UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d)
of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 10, 2017
DIGITAL REALTY TRUST, INC.
DIGITAL REALTY TRUST, L.P.
(Exact name of registrant as specified in its charter)
Maryland | 001-32336 | 26-0081711 | ||
Maryland | 000-54023 | 20-2402955 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
Four Embarcadero Center, Suite 3200 San Francisco, California |
94111 | |
(Address of principal executive offices) | (Zip Code) |
(415) 738-6500
(Registrants telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☒ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Digital Realty Trust, Inc.: | Emerging growth company ☐ | |
Digital Realty Trust, L.P.: | Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Digital Realty Trust, Inc.: ☐
Digital Realty Trust, L.P.: ☐
Item 8.01 Other Events.
As previously announced, on June 8, 2017, Digital Realty Trust, Inc. (DLR) entered into an Agreement and Plan of Merger (the Merger Agreement) by and among DLR, Digital Realty Trust, L.P. (DLR OP), Penguins REIT Sub, LLC (REIT Merger Sub), Penguins OP Sub 2, LLC and Penguins OP Sub, LLC (collectively, the DLR Parties), on the one hand and DuPont Fabros Technology, Inc. (DFT) and DuPont Fabros Technologies, L.P. (DFT OP, and, together with DFT, the DFT Parties), on the other hand, pursuant to which, subject to the satisfaction or waiver of certain conditions, DFT will be merged with and into REIT Merger Sub (the company merger) and Penguins OP Sub, LLC will be merged with and into DFT OP (the partnership merger and, together with the company merger, the mergers). The combined company after the mergers (the Combined Company) will retain the name Digital Realty Trust, Inc.
Risks Related to the Mergers
There are a number of significant risks related to the mergers, including the risk factors enumerated below.
The exchange ratio will not be adjusted in the event of any change in the stock prices of either DLR or DFT.
Upon the consummation of the mergers, each outstanding share of DFT common stock will be converted automatically into the right to receive 0.545 shares of DLR common stock, with cash paid in lieu of any fractional shares, without interest. The exchange ratio of 0.545 will not be adjusted for changes in the market prices of either shares of DLR common stock or shares of DFT common stock. Changes in the market price of shares of DLR common stock prior to the mergers will affect the market value of the merger consideration that DFT stockholders will receive on the closing date of the mergers. Stock price changes may result from a variety of factors (many of which are beyond the control of DLR and DFT), including the following factors:
| market reaction to the announcement of the mergers and the prospects of the Combined Company; |
| changes in the respective businesses, operations, assets, liabilities and prospects of DLR and DFT; |
| changes in market assessments of the business, operations, financial position and prospects of either company or the Combined Company; |
| market assessments of the likelihood that the mergers will be completed; |
| interest rates, general market and economic conditions and other factors generally affecting the market prices of DLR common stock and DFT common stock; |
| federal, state and local legislation, governmental regulation and legal developments in the businesses in which DLR and DFT operate; and |
| other factors beyond the control of DLR and DFT, including those described or referred to elsewhere in this Current Report. |
The market price of shares of DLR common stock at the closing of the mergers may vary from its price on the date the merger agreement was executed, on the date of this Current Report and on the date of the special meetings of DLR and DFT. As a result, the market value of the merger consideration represented by the exchange ratio will also vary. For example, based on the range of trading prices of shares of DLR common stock during the period after June 8, 2017, the last trading day before DLR and DFT announced the mergers, through July 6, 2017, the latest practicable date before the date of this Current Report, the exchange ratio of 0.545 represented a market value ranging from a low of $59.26 to a high of $66.23.
Because the mergers will be completed after the date of the DLR and DFT special meetings, at the time of each special meeting, stockholders will not know the exact market value of the shares of DLR common stock upon completion of the mergers. If the market price of shares of DLR common stock increases between the date the merger agreement was signed or the date of the DLR and DFT special meetings and the closing of the mergers, DFT stockholders could receive shares of DLR common stock that have a market value upon completion of the mergers that is greater than the market value of such shares calculated pursuant to the exchange ratio on the date the merger agreement was signed or on the date of the special meetings, respectively. Additionally, if the market price of
shares of DLR common stock declines between the date the merger agreement was signed or the date of the DLR and DFT special meetings and the closing of the mergers, DFT stockholders could receive shares of DLR common stock that have a market value upon completion of the mergers that is less than the market value of such shares calculated pursuant to the exchange ratio on the date the merger agreement was signed or on the date of the special meetings, respectively.
Therefore, while the number of shares of DLR common stock to be issued per share of DFT common stock is fixed, (1) DLR stockholders cannot be sure of the market value of the merger consideration that will be paid to DFT stockholders upon completion of the mergers and (2) DFT stockholders cannot be sure of the market value of the merger consideration they will receive upon completion of the mergers.
DLR and DFT stockholders will be diluted by the mergers.
The mergers will dilute the ownership position of DLR stockholders and result in DFT stockholders having an ownership stake in the Combined Company that is smaller than their current stake in DFT. Upon completion of the mergers, DLR estimates that continuing DLR stockholders will own approximately 77% of the issued and outstanding common stock of the Combined Company, and former DFT security holders will own approximately 23% of the issued and outstanding common stock of the Combined Company, assuming (1) all of the unvested DFT performance stock unit awards vest at the maximum level (i.e., 300% of target), provided that the actual number of DFT performance stock units that vest at the effective time of the company merger will be determined based on the greater of (i) the applicable target-level of performance or (ii) actual performance through the effective time of the company merger in accordance with the applicable award agreement, as determined by DFT in its sole discretion, (2) all of the stock options received by DFT stockholders to purchase shares of DLR common stock are subsequently exercised, and (3) all of the limited partners (excluding DFT) of DFT OP elect to receive shares of DLR common stock instead of DLR OP common units. Consequently, DLR stockholders and DFT stockholders, as a general matter, will have less influence over the management and policies of the Combined Company after the effective time of the company merger than each currently exercise over the management and policies of DLR and DFT, as applicable.
Completion of the mergers is subject to many conditions and if these conditions are not satisfied or waived, the mergers will not be completed, which could result in the requirement that DLR or DFT pay certain termination fees.
The merger agreement is subject to many conditions which must be satisfied or waived in order to complete the mergers. The mutual conditions of the parties include, among others: (i) the approval by the DFT stockholders of the company merger and the other transactions contemplated by the merger agreement; (ii) the approval by DLR stockholders of the issuance of DLR common stock to DFT stockholders; (iii) the absence of any law, order or injunction that would prohibit, restrain or make illegal the mergers; (iv) the approval for listing on the NYSE of DLR common stock to be issued in the mergers; and (v) the effectiveness of the registration statement on Form S-4 to be filed by DLR for purposes of registering the DLR common stock to be issued in connection with the mergers. In addition, each partys obligation to consummate the mergers is subject to certain other conditions, including, among others: (a) the accuracy of the other partys representations and warranties (subject to customary materiality qualifiers and other customary exceptions); (b) the other partys compliance with its covenants and agreements contained in the merger agreement (subject to customary materiality qualifiers); (c) the absence of any change, event, circumstance or development arising during the period from the date of the merger agreement until the effective time of the company merger that has had or is reasonably likely to have a material adverse effect on the other party; (d) the receipt of an opinion of counsel of the other party to the effect that such party has been organized and has operated in conformity with the requirements for qualification and taxation as a REIT; and (e) the receipt of an opinion of counsel of each party to the effect that the company merger will qualify as a reorganization within the meaning of Section 368(a) of the Code.
There can be no assurance that the conditions to closing of the mergers will be satisfied or waived or that the mergers will be completed. Failure to consummate the mergers may adversely affect DLRs or DFTs results of operations and business prospects for the following reasons, among others: (i) each of DLR and DFT will incur certain transaction costs, regardless of whether the proposed mergers close, which could adversely affect each companys respective financial condition, results of operations and ability to make distributions to its stockholders; and (ii) the proposed mergers, whether or not they close, will divert the attention of certain management and other key employees of DLR and DFT from ongoing business activities, including the pursuit of other opportunities that could be beneficial to DLR or DFT, respectively. In addition, DLR or DFT may terminate the merger agreement under certain circumstances, including, among other reasons, if the mergers are not completed by the Outside Date, and if the merger agreement is terminated under certain circumstances specified in the merger agreement, DLR may be required to pay DFT a termination fee of $300 million, and DFT may be required to pay DLR a termination fee of $150 million. If the mergers are not consummated, the price of DLRs common stock might decline.
Failure to complete the mergers could negatively impact the stock prices and the future business and financial results of both DLR and DFT.
If the mergers are not completed, the ongoing businesses of DLR and DFT could be adversely affected and each of DLR and DFT will be subject to a variety of risks associated with the failure to complete the mergers, including the following:
| DFT being required, under certain circumstances, to pay to DLR a termination fee of $150 million; |
| DLR being required, under certain circumstances, to pay to DFT a termination fee of $300 million; |
| DLR and/or DFT having to pay certain costs relating to the proposed mergers, such as legal, accounting, financial advisor, filing, printing and mailing fees; and |
| diversion of DLR and DFT management focus and resources from operational matters and other strategic opportunities while working to implement the mergers. |
If the mergers are not completed, these risks could materially affect the business, financial results and stock prices of both DLR and DFT.
The pendency of the mergers could adversely affect the business and operations of DLR and DFT.
Prior to the effective time of the company merger, some customers, prospective customers or vendors of each of DLR and DFT may delay or defer decisions, which could negatively affect the revenues, earnings, cash flows and expenses of DLR and DFT, regardless of whether the mergers are completed. Similarly, current and prospective employees of DLR and DFT may experience uncertainty about their future roles with the Combined Company following the mergers, which may materially adversely affect the ability of each of DLR and DFT to attract and retain key personnel during the pendency of the mergers. In addition, due to operating restrictions in the merger agreement, each of DLR and DFT may be unable, during the pendency of the mergers, to pursue strategic transactions, undertake significant capital projects, undertake certain significant financing transactions and otherwise pursue other actions, even if such actions would prove beneficial.
The merger agreement contains provisions that could discourage a potential competing acquirer of DFT or could result in a competing acquisition proposal being at a lower price than it might otherwise be.
The merger agreement contains provisions that, subject to limited exceptions necessary to comply with the duties of the DFT Board, restrict the ability of DFT to solicit, initiate or knowingly facilitate any third party proposals to acquire beneficial ownership of at least 20% of the assets of, equity interest in, or businesses of, DFT. Prior to receiving DFT stockholder approval of the mergers, DFT may negotiate with a third party after receiving an unsolicited written proposal if the DFT Board determines in good faith, after consultation with its financial advisors and outside legal counsel, that the unsolicited proposal could reasonably be likely to result in a transaction that is more favorable to the DFT stockholders from a financial point of view than the mergers. Once a third party proposal is received, DFT must notify DLR within 24 hours following receipt of the proposal and keep DLR informed of the status and terms of the proposal and associated negotiations. In response to such a proposal, DFT may, under certain circumstances, withdraw or modify its recommendation to DFT stockholders with respect to the mergers, and enter into an agreement to consummate a competing transaction with a third party, if the DFT Board determines in good faith, after consultation with outside legal counsel, that the competing proposal is more favorable to DFT stockholders from a financial point of view and that failure to take such action would be inconsistent with its duties under applicable law, and DFT pays the $150 million termination fee to DLR.
These provisions could discourage a potential competing acquirer that might have an interest in acquiring all or a significant part of DFT from considering or proposing such an acquisition, even if the potential competing acquirer was prepared to pay consideration with a higher per share value than the value proposed to be received or realized in the mergers, or might result in a potential competing acquirer proposing to pay a lower per share value than it might otherwise have proposed to pay because of the added expense of the termination fee that may become payable in certain circumstances under the merger agreement.
If the mergers are not consummated by the Outside Date, either DLR or DFT may terminate the merger agreement.
Either DLR or DFT may terminate the merger agreement if the mergers have not been consummated by the Outside Date. However, this termination right will not be available to a party if that party failed to fulfill its obligations under the merger agreement and that failure was a principle cause of, or resulted in, the failure to consummate the mergers.
There can be no assurance that DLR will be able to secure debt financing in connection with the mergers and the transactions contemplated by the merger agreement on acceptable terms, in a timely manner, or at all.
The mergers are not conditioned upon DLR having received any financing at or prior to the effective time of the company merger. However, in connection with the mergers and the transactions contemplated by the merger agreement, DLR has entered into bridge loan and mortgage loan commitment letters. The proceeds from any loan facilities obtained may be used, among other things, to pay costs and expenses incurred in connection with the mergers and the transactions contemplated by the merger agreement and to repay certain indebtedness of DFT and its subsidiaries. However, DLR has not entered into a definitive agreement for debt financing nor has it secured alternative financing. There can be no assurance that DLR will be able to secure such financing in a timely manner, or at all. If DLR is unable to secure such financing, DLR will nonetheless be required to close the mergers under the terms of the merger agreement.
Some of the directors and executive officers of DFT have interests in the mergers that are different from, or in addition to, those of the other DFT stockholders.
Some of the directors and executive officers of DFT have arrangements that provide them with interests in the mergers that are different from, or in addition to, those of the DFT stockholders, generally. These interests include, among other things, the continued service as a director or officer of the Combined Company or a severance payment if terminated upon, or following, consummation of the mergers. These interests, among other things, may influence or may have influenced the directors and executive officers of DFT to support or approve the company merger.
The mergers will result in changes to the board of directors of the Combined Company.
Upon completion of the mergers, the composition of the board of directors of the Combined Company will be different than the current DLR Board and the DFT Board. The DLR Board currently consists of ten directors and upon the consummation of the mergers, all of the directors of DLR immediately prior to the effective time of the company merger and two individuals designated by DFT, and reasonably satisfactory to DLR, are expected to comprise the board of directors of the Combined Company after the effective time of the company merger. As of the date of this Current Report the identities of the two additional board members to be designated by DFT are not known. This new composition of the board of directors of the Combined Company may affect the future decisions of the Combined Company.
Risks Related to the Combined Company Following the Mergers
The Combined Company expects to incur substantial expenses related to the mergers.
The Combined Company expects to incur substantial expenses in connection with completing the mergers and integrating the business, operations, networks, systems, technologies, policies and procedures of DFT with those of DLR. There are several systems that must be integrated, including accounting and finance and asset management. While DLR has assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond its control that could affect the total amount or the timing of the Combined Companys integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. As a result, the transaction and integration expenses associated with the mergers could, particularly in the near term, exceed the savings that the Combined Company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the integration of the businesses following the completion of the mergers.
Following the mergers, the Combined Company may be unable to integrate the businesses of DLR and DFT successfully and realize the anticipated synergies and other benefits of the mergers or do so within the anticipated timeframe.
The mergers involve the combination of two companies that currently operate as independent public companies and their respective operating partnerships. The Combined Company is expected to benefit from the elimination of duplicative costs associated with supporting a public company platform and the leveraging of state of the art technology and systems. These savings are expected to be realized upon full integration following the closing of the mergers. However, the Combined Company will be required to devote significant management attention and resources to integrating the business practices and operations of DLR and DFT. Potential difficulties the Combined Company may encounter in the integration process include the following:
| the inability to successfully combine the businesses of DLR and DFT in a manner that permits the Combined Company to achieve the cost savings anticipated to result from the mergers, which would result in the anticipated benefits of the mergers not being realized in the timeframe currently anticipated or at all; |
| the complexities associated with managing the combined businesses out of several different locations and integrating personnel from the two companies; |
| the additional complexities of combining two companies with different histories, cultures, regulatory restrictions, markets and customer bases; |
| potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the mergers; and |
| performance shortfalls as a result of the diversion of managements attention caused by completing the mergers and integrating the companies operations. |
For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the Combined Companys management, the disruption of the Combined Companys ongoing business or inconsistencies in the Combined Companys operations, services, standards, controls, procedures and policies, any of which could adversely affect the ability of the Combined Company to maintain relationships with tenants, vendors and employees or to achieve the anticipated benefits of the mergers, or could otherwise adversely affect the business and financial results of the Combined Company.
Following the mergers, the Combined Company may be unable to retain key employees.
The success of the Combined Company after the mergers will depend in part upon its ability to retain key DLR and DFT employees. Key employees may depart either before or after the mergers because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Combined Company following the mergers. Accordingly, no assurance can be given that DLR, DFT or, following the mergers, the Combined Company will be able to retain key employees to the same extent as in the past.
The Combined Companys anticipated level of indebtedness will increase upon completion of the mergers and will increase the related risks DLR now faces.
In connection with the mergers, the Combined Company will assume and/or refinance certain indebtedness of DFT and will be subject to increased risks associated with debt financing, including an increased risk that the Combined Companys cash flow could be insufficient to meet required payments on its debt. On March 31, 2017, DLR had indebtedness of $6.2 billion, including $0.6 billion of outstanding borrowings under its global revolving credit facility, a total of $6.2 billion of outstanding unsecured debt and a total of $3 million of outstanding mortgage debt. After giving effect to the mergers, the Combined Companys total pro forma consolidated indebtedness will increase. Taking into account DLRs existing indebtedness and the assumption and/or refinancing of indebtedness in the mergers, the Combined Companys pro forma consolidated indebtedness as of March 31, 2017, after giving effect to the mergers, would be approximately $7.8 billion, including $0.6 billion of outstanding borrowings under its global revolving credit facility, a total of $7.7 billion of outstanding unsecured debt and a total of $0.1 billion of outstanding mortgage debt. As of July 6, 2017, the latest practicable date before the date of this joint proxy statement/prospectus, DLR had an outstanding balance of $548.5 million for its global revolving credit facility, and DFT has an outstanding balance of $336.0 million for its revolving credit facility.
The Combined Companys increased indebtedness could have important consequences to holders of its common stock and preferred stock, including DFT stockholders who receive DLR common stock in the mergers, including:
| increasing the Combined Companys vulnerability to general adverse economic and industry conditions; |
| limiting the Combined Companys ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements; |
| requiring the use of a substantial portion of the Combined Companys cash flow from operations for the payment of principal and interest on its indebtedness, thereby reducing its ability to use its cash flow to fund working capital, acquisitions, capital expenditures and general corporate requirements; |
| limiting the Combined Companys flexibility in planning for, or reacting to, changes in its business and its industry; and |
| putting the Combined Company at a disadvantage compared to its competitors with less indebtedness. |
If the Combined Company defaults under a mortgage loan, it will automatically be in default under any other loan that has cross-default provisions, and it may lose the properties securing these loans. Although the Combined Company anticipates that it will pay off its mortgage payables as soon as prepayment penalties and other costs make it economically feasible to do so, the Combined Company cannot anticipate when such payment will occur.
The future results of the Combined Company will suffer if the Combined Company does not effectively manage its expanded operations following the mergers.
Following the mergers, the Combined Company expects to continue to expand its operations through additional acquisitions, some of which may involve complex challenges. The future success of the Combined Company will depend, in part, upon the ability of the Combined Company to manage its expansion opportunities, which may pose substantial challenges for the Combined Company to integrate new operations into its existing business in an efficient and timely manner, and upon its ability to successfully monitor its operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. There is no assurance that the Combined Companys expansion or acquisition opportunities will be successful, or that the Combined Company will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
Counterparties to certain significant agreements with DLR or DFT may exercise contractual rights under such agreements in connection with the mergers.
DLR and DFT are each party to certain agreements that give the counterparty certain rights following a change in control, including in some cases the right to terminate the agreement. Under some such agreements, the mergers may constitute a change in control and therefore the counterparty may exercise certain rights under the agreement upon the closing of the mergers. Any such counterparty may request modifications of their respective agreements as a condition to granting a waiver or consent under their agreement. There can be no assurances that such counterparties will not exercise their rights under these agreements, including termination rights where available, or that the exercise of any such rights under, or modification of, these agreements will not adversely affect the business or operations of the Combined Company.
The Combined Companys joint ventures could be adversely affected by the Combined Companys lack of sole decision-making authority, its reliance on its joint venture partners financial condition and disputes between the Combined Company and its joint venture partner.
DLR and DFT currently have joint venture investments that will constitute a portion of the Combined Companys assets upon consummation of the mergers. In addition, the Combined Company may enter into additional joint ventures after consummation of the mergers. These joint venture investments involve risks not present with a property wholly owned by the Combined Company, including that (i) one or more joint venture partners might become bankrupt or fail to fund a share of required capital contributions; (ii) one or more joint venture partners may have economic or other business interests or goals that are inconsistent with the Combined
Companys business interests or goals; (iii) one or more joint venture partners may be in a position to take action contrary to the Combined Companys instructions or requests, or its policies or objectives; or (iv) disputes between the Combined Company and one or more of its joint venture partners may result in litigation or arbitration that would increase the operating expenses of the Combined Company and divert management time and attention away from the business. The occurrence of one or more of the events described above could cause unanticipated disruption to the operations of the Combined Company or unanticipated costs and liabilities to the Combined Company, which could in turn adversely affect the financial condition, results of operations and cash flows of the Combined Company and limit its ability to make distributions to its stockholders.
