(5,519
)
 
(24,537
)
 
(13,178
)
Amortization of deferred financing costs
(916
)
 
(522
)
 
(1,803
)
 
(1,146
)
Net income
15,494

 
22,322

 
28,852

 
39,906

Net income attributable to redeemable noncontrolling interests – operating partnership
(2,006
)
 
(4,296
)
 
(3,576
)
 
(7,768
)
Net income attributable to controlling interests
13,488

 
18,026

 
25,276

 
32,138

Preferred stock dividends
(6,811
)
 
(5,572
)
 
(13,430
)
 
(9,729
)
Net income attributable to common shares
$
6,677

 
$
12,454

 
$
11,846

 
$
22,409

Earnings per share – basic:
 
 
 
 
 
 
 
Net income attributable to common shares
$
0.11

 
$
0.20

 
$
0.19

 
$
0.37

Weighted average common shares outstanding
62,897,982

 
60,533,755

 
62,733,265

 
60,373,069

Earnings per share – diluted:
 
 
 
 
 
 
 
Net income attributable to common shares
$
0.11

 
$
0.20

 
$
0.19

 
$
0.37

Weighted average common shares outstanding
63,749,724

 
61,577,461

 
63,648,912

 
61,480,769

Dividends declared per common share
$
0.15

 
$
0.12

 
$
0.27

 
$
0.24

See accompanying notes


6


DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(unaudited and in thousands except share data)

 
Preferred Stock
 
Common Shares
 
Additional Paid-in Capital
 
Retained Earnings (Accumulated Deficit)
 
 
 
 
Number
 
Amount
 
 
 
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
 
 
 
 
 
 
 
 
25,276

 
25,276

Issuance of preferred stock
65,000

 
 
 
 
 
(2,315
)
 
 
 
62,685

Dividends declared on common stock
 
 
 
 
 
 
(12,300
)
 
(4,766
)
 
(17,066
)
Dividends earned on preferred stock
 
 
 
 
 
 
 
 
(13,430
)
 
(13,430
)
Redemption of operating partnership units
 
 
232,193

 

 
5,700

 
 
 
5,700

Issuance of stock awards
 
 
156,425

 

 
336

 
 
 
336

Stock option exercises
 
 
113,955

 

 
868

 
 
 
868

Retirement and forfeiture of stock awards
 
 
(119,965
)
 

 
(2,327
)
 
 
 
(2,327
)
Amortization of deferred compensation costs
 
 
 
 
 
 
3,640

 
 
 
3,640

Adjustments to redeemable noncontrolling interests – operating partnership
 
 
 
 
 
 
(83,333
)
 
 
 
(83,333
)
Balance at June 30, 2012
$
351,250

 
63,297,595

 
$
63

 
$
838,171

 
$

 
$
1,189,484

See accompanying notes


7


DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

 
Six months ended June 30,
 
2012
 
2011
Cash flow from operating activities
 
 
 
Net income
$
28,852

 
$
39,906

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
44,354

 
36,204

Straight line rent
(11,226
)
 
(22,952
)
Amortization of deferred financing costs
1,803

 
1,146

Amortization of lease contracts above and below market value
(1,832
)
 
(1,071
)
Compensation paid with Company common shares
3,673

 
2,923

Changes in operating assets and liabilities
 
 
 
Restricted cash
155

 
223

Rents and other receivables
(566
)
 
1,578

Deferred costs
(787
)
 
(1,566
)
Prepaid expenses and other assets
(3,738
)
 
(738
)
Accounts payable and accrued liabilities
(2,045
)
 
(4,794
)
Accrued interest payable
56

 
(35
)
Prepaid rents and other liabilities
(110
)
 
3,903

Net cash provided by operating activities
58,589

 
54,727

Cash flow from investing activities
 
 
 
Investments in real estate – development
(35,752
)
 
(213,464
)
Land acquisition costs

 
(9,507
)
Interest capitalized for real estate under development
(1,533
)
 
(14,654
)
Improvements to real estate
(1,677
)
 
(1,454
)
Additions to non-real estate property
(55
)
 
