DuPont Fabros Reports Slower Leasing

DuPont Fabros Technology (DFT) said today that leasing at its data centers has slowed slightly due to a longer sales cycle for enterprise companies, who are the primary customers for the company's newly-opened Chicago data center. DuPont Fabros executives said they remain highly confident about demand for the company's facilities, and expect to have no trouble meeting their revenue projections.

"We feel demand outpaces supply and the market is healthy," said Hossein Fateh, the president and CEO of DuPont Fabros. "In the current economic climate, the decision to sign leases is now taking longer, particularly in the enterprise market. We originally hoped to be 100 percent leased in ACC4 (the company's new data center in Ashburn, Virginia) and we are currently at 86 percent. We also hoped to be further ahead on leasing our Chicago facility."

Fateh discussed the leasing in a conference call with analysts this morning. The company also said it had raised the low end of its 2008 guidance on funds from operations (FFO) from $1.20 to $1.24, while keeping the top end estimate at $1.30 per share.

The report of slower leasing differs from the experience at Digital Realty Trust (DLR), the other large REIT focused on the data center sector, which reported strong demand and higher leasing rates in its second quarter earnings and raised its 2008 FFO projection. Colocation providers Equinix (EQIX) and Switch and Data (SDXC) also reported strong demand for space and raised their revenue guidance.

Fateh wouldn't draw direct comparisons between DuPont Fabros' sales pipeline and demand projections by Digital Realty, but said the market remains healthy, and the slower leasing represents a longer decision process for enterprise clients.

DuPont Fabros' Chicago data center in Elk Grove Village, Illinois opened August 1 and is the first project it has built outside of northern Virginia, where the companies' facilities have been quickly leased to Internet companies. Microsoft (MSFT) and Yahoo (YHOO) account for 68 percent of DFT's revenue, while other customers include Facebook and MySpace.

Internet companies tend to move quickly to expand data center capacity, Fateh said, while enterprise companies are taking longer to make leasing decisions. That trend has become more pronounced as the U.S. economy has struggled, Fateh said, as large expenditures get closer scrutiny.

As a result, DuPont Fabros said it has increased its timetable for leasing its Chicago facility and another under construction in Ashburn (ACC5) to 18 to 24 months. Fateh said this adjustment wouldn't affect the company's financial performance, because the management team's conservative estimates assumed the facilities might take up to three years to lease.

For the quarter ended June 30, DuPont Fabros reported net income of $5.9 million ($0.17 per share) and funds from operations of $23.2 million ($0.35 per share). Revenues were $42.1 million, an increase of $1 million from the first quarter of 2008.

The company's data center portfolio of 539,198 square feet of raised floor space was 93.9 percent leased, compared to 93.2 percent at the close of the first quarter. During the second quarter DuPont Fabros signed one lease for 0.6 megawatts of critical load at ACC4 in Ashburn.

Despite the longer leasing timetables, Fateh said the company had no plans to delay construction on its current projects. DuPont Fabros recently began construction at a new Ashburn facility (ACC5) as well as a data center in Piscataway, NJ that will target financial clients. Central New Jersey has been a hot data center market, and should easily support the additional space. "We actually feel quite good about demand in New Jersey," Fateh said.