Additional Information and Where to Find It
This communication does not constitute an offer to sell or a solicitation of an offer to buy any securities or a solicitation of any vote or approval. This communication is being made in respect of the proposed transaction involving the DLR Parties and the DFT Parties. The proposed transaction will be submitted to the stockholders of DLR and DFT for their consideration. In connection with the proposed transaction, DLR intends to file with the Securities and Exchange Commission (the SEC) a registration statement on Form S-4 that will include a joint proxy statement of DLR and DFT and that also constitutes a prospectus of DLR. DLR and DFT plan to file with the SEC other documents regarding the proposed transaction. STOCKHOLDERS ARE URGED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE PROPOSED TRANSACTION AND ANY OTHER RELEVANT DOCUMENTS CAREFULLY AND IN THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. After the registration statement has been declared effective by the SEC, a definitive joint proxy statement/prospectus will be mailed to DLRs stockholders. You may obtain copies of all documents filed with the SEC concerning the proposed transaction, free of charge, at the SECs website at www.sec.gov. In addition, stockholders may obtain free copies of the documents filed with the SEC by DLR by going to DLRs SEC Filings website page by clicking the SEC Filings link at investor.digitalrealty.com.
Interests of Participants
DLR and DFT and each of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of DLR in connection with the proposed transaction. Information regarding DLRs directors and executive officers is set forth in the DLRs proxy statement for its 2017 annual meeting of stockholders and its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which were filed with the SEC on March 29, 2017 and March 1, 2017, respectively. Information regarding DFTs directors and executive officers is set forth in DFTs proxy statement for its 2017 annual meeting of shareholders and its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which were filed with the SEC on April 13, 2017 and February 23, 2017, respectively. Additional information regarding persons who may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction will be contained in the proxy statement to be filed by DLR with the SEC when it becomes available.
Cautionary Statement Regarding Forward-Looking Statements
This communication contains certain forward-looking statements as that term is defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are predictive in nature, that depend on or relate to future events or conditions, or that include words such as believes, anticipates, expects, may, will, would, should, estimates, could, intends, plans or other similar expressions are forward-looking statements. Forward-looking statements involve significant known and unknown risks and uncertainties that may cause DLRs or DFTs actual results in future periods to differ materially from those projected or contemplated in the forward-looking statements as a result of, but not limited to, the following factors: the failure to receive, on a timely basis or otherwise, the required approvals by DLRs or DFTs stockholders; the risk that a condition to closing of the proposed transaction may not be satisfied; DLRs and DFTs ability to consummate the mergers; the possibility that the anticipated benefits and synergies from the proposed transaction cannot be fully realized or may take longer to realize than expected; the possibility that costs or difficulties related to the integration of DLRs and DFTs operations will be greater than expected; operating costs and business disruption may be greater than expected; the ability of DLR or the combined company to retain and hire key personnel and maintain relationships with providers or other business partners pending the consummation of the transaction; and the impact of legislative, regulatory and competitive changes and other risk factors relating to the industries in which DLR and DFT operate, as detailed from time to time in each of DLRs and DFTs reports filed with the SEC. There can be no assurance that the proposed transaction will in fact be consummated.
Additional information about these factors and about the material factors or assumptions underlying such forward-looking statements may be found under Item 1.A in each of DLRs and DFTs Annual Report on Form 10-K for the fiscal year ended December 31, 2016. DLR and DFT caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on forward-looking statements to make decisions with respect to the proposed transaction, stockholders and others should carefully consider the foregoing factors and other uncertainties and potential events. All subsequent written and oral forward-looking statements concerning the proposed transaction or other matters attributable to DLR and DFT or any other person acting on their behalf are expressly qualified in their entirety by the cautionary statements referenced above. The forward-looking statements contained herein speak only as of the date of this communication. Neither DLR nor DFT undertakes any obligation to update or revise any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, except as may be required by law.
Item 9.01. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The unaudited condensed consolidated interim financial statements of DFT as of March 31, 2017 and for the three months ended March 31, 2017 and 2016 are filed as Exhibit 99.1 hereto. The audited financial statements of DFT as of and for the years ended December 31, 2016, 2015 and 2014 are filed as Exhibit 99.2 hereto.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined balance sheet as of March 31, 2017 and the unaudited pro forma condensed combined income statements for the three months ended March 31, 2017 and the year ended December 31, 2017 of Digital Realty Trust, Inc. are filed as Exhibit 99.3 hereto. The unaudited pro forma condensed combined balance sheet as of March 31, 2017 and the unaudited pro forma condensed combined income statements for the three months ended March 31, 2017 and the year ended December 31, 2017 of Digital Realty Trust, L.P. are filed as Exhibit 99.4 hereto. Such unaudited pro forma condensed combined financial statements are not necessarily indicative of the financial position that actually would have existed or the operating results that actually would have been achieved if the adjustments set forth therein had been in effect as of the dates and for the periods indicated or that may be achieved in future periods and should be read in conjunction with the historical financial statements of DLR and DFT.
(d) Exhibits.
Exhibit No. |
Description | |
23.1 | Consent of Ernst & Young LLP, Independent Registered Accounting Firm. | |
99.1 | Unaudited condensed consolidated financial statements of DuPont Fabros Technology, Inc. as of March 31, 2017 and for the three months ended March 31, 2017 and 2016. | |
99.2 | Audited financial statements of DuPont Fabros Technology, Inc. as of and for the years ended December 31, 2016, 2015 and 2014. | |
99.3 | Unaudited pro forma condensed combined financial information of Digital Realty Trust, Inc. as of March 31, 2017 and for the year ended December 31, 2016 and the three months ended March 31, 2017. | |
99.4 | Unaudited pro forma condensed combined financial information of Digital Realty Trust, L.P. as of March 31, 2017 and for the year ended December 31, 2016 and the three months ended March 31, 2017. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned hereunto duly authorized.
Date: July 10, 2017
Digital Realty Trust, Inc. | ||
By: | /s/ JOSHUA A. MILLS | |
Joshua A. Mills | ||
Senior Vice President, General Counsel and Secretary | ||
Digital Realty Trust, L.P. | ||
By: | Digital Realty Trust, Inc. | |
Its general partner | ||
By: | /s/ JOSHUA A. MILLS | |
Joshua A. Mills | ||
Senior Vice President, General Counsel and Secretary |
Exhibit Index
Exhibit No. |
Description | |
23.1 | Consent of Ernst & Young LLP, Independent Registered Accounting Firm. | |
99.1 | Unaudited condensed consolidated financial statements of DuPont Fabros Technology, Inc. as of March 31, 2017 and for the three months ended March 31, 2017 and 2016. | |
99.2 | Audited financial statements of DuPont Fabros Technology, Inc. as of and for the years ended December 31, 2016, 2015 and 2014. | |
99.3 | Unaudited pro forma condensed combined financial information of Digital Realty Trust, Inc. as of March 31, 2017 and for the year ended December 31, 2016 and the three months ended March 31, 2017. | |
99.4 | Unaudited pro forma condensed combined financial information of Digital Realty Trust, L.P. as of March 31, 2017 and for the year ended December 31, 2016 and the three months ended March 31, 2017. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements (Nos. 333-207330, 333-195524, 333-147746 and 333-121353) on Form S-8 of Digital Realty Trust, Inc., (Nos. 333-203535 and 333-129688) on Form S-3 of Digital Realty Trust, Inc. and (No. 333-203535-01) on Form S-3 of Digital Realty Trust, L.P. our reports dated February 23, 2017, with respect to the consolidated financial statements and schedules of DuPont Fabros Technology, Inc. and DuPont Fabros Technology, L.P. included in this Form 8-K of Digital Realty Trust, Inc.
/s/ Ernst & Young LLP
Tysons, Virginia
July 5, 2017
Exhibit 99.1
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
March 31, 2017 |
December 31, 2016 |
|||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Income producing property: |
||||||||
Land |
$ | 103,304 | $ | 105,890 | ||||
Buildings and improvements |
3,019,725 | 3,018,361 | ||||||
|
|
|
|
|||||
3,123,029 | 3,124,251 | |||||||
Less: accumulated depreciation |
(689,099 | ) | (662,183 | ) | ||||
|
|
|
|
|||||
Net income producing property |
2,433,930 | 2,462,068 | ||||||
Construction in progress and property held for development |
493,442 | 330,983 | ||||||
|
|
|
|
|||||
Net real estate |
2,927,372 | 2,793,051 | ||||||
Cash and cash equivalents |
44,980 | 38,624 | ||||||
Rents and other receivables, net |
9,504 | 11,533 | ||||||
Deferred rent, net |
121,340 | 123,058 | ||||||
Deferred costs, net |
24,560 | 25,776 | ||||||
Prepaid expenses and other assets |
50,256 | 46,422 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,178,012 | $ | 3,038,464 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Liabilities: |
||||||||
Line of credit |
$ | 197,819 | $ | 50,926 | ||||
Mortgage notes payable, net of deferred financing costs |
109,592 | 110,733 | ||||||
Unsecured term loan, net of deferred financing costs |
249,089 | 249,036 | ||||||
Unsecured notes payable, net of discount and deferred financing costs |
837,895 | 837,323 | ||||||
Accounts payable and accrued liabilities |
29,647 | 36,909 | ||||||
Construction costs payable |
75,884 | 56,428 | ||||||
Accrued interest payable |
6,273 | 11,592 | ||||||
Dividend and distribution payable |
46,426 | 46,352 | ||||||
Prepaid rents and other liabilities |
72,449 | 81,062 | ||||||
|
|
|
|
|||||
Total liabilities |
1,625,074 | 1,480,361 | ||||||
Redeemable noncontrolling interests operating partnership |
579,329 | 591,101 | ||||||
Commitments and contingencies |
| | ||||||
Stockholders equity: |
||||||||
Preferred stock, $.001 par value, 50,000,000 shares authorized: |
||||||||
Series C cumulative redeemable perpetual preferred stock, 8,050,000 shares issued and outstanding at March 31, 2017 and December 31, 2016 |
201,250 | 201,250 | ||||||
Common stock, $.001 par value, 250,000,000 shares authorized, 77,836,170 shares issued and outstanding at March 31, 2017 and 75,914,763 shares issued and outstanding at December 31, 2016 |
78 | 76 | ||||||
Additional paid in capital |
773,321 | 766,732 | ||||||
Retained earnings |
| | ||||||
Accumulated other comprehensive loss |
(1,040 | ) | (1,056 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
973,609 | 967,002 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 3,178,012 | $ | 3,038,464 | ||||
|
|
|
|
See accompanying notes
1
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except share and per share data)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Revenues: |
||||||||
Base rent |
$ | 91,268 | $ | 82,533 | ||||
Recoveries from tenants |
45,295 | 38,694 | ||||||
Other revenues |
2,921 | 2,922 | ||||||
|
|
|
|
|||||
Total revenues |
139,484 | 124,149 | ||||||
Expenses: |
||||||||
Property operating costs |
40,191 | 35,955 | ||||||
Real estate taxes and insurance |
5,010 | 5,316 | ||||||
Depreciation and amortization |
28,207 | 25,843 | ||||||
General and administrative |
6,812 | 5,575 | ||||||
Other expenses |
2,705 | 2,349 | ||||||
|
|
|
|
|||||
Total expenses |
82,925 | 75,038 | ||||||
|
|
|
|
|||||
Operating income |
56,559 | 49,111 | ||||||
Interest: |
||||||||
Expense incurred |
(11,459 | ) | (11,569 | ) | ||||
Amortization of deferred financing costs |
(825 | ) | (845 | ) | ||||
|
|
|
|
|||||
Net income |
44,275 | 36,697 | ||||||
Net income attributable to redeemable noncontrolling interests operating partnership |
(5,712 | ) | (5,478 | ) | ||||
Net income attributable to controlling interests |
38,563 | 31,219 | ||||||
Preferred stock dividends |
(3,333 | ) | (6,811 | ) | ||||
|
|
|
|
|||||
Net income attributable to common shares |
$ | 35,230 | $ | 24,408 | ||||
|
|
|
|
|||||
Earnings per share basic: |
||||||||
Net income attributable to common shares |
$ | 0.46 | $ | 0.36 | ||||
|
|
|
|
|||||
Weighted average common shares outstanding |
76,670,425 | 66,992,995 | ||||||
|
|
|
|
|||||
Earnings per share diluted: |
||||||||
Net income attributable to common shares |
$ | 0.45 | $ | 0.36 | ||||
|
|
|
|
|||||
Weighted average common shares outstanding |
77,651,406 | 67,846,115 | ||||||
|
|
|
|
|||||
Dividends declared per common share |
$ | 0.50 | $ | 0.47 | ||||
|
|
|
|
See accompanying notes
2
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Net income |
$ | 44,275 | $ | 36,697 | ||||
Other comprehensive income: |
||||||||
Foreign currency translation adjustments |
18 | | ||||||
|
|
|
|
|||||
Comprehensive income |
44,293 | 36,697 | ||||||
Net income attributable to redeemable noncontrolling interests operating partnership |
(5,712 | ) | (5,478 | ) | ||||
Other comprehensive income attributable to redeemable noncontrolling interests operating partnership |
(2 | ) | | |||||
|
|
|
|
|||||
Comprehensive income attributable to controlling interests |
38,579 | 31,219 | ||||||
Preferred stock dividends |
(3,333 | ) | (6,811 | ) | ||||
|
|
|
|
|||||
Comprehensive income attributable to common shares |
$ | 35,246 | $ | 24,408 | ||||
|
|
|
|
See accompanying notes
3
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 Other Comprehensive Loss |
Total | |||||||||||||||||||||||
Number | Amount | |||||||||||||||||||||||||||
Balance at December 31, 2016 |
$ | 201,250 | 75,914,763 | $ | 76 | $ | 766,732 | $ | | (1,056 | ) | $ | 967,002 | |||||||||||||||
Net income attributable to controlling interests |
38,563 | 38,563 | ||||||||||||||||||||||||||
Other comprehensive income attributable to controlling interests foreign currency translation adjustments |
16 | 16 | ||||||||||||||||||||||||||
Dividends declared on common stock |
(3,688 | ) | (35,230 | ) | (38,918 | ) | ||||||||||||||||||||||
Dividends earned on preferred stock |
(3,333 | ) | (3,333 | ) | ||||||||||||||||||||||||
Redemption of operating partnership units |
1,773,147 | 2 | 77,892 | 77,894 | ||||||||||||||||||||||||
Issuance of stock awards |
233,655 | | | | ||||||||||||||||||||||||
Retirement and forfeiture of stock awards |
(85,395 | ) | | (3,975 | ) | (3,975 | ) | |||||||||||||||||||||
Amortization of deferred compensation costs |
2,609 | 2,609 | ||||||||||||||||||||||||||
Adjustments to redeemable noncontrolling interests operating partnership |
(66,249 | ) | (66,249 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at March 31, 2017 |
$ | 201,250 | 77,836,170 | $ | 78 | $ | 773,321 | $ | | $ | (1,040 | ) | $ | 973,609 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
4
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Cash flow from operating activities |
||||||||
Net income |
$ | 44,275 | $ | 36,697 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
28,207 | 25,843 | ||||||
Straight-line revenues, net of reserve |
1,718 | (1,737 | ) | |||||
Amortization of deferred financing costs |
825 | 845 | ||||||
Amortization and write-off of lease contracts above and below market value |
(271 | ) | (116 | ) | ||||
Compensation paid with Company common shares |
2,536 | 1,769 | ||||||
Changes in operating assets and liabilities |
||||||||
Rents and other receivables |
2,029 | (97 | ) | |||||
Deferred costs |
(276 | ) | (1,611 | ) | ||||
Prepaid expenses and other assets |
(3,907 | ) | 61 | |||||
Accounts payable and accrued liabilities |
(7,274 | ) | (4,599 | ) | ||||
Accrued interest payable |
(5,319 | ) | (5,309 | ) | ||||
Prepaid rents and other liabilities |
(7,931 | ) | (407 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
54,612 | 51,339 | ||||||
|
|
|
|
|||||
Cash flow from investing activities |
||||||||
Investments in real estate development |
(137,223 | ) | (52,302 | ) | ||||
Acquisition of real estate related party |
| (20,168 | ) | |||||
Interest capitalized for real estate under development |
(4,051 | ) | (3,183 | ) | ||||
Improvements to real estate |
(186 | ) | (2,099 | ) | ||||
Additions to non-real estate property |
(68 | ) | (123 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(141,528 | ) | (77,875 | ) | ||||
|
|
|
|
|||||
Cash flow from financing activities |
||||||||
Line of credit: |
||||||||
Proceeds |
146,549 | 60,000 | ||||||
Repayments |
| (60,000 | ) | |||||
Mortgage notes payable: |
||||||||
Repayments |
(1,250 | ) | | |||||
Payments of financing costs |
(34 | ) | | |||||
Issuance of common stock, net of offering costs |
| 275,797 | ||||||
Equity compensation (payments) proceeds |
(3,975 | ) | 7,007 | |||||
Dividends and distributions: |
||||||||
Common shares |
(37,939 | ) | (31,070 | ) | ||||
Preferred shares |
(3,333 | ) | (6,811 | ) | ||||
Redeemable noncontrolling interests operating partnership |
(6,746 | ) | (7,084 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
93,272 | 237,839 | ||||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
6,356 | 211,303 | ||||||
Cash and cash equivalents, beginning of period |
38,624 | 31,230 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, ending of period |
$ | 44,980 | $ | 242,533 | ||||
|
|
|
|
|||||
Supplemental information: |
||||||||
Cash paid for interest, net of amounts capitalized |
$ | 16,778 | $ | 16,880 | ||||
|
|
|
|
|||||
Deferred financing costs capitalized for real estate under development |
$ | 302 | $ | 217 | ||||
|
|
|
|
|||||
Construction costs payable capitalized for real estate under development |
$ | 75,884 | $ | 21,247 | ||||
|
|
|
|
|||||
Redemption of operating partnership units |
$ | 77,894 | $ | 6,101 | ||||
|
|
|
|
|||||
Adjustments to redeemable noncontrolling interests operating partnership |
$ | 66,249 | $ | 131,582 | ||||
|
|
|
|
See accompanying notes
5
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands except unit data)
March 31, 2017 |
December 31, 2016 |
|||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Income producing property: |
||||||||
Land |
$ | 103,304 | $ | 105,890 | ||||
Buildings and improvements |
3,019,725 | 3,018,361 | ||||||
|
|
|
|
|||||
3,123,029 | 3,124,251 | |||||||
Less: accumulated depreciation |
(689,099 | ) | (662,183 | ) | ||||
|
|
|
|
|||||
Net income producing property |
2,433,930 | 2,462,068 | ||||||
Construction in progress and property held for development |
493,442 | 330,983 | ||||||
|
|
|
|
|||||
Net real estate |
2,927,372 | 2,793,051 | ||||||
Cash and cash equivalents |
40,765 | 34,409 | ||||||
Rents and other receivables, net |
9,504 | 11,533 | ||||||
Deferred rent, net |
121,340 | 123,058 | ||||||
Deferred costs, net |
24,560 | 25,776 | ||||||
Prepaid expenses and other assets |
50,256 | 46,422 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,173,797 | $ | 3,034,249 | ||||
|
|
|
|
|||||
LIABILITIES AND PARTNERS CAPITAL | ||||||||
Liabilities: |
||||||||
Line of credit |
$ | 197,819 | $ | 50,926 | ||||
Mortgage notes payable, net of deferred financing costs |
109,592 | 110,733 | ||||||
Unsecured term loan, net of deferred financing costs |
249,089 | 249,036 | ||||||
Unsecured notes payable, net of discount and deferred financing costs |
837,895 | 837,323 | ||||||
Accounts payable and accrued liabilities |
29,647 | 36,909 | ||||||
Construction costs payable |
75,884 | 56,428 | ||||||
Accrued interest payable |
6,273 | 11,592 | ||||||
Dividend and distribution payable |
46,426 | 46,352 | ||||||
Prepaid rents and other liabilities |
72,449 | 81,062 | ||||||
|
|
|
|
|||||
Total liabilities |
1,625,074 | 1,480,361 | ||||||
Redeemable partnership units |
579,329 | 591,101 | ||||||
Commitments and contingencies |
| | ||||||
Partners capital: |
||||||||
Limited partners capital: |
||||||||
Series C cumulative redeemable perpetual preferred units, 8,050,000 units issued and outstanding at March 31, 2017 and December 31, 2016 |
201,250 | 201,250 | ||||||
Common units, 77,173,797 units issued and outstanding at March 31, 2017 and 75,252,390 units issued and outstanding at December 31, 2016 |
761,607 | 754,892 | ||||||
General partners capital, common units, 662,373 issued and outstanding at March 31, 2017 and December 31, 2016 |
6,537 | 6,645 | ||||||
|
|
|
|
|||||
Total partners capital |
969,394 | 962,787 | ||||||
|
|
|
|
|||||
Total liabilities and partners capital |
$ | 3,173,797 | $ | 3,034,249 | ||||
|
|
|
|
See accompanying notes
6
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except unit and per unit data)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Revenues: |
||||||||
Base rent |
$ | 91,268 | $ | 82,533 | ||||
Recoveries from tenants |
45,295 | 38,694 | ||||||
Other revenues |
2,921 | 2,922 | ||||||
|
|
|
|
|||||
Total revenues |
139,484 | 124,149 | ||||||
Expenses: |
||||||||
Property operating costs |
40,191 | 35,955 | ||||||
Real estate taxes and insurance |
5,010 | 5,316 | ||||||
Depreciation and amortization |
28,207 | 25,843 | ||||||
General and administrative |
6,812 | 5,575 | ||||||
Other expenses |
2,705 | 2,349 | ||||||
|
|
|
|
|||||
Total expenses |
82,925 | 75,038 | ||||||
|
|
|
|
|||||
Operating income |
56,559 | 49,111 | ||||||
Interest: |
||||||||
Expense incurred |
(11,459 | ) | (11,569 | ) | ||||
Amortization of deferred financing costs |
(825 | ) | (845 | ) | ||||
|
|
|
|
|||||
Net income |
44,275 | 36,697 | ||||||
Preferred unit distributions |
(3,333 | ) | (6,811 | ) | ||||
Net income attributable to common units |
$ | 40,942 | $ | 29,886 | ||||
|
|
|
|
|||||
Earnings per unit basic: |
||||||||
Net income attributable to common units |
$ | 0.46 | $ | 0.36 | ||||
|
|
|
|
|||||
Weighted average common units outstanding |
89,095,663 | 82,028,440 | ||||||
|
|
|
|
|||||
Earnings per unit diluted: |
||||||||
Net income attributable to common units |
$ | 0.45 | $ | 0.36 | ||||
|
|
|
|
|||||
Weighted average common units outstanding |
90,076,644 | 82,881,560 | ||||||
|
|
|
|
|||||
Distributions declared per common unit |
$ | 0.50 | $ | 0.47 | ||||
|
|
|
|
See accompanying notes
7
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Net income |
$ | 44,275 | $ | 36,697 | ||||
Other comprehensive income: |
||||||||
Foreign currency translation adjustments |
18 | | ||||||
|
|
|
|
|||||
Comprehensive income |
44,293 | 36,697 | ||||||
Preferred unit distributions |
(3,333 | ) | (6,811 | ) | ||||
|
|
|
|
|||||
Comprehensive income attributable to common units |
$ | 40,960 | $ | 29,886 | ||||
|
|
|
|
See accompanying notes
8
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENT OF PARTNERS CAPITAL
(unaudited and in thousands except unit data)
Limited Partners Capital | General Partners Capital | Total | ||||||||||||||||||||||
Preferred Amount |
Common Units |
Common Amount |
Common Units |
Common Amount |
||||||||||||||||||||
Balance at December 31, 2016 |
$ | 201,250 | 75,252,390 | $ | 754,892 | 662,373 | $ | 6,645 | $ | 962,787 | ||||||||||||||
Net income |
43,898 | 377 | 44,275 | |||||||||||||||||||||
Other comprehensive income foreign currency translation adjustments |
18 | 18 | ||||||||||||||||||||||
Common unit distributions |
(44,428 | ) | (331 | ) | (44,759 | ) | ||||||||||||||||||
Preferred unit distributions |
(3,305 | ) | (28 | ) | (3,333 | ) | ||||||||||||||||||
Issuance of OP units to DFT when redeemable partnership units redeemed |
1,773,147 | 77,894 | 77,894 | |||||||||||||||||||||
Issuance of OP units for stock awards |
233,655 | | | |||||||||||||||||||||
Retirement and forfeiture of OP units |
(85,395 | ) | (3,975 | ) | (3,975 | ) | ||||||||||||||||||
Amortization of deferred compensation costs |
2,609 | 2,609 | ||||||||||||||||||||||
Adjustments to redeemable partnership units |
(65,996 | ) | (126 | ) | (66,122 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2017 |
$ | 201,250 | 77,173,797 | $ | 761,607 | 662,373 | $ | 6,537 | $ | 969,394 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
9
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Cash flow from operating activities |
||||||||
Net income |
$ | 44,275 | $ | 36,697 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
||||||||
Depreciation and amortization |
28,207 | 25,843 | ||||||
Straight-line rent, net of reserve |
1,718 | (1,737 | ) | |||||
Amortization of deferred financing costs |
825 | 845 | ||||||
Amortization and write-off of lease contracts above and below market value |
(271 | ) | (116 | ) | ||||
Compensation paid with Company common shares |
2,536 | 1,769 | ||||||
Changes in operating assets and liabilities |
||||||||
Rents and other receivables |
2,029 | (97 | ) | |||||
Deferred costs |
(276 | ) | (1,611 | ) | ||||
Prepaid expenses and other assets |
(3,907 | ) | 61 | |||||
Accounts payable and accrued liabilities |
(7,274 | ) | (4,599 | ) | ||||
Accrued interest payable |
(5,319 | ) | (5,309 | ) | ||||
Prepaid rents and other liabilities |
(7,931 | ) | (407 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
54,612 | 51,339 | ||||||
|
|
|
|
|||||
Cash flow from investing activities |
||||||||
Investments in real estate development |
(137,223 | ) | (52,302 | ) | ||||
Acquisition of real estate related party |
| (20,168 | ) | |||||
Interest capitalized for real estate under development |
(4,051 | ) | (3,183 | ) | ||||
Improvements to real estate |
(186 | ) | (2,099 | ) | ||||
Additions to non-real estate property |
(68 | ) | (123 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(141,528 | ) | (77,875 | ) | ||||
|
|
|
|
|||||
Cash flow from financing activities |
||||||||
Line of credit: |
||||||||
Proceeds |
146,549 | 60,000 | ||||||
Repayments |
| (60,000 | ) | |||||
Mortgage notes payable: |
||||||||
Repayments |
(1,250 | ) | | |||||
Payments of financing costs |
(34 | ) | | |||||
Issuance of common units, net of offering costs |
| 275,797 | ||||||
Equity compensation (payments) proceeds |
(3,975 | ) | 7,007 | |||||
Distributions |
(48,018 | ) | (44,965 | ) | ||||
|
|
|
|
|||||
Net cash provided by financing activities |
93,272 | 237,839 | ||||||
|
|
|
|
|||||
Net increase in cash and cash equivalents |
6,356 | 211,303 | ||||||
Cash and cash equivalents, beginning of period |
34,409 | 27,015 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, ending of period |
$ | 40,765 | $ | 238,318 | ||||
|
|
|
|
|||||
Supplemental information: |
||||||||
Cash paid for interest, net of amounts capitalized |
$ | 16,778 | $ | 16,880 | ||||
|
|
|
|
|||||
Deferred financing costs capitalized for real estate under development |
$ | 302 | $ | 217 | ||||
|
|
|
|
|||||
Construction costs payable capitalized for real estate under development |
$ | 75,884 | $ | 21,247 | ||||
|
|
|
|
|||||
Redemption of operating partnership units |
$ | 77,894 | $ | 6,101 | ||||
|
|
|
|
|||||
Adjustments to redeemable partnership units |
$ | 66,122 | $ | 130,066 | ||||
|
|
|
|
See accompanying notes
10
DUPONT FABROS TECHNOLOGY, INC.