(88
)
Net cash used in investing activities
(39,017
)
 
(239,167
)
Cash flow from financing activities
 
 
 
Issuance of preferred stock, net of offering costs
62,685

 
97,450

Line of credit:
 
 
 
Proceeds
15,000

 

Repayments
(35,000
)
 

Mortgage notes payable:
 
 
 
Repayments
(2,600
)
 
(2,600
)
Return of escrowed proceeds

 
1,104

Exercises of stock options
868

 
596

Payments of financing costs
(2,081
)
 
(218
)
Dividends and distributions:
 
 
 
Common shares
(15,122
)
 
(14,491
)
Preferred shares
(12,384
)
 
(8,180
)
Redeemable noncontrolling interests – operating partnership
(4,563
)
 
(5,146
)
Net cash provided by financing activities
6,803

 
68,515

Net increase (decrease) in cash and cash equivalents
26,375

 
(115,925
)
Cash and cash equivalents, beginning
14,402

 
226,950

Cash and cash equivalents, ending
$
40,777

 
$
111,025


8


DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
(Continued)
 
Six months ended June 30,
 
2012
 
2011
Supplemental information:
 
 
 
Cash paid for interest
$
26,014

 
$
27,867

Deferred financing costs capitalized for real estate under development
$
97

 
$
697

Construction costs payable capitalized for real estate under development
$
14,048

 
$
48,048

Redemption of operating partnership units
$
5,700

 
$
25,100

Adjustments to redeemable noncontrolling interests - operating partnership
$
83,333

 
$
79,360

See accompanying notes

9


DUPONT FABROS TECHNOLOGY, L.P.

CONSOLIDATED BALANCE SHEETS
(in thousands except units)
 
June 30,
2012
 
December 31,
2011
 
(unaudited)
 
 
ASSETS
 
 
 
Income producing property:
 
 
 
Land
$
73,197

 
$
63,393

Buildings and improvements
2,312,187

 
2,123,377

 
2,385,384

 
2,186,770

Less: accumulated depreciation
(283,673
)
 
(242,245
)
Net income producing property
2,101,711

 
1,944,525

Construction in progress and land held for development
161,245

 
320,611

Net real estate
2,262,956

 
2,265,136

Cash and cash equivalents
36,481

 
10,097

Restricted cash
19

 
174

Rents and other receivables
1,954

 
1,388

Deferred rent
138,088

 
126,862

Lease contracts above market value, net
10,805

 
11,352

Deferred costs, net
39,134

 
40,349

Prepaid expenses and other assets
28,709

 
31,708

Total assets
$
2,518,146

 
$
2,487,066

LIABILITIES AND PARTNERS’ CAPITAL
 
 
 
Liabilities:
 
 
 
Line of credit
$

 
$
20,000

Mortgage notes payable
142,200

 
144,800

Unsecured notes payable
550,000

 
550,000

Accounts payable and accrued liabilities
20,910

 
22,955

Construction costs payable
14,048

 
20,300

Accrued interest payable
2,584

 
2,528

Dividend and distribution payable
18,071

 
14,543

Lease contracts below market value, net
15,934

 
18,313

Prepaid rents and other liabilities
31,364

 
29,058

Total liabilities
795,111

 
822,497

Redeemable partnership units
537,847

 
461,739

Commitments and contingencies

 

Partners’ capital:
 
 
 
Limited partners’ capital:
 
 
 
Series A cumulative redeemable perpetual preferred units, 7,400,000 issued and outstanding at June 30, 2012 and December 31, 2011
185,000

 
185,000

Series B cumulative redeemable perpetual preferred units, 6,650,000 issued and outstanding at June 30, 2012 and 4,050,000 shares issued and outstanding at December 31, 2011
166,250

 
101,250

Common units, 62,635,222 issued and outstanding at June 30, 2012 and 62,252,614 issued and outstanding at December 31, 2011
825,211

 
903,917

General partner’s capital, common units, 662,373 issued and outstanding at June 30, 2012 and December 31, 2011
8,727

