Facebook Makes Big Investment in Data Centers

Facebook has made a major commitment to its future infrastructure, locking down a large chunk of data center space in northern Virginia that will provide room for thousands of additional servers to power its fast-growing social networking hub. The lease in Ashburn, Va., which doesn't start until 2011, represents a substantial financial commitment - as much as $125 million over the life of the lease, by some analysts' math.   

Facebook has pre-leased 33,000 square feet of additional space in a huge data center being built by DuPont Fabros Technology in Ashburn, Virginia known as ACC5. Facebook already operates a data center in an adjacent building known as ACC4, and is about to move into about 30,000 square feet of space it has leased in the first phase of ACC5, which has just opened to tenants.

Planning Ahead for Major Growth
The new lease is in Phase II of ACC5, which has not yet been completed, and provides Facebook with 6.8 megawatts of power to support its IT gear. The lease doesn't begin until January of 2011, meaning Facebook is planning ahead and expecting to fill the space in its first two Virginia data centers within the next 15 months. Facebook, which won't begin making payments until the lease commences, wouldn't comment on the length or total outlay involved in the agreement.

"We do not disclose specifics with regard to our lease financials, but we can confirm that we have signed an agreement," Facebook said in a statement. "This agreement continues with our effort to add data center capacity to support our growing business."

The new Facebook lease is the biggest example yet a trend in which users with large requirements are locking down space in northern Virginia, presumably to stay ahead of capacity constraints.   

"It's incredible that there's someone grabbing 6 megawatts for 2011," said one industry source who closely tracks the northern Virginia market. "You're either thinking you may not get that price later on, or that much space may not be available at all."

Growth Keeps Accelerating
As its growth has accelerated past 250 million users, Facebook has managed its infrastructure costs through its relationships with the two largest “wholesale” data center landlords, DuPont Fabros and Digital Realty Trust. We previously estimated that Facebook was spending about $20 million to $25 million a year on its data center leases. That figure doesn't include the two new leases in ACC5.

Here’s what we know about Facebook’s additional data center footprint.

Funding Wrinkles for DuPont Fabros
The move offers some advantages to landlord DuPont Fabros, which used Facebook's previous lease to help raise $30 million in funding to complete construction. Lenders are more willing to finance data center construction with a lease in place. Facebook's commitment may make it easier for DuPont Fabros to raise the $80 million needed to complete construction of Phase II.

If it isn't able to raise additional funds, DuPont Fabros says it will offer Facebook an equivalent amount of space in the remaidner of Phase I of ACC5. But CEO Hossein Fateh expressed confidence that the company will raise the funds.  

"Between now and sometime in the first quarter, we are going to look at all the options we have and decide how we’re going to raise the money to build it," Fateh said in the company's recent earnings call, adding that DFT would prefer to use debt financing but  could also consider selling more stock. 

Details of the Deal
Here's what we know about Facebook's agreement, based on press releases from DuPont Fabros and SEC disclosures from other tenants. In its second quarter earnings, DuPont Fabros announced two leases representing $275 million in contract value.

One of the leases was an announced deal with Rackspace Hosting (RAX) in Chicago. Analysts from Stifel Nicholas have estimated the value of the Rackspace lease as $140 million to $150 million. The second tenant's identity was not revealed by DuPont Fabros, but is now known to be Facebook.  Given DFT's statement that the two leases total $275 million in revenue, that suggests a value of $125 million to $135 million for the Facebook lease.

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