DUPONT FABROS TECHNOLOGY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2017
(unaudited)
1. Description of Business
DuPont Fabros Technology, Inc., 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 March 31, 2017, owned 86.9% of the common economic interest in the Operating Partnership, of which 0.9% is held as general partnership units. Unless otherwise indicated or unless the context requires otherwise, all references in this report to we, us, our, our Company or the Company refer to DFT and the Operating Partnership, collectively. As of March 31, 2017, we held a fee simple interest in the following properties:
| 11 operating data centers ACC2, ACC3, ACC4, ACC5, ACC6, ACC7, CH1, CH2, SC1 Phases I-II, VA3, and VA4; |
| Five data center projects under development ACC9 Phases I and II, CH3 Phase I, SC1 Phase III and TOR1 Phase IA; |
| One shell of a data center currently under development ACC10; |
| Three data center projects available for future development CH3 Phase II, TOR1 Phase IB/C and TOR1 Phase II; and |
| Land that may be used to develop four additional data centers ACC8, ACC11, OR1 and OR2. |
In April 2017, we commenced development of ACC10 Phase I and CH3 Phase II.
2. Significant Accounting Policies
Basis of Presentation
This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2017 of DuPont Fabros Technology, Inc. and DuPont Fabros Technology, L.P. References to 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.
We believe 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. |
We operate DFT and the Operating Partnership as one business. The management of DFT consists of the same employees as the management of the Operating Partnership.
We believe 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, through its wholly-owned subsidiaries, holds all the real estate assets
11
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 our business. These sources include the Operating Partnerships operations, its direct or indirect incurrence of indebtedness, and the issuance of partnership units.
As sole 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 Partnerships capital includes preferred units and general and limited common units that are owned by DFT and the other partners. DFTs stockholders equity includes preferred stock, common stock, additional paid in capital, retained earnings and accumulated other comprehensive income (loss). 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 Partnerships consolidated financial statements and as redeemable noncontrolling interests-operating partnership in DFTs consolidated financial statements. The only difference between the assets and liabilities of DFT and the Operating Partnership as of March 31, 2017 was a $4.2 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 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 our opinion, 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 accompanying consolidated financial statements. The results of operations for the three months ended March 31, 2017 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 Managements 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, 2016 contained in our Annual Report on Form 10-K, which contains a complete listing of our significant accounting policies.
We have one reportable segment consisting of investments in data centers located in the United States and Canada. All of our properties generate similar types of revenues and expenses related to customer rent and reimbursements and operating expenses. The delivery of our 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 our portfolio have similar economic characteristics and the nature of the products and services provided to our customers and the method to distribute such services are consistent throughout the portfolio.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us 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 to seven years. Depreciation expense was $27.1 million and $24.7 million for the three months ended March 31, 2017 and 2016, respectively. Repairs and maintenance costs are expensed as incurred.
We review each of our properties for indicators of impairment. Examples of such indicators may include a significant decrease in the market price of the property, a significant adverse change in the extent or manner in which the property is being used in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value
12
of a property, including an adverse action or assessment by a regulator, an accumulation of costs significantly in excess of the amount originally expected for the development of a property, a history of operating or cash flow losses of the property or a current expectation that, more likely than not, a property will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows expected to result from the real estate investments use and eventual disposition and compare that estimate to the carrying value of the property. We assess the recoverability of the carrying value of our assets on a property-by-property basis. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition, potential sales proceeds and other factors. If our undiscounted cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. No impairment losses were recorded during the three months ended March 31, 2017 and 2016.
We classify a data center property as held-for-sale when it meets the necessary criteria, which include when we commit to and actively embark on a plan to sell the asset, the sale is expected to be completed within one year under terms usual and customary for such sales, and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Data center properties held-for-sale are carried at the lower of cost or fair value less costs to sell. As of March 31, 2017 and December 31, 2016, we did not have any properties classified as held-for-sale.
Deferred Costs
Deferred costs, net in our accompanying 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 of financing costs for our unsecured revolving credit facility, or Unsecured Credit Facility, net of accumulated amortization, which are presented within deferred costs, net in our accompanying consolidated balance sheets at March 31, 2017 and December 31, 2016 were as follows (in thousands):
Financing costs presented within deferred costs, net | March 31, 2017 |
December 31, 2016 |
||||||
Financing costs |
$ | 12,353 | $ | 12,352 | ||||
Accumulated amortization |
(6,800 | ) | (6,376 | ) | ||||
|
|
|
|
|||||
Financing costs, net |
$ | 5,553 | $ | 5,976 | ||||
|
|
|
|
Balances of financing costs for our other recognized debt liabilities, net of accumulated amortization, which are presented as a reduction of each of the respective recognized debt liabilities in our accompanying consolidated balance sheets at March 31, 2017 and December 31, 2016 were as follows (in thousands):
Financing costs presented as a reduction of debt liability balances | March 31, 2017 |
December 31, 2016 |
||||||
Financing costs |
$ | 20,443 | $ | 20,423 | ||||
Accumulated amortization |
(8,634 | ) | (7,935 | ) | ||||
|
|
|
|
|||||
Financing costs, net |
$ | 11,809 | $ | 12,488 | ||||
|
|
|
|
Leasing costs, which consist of external fees and costs incurred in the successful negotiation of leases, internal costs expended in the successful negotiation of leases and 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 applicable leases on a straight-line basis. If an applicable lease terminates prior to the expiration of its initial term, the carrying amount of the leasing costs are written off to amortization expense. Leasing costs incurred for the three months ended March 31, 2017 and 2016 were as follows (in thousands):
13
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Leasing costs incurred for new leases |
$ | 276 | $ | 1,600 | ||||
Leasing costs incurred for renewals |
| 11 | ||||||
|
|
|
|
|||||
Total leasing costs incurred |
$ | 276 | $ | 1,611 | ||||
|
|
|
|
Amortization of deferred leasing costs totaled $1.1 million and $1.0 million for the three months ended March 31, 2017 and 2016, respectively. Balances, net of accumulated amortization, at March 31, 2017 and December 31, 2016 were as follows (in thousands):
March 31, 2017 |
December 31, 2016 |
|||||||
Leasing costs |
$ | 53,832 | $ | 53,556 | ||||
Accumulated amortization |
(34,825 | ) | (33,756 | ) | ||||
|
|
|
|
|||||
Leasing costs, net |
$ | 19,007 | $ | 19,800 | ||||
|
|
|
|
Inventory
We maintain fuel inventory for our generators, which is recorded at the lower of cost (on a first-in, first-out basis) or market. As of March 31, 2017 and December 31, 2016, the fuel inventory was $4.2 million and is included in prepaid expenses and other assets in the accompanying consolidated balance sheets.
Rental Income
We, as a lessor, have retained substantially all the risks and benefits of ownership and account for our 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 lease, which commences when control of the space and critical power have been provided to the customer. If the lease contains an early termination clause with a penalty payment, we determine the lease termination date by evaluating whether the penalty reasonably assures that the lease will not be terminated early.
Straight-line rents receivable are included in deferred rent, net in the accompanying consolidated balance sheets. Lease inducements, which include cash payments to customers, are amortized as a reduction of rental income over the non-cancellable lease term. Lease inducements are included in prepaid expenses and other assets in the accompanying 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 straight-line rents receivable, lease inducements and lease intangibles associated with that lease will be written off to rental revenue. Lease contracts above market value, net are included in prepaid expenses and other assets and lease contracts below market value, net are included in prepaid rents and other liabilities in the accompany consolidated balance sheets.
Balances, net of accumulated amortization, at March 31, 2017 and December 31, 2016 were as follows (in thousands):
March 31, 2017 |
December 31, 2016 |
|||||||
Lease contracts above market value |
$ | 18,900 | $ | 20,500 | ||||
Accumulated amortization |
(14,107 | ) | (15,362 | ) | ||||
|
|
|
|
|||||
Lease contracts above market value, net |
$ | 4,793 | $ | 5,138 | ||||
|
|
|
|
|||||
Lease contracts below market value |
$ | 13,575 | $ | 24,175 | ||||
Accumulated amortization |
(11,361 | ) | (21,345 | ) | ||||
|
|
|
|
|||||
Lease contracts below market value, net |
$ | 2,214 | $ | 2,830 | ||||
|
|
|
|
14
Our policy is to record an allowance for losses on accounts receivable equal to the estimated uncollectible accounts. The estimate is based on our historical experience and a review of the current status of our receivables. As of March 31, 2017 and December 31, 2016, we had a note receivable from a former customer of $25.0 million, which resulted from the settlement of our claim in this former customers bankruptcy proceedings in the fourth quarter of 2016. We are accounting for the note receivable on a non-accrual basis. As of March 31, 2017 and December 31, 2016, we had an allowance for this note receivable of $23.6 million, leaving a note receivable, net balance of $1.4 million as of March 31, 2017 and December 31, 2016, which is included within rents and other receivables, net in our accompanying consolidated balance sheets. Based on the principal payment schedule in the note that includes semiannual principal payments beginning in June 2017, we continue to be reasonably assured that we will be able to collect the balance of the note receivable.
We also establish an appropriate allowance for doubtful accounts for receivables arising from the straight-lining of rents. These receivables arise from revenue recognized in excess of amounts currently due under the lease and are recorded as deferred rent in the accompanying consolidated balance sheets. As of March 31, 2017 and December 31, 2016, we had no material allowances.
Our customer leases generally contain provisions under which the customers reimburse us for a portion of operating expenses and real estate taxes incurred by the property. Recoveries from tenants are included in revenue in the accompanying consolidated statements of operations in the period the applicable expenditures are incurred. The majority of our customer leases also provide us with a property management fee based on a percentage of base rent collected and property-level operating expenses, other than charges for power used by customers to run their servers and cool their space. Property management fees are included in base rent in the accompanying consolidated statements of operations in the applicable period in which they are earned.
Other Revenue
Other revenue primarily consists of services provided to customers on a non-recurring basis. This includes projects such as the purchase and installation of circuits, racks, circuit breakers and other customer requested items. Revenue is recognized on a completed contract basis when the project is finished and ready for the customers use. This method is consistently applied for all periods presented. 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 DFTs consolidated balance sheets, represent the OP units held by individuals and entities other than DFT. These interests are also presented on the Operating Partnerships consolidated balance sheets, referred to as redeemable partnership units. Accordingly, the following discussion related to redeemable noncontrolling interests operating partnership of DFT 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 the 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 DFTs 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 three months ended March 31, 2017 (dollars in thousands):
15
OP Units | ||||||||
Number | Amount | |||||||
Balance at December 31, 2016 |
13,455,515 | $ | 591,101 | |||||
Net income attributable to redeemable noncontrolling interests operating partnership |
| 5,712 | ||||||
Other comprehensive income attributable to redeemable noncontrolling interests operating partnership foreign currency translation adjustments |
| 2 | ||||||
Distributions declared |
| (5,841 | ) | |||||
Redemption of operating partnership units |
(1,773,147 | ) | (77,894 | ) | ||||
Adjustments to redeemable noncontrolling interests operating partnership |
| 66,249 | ||||||
|
|
|
|
|||||
Balance at March 31, 2017 |
11,682,368 | $ | 579,329 | |||||
|
|
|
|
The following is a summary of activity for redeemable partnership units for the three months ended March 31, 2017 (dollars in thousands):
OP Units | ||||||||
Number | Amount | |||||||
Balance at December 31, 2016 |
13,455,515 | $ | 591,101 | |||||
Redemption of operating partnership units |
(1,773,147 | ) | (77,894 | ) | ||||
Adjustments to redeemable partnership units |
| 66,122 | ||||||
|
|
|
|
|||||
Balance at March 31, 2017 |
11,682,368 | $ | 579,329 | |||||
|
|
|
|
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 months ended March 31, 2017 and 2016 (dollars in thousands):
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Net income attributable to controlling interests |
$ | 38,563 | $ | 31,219 | ||||
Transfers from noncontrolling interests: |
||||||||
Net change in the Companys common stock and additional paid in capital due to the redemption of OP units and other adjustments to redeemable noncontrolling interests operating partnership |
11,645 | (125,481 | ) | |||||
|
|
|
|
|||||
$ | 50,208 | $ | (94,262 | ) | ||||
|
|
|
|
Earnings Per Share of DFT
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 using the two class method.
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 using the two class method.
16
Stock-based Compensation
We periodically award stock-based compensation to employees and members of our Board of Directors in the form of common stock, restricted common stock, options and performance units. For each common 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 a common unit. We estimate the fair value of the awards and recognize this value over the requisite service period. The fair value of restricted stock-based compensation is based on the market value of DFTs 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.
Foreign Currency
The U.S. dollar is the functional currency of our consolidated operations in the United States. The functional currency of our consolidated entities outside of the United States is the principal currency of the economic environment in which the entity primarily generates and expends cash. We translate the financial statements of consolidated entities whose functional currency is not the U.S. dollar into U.S. dollars. We translate assets and liabilities at the exchange rate in effect as of the financial statement date and translate income statement accounts using the weighted average exchange rate for the period. We include foreign currency translation adjustments and the effect of exchange rate changes on intercompany transactions of a long-term investment nature as a separate component of stockholders equity or partners capital. We report gains and losses from the effect of rate changes on intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from remeasuring U.S. dollar transactions for non-U.S. functional currency entities, in other expenses on our consolidated statements of operations. For the three months ended March 31, 2017 and 2016, we had no foreign currency transaction losses.
Recently Issued Accounting Pronouncements
Revenue Recognition - In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standards core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We are required to apply the new standard in the first quarter of 2018 and expect to elect the modified retrospective method of application of the standard. Although the standard does not apply to leases, we have assessed the impact on our financial position and results of operations. The standard will change our method of recognizing revenue on service and installation contracts included in other revenue in the accompanying consolidated statements of operations from the completed contract method to a method that recognizes revenue over the course of the contract based on the goods or services transferred to date relative to the remaining goods or services promised under the contract. We do not expect that this change will have a material effect on our financial position or results of operations. In addition, we currently do not believe the standard will have a material impact on how we recognize revenues from tenants with respect to operating expense recoveries on our financial position or results of operations.
Leases - In February 2016, the FASB issued Accounting Standards Update No. 2016-02 - Leases (Topic 842). We are required to apply the new standard in the first quarter of 2019. The Companys leases consist of both lease components that will be accounted for under this standard and non-lease components such as operating expense recovery income that will be accounted for under ASU 2014-09, Revenue from Contracts with Customers. The standard does not fundamentally change the lessor accounting model, and we do not believe that the new standard will have a material effect on our financial position or results of operations.
Financial Instruments - In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. Under this guidance, a company will be required to use a new forward-looking expected loss model for trade and other receivables that generally will result in the earlier recognition of allowances for losses. We are required to apply the new standard in the first quarter of 2020 and do not believe that the new standard will have a material effect on our financial position or results of operations.
17
Statement of Cash Flows - In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The standard provides guidance on eight specific cash flow classification issues including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. We are required to apply the new standard in the first quarter of 2018 and do not believe that the new standard will have a material effect on our financial position or results of operations.
Statement of Cash Flows - Restricted Cash - In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (Topic 230), Restricted Cash. The standard requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts in the statement of cash flows. We are required to apply the new standard in the first quarter of 2018 and do not believe that the new standard will have a material effect on our financial position or results of operations.