 
12,663

Total partners’ capital
1,185,188

 
1,202,830

Total liabilities and partners’ capital
$
2,518,146

 
$
2,487,066

See accompanying notes

10


DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except unit and per unit data)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Base rent
$
55,773

 
$
48,515

 
$
108,943

 
$
95,703

Recoveries from tenants
25,728

 
21,609

 
49,814

 
42,467

Other revenues
1,157

 
632

 
2,283

 
1,085

Total revenues
82,658

 
70,756

 
161,040

 
139,255

Expenses:
 
 
 
 
 
 
 
Property operating costs
23,473

 
18,746

 
45,836

 
36,846

Real estate taxes and insurance
2,413

 
1,523

 
4,584

 
3,179

Depreciation and amortization
22,484

 
18,113

 
44,354

 
36,204

General and administrative
4,505

 
3,884

 
9,741

 
8,682

Other expenses
744

 
319

 
1,412

 
517

Total expenses
53,619

 
42,585

 
105,927

 
85,428

Operating income
29,039

 
28,171

 
55,113

 
53,827

Interest income
45

 
192

 
79

 
403

Interest:
 
 
 
 
 
 
 
Expense incurred
(12,674
)
 
(5,519
)
 
(24,537
)
 
(13,178
)
Amortization of deferred financing costs
(916
)
 
(522
)
 
(1,803
)
 
(1,146
)
Net income
15,494

 
22,322

 
28,852

 
39,906

Preferred unit distributions
(6,811
)
 
(5,572
)
 
(13,430
)
 
(9,729
)
Net income attributable to common units
$
8,683

 
$
16,750

 
$
15,422

 
$
30,177

Earnings per unit – basic:
 
 
 
 
 
 
 
Net income attributable to common units
$
0.11

 
$
0.20

 
$
0.19

 
$
0.37

Weighted average common units outstanding
81,771,775

 
81,395,430

 
81,672,861

 
81,303,883

Earnings per unit – diluted:
 
 
 
 
 
 
 
Net income attributable to common units
$
0.11

 
$
0.20

 
$
0.19

 
$
0.37

Weighted average common units outstanding
82,623,517

 
82,439,136

 
82,588,508

 
82,411,583

Distributions declared per unit
$
0.15

 
$
0.12

 
$
0.27

 
$
0.24

See accompanying notes


11


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
 
 
 
 
28,550

 
 
 
302

 
28,852

Issuance of OP units for preferred stock offering
65,000

 
 
 
(2,306
)
 
 
 
 
 
62,694

Common unit distributions
 
 
 
 
(21,988
)
 
 
 
(179
)
 
(22,167
)
Preferred unit distributions
 
 
 
 
(13,289
)
 
 
 
(141
)
 
(13,430
)
Issuance of OP units to REIT when redeemable partnership units redeemed
 
 
232,193

 
5,700

 
 
 
 
 
5,700

Issuance of OP units for stock awards
 
 
156,425

 
336

 
 
 
 
 
336

Issuance of OP units due to option exercises
 
 
113,955

 
868

 
 
 
 
 
868

Retirement and forfeiture of OP units
 
 
(119,965
)
 
(2,327
)
 
 
 
 
 
(2,327
)
Amortization of deferred compensation costs
 
 
 
 
3,640

 
 
 
 
 
3,640

Adjustments to redeemable partnership units
 
 
 
 
(77,890
)
 
 
 
(3,918
)
 
(81,808
)
Balance at June 30, 2012
$
351,250

 
62,635,222

 
$
825,211

 
662,373

 
$
8,727

 
$
1,185,188

See accompanying notes


12


DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

 
Six months ended June 30,
 
2012
 
2011
Cash flow from operating activities
 
 
 
Net income
$
28,852

 
$
39,906

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
44,354

 
36,204

Straight line rent
(11,226
)
 
(22,952
)
Amortization of deferred financing costs
1,803

 
1,146

Amortization of lease contracts above and below market value
(1,832
)
 
(1,071
)
Compensation paid with Company common shares
3,673

 
2,923

Changes in operating assets and liabilities
 
 
 
