DuPont Fabros Revenue Up 16%- UPDATED

By David Gross

DuPont Fabros reported quarterly revenue yesterday of $60.3 million, up 16% y/y, with FFO per share rising from 29 cents to 37 cents.

Property operating costs rose just 2% in spite of the revenue gain, allowing net income to grow from $5.5 million to $15.3 million.   Additionally, the company's NOI, or Net Operating Income, margin is now 63%, close to the 65-70% range that is typical for other apartment, office, and data center REITs.   A year ago, it was just 52%.  

DFT's ACC6 Building Under Construction Nov 2010

Leasing activity at its primary Ashburn, VA campus continues to be much stronger than at its expansion site in Piscataway, NJ, with ACC5 Phase 2 now 75% leased, while NJ1 is just 22% leased.  Both buildings were placed into service this week.   The company's Ashburn tenant roster includes brand name websites like Yahoo, Rackspace, Facebook, and Match.com, while the financial services sector which dominates Northern New Jersey is new for the firm, and is already crowding into facilities owned by Equinix and Digital Realty in Weehawken, Secaucus, and Piscataway.

The stock is down 4% today, possibly because the company reduced its annual FFO guidance midpoint slightly, from $1.35 to $1.32, due to a one-time write off of unamortized interest charges on its ACC4 loan, which it paid off early.

The earnings release came out last night, but the call is today, dial-in information is available here.

Northern Virginia vs. Northern New Jersey Data Centers

By David Gross

I recently wrote about how Ashburn, VA has become the hub of east coast data centers, and is carrying on Northern Virginia's, and particularly the Dulles Corridor's, legacy as a center for telecommunications providers.   That said, with Equinix (EQIX), Telx, Digital Realty (DLR), and now DuPont Fabros (DFT) all operating facilities in Northern New Jersey, you could argue the east coast data center hub is really near Giants Stadium, not Dulles Airport.   However, the tenant mix shows that New Jersey is unquestionably the financial hub, while Northern Virginia is the hub for everyone else.

Equinix's flagship NY4, located in Secaucus, is a 300,000+ square foot facility dominiated by financial tenants, including Tudor Investment Corporation, TheStreet.com, JP Morgan Chase, Direct Edge, Citadel Investment Group, ACTIV Financial, and Hardcastle Trading.   Compare that to its DC2 facility in Ashburn, whose tenants include The Motley Fool, Accenture, The College Board and Electronic Arts.     But the firm really impacted by the difference between New Jersey and Virginia is DuPont Fabros (DFT), which is based in DC and built five of its first seven properties in Northern Virginia, and is now expanding into New Jersey where the news on leasing activity has been fairly quiet.

DuPont Fabros has an impressive tenant roster in Ashburn, including Yahoo (YHOO), Facebook, and Rackspace (RAX).   Northern Virginia's data center presence with major websites is strengthened further by one of the DLR facilities on Devin Shafron Drive, which serves as the east coast hub for Amazon's (AMZN) EC2 service.   When you order that service, the DLR building is the "Virginia location" Amazon allows you to select on its web-based entry form.

Digital Realty has had success in New Jersey by building on its base of wholesale customers like Telx in Weehawken and Savvis (SVVS) in Piscataway, which in turn sell to financial traders.    But DFT has historically relied on leading websites, not financial service providers or co-lo providers.   Rackspace has its 2nd largest facility in DFT's Elk Grove Village center near O'Hare Airport, and its east coast hub at DFT's ACC4 in Ashburn.   However, Rackspace does not sell to low latency financial traders, and its managed hosting service is designed to be geographically independent of its customer's physical locations, which means it has no need to expand to Northern New Jersey.

It will be interesting to see how DFT does in New Jersey, far more so than in its new building in Santa Clara, because Silicon Valley data centers look like mirrors of Northern Virginia's.   And when it comes to tenant mix, market characteristics, and customer requirements, New Jersey and Northern Virginia have little in common.   One is the unquestionable east coast hub for financial traffic, the other the east coast hub for web traffic.

DuPont Fabros Issuing $169 Million of Preferred Stock, Will Pay Off ACC4 Loan

DuPont Fabros (DFT) is issuing $169 milion of 7.875% Preferred Stock ($25 per share liquidation preference) to pay off the term loan that financed its ACC4 building in Ashburn, Virginia.    After this transaction closes, the company's only remaining secured debt will be the term loan on its ACC5 expansion, which has a balance of $150 million.    The covenants on the outstanding ACC5 loan are fairly similar to the ACC4 loan, and in addition to requiring DFT to maintain specific balance sheet and cash flow ratios, limit the number of new projects it can develop while the loan remains outstanding.   ACC4 is fully leased, and includes well-known tenants like Facebook, Yahoo (YHOO), Rackspace (RAX), and Match.com

Most of DFT's remaining debt is the $550 million of 8.5% of unsecured notes it issued last December, which matures in 2017.  Digital Realty (DLR), in contrast, has over $1 billion of mortgages outstanding, which represent about 50% of its total debt outstanding, with over 80% of its unsecured debt maturing in the 2020s.