Business Combinations - In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition of assets or a business. The guidance is effective for public entities for fiscal years beginning after December 15, 2017 and interim periods within those years. We early-adopted the standard effective January 1, 2017. As a result of this new guidance, acquisitions may now result in an asset purchase rather than a business combination. We do not believe that the new standard will have a material effect on our financial position or results of operations.
Reclassifications
We have combined the previously reported line item for lease contracts above market value, net into the prepaid expenses and other assets line item in the accompanying consolidated balance sheet as of December 31, 2016 to conform to the current year presentation. We have also combined the previously reported line item for lease contracts below market value, net into the prepaid rents and other liabilities line item in the accompanying consolidated balance sheet as of December 31, 2016 to conform to the current year presentation.
3. Real Estate Assets
The following is a summary of our properties as of March 31, 2017 (dollars in thousands):
Property |
Location | Land | Buildings and Improvements |
Construction in Progress and Land Held for Development |
Total Cost (2) | |||||||||||||||
ACC2 |
Ashburn, VA | $ | 2,500 | $ | 156,505 | $ | 159,005 | |||||||||||||
ACC3 |
Ashburn, VA | 1,071 | 96,080 | 97,151 | ||||||||||||||||
ACC4 |
Ashburn, VA | 6,600 | 538,869 | 545,469 | ||||||||||||||||
ACC5 |
Ashburn, VA | 6,443 | 299,016 | 305,459 | ||||||||||||||||
ACC6 |
Ashburn, VA | 5,518 | 216,829 | 222,347 | ||||||||||||||||
ACC7 |
Ashburn, VA | 9,753 | 334,172 | 343,925 | ||||||||||||||||
CH1 |
Elk Grove Village, IL | 21,025 | 359,171 | 380,196 | ||||||||||||||||
CH2 |
Elk Grove Village, IL | 14,392 | 256,676 | 271,068 | ||||||||||||||||
SC1 Phases I-II |
Santa Clara, CA | 20,202 | 433,099 | 453,301 | ||||||||||||||||
VA3 |
Reston, VA | 9,000 | 179,694 | 188,694 | ||||||||||||||||
VA4 |
Bristow, VA | 6,800 | 149,614 | 156,414 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
103,304 | 3,019,725 | | 3,123,029 | |||||||||||||||||
Construction in progress and land held for development (1) |
493,442 | 493,442 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
$ | 103,304 | $ | 3,019,725 | $ | 493,442 | $ | 3,616,471 | |||||||||||||
|
|
|
|
|
|
|
|
(1) | Properties located in Ashburn, VA (ACC8, ACC9, ACC10, and ACC11), Elk Grove Village, IL (CH3), Santa Clara, CA (SC1 Phase III), Hillsboro, OR (OR1 and OR2) and Vaughan, ON (TOR1). |
18
(2) | As of March 31, 2017, the total cost of long-lived assets located in the United States totaled $3,547.7 million, and the total costs of long-lived assets located in Canada totaled $68.8 million (TOR1 in Vaughan, ON). |
4. Debt
Debt Summary as of March 31, 2017 and December 31, 2016
($ in thousands)
March 31, 2017 | December 31, 2016 | |||||||||||||||||||
Amounts (1) | % of Total | Rates | Maturities (years) |
Amounts | ||||||||||||||||
Secured |
$ | 110,000 | 8 | % | 2.5 | % | 1.0 | $ | 111,250 | |||||||||||
Unsecured |
1,297,819 | 92 | % | 4.7 | % | 4.7 | 1,150,926 | |||||||||||||
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Total |
$ | 1,407,819 | 100 | % | 4.5 | % | 4.4 | $ | 1,262,176 | |||||||||||
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Fixed Rate Debt: |
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Unsecured Notes due 2021 |
$ | 600,000 | 42 | % | 5.9 | % | 4.5 | $ | 600,000 | |||||||||||
Unsecured Notes due 2023 (2) |
250,000 | 18 | % | 5.6 | % | 6.2 | 250,000 | |||||||||||||
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Fixed Rate Debt |
$ | 850,000 | 60 | % | 5.8 | % | 5.0 | $ | 850,000 | |||||||||||
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Floating Rate Debt: |
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Unsecured Credit Facility |
197,819 | 14 | % | 2.5 | % | 3.3 | 50,926 | |||||||||||||
Unsecured Term Loan |
250,000 | 18 | % | 2.5 | % | 4.8 | 250,000 | |||||||||||||
ACC3 Term Loan |
110,000 | 8 | % | 2.5 | % | 1.0 | 111,250 | |||||||||||||
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Floating Rate Debt |
557,819 | 40 | % | 2.5 | % | 3.5 | 412,176 | |||||||||||||
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Total |
$ | 1,407,819 | 100 | % | 4.5 | % | 4.4 | $ | 1,262,176 | |||||||||||
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(1) | Principal amounts exclude deferred financing costs. |
(2) | Principal amount excludes original issue discount of $1.6 million. |
Outstanding Indebtedness
Unsecured Credit Facility and Unsecured Term Loan
On July 25, 2016, we entered into an amended and restated credit agreement with a syndicate of banks (the Amended and Restated Credit Agreement) that includes the following:
| an unsecured revolving credit facility with a total commitment of $750 million (the Unsecured Credit Facility); and |
| an unsecured term loan facility, which has a total commitment and amount outstanding of $250 million (the (Unsecured Term Loan). |
In November 2016, we added a Canadian dollar sublimit of up to $185 million (approximately CAD $250 million) to the Unsecured Credit Facility, which allows us to borrow in Canadian dollars to fund our TOR1 data center development in Vaughan, Ontario. In addition, the Canadian borrowings allow us to hedge our foreign currency investment risk by having these liabilities translate at the same exchange rates as our Canadian assets at the end of each period. To date, we have designated all of the Canadian borrowings on our Unsecured Credit Facility, which totaled CAD $77 million as of March 31, 2017, as a net investment hedge of our Canadian assets. For the effective portion of these net investment hedges, the currency translation effects of these borrowings are reflected in accumulated other comprehensive loss within shareholders equity on our consolidated balance sheets, where they offset the currency translation effects of our investment in our Canadian assets. There has been no ineffectiveness for our net investment hedges to date as of March 31, 2017.
At our option, we may increase the total commitment under the Unsecured Credit Facility and the Unsecured Term Loan to $1.25 billion, if one or more lenders commit to being a lender for the additional amount and certain other customary conditions are met.
19
The obligations under the Amended and Restated Credit Agreement are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and all of the Operating Partnerships subsidiaries that currently guaranty the obligations under the Unsecured Notes due 2021, listed below. We may prepay the Unsecured Credit Facility and Unsecured Term Loan at any time, in whole or in part, without penalty or premium.
The Amended and Restated Credit Agreement requires that DFT, 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 limits on dividend payments, distributions and purchases of DFTs stock. In addition, the facility imposes financial maintenance covenants relating to, among other things, the following matters:
| unsecured debt not exceeding 60% of the value of unencumbered assets, subject to an increase up to 65% following a material acquisition; |
| net operating income generated from unencumbered properties divided by the amount of unsecured debt (net of unrestricted cash and cash equivalents) being not less than 12.5%, subject to a decrease to not less than 10% following a material acquisition; |
| total indebtedness not exceeding 60% of gross asset value, subject to an increase up to 65% following a material acquisition; |
| fixed charge coverage ratio being not less than 1.70 to 1.00; and |
| tangible net worth being not less than $2.3 billion plus 75% of the sum of (i) net equity offering proceeds after July 25, 2016 (but excluding such net offering proceeds that are used within ninety (90) days following the consummation of the applicable equity offering for permitted equity redemptions) and (ii) the value of equity interests issued in connection with a contribution of assets to the Borrower or its subsidiaries; and |
| until an investment grade unsecured debt credit rating has been achieved, unhedged variable rate debt not exceeding 30% of gross asset value. |
The Amended and Restated Credit Agreement 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.
We were in compliance with all covenants under the Unsecured Credit Facility and the Unsecured Term Loan as of March 31, 2017.
The Unsecured Credit Facility matures on July 25, 2020 and includes a one-year extension option, subject to the payment of an extension fee equal to 7.5 basis points on the total commitment in effect on such initial maturity date and certain other customary conditions.
We may elect to have borrowings under the Unsecured Credit Facility bear interest at either LIBOR or a base rate, which is based on the lenders prime rate, in each case plus an applicable margin. Prior to our 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% | 1.55 | % | 0.55 | % | |||||
Level 2 |
Greater than 35% but less than or equal to 40% | 1.65 | % | 0.65 | % | |||||
Level 3 |
Greater than 40% but less than or equal to 45% | 1.80 | % | 0.80 | % | |||||
Level 4 |
Greater than 45% but less than or equal to 52.5% | 1.95 | % | 0.95 | % | |||||
Level 5 |
Greater than 52.5% | 2.15 | % | 1.15 | % |
The applicable margin is currently set at pricing Level 1. The terms of the Unsecured Credit Facility provide for the adjustment of the applicable margin from time to time according to the ratio of the Operating Partnerships total indebtedness to gross asset value in effect from time to time.
20
In the event we receive an investment grade credit rating, borrowings under the Unsecured Credit 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 Moodys | 0.85 | % | 0.00 | % | |||||
Level 2 |
Greater than or equal to BBB+ by S&P or Baa1 by Moodys | 0.90 | % | 0.00 | % | |||||
Level 3 |
Greater than or equal to BBB by S&P or Baa2 by Moodys | 1.00 | % | 0.00 | % | |||||
Level 4 |
Greater than or equal to BBB- by S&P or Baa3 by Moodys | 1.20 | % | 0.20 | % | |||||
Level 5 |
Less than BBB- by S&P or Baa3 by Moodys | 1.55 | % | 0.55 | % |
Following the receipt of such investment grade rating, the terms of the Unsecured Credit Facility provide for the adjustment of the applicable margin from time to time according to the rating then in effect.
The amount available for borrowings under the Unsecured Credit 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 Partnerships unsecured debt. Up to $35 million of the borrowings under the Unsecured Credit Facility may be used for letters of credit.
As of March 31, 2017, we had no letters of credit outstanding and borrowings of $197.8 million outstanding under this Unsecured Credit Facility.
The Unsecured Term Loan matures on January 21, 2022, with no extension option.
Under the terms of the Unsecured Term Loan, we may elect to have borrowings under the loan bear interest at either LIBOR or a base rate, which is based on the lenders prime rate, in each case plus an applicable margin. Prior to our 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% | 1.50 | % | 0.50 | % | |||||
Level 2 |
Greater than 35% but less than or equal to 40% | 1.60 | % | 0.60 | % | |||||
Level 3 |
Greater than 40% but less than or equal to 45% | 1.75 | % | 0.75 | % | |||||
Level 4 |
Greater than 45% but less than or equal to 52.5% | 1.90 | % | 0.90 | % | |||||
Level 5 |
Greater than 52.5% | 2.10 | % | 1.10 | % |
The applicable margin is currently set at pricing Level 1. The terms of the Unsecured Term Loan also provide that, in the event we receive an investment grade credit rating, borrowings under the loan 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 Moodys | 0.825 | % | 0.00 | % | |||||
Level 2 |
Greater than or equal to BBB+ by S&P or Baa1 by Moodys | 0.875 | % | 0.00 | % | |||||
Level 3 |
Greater than or equal to BBB by S&P or Baa2 by Moodys | 1.00 | % | 0.00 | % | |||||
Level 4 |
Greater than or equal to BBB- by S&P or Baa3 by Moodys | 1.25 | % | 0.25 | % | |||||
Level 5 |
Less than BBB- by S&P or Baa3 by Moodys | 1.65 | % | 0.65 | % |
Following the receipt of such investment grade rating, the terms of the loan provide for the adjustment of the applicable margin from time to time according to the rating then in effect.
21
ACC3 Term Loan
We have a $110.0 million term loan facility, the ACC3 Term Loan, that is secured by our ACC3 data center facility and an assignment of the lease agreement between us and the customer of ACC3. The borrower, one of our subsidiaries, may elect to have borrowings under the ACC3 Term Loan bear interest at (i) LIBOR plus 1.55% or (ii) a base rate, which is based on the lenders prime rate, plus 0.55%. The interest rate is currently at LIBOR plus 1.55%. The ACC3 Term Loan matures on March 27, 2018, and we may prepay the ACC3 Term Loan at any time, in whole or in part, without penalty or premium. The Operating Partnership has guaranteed the outstanding principal amount of the ACC3 Term Loan, plus interest and certain costs under the loan.
The ACC3 Term Loan imposes financial maintenance covenants relating to, among other things, the following matters:
| consolidated total indebtedness of the Operating Partnership not exceeding 60% of gross asset value of the Operating Partnership; |
| fixed charge coverage ratio of the Operating Partnership being not less than 1.70 to 1.00; |
| tangible net worth of the Operating Partnership 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; and |
| debt service coverage ratio of the borrower not less than 1.50 to 1.00. |
We were in compliance with all of the covenants under the ACC3 Term Loan as of March 31, 2017.
Unsecured Notes due 2021
On September 24, 2013, the Operating Partnership completed the sale of $600 million of 5.875% senior unsecured notes due 2021, which we refer to as the Unsecured Notes due 2021. The Unsecured Notes due 2021 were issued at face value and mature on September 15, 2021. We pay interest on the Unsecured Notes due 2021 semi-annually, in arrears, on March 15th and September 15th of each year.
The Unsecured Notes due 2021 are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and certain of the Operating Partnerships subsidiaries, including the subsidiaries that own the ACC2, ACC4, ACC5, ACC6, VA3, VA4, CH1 and SC1 data centers (collectively, the Subsidiary Guarantors), but excluding the subsidiaries that own the ACC3, ACC7, ACC9, ACC10, CH2, CH3 and TOR1 data centers, the ACC8, ACC11, OR1 and OR2 parcels of land, our taxable REIT subsidiary, DF Technical Services LLC and our property management subsidiary, DF Property Management LLC.
The Unsecured Notes due 2021 rank (i) equally in right of payment with all of the Operating Partnerships existing and future senior unsecured indebtedness, (ii) senior in right of payment with all of its existing and future subordinated indebtedness, (iii) effectively subordinate to any of the Operating Partnerships existing and future secured indebtedness and (iv) effectively junior to any liabilities of any subsidiaries of the Operating Partnership that do not guarantee the Unsecured Notes due 2021. The guarantees of the Unsecured Notes due 2021 by DFT and the Subsidiary Guarantors rank (i) equally in right of payment with such guarantors existing and future senior unsecured indebtedness, (ii) senior in right of payment with all of such guarantors existing and future subordinated indebtedness and (iii) effectively subordinate to any of such guarantors existing and future secured indebtedness.
The Unsecured Notes due 2021 may be redeemed at the Operating Partnerships option, in whole or in part, at any time, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the 12-month period commencing September 15 of the years indicated below, in each case together with accrued and unpaid interest to the date of redemption:
22
Year |
Redemption Price | |||
2016 |
104.406 | % | ||
2017 |
102.938 | % | ||
2018 |
101.469 | % | ||
2019 and thereafter |
100.000 | % |
If there is a change of control (as defined in the indenture governing the Unsecured Notes due 2021) of the Operating Partnership or DFT, we must offer to purchase the Unsecured Notes due 2021 at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. In addition, in certain circumstances we may be required to use the net proceeds of asset sales to purchase a portion of the Unsecured Notes due 2021 at 100% of the principal amount thereof, plus accrued and unpaid interest.
The Unsecured Notes due 2021 have certain covenants limiting the ability of or prohibiting the Operating Partnership and certain of its subsidiaries from, among other things, (i) incurring secured or unsecured indebtedness, (ii) entering into sale and leaseback transactions, (iii) making certain dividend payments, distributions, purchases of DFTs common stock and investments, (iv) entering into transactions with affiliates, (v) entering into agreements limiting the ability to make certain transfers and other payments from subsidiaries, (vi) engaging in sales of assets or (vii) engaging in certain mergers, consolidations or transfers/sales of all or substantially all assets. However, DFT may pay the minimum dividend necessary to meet its REIT income distribution requirements.
The Unsecured Notes due 2021 also require the Operating Partnership and the Subsidiary Guarantors to maintain total unencumbered assets of at least 150% of their unsecured debt on a consolidated basis. The Unsecured Notes due 2021 also have customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of ours or certain of our subsidiaries. Upon an event of default, the holders of the Unsecured Notes due 2021 or the trustee may declare the Unsecured Notes due 2021 due and immediately payable. We were in compliance with all covenants under the Unsecured Notes due 2021 as of March 31, 2017.
Unsecured Notes due 2023
On June 9, 2015, the Operating Partnership completed the sale of $250 million of 5.625% senior unsecured notes due 2023, which we refer to as the Unsecured Notes due 2023. The Unsecured Notes due 2023 were issued at 99.205% of par and mature on June 15, 2023. We pay interest on the Unsecured Notes due 2023 semi-annually, in arrears, on June 15th and December 15th of each year.
The Unsecured Notes due 2023 are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and the same Subsidiary Guarantors as those that guarantee the Unsecured Notes due 2021.
The ranking of the Unsecured Notes due 2023 and the guarantees of these notes are the same as the ranking of the Unsecured Notes due 2021 and the guarantee of those notes.
At any time prior to June 15, 2018, the Operating Partnership may redeem the Unsecured Notes due 2023, in whole or in part, at a price equal to the sum of (i) 100% of the principal amount of the Unsecured Notes due 2023 to be redeemed, plus (ii) a make-whole premium and accrued and unpaid interest. The Unsecured Notes due 2023 may be redeemed at the Operating Partnerships option, in whole or in part, at any time, on and after June 15, 2018 at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the 12-month period commencing June 15 of the years indicated below, in each case together with accrued and unpaid interest to the date of redemption:
Year |
Redemption Price | |||
2018 |
104.219 | % | ||
2019 |
102.813 | % | ||
2020 |
101.406 | % | ||
2021 and thereafter |
100.000 | % |
23
If there is a change of control (as defined in the indenture governing the Unsecured Notes due 2023) of the Operating Partnership or DFT, we must offer to purchase the Unsecured Notes due 2023 at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. In addition, in certain circumstances we may be required to use the net proceeds of asset sales to purchase a portion of the Unsecured Notes due 2023 at 100% of the principal amount thereof, plus accrued and unpaid interest.
The Unsecured Notes due 2023 have certain covenants limiting or prohibiting the ability of the Operating Partnership and certain of its subsidiaries from, among other things, (i) incurring secured or unsecured indebtedness, (ii) entering into sale and leaseback transactions, (iii) making certain dividend payments, distributions, purchases of DFTs common stock and investments, (iv) entering into transactions with affiliates, (v) entering into agreements limiting the ability to make certain transfers and other payments from subsidiaries, (vi) engaging in sales of assets or (vii) engaging in certain mergers, consolidations or transfers/sales of all or substantially all assets. However, DFT may pay the minimum dividend necessary to meet its REIT income distribution requirements.
The Unsecured Notes due 2023 also require the Operating Partnership and the Subsidiary Guarantors to maintain total unencumbered assets of at least 150% of their unsecured debt on a consolidated basis. The Unsecured Notes due 2023 also have customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of ours or certain of our subsidiaries. Upon an event of default, the holders of the Unsecured Notes due 2023 or the trustee may declare the Unsecured Notes due 2023 due and immediately payable. We were in compliance with all covenants under the Unsecured Notes due 2023 as of March 31, 2017.
A summary of our debt maturity schedule as of March 31, 2017 is as follows:
Debt Maturity as of March 31, 2017
($ in thousands)
Year |
Fixed Rate (1) | Floating Rate (1) | Total (1) | % of Total | Rates | |||||||||||||||||||
2017 |
| 7,500 | (4) | 7,500 | 0.5 | % | 2.5 | % | ||||||||||||||||
2018 |
| 102,500 | (4) | 102,500 | 7.3 | % | 2.5 | % | ||||||||||||||||
2019 |
| | | | % | | % | |||||||||||||||||
2020 |
| 197,819 | (5) | 197,819 | 14.0 | % | 2.5 | % | ||||||||||||||||
2021 |
600,000 | (2) | | 600,000 | 42.6 | % | 5.9 | % | ||||||||||||||||
2022 |
| 250,000 | (6) | 250,000 | 17.8 | % | 2.5 | % | ||||||||||||||||
2023 |
250,000 | (3) | | 250,000 | 17.8 | % | 5.6 | % | ||||||||||||||||
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Total |
$ | 850,000 | $ | 557,819 | $ | 1,407,819 | 100.0 | % | 4.5 | % | ||||||||||||||
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(1) | Principal amounts exclude deferred financing costs. |
(2) | The 5.875% Unsecured Notes due 2021 mature on September 15, 2021. |
(3) | The 5.625% Unsecured Notes due 2023 mature on June 15, 2023. Principal amount excludes original issue discount of $1.6 million as of March 31, 2017. |
(4) | The ACC3 Term Loan matures on March 27, 2018 with no extension option. Quarterly principal payments of $1.25 million began on April 1, 2016, increased to $2.5 million on April 1, 2017 and continue through maturity. |
(5) | The Unsecured Credit Facility matures on July 25, 2020 with a one-year extension option. |
(6) | The Unsecured Term Loan matures on January 21, 2022 with no extension option. |
5. Commitments and Contingencies
We are 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. We currently believe that the resolution of such matters will not have a material adverse effect on our financial condition or results of operations.