Restricted cash
155

 
223

Rents and other receivables
(566
)
 
1,578

Deferred costs
(787
)
 
(1,566
)
Prepaid expenses and other assets
(3,738
)
 
(738
)
Accounts payable and accrued liabilities
(2,045
)
 
(4,577
)
Accrued interest payable
56

 
(35
)
Prepaid rents and other liabilities
(110
)
 
3,903

Net cash provided by operating activities
58,589

 
54,944

Cash flow from investing activities
 
 
 
Investments in real estate – development
(35,752
)
 
(213,464
)
Land Acquisition Costs

 
(9,507
)
Interest capitalized for real estate under development
(1,533
)
 
(14,654
)
Improvements to real estate
(1,677
)
 
(1,454
)
Additions to non-real estate property
(55
)
 
(88
)
Net cash used in investing activities
(39,017
)
 
(239,167
)
Cash flow from financing activities
 
 
 
Issuance of preferred units, net of offering costs
62,694

 
97,450

Line of credit:
 
 
 
Proceeds
15,000

 

Repayments
(35,000
)
 

Mortgage notes payable:
 
 
 
Repayments
(2,600
)
 
(2,600
)
Return of escrowed proceeds

 
1,104

Issuance of OP units for stock option exercises
868

 
596

Payments of financing costs
(2,081
)
 
(218
)
Distributions
(32,069
)
 
(27,817
)
Net cash provided by financing activities
6,812

 
68,515

Net increase (decrease) in cash and cash equivalents
26,384

 
(115,708
)
Cash and cash equivalents, beginning
10,097

 
222,428

Cash and cash equivalents, ending
$
36,481

 
$
106,720


13


DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
(Continued)
 
Six months ended June 30,
 
2012
 
2011
Supplemental information:
 
 
 
Cash paid for interest
$
26,014

 
$
27,867

Deferred financing costs capitalized for real estate under development
$
97

 
$
697

Construction costs payable capitalized for real estate under development
$
14,048

 
$
48,048

Redemption of operating partnership units
$
5,700

 
$
25,100

Adjustments to redeemable partnership units
$
81,808

 
$
81,905

See accompanying notes


14


DUPONT FABROS TECHNOLOGY, INC.
DUPONT FABROS TECHNOLOGY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2012, owned 77.1% of the common economic interest in the Operating Partnership, of which 1.0% is held as general partnership units. As of June 30, 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;
one data center project under development – referred to as ACC6 Phase II;
two data center projects available for future development – the second phases of NJ1 and SC1; and
land that may be used to develop three additional data centers – referred to as ACC7, ACC8 and SC2.
CH1 Phase II was placed in service on February 1, 2012. In April 2012, the Company began development of ACC6 Phase II.
2. Significant Accounting Policies
Basis of Presentation
This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 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 employees 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 retained earnings (accumulated deficit). The common limited partnership interests held by the limited partners (other than DFT) in the Operating Partnership are presented

15


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 June 30, 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.
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 and six months ended June 30, 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 the Company's properties generate similar types of revenues and expenses related to tenant rent and reimbursements and operating expenses. The delivery of the Company's 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 the Company's portfolio have similar economic characteristics and the nature of the products and services provided to the Company's 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 years to seven years. Depreciation expense was $21.3 million and $17.0 million for the three months ended June 30, 2012 and 2011, respectively, and $42.0 million and $33.9 million for the six months ended June 30, 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 June 30, 2012 and 2011, respectively, and $1.6 million and $2.4 million for the six months ended June 30, 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 six months ended June 30, 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 June 30, 2012 and December 31, 2011 are as follows (in thousands): 

16


 
June 30,
2012
 
December 31,
2011
Financing costs
$
23,081

 
$
21,047

Accumulated amortization
(8,684
)
 
(6,831
)
Financing costs, net
$
14,397

 
$
14,216


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 $0.6 million and $0.3 million for the three months ended June 30, 2012 and 2011, respectively, and $0.8 million and $1.6 million for the six months ended June 30, 2012 and 2011, respectively. Amortization of deferred leasing costs totaled $1.1 million for each of the three months ended June 30, 2012 and 2011, respectively, and $2.2 million and $2.3 million for the six months ended June 30, 2012 and 2011, respectively. Balances, net of accumulated amortization, at June 30, 2012 and December 31, 2011 are as follows (in thousands): 
 