Ashburn Data Centers

By David Gross

In Northern Virginia, many of our telecom carriers went bankrupt in the early-mid 2000s.   The region spent much of the last decade shifting its emphasis from being a leading hub for ISPs and CLECs, back to its more traditional role in government contracting.   However, data centers held on due to the unusually large amount of fiber optic capacity and interconnection points that already existed in the region, and centered in on one area - Ashburn - for their large expansions.

Ashburn sits in the middle of rapidly growing Loudoun County, a few miles to the north of Dulles Airport.   Anyone who has visited the Equinix (EQIX), Digital Realty (DLR), or DuPont Fabros (DFT) facilities there has seen the planes, including many European flag carriers, flying right over the data center clusters on Beaumeade Circle/Filigree Court and Devin Shafron Drive.

The first major facility to go up in Ashburn was Equinix's DC1 in 1999.   When it was built, many thought it was too far out, and that it might have been better off closer to the large MAE East NAP in Tyson's Corner, 15 miles east, which along with MAE West in Silicon Valley passed more Internet traffic than just about any location in the world.    And with interconnection the centerpiece of the co-location business, proximity to both fiber and existing peering locations were highly important.  But land costs are much lower in Ashburn, as are existing building densities, two factors which have made it conducive to large, 100,000+ square foot facilities, while the smaller data centers have tended to stay to the east in Fairfax County and downtown DC. 

Today, there is just over 2 million square feet of public data center space in the Ashburn area, including the Savvis-operated/DLR-owned facilities a couple miles away on Ridgetop Circle and Nokes Boulevard, which have a Sterling address.   Those facilities are adjacent to the Dulles Town Center mall, which itself was built in 1999, and are surrounded by shopping centers, and new apartment and townhouse developments.   Meanwhile,  the Ashburn clusters tend to be slightly more rural, sitting west of Route 28, which runs right into the Dulles Airport entrance, and used to mark the end of civilization for many DC area residents.

The primary hub for data centers in Ashburn is a collection of interconnected roads - Beaumeade Circle, Hastings Drive, Chillum Place, and Filigree Court, which are less than a mile down Loudoun County Parkway from the Washington Redskins training facility.    The large former WorldCom/now Verizon Business office complex is another mile down Loudoun County Parkway.    And if you continue another half mile down that road, you come to the DLR cluster at Devin Shafron Drive.

DLR's new data center at 43915 Devin Shafron Drive

On Devin Shafron, there is a small patch of dirt and grass with a Digital Realty "for lease" sign in front, while nearby on Red Rum Drive, office REIT First Potomac Realty (FPO) recently bought the Corporate Campus at Ashburn Center, 123,000 feet of which are leased to managed hosting provider Latisys, which held a grand opening there last Thursday.  Among the established properties, Equinix's DC2 has long been the place to be, with a long list of financial, media, and telecom clients including MasterCard, The Motley Fool, Level 3, Internap, Electronic Arts, BT North America, and Accenture.   Around the corner from there on Hastings Drive, DC-based DFT has attracted its own set of brand name clients with Rackspace, Facebook, Yahoo, and Match.com.

This tenant mix in Ashburn reflects that this is the leading east coast data center hub, bringing together some of the largest telecom providers and most highly visited websites in the world.   In the 2010s, Ashburn is carrying on Northern Virginia's 1990s legacy as the hub of ISPs and internet connectivity.

Ashburn Data Centers
		Rentable Sq Ft	Tenants
DFT	ACC2 44490 Chillum Place	53,000	Yahoo
	ACC3 Hastings Drive	80,000
	ACC4 44480 Hastings Drive	172,000	Rackspace, Yahoo, Match.com., Facebook
	ACC5 Phase 1	86,000	Facebook
	ACC5 Phase 2	86,000
		477,000
DLR	21561/21571 Beaumeade Circle	164,453	AT&T
	43881 Devin Shafron Drive	180,000	FAA
	43791 Devin Shafron Drive	132,086	Morgan Stanley
	43831 Devin Shafron Drive	180,000	Amazon.com
	43915 Devin Shafron Drive	132,000
	21110 Ridgetop Circle, Sterling	135,513	Savvis
	45901/45845 Nokes Boulevard, Sterling	167,160	Savvis
	44470 Chillum Place	95,440	Equinix (DC3)
		1,186,652
EQIX	44470 Chillum Place	Leased from DLR	DC3
	21715 Filigree Court	147,600	DC2
	21701 Filigree Court	92,000	DC5
	21711 Filigree Court	43,000	DC1
	21721 Filigree Ct.	148,000	DC6
	21691 Filigree Court	100,000	DC4
		530,600
First Potomac Realty
	21635 Red Rum Drive	123,000	Latisys
	Total	2,317,252