24
Contracts related to the development of ACC9 Phases I-II, SC1 Phase III, CH3 Phase I and ACC10 data centers were in place as of March 31, 2017. These contracts are cost-plus in nature whereby the contract sum is the aggregate of the contractors cost to perform the work and to purchase the equipment 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 March 31, 2017, the control estimates were as follows for our projects under development:
| ACC9 Phase I: $168.4 million, of which $155.7 million has been incurred, and an additional $7.3 million has been committed under this contract. |
| ACC9 Phase II: $63.9 million, of which $34.1 million has been incurred, and an additional $17.5 million has been committed under this contract. |
| SC1 Phase III: $149.0 million, of which $101.4 million has been incurred, and an additional $34.7 million has been committed under this contract. |
| CH3 Phase I: $190.7 million, of which $49.1 million has been incurred, and an additional $71.1 million has been committed under this contract. |
| ACC10 shell: $52.1 million, of which $4.3 million has been incurred, and an additional $9.3 million has been committed under this contract. |
In February 2017, we entered into a purchase and sale agreement with an unrelated party to purchase 56.5 acres of undeveloped land in Mesa, Arizona for a purchase price of $12.2 million.
Concurrent with DFTs October 2007 initial public offering, we entered into tax protection agreements with some of the contributors of the initial properties including our Chairman of the Board and our former CEO. Pursuant to the terms of these agreements, we must provide an opportunity for certain of the contributors of the initial properties to guarantee a secured loan and, if we fail to do so, we could be liable for protection on the taxes related to approximately $57 million (unaudited) of remaining minimum liability. The amount of our liability for protection on taxes could be based on the highest federal, state and local capital gains tax rates of the applicable contributor. Any sale by the Company that requires payments to any of DFTs executive officers or directors pursuant to these agreements requires the approval of at least 75% of the disinterested members of DFTs Board of Directors.
6. Redeemable noncontrolling interests operating partnership / Redeemable partnership units
Redeemable noncontrolling interests operating partnership, as presented in DFTs accompanying consolidated balance sheets, represent the OP units held by individuals and entities other than DFT. These interests are also presented in the Operating Partnerships consolidated balance sheets, referred to as redeemable partnership units. Accordingly, the following discussion related to redeemable noncontrolling interests operating partnership of DFT refers equally to redeemable partnership units of the Operating Partnership.
The redemption value of redeemable noncontrolling interests operating partnership as of March 31, 2017 and December 31, 2016 was $579.3 million and $591.1 million, respectively, based on the closing share price of DFTs common stock of $49.59 and $43.93, 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 DFTs common stock, if and when DFTs 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 DFTs common stock. DFT may elect to redeem tendered OP units for cash or for shares of DFTs common stock. During the three months ended March 31, 2017, OP unitholders redeemed a total of 1,773,147 OP units in exchange for an equal number of shares of common stock. See Note 2.
7. Preferred Stock
Series C Preferred Stock
In May 2016, DFT issued 8,050,000 shares of 6.625% Series C Cumulative Redeemable Perpetual Preferred Stock, or Series C Preferred Stock, for $201.3 million in an underwritten public offering that resulted in proceeds to the Company, net of underwriting discounts, commissions and other offering costs of $194.3 million. The liquidation preference on the Series C Preferred Stock is $25 per share and dividends are scheduled quarterly. For each share of Series C Preferred Stock issued by DFT, the Operating Partnership issued a preferred unit equivalent to DFT with the same terms.
25
In 2017, DFT declared the following cash dividends on its Series C Preferred Stock, of which the OP will pay or has paid an equivalent distribution on its preferred units:
| $0.4140625 per share payable to stockholders of record as of February 1, 2017. This dividend was paid on February 15, 2017. |
| $0.4140625 per share payable to stockholders of record as of May 1, 2017. This dividend is scheduled to be paid on May 15, 2017. |
Except in instances relating to preservation of our qualification as a REIT or in connection with our special optional redemption right discussed below, our Series C Preferred Stock is not redeemable prior to May 15, 2021. On and after May 15, 2021, we may, at our option, redeem our Series C Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of $25 per share, plus any accrued and unpaid dividends (whether or not declared) to, but not including, the date of redemption.
Upon the occurrence of a change of control, we have a special optional redemption right that enables us to redeem the Series C Preferred Stock within 120 days after the first date on which a change of control has occurred resulting in neither DFT nor the surviving entity having a class of common shares listed on the NYSE, NYSE MKT, or NASDAQ. For this special redemption right, the redemption price is $25 per share in cash, plus accrued and unpaid dividends (whether or not declared) to, but not including, the redemption date.
Upon the occurrence of a change of control that results in neither DFT nor the surviving entity having a class of common shares listed on the NYSE, NYSE MKT, or NASDAQ, the holder will have the right (subject to our special optional redemption right to redeem the Series C Preferred Stock) to convert some or all of the Series C Preferred Stock into a number of shares of DFTs common stock equal to the lesser of (A) the quotient obtained by dividing (i) the sum of (x) $25, plus (y) an amount equal to any accrued and unpaid dividends, whether or not declared to, but not including, the date of conversion (unless the date of conversion is after a record date for a Series C Preferred Stock dividend payment and prior to the corresponding Series C Preferred Stock dividend payment date, in which case no additional amount for such accrued and unpaid dividend will be included in this quotient), by (ii) the price of DFTs common stock, and (B) 1.1723 (the Share Cap), subject to certain adjustments and provisions for the receipt of alternative consideration of equivalent value.
8. Stockholders Equity of DFT and Partners Capital of the OP
In February 2017, DFT announced the establishment of an at-the-market equity issuance program, or ATM program, through which it may issue and sell up to an aggregate of $200 million of the Companys shares of common stock. As of March 31, 2017, no shares of common stock have been issued under this program.
The Board of Directors approved a common stock repurchase program of to acquire up to $100 million of DFTs common shares in 2017. As of March 31, 2017, no shares of common stock have been repurchased under this program.
In 2017, DFT declared and paid the following cash dividends per share on its common stock, of which the OP paid equivalent distributions on OP units:
| $0.50 per share payable to stockholders of record as of April 3, 2017. This dividend was paid on April 17, 2017. |
9. Equity Compensation Plan
In May 2011, our Board of Directors adopted the 2011 Equity Incentive Plan (the 2011 Plan) following approval from our stockholders. The 2011 Plan is administered by the Compensation Committee of our Board of Directors. The 2011 Plan allows us to provide equity-based compensation to our personnel and directors 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, or LTIP units, and other awards.
26
The 2011 Plan authorizes a maximum aggregate of 6,300,000 share equivalents be reserved for future issuances. In addition, 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.
As of March 31, 2017, 4,502,298 share equivalents were issued under the 2011 Plan, and the maximum aggregate amount of share equivalents remaining available for future issuance was 1,797,702.
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, 2016 |
309,175 | $ | 32.30 | |||||
Granted |
174,319 | 47.41 | ||||||
Vested |
(123,419 | ) | 30.01 | |||||
Forfeited |
(7,595 | ) | 36.37 | |||||
|
|
|
|
|||||
Unvested balance at March 31, 2017 |
352,480 | $ | 40.01 | |||||
|
|
|
|
During the three months ended March 31, 2017, we issued 174,319 shares of restricted stock, which had an aggregate value of $8.3 million on the grant date. This amount will be amortized to expense over the respective vesting periods, which are between three and five years. Also during the three months ended March 31, 2017, 123,419 shares of restricted stock vested at a value of $6.3 million on the respective vesting dates.
As of March 31, 2017, total unearned compensation on restricted stock was $12.7 million, and the weighted average vesting period was 2.1 years.
Stock Options
Stock option awards are granted with an exercise price equal to the closing market price of DFTs 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. During the three months ended March 31, 2017, no options were granted to employees. The last grant of stock options occurred in 2013, and all stock option grants have fully vested.
A summary of our stock option activity for the three months ended March 31, 2017 is presented in the tables below.
Number of Options |
Weighted Average Exercise Price |
|||||||
Under option, December 31, 2016 |
751,479 | $ | 15.83 | |||||
Granted |
| | ||||||
Exercised |
| | ||||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Under option, March 31, 2017 |
751,479 | $ | 15.83 | |||||
|
|
|
|
Shares Subject to Option |
Total Unearned Compensation |
Weighted Average Remaining Contractual Term |
||||||||||
As of March 31, 2017 |
751,479 | $ | | 3.4 years |
27
The following tables set forth the number of exercisable options as of March 31, 2017 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, 2016 |
751,479 | $ | 4.71 | |||||
Vested |
| | ||||||
Exercised |
| | ||||||
|
|
|
|
|||||
Options Exercisable at March 31, 2017 |
751,479 | $ | 4.71 | |||||
|
|
|
|
Exercisable Options |
Intrinsic Value | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||||||
As of March 31, 2017 |
751,479 | $ | 25.4 million | $ | 15.83 | 3.4 years |
Performance Units
Performance unit awards are awarded to certain executive employees and have a three calendar-year performance period with no dividend rights. Performance units will be settled in common shares following the performance period as long as the employee remains employed with us on the vesting date, which is the March 1st date following the last day of the applicable performance period. Performance units are valued using a Monte Carlo simulation and are amortized over the approximate three year vesting period from the grant date to the vesting date.
One-half of the recipients performance unit award is dependent on DFTs total stockholder return compared to the MSCI US REIT index over the three calendar-year performance period. The other half of the performance unit award is dependent on DFTs total stockholder return compared to an index of five comparable publicly traded data center companies over the three calendar-year performance period. For each half of the performance unit awards granted, the number of common shares that are ultimately settled could range from 0% to 300%.
For the performance units granted in 2014, based on DFTs total stockholder return compared to the MSCI US REIT index return for half of the grant and an index of five comparable publicly traded data center companies for the other half of the grant for the period from January 1, 2014 to January 1, 2017, 57,177 common shares were issued upon their vesting on March 1, 2017, which represents an aggregate payout of 150%.
The following table summarizes the assumptions used to value, and the resulting fair and maximum values of, the performance units granted during the three months ended March 31, 2017. These performance unit awards will vest in 2020.
Assumptions | ||||
Number of performance units granted |
69,610 | |||
Expected volatility |
24 | % | ||
Expected annual dividend |
4.23 | % | ||
Risk-free rate |
1.50 | % | ||
Performance unit fair value at date of grant |
$ | 73.46 | ||
Total grant fair value at date of grant |
$ | 5.1 million | ||
Maximum value of grant on vesting date based on closing price of DFTs stock at the date of grant |
$ | 9.9 million |
28
A summary of our performance unit activity for the three months ended March 31, 2017 is presented in the table below.
Number of Performance Units |
Weighted Average Fair Value at Date of Grant |
|||||||
Unvested balance at December 31, 2016 |
196,652 | $ | 37.25 | |||||
Granted |
69,610 | 73.46 | ||||||
Vested |
(40,277 | ) | 33.94 | |||||
Forfeited |
(5,812 | ) | 56.00 | |||||
|
|
|
|
|||||
Unvested balance at March 31, 2017 |
220,173 | $ | 48.81 | |||||
|
|
|
|
As of March 31, 2017, total unearned compensation on performance units was $7.5 million, and the weighted average vesting period was 2.0 years.
10. Earnings Per Share of DFT
The following table sets forth the reconciliation of basic and diluted average shares outstanding and net income attributable to common shares used in the computation of earnings per share of common stock (in thousands except for share and per share amounts):
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Basic and Diluted Shares Outstanding |
||||||||
Weighted average common shares basic |
76,670,425 | 66,992,995 | ||||||
Effect of dilutive securities |
980,981 | 853,120 | ||||||
|
|
|
|
|||||
Weighted average common shares diluted |
77,651,406 | 67,846,115 | ||||||
|
|
|
|
|||||
Calculation of Earnings per Share Basic |
||||||||
Net income attributable to common shares |
$ | 35,230 | $ | 24,408 | ||||
Net income allocated to unvested restricted shares |
(176 | ) | (163 | ) | ||||
|
|
|
|
|||||
Net income attributable to common shares, adjusted |
35,054 | 24,245 | ||||||
Weighted average common shares basic |
76,670,425 | 66,992,995 | ||||||
|
|
|
|
|||||
Earnings per common share basic |
$ | 0.46 | $ | 0.36 | ||||
|
|
|
|
|||||
Calculation of Earnings per Share Diluted |
||||||||
Net income attributable to common shares, adjusted |
$ | 35,054 | $ | 24,245 | ||||
Weighted average common shares diluted |
77,651,406 | 67,846,115 | ||||||
|
|
|
|
|||||
Earnings per common share diluted |
$ | 0.45 | $ | 0.36 | ||||
|
|
|
|
The following table sets forth the number of performance units that have been excluded from the calculation of diluted earnings per share as their effect would have been antidilutive (in millions):
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Performance Units |
0.1 | 0.1 |
11. Earnings Per Unit of the Operating Partnership
The following table sets forth the reconciliation of basic and diluted average units outstanding and net income attributable to common units used in the computation of earnings per unit (in thousands except for unit and per unit amounts):
29
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Basic and Diluted Units Outstanding |
||||||||
Weighted average common units basic (includes redeemable partnership units and units of general and limited partners) |
89,095,663 | 82,028,440 | ||||||
Effect of dilutive securities |
980,981 | 853,120 | ||||||
|
|
|
|
|||||
Weighted average common units diluted |
90,076,644 | 82,881,560 | ||||||
|
|
|
|
|||||
Calculation of Earnings per Unit Basic |
||||||||
Net income attributable to common units |
$ | 40,942 | $ | 29,886 | ||||
Net income allocated to unvested restricted units |
(176 | ) | (163 | ) | ||||
|
|
|
|
|||||
Net income attributable to common units, adjusted |
40,766 | 29,723 | ||||||
Weighted average common units basic |
89,095,663 | 82,028,440 | ||||||
|
|
|
|
|||||
Earnings per common unit basic |
$ | 0.46 | $ | 0.36 | ||||
|
|
|
|
|||||
Calculation of Earnings per Unit Diluted |
||||||||
Net income attributable to common units, adjusted |
$ | 40,766 | $ | 29,723 | ||||
Weighted average common units diluted |
90,076,644 | 82,881,560 | ||||||
|
|
|
|
|||||
Earnings per common unit diluted |
$ | 0.45 | $ | 0.36 | ||||
|
|
|
|
The following table sets forth the amount of performance units that have been excluded from the calculation of diluted earnings per unit as their effect would have been antidilutive (in millions):
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Performance Units |
0.1 | 0.1 |
12. Fair Value
Assets and Liabilities Measured at Fair Value
The authoritative guidance issued by the FASB requires disclosure of the fair value of financial instruments. Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates, and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the amounts are not necessarily indicative of the amounts we would realize in a current market exchange.
The following methods and assumptions were used in estimating the fair value amounts and disclosures for financial instruments as of March 31, 2017:
| Cash and cash equivalents: The carrying amount of cash and cash equivalents reported in the accompanying consolidated balance sheets approximates fair value because of the short maturity of these instruments (i.e., less than 90 days). |
| Rents and other receivables, accounts payable and accrued liabilities, and prepaid rents: The carrying amount of these assets and liabilities reported in the accompanying consolidated balance sheets approximates fair value because of the short-term nature of these amounts. |
| Debt: The combined balance of the Unsecured Notes due 2021, Unsecured Notes due 2023, Unsecured Term Loan, Unsecured Credit Facility and ACC3 Term Loan, excluding the effect of deferred financing costs, was $1,406.2 million with a fair value of $1,433.1 million. The Unsecured Notes due 2021 and the Unsecured Notes due 2023 were valued based on Level 2 data which consisted of a quoted price from Bloomberg. The Unsecured Term Loan, the US dollar-denominated borrowings under the Unsecured Credit facility and ACC3 Term Loan were valued based on Level |
30
3 data which consisted of a one-month LIBOR swap rate coterminous with the maturity of each loan plus a spread consistent with current market conditions. The Canadian dollar-denominated borrowings under the Unsecured Credit facility were valued based on Level 3 data which consisted of a one-month Canadian Dollar Offered Rate swap rate coterminous with the maturity of the Unsecured Credit Facility plus a spread consistent with current market conditions. |
13. Supplemental Consolidating Financial Data for Subsidiary Guarantors of the Unsecured Notes
The Unsecured Notes due 2021 and the Unsecured Notes due 2023 are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and certain of the Operating Partnerships subsidiaries, including the subsidiaries that own the ACC2, ACC4, ACC5, ACC6, VA3, VA4, CH1 and SC1 data centers (collectively, the Subsidiary Guarantors), but excluding the subsidiaries that own the ACC3, ACC7, ACC9, ACC10, CH2, CH3 and TOR1 data centers, the ACC8, ACC11, OR1 and OR2 parcels of land, our taxable REIT subsidiary, DF Technical Services LLC and our property management subsidiary, DF Property Management LLC. The following consolidating financial information sets forth the financial position as of March 31, 2017 and December 31, 2016 and the results of operations and cash flows for the three months ended March 31, 2017 and 2016 of the Operating Partnership, Subsidiary Guarantors and the Subsidiary Non-Guarantors.