June 30,
2012
 
December 31,
2011
Leasing costs
$
46,227

 
$
46,128

Accumulated amortization
(21,490
)
 
(19,995
)
Leasing costs, net
$
24,737

 
$
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 June 30, 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 June 30, 2012 and December 31, 2011 are as follows (in thousands):
 
 
June 30,
2012
 
December 31,
2011
Lease contracts above market value
$
23,100

 
$
23,100

Accumulated amortization
(12,295
)
 
(11,748
)
Lease contracts above market value, net
$
10,805

 
$
11,352

 
 
 
 
Lease contracts below market value
$
39,375

 
$
45,700

Accumulated amortization
(23,441
)
 
(27,387
)
Lease contracts below market value, net
$
15,934

 
$
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

17


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.

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 six months ended June 30, 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

 
3,576

Distributions declared

 
(5,101
)
Redemption of operating partnership units
(232,193
)
 
(5,700
)
Adjustments to redeemable noncontrolling interests – operating partnership

 
83,333

Balance at June 30, 2012
18,832,188

 
$
537,847

The following is a summary of activity for redeemable partnership units for the six months ended June 30, 2012 (dollars in thousands):
 
OP Units
 
Number
 
Amount
Balance at December 31, 2011
19,064,381

 
$
461,739

Redemption of operating partnership units
(232,193
)
 
(5,700
)
Adjustments to redeemable partnership units

 
81,808

Balance at June 30, 2012
18,832,188

 
$
537,847

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 and

18


six months ended June 30, 2012 and 2011 (dollars in thousands): 
 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Net income attributable to controlling interests
$
13,488

 
$
18,026

 
$
25,276

 
$
32,138

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
(74,926
)
 
(14,309
)
 
(77,633
)
 
(54,260
)
 
$
(61,438
)
 
$
3,717

 
$
(52,357
)
 
$
(22,122
)

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 June 30, 2011 (dollars in thousands):
 

19


Property
Location
 
Land
 
Buildings and
Improvements
 
Construction
in Progress
and Land Held
for
Development
 
Total Cost
ACC2
Ashburn, VA
 
$
2,500

 
$
158,925

 
$

 
$
161,425

ACC3
Ashburn, VA
 
1,071

 
95,442

 

 
96,513

ACC4
Ashburn, VA
 
6,600

 
538,031

 

 
544,631

ACC5
Ashburn, VA
 
6,443

 
297,743

 

 
304,186

ACC6 Phase I
Ashburn, VA
 
2,759

 
114,415

 

 
117,174

VA3
Reston, VA
 
9,000

 
175,648

 

 
184,648

VA4
Bristow, VA
 
6,800

 
142,774

 

 
149,574

CH1
Elk Grove Village, IL
 
23,611

 
358,381

 

 
381,992

NJ1 Phase I
Piscataway, NJ
 
4,311

 
211,271

 

 
215,582

SC1 Phase I
Santa Clara, CA
 
10,102

 
219,557

 

 
229,659

 
 
 
73,197

 
2,312,187

 

 
2,385,384

Construction in progress and land held for development
(1
)
 

 

 
161,245

 
161,245

 
 
 
$
73,197

 
$
2,312,187

 
$
161,245

 
$
2,546,629

 
(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).

