Strong Leasing Boosts Shares of DuPont Fabros

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The ACC5 data center, one of the northern Virginia properties operated by DuPont Fabros Technology.

Hossein Fateh, the President and CEO of data center developer DuPont Fabros Technology, is very clear about the company's priority. "Leasing continues to be our relentless focus," said Fateh.

That focus has helped DuPont Fabros (DFT) lease 125,716 square feet of data center space in the first nine months of 2011, equal to 23.6 megawatts of critical load and more than the company leased in all of 2010. That includes three new leases in its data center in Piscataway, New Jersey, totaling 2.2 megawatts of critical power.

The New Jersey leases mean that DuPont Fabros' huge NJ1 facility is now 34 percent leased, and will help further allay concerns that the New Jersey market is overbuilt, with too much vacant inventory of wholesale data center space. Digital Realty Trust, one of DFT's primary competitors, reported this week that it had seen a rebound in demand in the Garden State, with up to 42 megawatts of demand and just 24 megawatts of available supply. Fateh would not comment on Digital Realty's data, but said he is pleased with the activity that DuPont Fabros is seeing.

DFT Shares Rise on Results

"I think New Jersey's coming along," said Fateh. "I see it as a good, solid market." He said the new tenants include companies from the cloud computing and financial services sectors.

Those leases helped boost DuPont Fabros' revenues to $73.8 million for the third quarter of 2011, a 22 percent improvement over the third quarter of 2010.
Funds from Operations (FFO) for the quarter was $0.44 per share, a 19 percent increase from $0.37 per share in the year ago quarter. Those results cheered investors, who bid up DFT shares by $2.20 to $21.93 a share in afternoon trading, a gain of 11 percent for the session.

Fateh's quarterly earnings calls with securities analysts always provide an informative overview of the leasing environment for wholesale data center space, and today's call was no exception. Fateh said competition in the Silicon Valley market had led the company to adjust some assumptions about its Santa Clara facility, which opened for business on Oct. 1 with 18 megawatts of critical power load. Just 13 percent of that space has been leased thus far.

Competition in Silicon Valley

"We have slightly lowered our rental assumptions in Santa Clara," said Fateh. "There are one or two private equity players in that market that have done deals that (publicly-held) players aren't willing to do. The majority of that private equity space is now gone. Whether the rents will ratchet up or remain at a lower level, I'm uncertain. We remain confident in the demand in the Santa Clara market, and believe that over the long term we are well positioned to take advantage of this."

Fateh didn't name names. Privately-held Vantage Data Centers has leased 93 percent of the space at its first two data centers in Santa Clara this year, while new space is also available at facilities from Server Farm Realty and QTS, which are also privately-held. Other publicly-held players with space in Santa Clara include Digital Realty Trust (DLR) and CoreSite Realty (COR)

Fateh said he didn't see competition from privately-held players impacting pricing in other regions. "At the moment, I'd says this situation is isolated to California," he said. "We haven't seen it anywhere else."

Certainly not in northern Virginia, which serves as home base for DuPont Fabros. "Northern Virginia continues to be our best market," Fateh said. "It's the strongest market in the country, and we're the dominant provider." He said DFT was tracking at least five large data center requirements, and he had "zero concerns" about leasing ACC6, the company's newest property in its Ashburn Corporate Campus.

The Economy and the Data Center Market

Fateh also discussed concerns about the global economy, which could factor into U.S. companies' decisions on spending. He said that a cautious approach is in order, but noted that the impact of a slowing economy on the data center industry is not always predictable.

"I am worried a little bit about the macro environment," said Fateh. "Data centers are one of the sectors in real estate that have continued to grow. Previous (economic downturns) have not affected the data center market.

"I'm a little worried about some of the decision-making based on what's going on in the world. But in a world that is uncertain, we may see companies outsourcing their data centers instead of doing it themselves. So it could also turn out that this environment will help us."