31
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
(in thousands except unit data)
March 31, 2017 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Income producing property: |
||||||||||||||||||||
Land |
$ | | $ | 78,087 | $ | 25,217 | $ | | $ | 103,304 | ||||||||||
Buildings and improvements |
| 2,332,796 | 686,929 | | 3,019,725 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 2,410,883 | 712,146 | | 3,123,029 | ||||||||||||||||
Less: accumulated depreciation |
| (626,377 | ) | (62,722 | ) | | (689,099 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income producing property |
| 1,784,506 | 649,424 | | 2,433,930 | |||||||||||||||
Construction in progress and property held for development |
| 113,132 | 380,310 | | 493,442 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net real estate |
| 1,897,638 | 1,029,734 | | 2,927,372 | |||||||||||||||
Cash and cash equivalents |
37,590 | | 3,175 | | 40,765 | |||||||||||||||
Rents and other receivables, net |
1,663 | 4,333 | 3,508 | | 9,504 | |||||||||||||||
Deferred rent, net |
| 105,489 | 15,851 | | 121,340 | |||||||||||||||
Deferred costs, net |
5,553 | 10,908 | 8,099 | | 24,560 | |||||||||||||||
Investment in affiliates |
2,840,296 | | | (2,840,296 | ) | | ||||||||||||||
Prepaid expenses and other assets |
4,029 | 32,015 | 14,212 | | 50,256 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 2,889,131 | $ | 2,050,383 | $ | 1,074,579 | $ | (2,840,296 | ) | $ | 3,173,797 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Line of credit |
$ | 197,819 | $ | | $ | | $ | | $ | 197,819 | ||||||||||
Mortgage notes payable, net of deferred financing costs |
| | 109,592 | | 109,592 | |||||||||||||||
Unsecured term loan, net of deferred financing costs |
249,089 | | | | 249,089 | |||||||||||||||
Unsecured notes payable, net of discount and deferred financing costs |
837,895 | | | | 837,895 | |||||||||||||||
Accounts payable and accrued liabilities |
2,680 | 20,831 | 6,136 | | 29,647 | |||||||||||||||
Construction costs payable |
| 14,723 | 61,161 | | 75,884 | |||||||||||||||
Accrued interest payable |
6,265 | | 8 | | 6,273 | |||||||||||||||
Distribution payable |
46,426 | | | | 46,426 | |||||||||||||||
Prepaid rents and other liabilities |
234 | 53,210 | 19,005 | | 72,449 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,340,408 | 88,764 | 195,902 | | 1,625,074 | |||||||||||||||
Redeemable partnership units |
579,329 | | | | 579,329 | |||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Limited Partners Capital: |
||||||||||||||||||||
Series C cumulative redeemable perpetual preferred units, 8,050,000 units issued and outstanding at March 31, 2017 |
201,250 | | | | 201,250 | |||||||||||||||
Common units, 77,173,797 units issued and outstanding at March 31, 2017 |
761,607 | 1,961,619 | 878,677 | (2,840,296 | ) | 761,607 | ||||||||||||||
General partners capital, 662,373 common units issued and outstanding at March 31, 2017 |
6,537 | | | | 6,537 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total partners capital |
969,394 | 1,961,619 | 878,677 | (2,840,296 | ) | 969,394 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities & partners capital |
$ | 2,889,131 | $ | 2,050,383 | $ | 1,074,579 | $ | (2,840,296 | ) | $ | 3,173,797 | |||||||||
|
|
|
|
|
|
|
|
|
|
32
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
(in thousands except unit data)
December 31, 2016 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Income producing property: |
||||||||||||||||||||
Land |
$ | | $ | 80,673 | $ | 25,217 | $ | | $ | 105,890 | ||||||||||
Buildings and improvements |
| 2,332,771 | 685,590 | | 3,018,361 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 2,413,444 | 710,807 | | 3,124,251 | ||||||||||||||||
Less: accumulated depreciation |
| (605,488 | ) | (56,695 | ) | | (662,183 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income producing property |
| 1,807,956 | 654,112 | | 2,462,068 | |||||||||||||||
Construction in progress and property held for development |
| 88,836 | 242,147 | | 330,983 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net real estate |
| 1,896,792 | 896,259 | | 2,793,051 | |||||||||||||||
Cash and cash equivalents |
31,781 | | 2,628 | | 34,409 | |||||||||||||||
Rents and other receivables, net |
1,390 | 4,743 | 5,400 | | 11,533 | |||||||||||||||
Deferred rent, net |
| 109,142 | 13,916 | | 123,058 | |||||||||||||||
Deferred costs, net |
6,066 | 11,632 | 8,078 | | 25,776 | |||||||||||||||
Investment in affiliates |
2,713,096 | | | (2,713,096 | ) | | ||||||||||||||
Prepaid expenses and other assets |
3,463 | 32,479 | 10,480 | | 46,422 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 2,755,796 | $ | 2,054,788 | $ | 936,761 | $ | (2,713,096 | ) | $ | 3,034,249 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND PARTNERS CAPITAL |
||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Line of credit |
$ | 50,926 | $ | | $ | | $ | | $ | 50,926 | ||||||||||
Mortgage notes payable, net of deferred financing costs |
| | 110,733 | | 110,733 | |||||||||||||||
Unsecured term loan, net of deferred financing costs |
249,036 | | | | 249,036 | |||||||||||||||
Unsecured notes payable, net of discount and deferred financing costs |
837,323 | | | | 837,323 | |||||||||||||||
Accounts payable and accrued liabilities |
6,477 | 22,319 | 8,113 | | 36,909 | |||||||||||||||
Construction costs payable |
| 10,159 | 46,269 | | 56,428 | |||||||||||||||
Accrued interest payable |
11,578 | | 14 | | 11,592 | |||||||||||||||
Distribution payable |
46,352 | | | | 46,352 | |||||||||||||||
Prepaid rents and other liabilities |
216 | 61,429 | 19,417 | | 81,062 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,201,908 | 93,907 | 184,546 | | 1,480,361 | |||||||||||||||
Redeemable partnership units |
591,101 | | | | 591,101 | |||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Limited Partners Capital: |
||||||||||||||||||||
Series C cumulative redeemable perpetual preferred units, 8,050,000 units issued and outstanding at December 31, 2016 |
201,250 | | | | 201,250 | |||||||||||||||
Common units, 75,252,390 units issued and outstanding at December 31, 2016 |
754,892 | 1,960,881 | 752,215 | (2,713,096 | ) | 754,892 | ||||||||||||||
General partners capital, 662,373 common units issued and outstanding at December 31, 2016 |
6,645 | | | | 6,645 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total partners capital |
962,787 | 1,960,881 | 752,215 | (2,713,096 | ) | 962,787 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities & partners capital |
$ | 2,755,796 | $ | 2,054,788 | $ | 936,761 | $ | (2,713,096 | ) | $ | 3,034,249 | |||||||||
|
|
|
|
|
|
|
|
|
|
33
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
(in thousands)
Three months ended March 31, 2017 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non- Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Revenues: |
||||||||||||||||||||
Base rent |
$ | 4,695 | $ | 66,692 | $ | 24,576 | $ | (4,695 | ) | $ | 91,268 | |||||||||
Recoveries from tenants |
| 36,093 | 9,202 | | 45,295 | |||||||||||||||
Other revenues |
| 420 | 2,501 | | 2,921 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
4,695 | 103,205 | 36,279 | (4,695 | ) | 139,484 | ||||||||||||||
Expenses: |
||||||||||||||||||||
Property operating costs |
| 35,915 | 8,971 | (4,695 | ) | 40,191 | ||||||||||||||
Real estate taxes and insurance |
| 3,979 | 1,031 | | 5,010 | |||||||||||||||
Depreciation and amortization |
44 | 21,775 | 6,388 | | 28,207 | |||||||||||||||
General and administrative |
6,546 | 8 | 258 | | 6,812 | |||||||||||||||
Other expenses |
512 | 12 | 2,181 | | 2,705 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
7,102 | 61,689 | 18,829 | (4,695 | ) | 82,925 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating (loss) income |
(2,407 | ) | 41,516 | 17,450 | | 56,559 | ||||||||||||||
Interest: |
||||||||||||||||||||
Expense incurred |
(14,870 | ) | 1,037 | 2,374 | | (11,459 | ) | |||||||||||||
Amortization of deferred financing costs |
(1,018 | ) | 77 | 116 | | (825 | ) | |||||||||||||
Equity in earnings |
62,570 | | | (62,570 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
44,275 | 42,630 | 19,940 | (62,570 | ) | 44,275 | ||||||||||||||
Preferred unit distributions |
(3,333 | ) | | | | (3,333 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income attributable to common units |
$ | 40,942 | $ | 42,630 | $ | 19,940 | $ | (62,570 | ) | $ | 40,942 | |||||||||
|
|
|
|
|
|
|
|
|
|
34
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
(in thousands)
Three months ended March 31, 2016 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non- Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Revenues: |
||||||||||||||||||||
Base rent |
$ | 4,402 | $ | 69,366 | $ | 13,204 | $ | (4,439 | ) | $ | 82,533 | |||||||||
Recoveries from tenants |
| 34,375 | 4,319 | | 38,694 | |||||||||||||||
Other revenues |
| 464 | 2,482 | (24 | ) | 2,922 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
4,402 | 104,205 | 20,005 | (4,463 | ) | 124,149 | ||||||||||||||
Expenses: |
||||||||||||||||||||
Property operating costs |
| 35,605 | 4,776 | (4,426 | ) | 35,955 | ||||||||||||||
Real estate taxes and insurance |
| 4,696 | 620 | | 5,316 | |||||||||||||||
Depreciation and amortization |
15 | 22,486 | 3,342 | | 25,843 | |||||||||||||||
General and administrative |
5,433 | 9 | 133 | | 5,575 | |||||||||||||||
Other expenses |
106 | 139 | 2,141 | (37 | ) | 2,349 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
5,554 | 62,935 | 11,012 | (4,463 | ) | 75,038 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating (loss) income |
(1,152 | ) | 41,270 | 8,993 | | 49,111 | ||||||||||||||
Interest: |
||||||||||||||||||||
Expense incurred |
(14,174 | ) | | 2,605 | | (11,569 | ) | |||||||||||||
Amortization of deferred financing costs |
(953 | ) | | 108 | | (845 | ) | |||||||||||||
Equity in earnings |
52,976 | | | (52,976 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
36,697 | 41,270 | 11,706 | (52,976 | ) | 36,697 | ||||||||||||||
Preferred unit distributions |
(6,811 | ) | | | | (6,811 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income attributable to common units |
$ | 29,886 | $ | 41,270 | $ | 11,706 | $ | (52,976 | ) | $ | 29,886 | |||||||||
|
|
|
|
|
|
|
|
|
|
35
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31, 2017 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Cash flow from operating activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (21,718 | ) | $ | 54,701 | $ | 21,629 | $ | | $ | 54,612 | |||||||||
Return on investment in subsidiaries |
76,330 | | | (76,330 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) operating activities |
54,612 | 54,701 | 21,629 | (76,330 | ) | 54,612 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from investing activities |
||||||||||||||||||||
Investments in real estate development |
(503 | ) | (13,448 | ) | (123,272 | ) | | (137,223 | ) | |||||||||||
Investments in subsidiaries |
(142,768 | ) | | | 142,768 | | ||||||||||||||
Interest capitalized for real estate under development |
| (1,036 | ) | (3,015 | ) | | (4,051 | ) | ||||||||||||
Improvements to real estate |
| (44 | ) | (142 | ) | | (186 | ) | ||||||||||||
Additions to non-real estate property |
(54 | ) | (14 | ) | | | (68 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by investing activities |
(143,325 | ) | (14,542 | ) | (126,429 | ) | 142,768 | (141,528 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from financing activities |
||||||||||||||||||||
Line of credit: |
||||||||||||||||||||
Proceeds |
146,549 | | | | 146,549 | |||||||||||||||
Mortgage notes payable: |
||||||||||||||||||||
Repayments |
| | (1,250 | ) | | (1,250 | ) | |||||||||||||
Payments of financing costs |
(34 | ) | | | | (34 | ) | |||||||||||||
Equity compensation payments |
(3,975 | ) | | | | (3,975 | ) | |||||||||||||
Parent financing |
| 14,542 | 128,226 | (142,768 | ) | | ||||||||||||||
Distribution to parent |
| (54,701 | ) | (21,629 | ) | 76,330 | | |||||||||||||
Distributions |
(48,018 | ) | | | | (48,018 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) financing activities |
94,522 | (40,159 | ) | 105,347 | (66,438 | ) | 93,272 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase in cash and cash equivalents |
5,809 | | 547 | | 6,356 | |||||||||||||||
Cash and cash equivalents, beginning of period |
31,781 | | 2,628 | | 34,409 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents, ending of period |
$ | 37,590 | $ | | $ | 3,175 | $ | | $ | 40,765 | ||||||||||
|
|
|
|
|
|
|
|
|
|
36
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Three months ended March 31, 2016 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Cash flow from operating activities |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by operating activities |
$ | (17,791 | ) | $ | 52,007 | $ | 17,123 | $ | | $ | 51,339 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from investing activities |
||||||||||||||||||||
Investments in real estate development |
| (1,197 | ) | (51,105 | ) | | (52,302 | ) | ||||||||||||
Land acquisition costs related party |
| | (20,168 | ) | | (20,168 | ) | |||||||||||||
Investments in subsidiaries |
(9,419 | ) | (48,627 | ) | 58,046 | | | |||||||||||||
Interest capitalized for real estate under development |
(2 | ) | | (3,181 | ) | | (3,183 | ) | ||||||||||||
Improvements to real estate |
| (2,099 | ) | | | (2,099 | ) | |||||||||||||
Additions to non-real estate property |
(26 | ) | (84 | ) | (13 | ) | | (123 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash used in investing activities |
(9,447 | ) | (52,007 | ) | (16,421 | ) | | (77,875 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from financing activities |
||||||||||||||||||||
Line of credit: |
||||||||||||||||||||
Proceeds |
60,000 | | | | 60,000 | |||||||||||||||
Repayments |
(60,000 | ) | | | | (60,000 | ) | |||||||||||||
Issuance of common units, net of offering costs |
275,797 | | | | 275,797 | |||||||||||||||
Equity compensation proceeds |
7,007 | | | | 7,007 | |||||||||||||||
Distributions |
(44,965 | ) | | | | (44,965 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by financing activities |
237,839 | | | | 237,839 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase in cash and cash equivalents |
210,601 | | 702 | | 211,303 | |||||||||||||||
Cash and cash equivalents, beginning of period |
21,697 | | 5,318 | | 27,015 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents, ending of period |
$ | 232,298 | $ | | $ | 6,020 | $ | | $ | 238,318 | ||||||||||
|
|
|
|
|
|
|
|
|
|
37
Exhibit 99.2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of DuPont Fabros Technology, Inc.
We have audited the accompanying consolidated balance sheets of DuPont Fabros Technology, Inc. (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DuPont Fabros Technology, Inc. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DuPont Fabros Technology, Inc.s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2017, not included herein, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Tysons, Virginia
February 23, 2017
1
Report of Independent Registered Public Accounting Firm
The Partners of DuPont Fabros Technology, L.P.
We have audited the accompanying consolidated balance sheets of DuPont Fabros Technology, L.P. (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, partners capital, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of DuPont Fabros Technology, L.P. at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DuPont Fabros Technology, L.Ps internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2017, not included herein, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Tysons, Virginia
February 23, 2017
2
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
December 31, 2016 |
December 31, 2015 |
|||||||
ASSETS | ||||||||
Income producing property: |
||||||||
Land |
$ | 105,890 | $ | 94,203 | ||||
Buildings and improvements |
3,018,361 | 2,736,936 | ||||||
|
|
|
|
|||||
3,124,251 | 2,831,139 | |||||||
Less: accumulated depreciation |
(662,183 | ) | (560,837 | ) | ||||
|
|
|
|
|||||
Net income producing property |
2,462,068 | 2,270,302 | ||||||
Construction in progress and property held for development |
330,983 | 300,939 | ||||||
|
|
|
|
|||||
Net real estate |
2,793,051 | 2,571,241 | ||||||
Cash and cash equivalents |
38,624 | 31,230 | ||||||
Rents and other receivables, net |
11,533 | 9,588 | ||||||
Deferred rent, net |
123,058 | 128,941 | ||||||
Lease contracts above market value, net |
5,138 | 6,029 | ||||||
Deferred costs, net |
25,776 | 23,774 | ||||||
Prepaid expenses and other assets |
41,284 | 44,689 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,038,464 | $ | 2,815,492 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
Liabilities: |
||||||||
Line of credit |
$ | 50,926 | $ | | ||||
Mortgage notes payable, net of deferred financing costs |
110,733 | 114,075 | ||||||
Unsecured term loan, net of deferred financing costs |
249,036 | 249,172 | ||||||
Unsecured notes payable, net of discount and deferred financing costs |
837,323 | 834,963 | ||||||
Accounts payable and accrued liabilities |
36,909 | 32,301 | ||||||
Construction costs payable |
56,428 | 22,043 | ||||||
Accrued interest payable |
11,592 | 11,821 | ||||||
Dividend and distribution payable |
46,352 | 43,906 | ||||||
Lease contracts below market value, net |
2,830 | 4,132 | ||||||
Prepaid rents and other liabilities |
78,232 | 67,477 | ||||||
|
|
|
|
|||||
Total liabilities |
1,480,361 | 1,379,890 | ||||||
Redeemable noncontrolling interests operating partnership |
591,101 | 479,189 | ||||||
Commitments and contingencies |
| | ||||||
Stockholders equity: |
||||||||
Preferred stock, $.001 par value, 50,000,000 shares authorized: |
||||||||
Series A cumulative redeemable perpetual preferred stock, no shares issued and outstanding at December 31, 2016 and 7,400,000 shares issued and outstanding at December 31, 2015 |
| 185,000 | ||||||
Series B cumulative redeemable perpetual preferred stock, no shares issued and outstanding at December 31, 2016 and 6,650,000 shares issued and outstanding at December 31, 2015 |
| 166,250 | ||||||
Series C cumulative redeemable perpetual preferred stock, 8,050,000 shares issued and outstanding at December 31, 2016 and no shares issued and outstanding at December 31, 2015 |
201,250 | | ||||||
Common stock, $.001 par value, 250,000,000 shares authorized, 75,914,763 shares issued and outstanding at December 31, 2016 and 66,105,650 shares issued and outstanding at December 31, 2015 |
76 | 66 | ||||||
Additional paid in capital |
766,732 | 685,042 | ||||||
Retained earnings (Accumulated deficit) |
| (79,945 | ) | |||||
Accumulated other comprehensive loss |
(1,056 | ) | | |||||
|
|
|
|
|||||
Total stockholders equity |
967,002 | 956,413 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 3,038,464 | $ | 2,815,492 | ||||
|
|
|
|
See accompanying notes
3
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Revenues: |
||||||||||||
Base rent |
$ | 345,022 | $ | 298,585 | $ | 285,716 | ||||||
Recoveries from tenants |
169,668 | 139,537 | 124,853 | |||||||||
Other revenues |
14,011 | 14,278 | 7,023 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
528,701 | 452,400 | 417,592 | |||||||||
Expenses: |
||||||||||||
Property operating costs |
154,064 | 130,051 | 117,339 | |||||||||
Real estate taxes and insurance |
20,180 | 21,335 | 14,195 | |||||||||
Depreciation and amortization |
107,781 | 104,044 | 96,780 | |||||||||
General and administrative |
23,043 | 18,064 | 17,181 | |||||||||
Impairment on investment in real estate |
| 122,472 | | |||||||||
Other expenses |
11,781 | 16,859 | 9,222 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
316,849 | 412,825 | 254,717 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
211,852 | 39,575 | 162,875 | |||||||||
Interest: |
||||||||||||
Expense incurred |
(48,294 | ) | (40,510 | ) | (33,583 | ) | ||||||
Amortization of deferred financing costs |
(3,712 | ) | (3,151 | ) | (2,980 | ) | ||||||
Gain on sale of real estate |
22,833 | | | |||||||||
Loss on early extinguishment of debt |
(1,232 | ) | | (1,701 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
181,447 | (4,086 | ) | 124,611 | ||||||||
Net (income) loss attributable to redeemable noncontrolling interests operating partnership |
(24,248 | ) | 5,993 | (18,704 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income attributable to controlling interests |
157,199 | 1,907 | 105,907 | |||||||||
Preferred stock dividends |
(20,739 | ) | (27,245 | ) | (27,245 | ) | ||||||
Issuance costs associated with redeemed preferred stock |
$ | (12,495 | ) | $ | | $ | | |||||
|
|
|
|
|
|
|||||||
Net income (loss) attributable to common shares |
$ | 123,965 | $ | (25,338 | ) | $ | 78,662 | |||||
|
|
|
|
|
|
|||||||
Earnings per share basic: |
||||||||||||
Net income (loss) attributable to common shares |
$ | 1.69 | $ | (0.40 | ) | $ | 1.19 | |||||
|
|
|
|
|
|
|||||||
Weighted average common shares outstanding |
73,003,164 | 65,184,013 | 65,486,108 | |||||||||
|
|
|
|
|
|
|||||||
Earnings per share diluted: |
||||||||||||
Net income (loss) attributable to common shares |
$ | 1.67 | $ | (0.40 | ) | $ | 1.18 | |||||
|
|
|
|
|
|
|||||||
Weighted average common shares outstanding |
73,839,036 | 65,184,013 | 66,086,379 | |||||||||
|
|
|
|
|
|
See accompanying notes
4
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net income (loss) |
$ | 181,447 | $ | (4,086 | ) | $ | 124,611 | |||||
Other comprehensive loss: |
||||||||||||
Foreign currency translation adjustments |
(1,257 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) |
180,190 | (4,086 | ) | 124,611 | ||||||||
Net (income) loss attributable to redeemable noncontrolling interests operating partnership |
(24,248 | ) | 5,993 | (18,704 | ) | |||||||
Other comprehensive loss attributable to redeemable noncontrolling interests operating partnership |
201 | | | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income attributable to controlling interests |
156,143 | 1,907 | 105,907 | |||||||||
Preferred stock dividends |
(20,739 | ) | (27,245 | ) | (27,245 | ) | ||||||
Issuance costs associated with redeemed preferred stock |
(12,495 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) attributable to common shares |
$ | 122,909 | $ | (25,338 | ) | $ | 78,662 | |||||
|
|
|
|
|
|
See accompanying notes
5
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands except share data)
Preferred | Common Shares | Additional Paid-in |
Retained Earnings (Accumulated |
Accumulated Other Comprehensive |
||||||||||||||||||||||||
Stock | Number | Amount | Capital | Deficit) | Loss | Total | ||||||||||||||||||||||
Balance at December 31, 2013 |