4. Debt
Debt Summary as of June 30, 2012 and December 31, 2011
($ in thousands)
 
 
June 30, 2012
 
December 31, 2011
 
Amounts
 
% of Total
 
Rates
 
Maturities
(years)
 
Amounts
Secured
$
142,200

 
21
%
 
3.2
%
 
2.4

 
$
144,800

Unsecured
550,000

 
79
%
 
8.5
%
 
4.8

 
570,000

Total
$
692,200

 
100
%
 
7.4
%
 
4.3

 
$
714,800

Fixed Rate Debt:
 
 
 
 
 
 
 
 
 
Unsecured Notes
$
550,000

 
79
%
 
8.5
%
 
4.8

 
$
550,000

Fixed Rate Debt
550,000

 
79
%
 
8.5
%
 
4.8

 
550,000

Floating Rate Debt:
 
 
 
 
 
 
 
 
 
Unsecured Credit Facility

 

 
%
 
3.7

 
20,000

ACC5 Term Loan
142,200

 
21
%
 
3.2
%
 
2.4

 
144,800

Floating Rate Debt
142,200

 
21
%
 
3.2
%
 
2.4

 
164,800

Total
$
692,200

 
100
%
 
7.4
%
 
4.3

 
$
714,800

 
Note:
The Company capitalized interest and deferred financing cost amortization of $0.4 million and $1.6 million during the three and six months ended June 30, 2012, respectively.
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

20


premium.
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 June 30, 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
%

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 June 30, 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
%

21


As of June 30, 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.

As of June 30, 2012 and the date of this report, 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 $1.3 billion plus 80% of the sum of (i) net equity offering proceeds and (ii) the value of equity interests issued in connection with a contribution of assets to the Operating Partnership or its subsidiaries.
The facility includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Operating Partnership under the facility to be immediately due and payable. The Company was in compliance with all covenants under the facility as of June 30, 2012.
A summary of the Company’s debt maturity schedule as of June 30, 2012 is as follows:
Debt Maturity as of June 30, 2012
($ in thousands)

22


 
Year
 
Fixed Rate
 
 
Floating Rate
 
 
Total
 
% of Total
 
Rates
2012
 

  
 
2,600

 
 
2,600

 
0.4
%
 
3.2
%
2013
 

  
 
5,200

 
 
5,200

 
0.8
%
 
3.2
%
2014
 

  
 
134,400

(2)
 
134,400

 
19.4
%
 
3.2
%
2015
 
125,000

(1)
 

  
 
125,000

 
18.1
%
 
8.5
%
2016
 
125,000

(1)
 

 
 
125,000

 
18.1
%
 
8.5
%
2017
 
300,000

(1)
 

  
 
300,000

 
43.2
%
 
8.5
%
Total
 
$
550,000

  
 
$
142,200

  
 
$
692,200

 
100
%
 
7.4
%
 
(1)
The Unsecured Notes have mandatory amortization payments due December 15 of each respective year.
(2)
Remaining principal payment due on December 2, 2014 with no extension option.

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.
A contract related to the development of ACC6 Phase II data center was in place as of June 30, 2012. This contract is cost-plus in nature whereby the contract sum is the aggregate of the cost of the actual work performed and equipment purchased plus a contractor fee. Control estimates, which are adjusted from time to time to reflect any contract changes, are estimates of the total contract cost at completion. As of June 30, 2012, the ACC6 Phase II control estimate was $81.0 million of which $17.1 million has been incurred.
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.

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 June 30, 2012 and December 31, 2011 was $537.8 million and $461.7 million, respectively, based on the closing share price of DFT’s common stock of $28.56 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 six months ended June 30, 2012, OP unitholders redeemed a total of 232,193 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

23


(“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.
In 2012, DFT has declared and paid the following cash dividends on its Series A Preferred Stock:
$0.4921875 per share payable to stockholders of record as of April 5, 2012. This dividend was paid on April 16, 2012.
$0.4921875 per share payable to stockholders of record as of July 6, 2012. This dividend was paid on July 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 2,600,000 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.
In 2012, DFT has declared and paid the following cash dividends on its Series B Preferred Stock:
$0.4765625 per share payable to stockholders of record as of April 5, 2012. This dividend was paid on April 16, 2012.
$0.4765625 per share payable to stockholders of record as of July 6, 2012. This dividend was paid on July 16, 2012.