Equinix Would Make a Terrible REIT

By David Gross

Citigroup put out a note last week arguing that Equinix (EQIX) should consider becoming a REIT in order to close a gap in its market value relative to Digital Realty (DLR) and DuPont Fabros (DFT). This would be a terrible idea though for the collocation provider. Co-lo and data center REITs remain very separate businesses, with different operating and financial requirements, and in many respects they're growing further apart.

The primary financial difference between providing co-lo space and building space is the number of people a provider has to pay. DLR generates over $2 million dollars in revenue per employee, Equinix just $600,000. DLR, DFT, and COR, like most REITs, need to generate NOI (net operating income) margins of about 65% to justify the high cash flow/high dividend strategy needed for that form of business. While less hands-on than managed services, which often entail a lot of software configuration, co-location is not a real estate business. It requires far more internal experts in areas like database management, network technology, and industry-specific sales support than a typical data center REIT has on staff. The additional staffing needed to do this in the co-lo business eats into operating margins, and makes it financially unsuitable for the REIT structure.

A co-lo provider needs to generate more revenue per dollar invested in fixed assets than a REIT to offset the higher staffing requirements. Equinix has been producing about 40 cents of revenue per dollar invested in PP&E compared to around 20 cents for DLR and DFT. Essentially, co-lo is more labor-intensive, less capital-intensive than the data center REIT business, which makes mixing the two very difficult.

It's easy to look at stock valuations and rush to judgments about quick fixes that could temporarily lift the price. But the trend is for co-location providers to lease space from REITs, as Telx is doing with DLR. Perhaps sometime in the future when it slows down its expansion, Equinix could consider paying some kind of dividend, but bringing its productivity and fixed asset ratios into line for a higher yielding REIT would require destroying existing operations, which would cause a lot more problems for the stock than its current valuation gap.

CoreSite Raises $270.4 Million, Prices at Midpoint, IPO's Today

By David Gross

CoreSite (COR) priced at $16, in the middle of its projected $15-$17 range, and begins trading today on NYSE. The offering raised a total of $270.4 million for the data center REIT, which will be the third publicly traded stock in that category, along with DLR and DFT.

We have added CoreSite to the list of stocks tracked in the ticker in the widget in the right column.

CoreSite to Debut This Week

by David Gross

DLR is near its 52 week high, DFT is barely 10% off of its annual peak, and it looks like they will be getting a peer this week, as CoreSite prepares to becomes the 3rd publicly traded data center REIT.   Like the other REITs, CoreSite is planning to list on NYSE, and is expected to trade under the ticker "COR".

According to the S-11 CoreSite filed last week, the company is planning to offer 16.9 million shares, and raise approximately $246 million.   Like most REITs and co-lo providers, the company's portfolio skews heavily to major markets, with the Boston, NY, SF, DC, and LA metro areas accounting for 98% of its annualized rent.   This emphasis on a handful of top regions is one reason why data center geographical markets cannot be treated like office markets, although this is not stopping old school real estate firms from trying to force fit data centers into vacancy models better suited for commercial offices.

Co-location provider Telx, whose S-1 is beginning to show signs of age, has yet to price its shares in preparation for a public offering, though it would be surprising if it remained on the sidelines much longer, particularly with its peer Equinix (EQIX) up 20% since July.

DuPont Fabros Revenue Up 21% Y/Y to $59 Million

DuPont Fabros (DFT) is approaching a quarter billion dollar annual run rate. In its earnings release, the company narrowd annual guidance slightly to a range of $1.30 to $1.40 from a previous range of $1.25 to $1.45.

The stock has traded flat after hours. The call will be held tomorrow morning at 10am.

Facebook's First Company-Owned Data Center to Open in Six Months

Facebook's Prineville, Oregon data center is set to open in six months. The social media company's primary existing centers are the DuPont Fabros (DFT) facility in the DC area and the Digital Realty Trust (DLR) center in Santa Clara.

Located in central Oregon, Prineville is about two hours from the new Google facility in The Dalles. High traffic websites have sought out the Pacific Northwest because of its low cost hydro and windpower. Meanwhile, the wholesalers and co-location providers continue to focus instead on access to high bandwidth Internet exchange points in DC/Northern Virginia and Silicon Valley.