$ | 351,250 | 65,205,274 | $ | 65 | $ | 900,959 | $ | | $ | | $ | 1,252,274 | |||||||||||||||
Net income attributable to controlling interests |
105,907 | 105,907 | ||||||||||||||||||||||||||
Dividends declared on common stock |
(18,204 | ) | (78,662 | ) | (96,866 | ) | ||||||||||||||||||||||
Dividends earned on preferred stock |
(27,245 | ) | (27,245 | ) | ||||||||||||||||||||||||
Redemption of operating partnership units |
234,300 | | 6,100 | 6,100 | ||||||||||||||||||||||||
Issuance of stock awards |
163,187 | | 360 | 360 | ||||||||||||||||||||||||
Stock option exercises |
507,056 | 1 | 5,555 | 5,556 | ||||||||||||||||||||||||
Retirement and forfeiture of stock awards |
(48,013 | ) | | (1,193 | ) | (1,193 | ) | |||||||||||||||||||||
Amortization of deferred compensation costs |
6,565 | 6,565 | ||||||||||||||||||||||||||
Adjustments to redeemable noncontrolling interests operating partnership |
(136,117 | ) | (136,117 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at December 31, 2014 |
$ | 351,250 | 66,061,804 | $ | 66 | $ | 764,025 | $ | | $ | | $ | 1,115,341 | |||||||||||||||
Net income attributable to controlling interests |
1,907 | 1,907 | ||||||||||||||||||||||||||
Dividends declared on common stock |
(58,917 | ) | (54,533 | ) | (113,450 | ) | ||||||||||||||||||||||
Dividends earned on preferred stock |
(27,245 | ) | (27,245 | ) | ||||||||||||||||||||||||
Redemption of operating partnership units |
363,674 | | 9,544 | 9,544 | ||||||||||||||||||||||||
Common stock repurchases |
(1,002,610 | ) | (1 | ) | (31,911 | ) | (31,912 | ) | ||||||||||||||||||||
Issuance of stock awards |
565,162 | 1 | 2,238 | 2,239 | ||||||||||||||||||||||||
Stock option exercises |
362,642 | | 7,930 | 7,930 | ||||||||||||||||||||||||
Retirement and forfeiture of stock awards |
(245,022 | ) | | (7,682 | ) | (7,682 | ) | |||||||||||||||||||||
Amortization of deferred compensation costs |
7,846 | 7,846 | ||||||||||||||||||||||||||
Adjustments to redeemable noncontrolling interests operating partnership |
(8,105 | ) | (8,105 | ) | ||||||||||||||||||||||||
Impact of adoption of new accounting guidance related to stock-based compensation |
74 | (74 | ) | | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at December 31, 2015 |
$ | 351,250 | 66,105,650 | $ | 66 | $ | 685,042 | $ | (79,945 | ) | $ | | $ | 956,413 | ||||||||||||||
Net income attributable to controlling interests |
157,199 | 157,199 | ||||||||||||||||||||||||||
Other comprehensive loss attributable to controlling interests foreign currency translation adjustments |
(1,056 | ) | (1,056 | ) | ||||||||||||||||||||||||
Issuance of common stock, net |
7,613,000 | 8 | 275,462 | 275,470 |
6
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands except share data)
Preferred | Common Shares | Additional Paid-in |
Retained Earnings (Accumulated |
Accumulated Other Comprehensive |
||||||||||||||||||||||||
Stock | Number | Amount | Capital | Deficit) | Loss | Total | ||||||||||||||||||||||
Dividends declared on common stock |
(99,925 | ) | (44,020 | ) | (143,945 | ) | ||||||||||||||||||||||
Dividends earned on preferred stock |
(20,739 | ) | (20,739 | ) | ||||||||||||||||||||||||
Redemption of operating partnership units |
1,618,048 | 2 | 64,167 | 64,169 | ||||||||||||||||||||||||
Issuance of preferred stock, net |
201,250 | (6,998 | ) | 194,252 | ||||||||||||||||||||||||
Redemption of preferred stock |
(351,250 | ) | 12,495 | (12,495 | ) | (351,250 | ) | |||||||||||||||||||||
Issuance of stock awards |
227,430 | 810 | 810 | |||||||||||||||||||||||||
Stock option exercises |
478,733 | 10,592 | 10,592 | |||||||||||||||||||||||||
Retirement and forfeiture of stock awards |
(128,098 | ) | (2,969 | ) | (2,969 | ) | ||||||||||||||||||||||
Amortization of deferred compensation costs |
6,813 | 6,813 | ||||||||||||||||||||||||||
Adjustments to redeemable noncontrolling interests operating partnership |
(178,757 | ) | (178,757 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at December 31, 2016 |
$ | 201,250 | 75,914,763 | $ | 76 | $ | 766,732 | $ | | $ | (1,056 | ) | $ | 967,002 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
7
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Cash flow from operating activities |
||||||||||||
Net income (loss) |
$ | 181,447 | $ | (4,086 | ) | $ | 124,611 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
||||||||||||
Depreciation and amortization |
107,781 | 104,044 | 96,780 | |||||||||
Impairment on investment in real estate |
| 122,472 | | |||||||||
Gain on sale of real estate |
(22,833 | ) | | | ||||||||
Loss on early extinguishment of debt |
1,232 | | 1,701 | |||||||||
Straight-line revenues, net of reserve |
(93 | ) | 13,424 | 7,673 | ||||||||
Amortization of deferred financing costs |
3,712 | 3,151 | 2,980 | |||||||||
Amortization and write-off of lease contracts above and below market value |
(411 | ) | (880 | ) | (2,393 | ) | ||||||
Compensation paid with Company common shares |
6,597 | 9,303 | 6,191 | |||||||||
Changes in operating assets and liabilities |
||||||||||||
Rents and other receivables |
(1,884 | ) | (1,475 | ) | 4,561 | |||||||
Deferred costs |
(3,892 | ) | (4,233 | ) | (2,552 | ) | ||||||
Prepaid expenses and other assets |
(2,196 | ) | 4,901 | (5,637 | ) | |||||||
Accounts payable and accrued liabilities |
4,546 | 5,053 | 1,395 | |||||||||
Accrued interest payable |
(229 | ) | 1,062 | 776 | ||||||||
Prepaid rents and other liabilities |
16,185 | 2,285 | 8,427 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
289,962 | 255,021 | 244,513 | |||||||||
|
|
|
|
|
|
|||||||
Cash flow from investing activities |
||||||||||||
Net proceeds from sale of real estate |
123,545 | | | |||||||||
Investments in real estate development |
(294,764 | ) | (217,339 | ) | (265,374 | ) | ||||||
Acquisition of real estate |
(53,105 | ) | (8,600 | ) | | |||||||
Acquisition of real estate related party |
(20,168 | ) | | | ||||||||
Interest capitalized for real estate under development |
(10,380 | ) | (11,564 | ) | (9,644 | ) | ||||||
Improvements to real estate |
(4,843 | ) | (3,459 | ) | (1,916 | ) | ||||||
Additions to non-real estate property |
(1,270 | ) | (753 | ) | (316 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(260,985 | ) | (241,715 | ) | (277,250 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash flow from financing activities |
||||||||||||
Line of credit: |
||||||||||||
Proceeds |
135,899 | 120,000 | 60,000 | |||||||||
Repayments |
(85,000 | ) | (180,000 | ) | | |||||||
Mortgage notes payable: |
||||||||||||
Repayments |
(3,750 | ) | | | ||||||||
Unsecured term loan: |
||||||||||||
Proceeds |
| | 96,000 | |||||||||
Unsecured notes payable: |
||||||||||||
Proceeds |
| 248,012 | | |||||||||
Payments of financing costs |
(5,866 | ) | (4,740 | ) | (3,829 | ) | ||||||
Issuance of common stock, net of offering costs |
275,470 | | | |||||||||
Issuance of preferred stock, net of offering costs |
194,252 | | |
8
DUPONT FABROS TECHNOLOGY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Redemption of preferred stock |
(351,250 | ) | | | ||||||||
Equity compensation proceeds |
7,623 | 249 | 4,363 | |||||||||
Common stock repurchases |
| (31,912 | ) | | ||||||||
Dividends and distributions: |
||||||||||||
Common shares |
(137,076 | ) | (110,126 | ) | (85,422 | ) | ||||||
Preferred shares |
(24,824 | ) | (27,245 | ) | (27,245 | ) | ||||||
Redeemable noncontrolling interests operating partnership |
(27,061 | ) | (25,912 | ) | (20,265 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by financing activities |
(21,583 | ) | (11,674 | ) | 23,602 | |||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in cash and cash equivalents |
7,394 | 1,632 | (9,135 | ) | ||||||||
Cash and cash equivalents, beginning of period |
31,230 | 29,598 | 38,733 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, ending of period |
$ | 38,624 | $ | 31,230 | $ | 29,598 | ||||||
|
|
|
|
|
|
|||||||
Supplemental information: |
||||||||||||
Cash paid for interest, net of amounts capitalized |
$ | 48,871 | $ | 39,509 | $ | 32,923 | ||||||
|
|
|
|
|
|
|||||||
Deferred financing costs capitalized for real estate under development |
$ | 629 | $ | 737 | $ | 601 | ||||||
|
|
|
|
|
|
|||||||
Construction costs payable capitalized for real estate under development |
$ | 56,428 | $ | 22,043 | $ | 32,949 | ||||||
|
|
|
|
|
|
|||||||
Redemption of operating partnership units |
$ | 64,169 | $ | 9,544 | $ | 6,100 | ||||||
|
|
|
|
|
|
|||||||
Adjustments to redeemable noncontrolling interests operating partnership |
$ | 178,757 | $ | 8,105 | $ | 136,117 | ||||||
|
|
|
|
|
|
See accompanying notes
9
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands except units)
December 31, 2016 |
December 31, 2015 |
|||||||
ASSETS | ||||||||
Income producing property: |
||||||||
Land |
$ | 105,890 | $ | 94,203 | ||||
Buildings and improvements |
3,018,361 | 2,736,936 | ||||||
|
|
|
|
|||||
3,124,251 | 2,831,139 | |||||||
Less: accumulated depreciation |
(662,183 | ) | (560,837 | ) | ||||
|
|
|
|
|||||
Net income producing property |
2,462,068 | 2,270,302 | ||||||
Construction in progress and property held for development |
330,983 | 300,939 | ||||||
|
|
|
|
|||||
Net real estate |
2,793,051 | 2,571,241 | ||||||
Cash and cash equivalents |
34,409 | 27,015 | ||||||
Rents and other receivables, net |
11,533 | 9,588 | ||||||
Deferred rent, net |
123,058 | 128,941 | ||||||
Lease contracts above market value, net |
5,138 | 6,029 | ||||||
Deferred costs, net |
25,776 | 23,774 | ||||||
Prepaid expenses and other assets |
41,284 | 44,689 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,034,249 | $ | 2,811,277 | ||||
|
|
|
|
|||||
LIABILITIES AND PARTNERS CAPITAL | ||||||||
Liabilities: |
||||||||
Line of credit |
$ | 50,926 | $ | | ||||
Mortgage notes payable, net of deferred financing costs |
110,733 | 114,075 | ||||||
Unsecured term loan, net of deferred financing costs |
249,036 | 249,172 | ||||||
Unsecured notes payable, net of discount and deferred financing costs |
837,323 | 834,963 | ||||||
Accounts payable and accrued liabilities |
36,909 | 32,301 | ||||||
Construction costs payable |
56,428 | 22,043 | ||||||
Accrued interest payable |
11,592 | 11,821 | ||||||
Dividend and distribution payable |
46,352 | 43,906 | ||||||
Lease contracts below market value, net |
2,830 | 4,132 | ||||||
Prepaid rents and other liabilities |
78,232 | 67,477 | ||||||
|
|
|
|
|||||
Total liabilities |
1,480,361 | 1,379,890 | ||||||
Redeemable partnership units |
591,101 | 479,189 | ||||||
Commitments and contingencies |
| | ||||||
Partners capital: |
||||||||
Limited partners capital: |
||||||||
Series A cumulative redeemable perpetual preferred units, no units issued and outstanding at December 31, 2016 and 7,400,000 units issued and outstanding at December 31, 2015 |
| 185,000 | ||||||
Series B cumulative redeemable perpetual preferred units, no units issued and outstanding at December 31, 2016 and 6,650,000 units issued and outstanding at December 31, 2015 |
| 166,250 | ||||||
Series C cumulative redeemable perpetual preferred stock, 8,050,000 units issued and outstanding at December 31, 2016 and no units issued and outstanding at December 31, 2015 |
201,250 | | ||||||
Common units, 75,252,390 units issued and outstanding at December 31, 2016 and 65,443,277 units issued and outstanding at December 31, 2015 |
754,892 | 594,927 | ||||||
General partners capital, common units, 662,373 issued and outstanding at December 31, 2016 and December 31, 2015 |
6,645 | 6,021 | ||||||
|
|
|
|
|||||
Total partners capital |
962,787 | 952,198 | ||||||
|
|
|
|
|||||
Total liabilities and partners capital |
$ | 3,034,249 | $ | 2,811,277 | ||||
|
|
|
|
See accompanying notes
10
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except unit and per unit data)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Revenues: |
||||||||||||
Base rent |
$ | 345,022 | $ | 298,585 | $ | 285,716 | ||||||
Recoveries from tenants |
169,668 | 139,537 | 124,853 | |||||||||
Other revenues |
14,011 | 14,278 | 7,023 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
528,701 | 452,400 | 417,592 | |||||||||
Expenses: |
||||||||||||
Property operating costs |
154,064 | 130,051 | 117,339 | |||||||||
Real estate taxes and insurance |
20,180 | 21,335 | 14,195 | |||||||||
Depreciation and amortization |
107,781 | 104,044 | 96,780 | |||||||||
General and administrative |
23,043 | 18,064 | 17,181 | |||||||||
Impairment on investment in real estate |
| 122,472 | | |||||||||
Other expenses |
11,781 | 16,859 | 9,222 | |||||||||
|
|
|
|
|
|
|||||||
Total expenses |
316,849 | 412,825 | 254,717 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
211,852 | 39,575 | 162,875 | |||||||||
Interest: |
||||||||||||
Expense incurred |
(48,294 | ) | (40,510 | ) | (33,583 | ) | ||||||
Amortization of deferred financing costs |
(3,712 | ) | (3,151 | ) | (2,980 | ) | ||||||
Gain on sale of real estate |
22,833 | | | |||||||||
Loss on early extinguishment of debt |
(1,232 | ) | | (1,701 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income (loss) |
181,447 | (4,086 | ) | 124,611 | ||||||||
Preferred unit distributions |
(20,739 | ) | (27,245 | ) | (27,245 | ) | ||||||
Issuance costs associated with redeemed preferred units |
(12,495 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Net income (loss) attributable to common units |
$ | 148,213 | $ | (31,331 | ) | $ | 97,366 | |||||
|
|
|
|
|
|
|||||||
Earnings per unit basic: |
||||||||||||
Net income (loss) attributable to common units |
$ | 1.69 | $ | (0.40 | ) | $ | 1.19 | |||||
|
|
|
|
|
|
|||||||
Weighted average common units outstanding |
87,284,564 | 80,599,199 | 81,053,127 | |||||||||
|
|
|
|
|
|
|||||||
Earnings per unit diluted: |
||||||||||||
Net income (loss) attributable to common units |
$ | 1.67 | $ | (0.40 | ) | $ | 1.18 | |||||
|
|
|
|
|
|
|||||||
Weighted average common units outstanding |
88,120,436 | 80,599,199 | 81,653,398 | |||||||||
|
|
|
|
|
|
See accompanying notes
11
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net income (loss) |
$ | 181,447 | $ | (4,086 | ) | $ | 124,611 | |||||
Other comprehensive loss: |
||||||||||||
Foreign currency translation adjustments |
(1,257 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) |
180,190 | (4,086 | ) | 124,611 | ||||||||
Preferred unit distributions |
(20,739 | ) | (27,245 | ) | (27,245 | ) | ||||||
Issuance costs associated with redeemed preferred units |
(12,495 | ) | | | ||||||||
|
|
|
|
|
|
|||||||
Comprehensive income (loss) attributable to common units |
$ | 146,956 | $ | (31,331 | ) | $ | 97,366 | |||||
|
|
|
|
|
|
See accompanying notes
12
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
(in thousands, except unit data)
Limited Partners Capital | General Partners Capital | |||||||||||||||||||||||
Preferred Amount |
Common Units |
Common Amount |
Common Units |
Common Amount |
Total | |||||||||||||||||||
Balance at December 31, 2013 |
$ | 351,250 | 64,542,901 | $ | 887,695 | 662,373 | $ | 9,110 | $ | 1,248,055 | ||||||||||||||
Net income |
123,362 | 1,249 | 124,611 | |||||||||||||||||||||
Common unit distributions |
(118,723 | ) | (974 | ) | (119,697 | ) | ||||||||||||||||||
Preferred unit distributions |
(26,972 | ) | (273 | ) | (27,245 | ) | ||||||||||||||||||
Issuance of OP units to DFT when redeemable partnership units redeemed |
234,300 | 6,100 | 6,100 | |||||||||||||||||||||
Issuance of OP units for stock awards |
163,187 | 360 | 360 | |||||||||||||||||||||
Issuance of OP units due to option exercises |
507,056 | 5,556 | 5,556 | |||||||||||||||||||||
Retirement and forfeiture of OP units |
(48,013 | ) | (1,193 | ) | (1,193 | ) | ||||||||||||||||||
Amortization of deferred compensation costs |
6,565 | 6,565 | ||||||||||||||||||||||
Adjustments to redeemable partnership units |
(130,496 | ) | (1,493 | ) | (131,989 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2014 |
$ | 351,250 | 65,399,431 | $ | 752,254 | 662,373 | $ | 7,619 | $ | 1,111,123 | ||||||||||||||
Net loss |
(4,045 | ) | (41 | ) | (4,086 | ) | ||||||||||||||||||
Common unit distributions |
(138,817 | ) | (1,146 | ) | (139,963 | ) | ||||||||||||||||||
Preferred unit distributions |
(26,972 | ) | (273 | ) | (27,245 | ) | ||||||||||||||||||
Issuance of OP units to DFT when redeemable partnership units redeemed |
363,674 | 9,544 | 9,544 | |||||||||||||||||||||
OP unit repurchases |
(1,002,610 | ) | (31,912 | ) | (31,912 | ) | ||||||||||||||||||
Issuance of OP units for stock awards |
565,162 | 2,239 | 2,239 | |||||||||||||||||||||
Issuance of OP units due to option exercises |
362,642 | 7,930 | 7,930 | |||||||||||||||||||||
Retirement and forfeiture of OP units |
(245,022 | ) | (7,682 | ) | (7,682 | ) | ||||||||||||||||||
Amortization of deferred compensation costs |
7,846 | 7,846 | ||||||||||||||||||||||
Adjustments to redeemable partnership units |
24,542 | (138 | ) | 24,404 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2015 |
$ | 351,250 | 65,443,277 | $ | 594,927 | 662,373 | $ | 6,021 | $ | 952,198 | ||||||||||||||
Net income |
179,864 | 1,583 | 181,447 | |||||||||||||||||||||
Other comprehensive loss foreign currency translation adjustments |
(1,246 | ) | (11 | ) | (1,257 | ) | ||||||||||||||||||
Issuance of OP units for common stock offering, net |
7,613,000 | 275,470 | 275,470 | |||||||||||||||||||||
Common unit distributions |
(169,403 | ) | (1,265 | ) | (170,668 | ) | ||||||||||||||||||
Preferred unit distributions |
(20,558 | ) | (181 | ) | (20,739 | ) | ||||||||||||||||||
Issuance of OP units to DFT when redeemable partnership units redeemed |
1,618,048 | 64,169 | 64,169 | |||||||||||||||||||||
Issuance of OP units for preferred stock offering, net |
201,250 | (6,998 | ) | 194,252 | ||||||||||||||||||||
Redemption of OP units for preferred stock |
(351,250 | ) | (351,250 | ) | ||||||||||||||||||||
Issuance of OP units for stock awards |
227,430 | 810 | 810 | |||||||||||||||||||||
Issuance of OP units due to option exercises |
478,733 | 10,592 | 10,592 | |||||||||||||||||||||
Retirement and forfeiture of OP units |
(128,098 | ) | (2,969 | ) | (2,969 | ) | ||||||||||||||||||
Amortization of deferred compensation costs |
6,813 | 6,813 | ||||||||||||||||||||||
Adjustments to redeemable partnership units |
(176,579 | ) | 498 | (176,081 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at December 31, 2016 |
$ | 201,250 | 75,252,390 | $ | 754,892 | 662,373 | $ | 6,645 | $ | 962,787 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
13
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Cash flow from operating activities |
||||||||||||
Net income (loss) |
$ | 181,447 | $ | (4,086 | ) | $ | 124,611 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
||||||||||||
Depreciation and amortization |
107,781 | 104,044 | 96,780 | |||||||||
Impairment on investment in real estate |
| 122,472 | | |||||||||
Gain on sale of real estate |
(22,833 | ) | | | ||||||||
Loss on early extinguishment of debt |
1,232 | | 1,701 | |||||||||
Straight-line rent, net of reserve |
(93 | ) | 13,424 | 7,673 | ||||||||
Amortization of deferred financing costs |
3,712 | 3,151 | 2,980 | |||||||||
Amortization of lease contracts above and below market value |
(411 | ) | (880 | ) | (2,393 | ) | ||||||
Compensation paid with Company common shares |
6,597 | 9,303 | 6,191 | |||||||||
Changes in operating assets and liabilities |
||||||||||||
Rents and other receivables |
(1,884 | ) | (1,475 | ) | 4,561 | |||||||
Deferred costs |
(3,892 | ) | (4,233 | ) | (2,552 | ) | ||||||
Prepaid expenses and other assets |
(2,196 | ) | 4,901 | (5,637 | ) | |||||||
Accounts payable and accrued liabilities |
4,546 | 5,053 | 1,396 | |||||||||
Accrued interest payable |
(229 | ) | 1,062 | 776 | ||||||||
Prepaid rents and other liabilities |
16,185 | 2,288 | 8,427 | |||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
289,962 | 255,024 | 244,514 | |||||||||
|
|
|
|
|
|
|||||||
Cash flow from investing activities |
||||||||||||
Proceeds from the sale of real estate |
123,545 | | | |||||||||
Investments in real estate development |
(294,764 | ) | (217,339 | ) | (265,374 | ) | ||||||
Acquisition of real estate |
(53,105 | ) | (8,600 | ) | | |||||||
Acquisition of real estate related party |
(20,168 | ) | | | ||||||||
Interest capitalized for real estate under development |
(10,380 | ) | (11,564 | ) | (9,644 | ) | ||||||
Improvements to real estate |
(4,843 | ) | (3,459 | ) | (1,916 | ) | ||||||
Additions to non-real estate property |
(1,270 | ) | (753 | ) | (316 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash used in investing activities |
(260,985 | ) | (241,715 | ) | (277,250 | ) | ||||||
|
|
|
|
|
|
|||||||
Cash flow from financing activities |
||||||||||||
Line of credit: |
||||||||||||
Proceeds |
135,899 | 120,000 | 60,000 | |||||||||
Repayments |
(85,000 | ) | (180,000 | ) | | |||||||
Mortgage notes payable: |
||||||||||||
Repayments |
(3,750 | ) | | | ||||||||
Unsecured term loan: |
||||||||||||
Proceeds |
| | 96,000 | |||||||||
Unsecured notes payable: |
||||||||||||
Proceeds |
| 248,012 | | |||||||||
Payments of financing costs |
(5,866 | ) | (4,740 | ) | (3,829 | ) | ||||||
Issuance of common units, net of offering costs |
275,470 | | | |||||||||
Issuance of preferred units, net of offering costs |
194,252 | | |
14
DUPONT FABROS TECHNOLOGY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Redemption of preferred units |
(351,250 | ) | | | ||||||||
Equity compensation proceeds |
7,623 | 249 | 4,363 | |||||||||
OP unit repurchases |
| (31,912 | ) | | ||||||||
Distributions |
(188,961 | ) | (163,283 | ) | (132,932 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by financing activities |
(21,583 | ) | (11,674 | ) | 23,602 | |||||||
|
|
|
|
|
|
|||||||
Net increase (decrease) in cash and cash equivalents |
7,394 | 1,635 | (9,134 | ) | ||||||||
Cash and cash equivalents, beginning of period |
27,015 | 25,380 | 34,514 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents, ending of period |
$ | 34,409 | $ | 27,015 | $ | 25,380 | ||||||
|
|
|
|
|
|
|||||||
Supplemental information: |
||||||||||||
Cash paid for interest, net of amounts capitalized |
$ | 48,871 | $ | 39,509 | $ | 32,923 | ||||||
|
|
|
|
|
|
|||||||
Deferred financing costs capitalized for real estate under development |
$ | 629 | $ | 737 | $ | 601 | ||||||
|
|
|
|
|
|
|||||||
Construction costs payable capitalized for real estate under development |
$ | 56,428 | $ | 22,043 | $ | 32,949 | ||||||
|
|
|
|
|
|
|||||||
Redemption of operating partnership units |
$ | 64,169 | $ | 9,544 | $ | 6,100 | ||||||
|
|
|
|
|
|
|||||||
Adjustments to redeemable partnership units |
$ | 176,081 | $ | (24,404 | ) | $ | 131,989 | |||||
|
|
|
|
|
|
See accompanying notes
15
DUPONT FABROS TECHNOLOGY, INC.