8. Stockholders’ Equity of the REIT and Partners’ Capital of the OP
During the six months ended June 30, 2012:

DFT issued an aggregate of 156,425 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 232,193 OP units in exchange for an equal number of shares of DFT’s common stock.
During the six months ended June 30, 2012, DFT declared and paid the following cash dividends totaling $0.27 per share on its common stock, of which the OP paid equivalent distributions on OP units:
$0.12 per share payable to shareholders of record as of April 5, 2012. This dividend was paid on April 16, 2012.
$0.15 per share payable to shareholders of record as of July 6, 2012. This dividend was paid on July 16, 2012.

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.

24


As of June 30, 2012, 775,269 share equivalents were issued under the 2011 Plan, and the maximum aggregate amount of share equivalents remaining available for future issuance was 5,524,731.
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
143,191

 
$
22.66

Vested
(310,737
)
 
$
11.46

Forfeited
(18,688
)
 
$
22.37

Unvested balance at June 30, 2012
303,095

 
$
22.31

During the six months ended June 30, 2012, the Company issued 143,191 shares of restricted stock, which had an aggregate value of $3.2 million on the respective grant dates. This amount will be amortized to expense over a three year vesting period. Also during the six months ended June 30, 2012, 310,737 shares of restricted stock vested at a value of $7.1 million on the vesting date.
As of June 30, 2012, total unearned compensation on restricted stock was $5.5 million, and the weighted average vesting period was 1.3 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 applicable equity incentive plan for the six months ended June 30, 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
(113,955
)
 
$
7.62

Forfeited
(53,648
)
 
$
22.60

Under option, June 30, 2012
2,076,781

 
$
15.17

 
 
Shares Subject
to Option
 
Total Unearned
Compensation
 
Weighted Average
Vesting Period
 
Weighted Average
Remaining
Contractual Term
As of June 30, 2012
2,076,781

 
$
4.7
 million
 
1.3 years
 
7.8 years
The following table sets forth the number of unvested options as of June 30, 2012 and the weighted average fair value of these options at the grant date.
 
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

Forfeited
(53,648
)
 
$
6.52

Unvested balance at June 30, 2012
809,991

 
$
6.96


25


The following tables sets forth the number of exercisable options as of June 30, 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
(113,955
)
 
$
2.56

Options Exercisable at June 30, 2012
1,266,790

 
$
3.52

 
 
Exercisable
Options
 
Intrinsic Value
 
Weighted Average
Exercise Price
 
Weighted Average
Remaining
Contractual Term
As of June 30, 2012
1,266,790

 
$
23.2
 million
 
$
10.24

 
7.1 years
The intrinsic value of stock options exercised during the six months ended June 30, 2012 was $1.9 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 six months ended June 30, 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 six months ended June 30, 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): 

26


 
Three months ended June 30,
 
Six months ended June 30,
 
2012
 
2011
 
2012
 
2011
Basic and Diluted Shares Outstanding
 
 
 
 
 
 
 
Weighted average common shares – basic
62,897,982

 
60,533,755

 
62,733,265

 
60,373,069

Effect of dilutive securities
851,742

 
1,043,706

 
915,647

 
1,107,700

Weighted average common shares – diluted
63,749,724

 
61,577,461

 
63,648,912

 
61,480,769

Calculation of Earnings per Share – Basic
 
 
 
 
 
 
 
Net income attributable to common shares
$
6,677

 
$
12,454

 
$
11,846

 
$
22,409

Net income allocated to unvested restricted shares
(32
)
 
(104
)
 
(52
)
 
(194
)
Net income attributable to common shares, adjusted
6,645

 
12,350

 
11,794

 
22,215

Weighted average common shares – basic
62,897,982

 
60,533,755

 
62,733,265

 
60,373,069

Earnings per common share – basic
$
0.11

 
$
0.20

 
$
0.19

 
$
0.37

Calculation of Earnings per Share – Diluted
 
 
 
 
 
 
 
Net income attributable to common shares
$
6,677

 
$
12,454

 
$
11,846

 
$
22,409

Adjustments to redeemable noncontrolling interests
21

 
53

 
40

 
103

Adjusted net income available to common shares
6,698

 
12,507

 
11,886

 
22,512

Weighted average common shares – diluted
63,749,724

 
61,577,461

 
63,648,912