DUPONT FABROS TECHNOLOGY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016
1. Description of Business
DuPont Fabros Technology, Inc. (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 December 31, 2016, owned 84.9% of the common economic interest in the Operating Partnership, of which 0.9% is held as general partnership units. Unless otherwise indicated or unless the context requires otherwise, all references in this report to we, us, our, our Company or the Company refer to DFT and the Operating Partnership, collectively. As of December 31, 2016, we held a fee simple interest in the following properties:
| 11 operating data centers ACC2, ACC3, ACC4, ACC5, ACC6, ACC7, CH1, CH2, SC1 Phases I-II, VA3, and VA4; |
| Five data center projects under development ACC9 Phases I and II, CH3 Phase I, SC1 Phase III and TOR1 Phase IA; |
| One shell of a data center currently under development ACC10; |
| Three data center projects available for future development CH3 Phase II, TOR1 Phase IB and TOR1 Phase II; |
| Land that may be used to develop four additional data centers ACC8, ACC11, OR1 and OR2. |
2. Significant Accounting Policies
Basis of Presentation
This report combines the annual reports on Form 10-K for the year ended December 31, 2016 of DuPont Fabros Technology, Inc. and DuPont Fabros Technology, L.P. References to 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.
We believe combining the annual reports on Form 10-K 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. |
We operate DFT and the Operating Partnership as one business. The management of DFT consists of the same employees as the management of the Operating Partnership.
We believe 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, through its wholly-owned subsidiaries, 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 our business. These sources include the Operating Partnerships operations, its direct or indirect incurrence of indebtedness, and the issuance of partnership units.
16
As sole 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 Partnerships capital includes preferred units and general and limited common units that are owned by DFT and the other partners. DFTs stockholders equity includes preferred stock, common stock, additional paid in capital, retained earnings and accumulated other comprehensive income (loss). 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 Partnerships consolidated financial statements and as redeemable noncontrolling interests-operating partnership in DFTs consolidated financial statements. The only difference between the assets and liabilities of DFT and the Operating Partnership as of December 31, 2016 was a $4.2 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 consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
We have one reportable segment consisting of investments in data centers located in the United States and Canada. All of our properties generate similar types of revenues and expenses related to customer rent and reimbursements and operating expenses. The delivery of our 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 our portfolio have similar economic characteristics and the nature of the products and services provided to our customers and the method to distribute such services are consistent throughout the portfolio.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires us 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
All capital improvements for the income-producing properties are capitalized to individual building components, including interest and real estate taxes incurred during the period of development, and depreciated over their estimated useful lives. Interest is capitalized during the period of development based upon applying the propertys specific borrowing rate to the actual development costs expended up to specific borrowings, if any, and then applying our weighted-average borrowing rate to any residual development costs expended during the construction period. Interest is capitalized until the property has reached substantial completion and is ready for its intended use. Interest costs capitalized totaled $11.0 million, $12.3 million and $10.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. We cease interest capitalization when a development is placed in service or temporarily suspended.
We capitalize pre-development costs, including internal costs, incurred in pursuit of new development opportunities for which we believe future development is probable. Future development is dependent upon various factors, including zoning and regulatory approval, rental market conditions, construction costs and availability of capital. Pre-development costs incurred for which future development is not yet considered probable are expensed as incurred. In addition, if the status of such a pre-development opportunity changes, making future development no longer probable, any capitalized pre-development costs are written-off with a charge to expense. Furthermore, the revenue from incidental operations received from the current improvements in excess of any incremental costs are recorded as a reduction of total capitalized costs of the development project and not as a part of net income. The capitalization of costs during the development of assets (including interest and related loan fees, property taxes and other direct and indirect costs) begins when development efforts commence and ends when the asset, or a portion of the asset, is substantially complete and ready for its intended use. For the years ended December 31, 2016, 2015 and 2014, we capitalized $8.0 million, $7.5 million and $4.5 million, respectively, of internal development and leasing costs on all of our data centers.
17
The fair value of in-place leases consists of the following components, as applicable: (1) the estimated cost to replace the leases, including foregone rents during the period of finding a new customer, foregone recovery of customer pass-through, customer improvements, and other direct costs associated with obtaining a new customer (referred to as tenant origination costs); (2) the estimated leasing commissions associated with obtaining a new customer (referred to as leasing commissions); and (3) the above/below market cash flow of the leases, determined by comparing the projected cash flows of the leases in place to projected cash flows of comparable market-rate leases (referred to as lease intangibles). Tenant origination costs are included in buildings and improvements in our accompanying consolidated balance sheets and are amortized as depreciation expense on a straight-line basis over the average remaining life of the underlying leases. Leasing commissions are classified as deferred costs and are amortized as amortization expense on a straight-line basis over the remaining life of the underlying leases. Lease intangible assets and liabilities are classified as lease contracts above and below market value, respectively, and amortized on a straight-line basis as decreases and increases, respectively, to rental revenue over the remaining life of the underlying leases. Should a customer terminate its lease early, the unamortized portions of leasing commissions and lease intangibles associated with that lease are written off to amortization expense or rental revenue, respectively, as further described below.
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 $103.5 million, $98.8 million and $92.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. Repairs and maintenance costs are expensed as incurred.
We review each of our properties for indicators of impairment. Examples of such indicators may include a significant decrease in the market price of the property, a significant adverse change in the extent or manner in which the property is being used in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of a property, including an adverse action or assessment by a regulator, an accumulation of costs significantly in excess of the amount originally expected for the development of a property, a history of operating or cash flow losses of the property or a current expectation that, more likely than not, a property will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows expected to result from the real estate investments use and eventual disposition and compare that estimate to the carrying value of the property. We assess the recoverability of the carrying value of our assets on a property-by-property basis. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition, potential sales proceeds and other factors. If our undiscounted cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property.
No impairment losses were recorded for the years ended December 31, 2016 and 2014. In the fourth quarter of 2015, we identified our NJ1 data center as an asset that fell outside of our strategic focus on wholesale data centers in our targeted markets, and it became evident that we would, more likely than not, sell NJ1 prior to its previously estimated useful life. In connection with that determination, we evaluated the recoverability of the carrying value for NJ1 and determined that its carrying value was no longer recoverable due to reducing its expected holding period. As a result, for the year ended December 31, 2015, we reduced the carrying value of NJ1 to its estimated fair value by recording an impairment charge of $122.5 million. Estimated fair value was determined using a third party appraisal for NJ1 in conjunction with the guidance in ASC 820, which involved the use of Level 3 inputs. The appraisal was based on the income capitalization approach which derives value using the propertys potential income and an average market capitalization rate for comparable sales in the market. NJ1 was sold in the second quarter of 2016 at a gain of $22.8 million.
We classify a data center property as held-for-sale when it meets the necessary criteria, which include when we commit to and actively embark on a plan to sell the asset, the sale is expected to be completed within one year under terms usual and customary for such sales, and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Data center properties held-for-sale are carried at the lower of cost or fair value less costs to sell. Accordingly, as of December 31, 2016 and 2015, we did not have any properties classified as held-for-sale.
18
Cash and Cash Equivalents
We consider all demand deposits and money market accounts purchased with a maturity date of three months or less, at the date of purchase, to be cash equivalents. Our account balances at one or more institutions exceed the Federal Deposit Insurance Corporation (FDIC) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. We have not experienced any losses and believe that the risk is not significant.
Deferred Costs
Deferred costs, net in our accompanying 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 of financing costs for our unsecured revolving credit facility (the Unsecured Credit Facility), net of accumulated amortization, which are presented within deferred costs, net in our accompanying consolidated balance sheets at December 31, 2016 and 2015, are as follows (in thousands):
December 31, | ||||||||
Financing costs presented within deferred costs, net | 2016 | 2015 | ||||||
Financing costs |
$ | 12,352 | $ | 8,198 | ||||
Accumulated amortization |
(6,376 | ) | (4,969 | ) | ||||
|
|
|
|
|||||
Financing costs, net |
$ | 5,976 | $ | 3,229 | ||||
|
|
|
|
Balances of financing costs for our other recognized debt liabilities, net of accumulated amortization, which are presented as a reduction of each of the respective recognized debt liabilities in our accompanying consolidated balance sheets at December 31, 2016 and 2015, are as follows (in thousands):
December 31, | ||||||||
Financing costs presented as a reduction of debt liability balances | 2016 | 2015 | ||||||
Financing costs |
$ | 20,423 | $ | 20,531 | ||||
Accumulated amortization |
(7,935 | ) | (5,618 | ) | ||||
|
|
|
|
|||||
Financing costs, net |
$ | 12,488 | $ | 14,913 | ||||
|
|
|
|
On July 25, 2016, we amended and restated the Unsecured Credit Facility and the Unsecured Term Loan, which, due to the change in composition of lenders comprising the Unsecured Credit Facilitys bank group, resulted in a loss on early extinguishment of debt of $1.2 million in the third quarter of 2016, which included a partial write-off of unamortized deferred financing costs of $0.5 million. In May 2014, we amended the Unsecured Credit Facility, which, due to the change in composition of lenders comprising the Unsecured Credit Facilitys bank group, resulted in the partial write-off of unamortized deferred financing costs totaling $0.3 million. In July 2014, we amended the Unsecured Term Loan, which, due to the change in composition of lenders comprising the Unsecured Term Loans bank group, resulted in a loss on early extinguishment of debt of $1.4 million, which included a partial write-off of unamortized deferred financing costs of $0.7 million.
Leasing costs, which consist of external fees and costs incurred in the successful negotiation of leases, internal costs expended in the successful negotiation of leases and 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 applicable leases on a straight-line basis. If an applicable lease terminates prior to the expiration of its initial term, the carrying amount of the leasing costs are written off to amortization expense. In June 2015, we wrote off $0.7 million of unamortized leasing costs to amortization expense related to a former customer in bankruptcy whose leases with us were rejected effective July 1, 2015 pursuant to an order made by the bankruptcy court, described below.
19
Leasing costs incurred for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Costs incurred for new leases |
$ | 3,690 | $ | 2,096 | $ | 2,004 | ||||||
Costs incurred for renewals |
202 | 1,188 | 153 | |||||||||
Costs incurred for re-leases |
| 949 | 2,000 | |||||||||
|
|
|
|
|
|
|||||||
Total leasing costs incurred |
$ | 3,892 | $ | 4,233 | $ | 4,157 | ||||||
|
|
|
|
|
|
Amortization of deferred leasing costs totaled $4.2 million, $4.9 million and $4.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. Balances, net of accumulated amortization, at December 31, 2016 and 2015 are as follows (in thousands):
December 31, | ||||||||
2016 | 2015 | |||||||
Leasing costs |
$ | 53,556 | $ | 50,503 | ||||
Accumulated amortization |
(33,756 | ) | (29,958 | ) | ||||
|
|
|
|
|||||
Leasing costs, net |
$ | 19,800 | $ | 20,545 | ||||
|
|
|
|
Inventory
We maintain fuel inventory for our generators, which is recorded at the lower of cost (on a first-in, first-out basis) or market. As of December 31, 2016 and 2015, the fuel inventory was $4.2 million and $4.5 million, respectively, and is included in prepaid expenses and other assets in the accompanying consolidated balance sheets.
Prepaid Rents
Prepaid rents, typically prepayment of the following months rent, consist of payments received from customers prior to the time the payments are earned and are recognized as revenue in subsequent periods when earned.
Rental Income
We, as a lessor, have retained substantially all the risks and benefits of ownership and account for our 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 lease, which commences when control of the space and critical power have been provided to the customer. If the lease contains an early termination clause with a penalty payment, we determine the lease termination date by evaluating whether the penalty reasonably assures that the lease will not be terminated early.
Straight-line rents receivable are included in deferred rent, net in the accompanying consolidated balance sheets. Lease inducements, which include cash payments to customers, are amortized as a reduction of rental income over the noncancellable lease term. Lease inducements are included in prepaid expenses and other assets in the accompanying 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 straight-line rents receivable, lease inducements and lease intangibles associated with that lease will be written off to rental revenue. In June 2015, we wrote-off as a reduction of base rent $0.4 million of unreserved straight-line rents receivable, $0.1 million of unamortized lease inducements and $1.0 million of unamortized lease intangibles related to a former customer in bankruptcy whose leases with us were rejected effective July 1, 2015 pursuant to an order made by the bankruptcy court.
20
Balances, net of accumulated amortization, at December 31, 2016 and 2015 are as follows (in thousands):
December 31, | ||||||||
2016 | 2015 | |||||||
Lease contracts above market value |
$ | 20,500 | $ | 20,500 | ||||
Accumulated amortization |
(15,362 | ) | (14,471 | ) | ||||
|
|
|
|
|||||
Lease contracts above market value, net |
$ | 5,138 | $ | 6,029 | ||||
|
|
|
|
|||||
Lease contracts below market value |
$ | 24,175 | $ | 24,175 | ||||
Accumulated amortization |
(21,345 | ) | (20,043 | ) | ||||
|
|
|
|
|||||
Lease contracts below market value, net |
$ | 2,830 | $ | 4,132 | ||||
|
|
|
|
Our policy is to record an allowance for losses on accounts receivable equal to the estimated uncollectible accounts. The estimate is based on our historical experience and a review of the current status of our receivables. As of December 31, 2016, we had a note receivable from a former customer of $25.0 million, which resulted from the settlement of our claim in this former customers bankruptcy proceedings in the fourth quarter of 2016 and replaced the $6.5 million note receivable that we had from this former customer as of December 31, 2015. We are accounting for the note receivable on a non-accrual basis. As of December 31, 2016 and 2015, we had allowances against these notes of $23.6 million and $5.1 million, respectively, leaving a note receivable, net, of $1.4 million as of December 31, 2016 and 2015, which is included within rents and other receivables, net in our accompanying consolidated balance sheets. Based on the principal payment schedule in the note that includes semiannual principal payments beginning in June 2017, we continue to be reasonably assured that we will be able to collect the balance of the note receivable, net.
We also establish an appropriate allowance for doubtful accounts for receivables arising from the straight-lining of rents. These receivables arise from revenue recognized in excess of amounts currently due under the lease and are recorded as deferred rent in the accompanying consolidated balance sheets. As of December 31, 2016 and 2015, we had no material allowances.
Our customer leases generally contain provisions under which the customers reimburse us for a portion of operating expenses and real estate taxes incurred by the property. Recoveries from tenants are included in revenue in the accompanying consolidated statements of operations in the period the applicable expenditures are incurred. The majority of our customer leases also provide us with a property management fee based on a percentage of base rent collected and property-level operating expenses, other than charges for power used by customers to run their servers and cool their space. Property management fees are included in base rent in the accompanying consolidated statements of operations in the applicable period in which they are earned.
Other Revenue
Other revenue primarily consists of services provided to customers on a non-recurring basis. This includes layout design and installation of electrical power circuits, data cabling, server cabinets and racks, computer room airflow analyses and monitoring and other services requested by customers. Revenue is recognized on a completed contract basis when the project is finished and ready for the customers use. This method is consistently applied for all periods presented. Costs of providing these services are included in other expenses in the accompanying consolidated statements of operations.
21
Income Taxes
DFT elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Code), commencing with the taxable year ended December 31, 2007. In general, a REIT that meets certain organizational and operational requirements and distributes at least 90 percent of its REIT taxable income to its shareholders in a year will not be subject to income tax to the extent of the income it distributes. We currently qualify and intend to continue to qualify as a REIT under the Code. As a result, no provision for federal income taxes on income from continuing operations is required, except for taxes on certain property sales and on income, if any, of DF Technical Services, LLC, our taxable REIT subsidiary (TRS). If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our income at regular corporate tax rates for the year in which we do not qualify and the succeeding four years. Although we expect to qualify for taxation as a REIT, we may be subject to state and local income and franchise taxes and to federal income and excise taxes on any undistributed income.
As of December 31, 2016 and 2015, we did not have any unrecognized tax benefits. We do not believe that there will be any material changes in our unrecognized tax positions over the next 12 months. We are subject to examination by the respective taxing authorities for the tax years 2013 through 2016.
In general, a TRS may perform non-customary services for customers, hold assets that DFT cannot hold directly and generally may engage in any real estate or non real estate-related business. A TRS is subject to corporate federal and state income taxes on its taxable income at regular statutory tax rates. For the years ended December 31, 2016 and 2014, we incurred $0.1 million of income taxes. For the year ended December 31, 2015, we incurred no income taxes; however, we recorded a deferred income tax credit of $0.2 million to reverse the cumulative deferred tax expense recorded as of December 31, 2014.
We account for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided if, based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
As of December 31, 2016, our TRS had a deferred tax asset of $0.2 million, comprised entirely of its net operating loss carryforward, and no deferred tax liability, resulting in a net deferred tax asset of $0.2 million. We recorded a full valuation allowance for this net deferred tax asset as of December 31, 2016 due to the uncertainty of the realizability of this asset. The net operating loss carryforward of $0.2 million will begin to expire in 2031 if not utilized by then.
As of December 31, 2015, our TRS had a deferred tax asset of $4.6 million, comprised entirely of its net operating loss carryforward, and a deferred tax liability of $2.3 million, primarily comprised of a temporary depreciation difference, resulting in a net deferred tax asset of $2.3 million. We recorded a full valuation allowance for this net deferred tax asset as of December 31, 2015 due to the uncertainty of the realizability of this asset.
Redeemable Noncontrolling Interests Operating Partnership / Redeemable Partnership Units
Redeemable noncontrolling interests operating partnership, as presented on DFTs consolidated balance sheets, represent the limited partnership interests in the Operating Partnership (the OP units) held by individuals and entities other than DFT. These interests are also presented on the Operating Partnerships consolidated balance sheets, referred to as redeemable partnership units. Accordingly, the following discussion related to redeemable noncontrolling interests operating partnership of DFT 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 the 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 DFTs common stock. If such adjustments result in redeemable noncontrolling
22
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 9. 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 years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
OP Units | ||||||||
Number | Amount | |||||||
Balance at December 31, 2013 |
15,671,537 | $ | 387,244 | |||||
Net income attributable to redeemable noncontrolling interests operating partnership |
| 18,704 | ||||||
Distributions declared |
| (22,831 | ) | |||||
Redemption of operating partnership units |
(234,300 | ) | (6,100 | ) | ||||
Adjustments to redeemable noncontrolling interests operating partnership |
| 136,117 | ||||||
|
|
|
|
|||||
Balance at December 31, 2014 |
15,437,237 | $ | 513,134 | |||||
Net loss attributable to redeemable noncontrolling interests operating partnership |
| (5,993 | ) | |||||
Distributions declared |
| (26,513 | ) | |||||
Redemption of operating partnership units |
(363,674 | ) | (9,544 | ) | ||||
Adjustments to redeemable noncontrolling interests operating partnership |
| 8,105 | ||||||
|
|
|
|
|||||
Balance at December 31, 2015 |
15,073,563 | $ | 479,189 | |||||
Net income attributable to redeemable noncontrolling interests operating partnership |
| 24,248 | ||||||
Other comprehensive loss attributable to redeemable noncontrolling interests operating partnership |
| (201 | ) | |||||
Distributions declared |
| (26,723 | ) | |||||
Redemption of operating partnership units |
(1,618,048 | ) | (64,169 | ) | ||||
Adjustments to redeemable noncontrolling interests operating partnership |
| 178,757 | ||||||
|
|
|
|
|||||
Balance at December 31, 2016 |
13,455,515 | $ | 591,101 | |||||
|
|
|
|
The following is a summary of activity for redeemable partnership units for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
OP Units | ||||||||
Number | Amount | |||||||
Balance at December 31, 2013 |
15,671,537 | $ | 387,244 | |||||
Redemption of operating partnership units |
(234,300 | ) | (6,100 | ) | ||||
Adjustments to redeemable partnership units |
| 131,990 | ||||||
|
|
|
|
|||||
Balance at December 31, 2014 |
15,437,237 | $ | 513,134 | |||||
Redemption of operating partnership units |
(363,674 | ) | (9,544 | ) | ||||
Adjustments to redeemable partnership units |
| (24,401 | ) | |||||
|
|
|
|
|||||
Balance at December 31, 2015 |
15,073,563 | $ | 479,189 | |||||
Redemption of operating partnership units |
(1,618,048 | ) | (64,169 | ) | ||||
Adjustments to redeemable partnership units |
| 176,081 | ||||||
|
|
|
|
|||||
Balance at December 31, 2016 |
13,455,515 | $ | 591,101 | |||||
|
|
|
|
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 years ended December 31, 2016, 2015 and 2014 (dollars in thousands):
23
Year ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Net income attributable to controlling interests |
$ | 157,199 | $ | 1,907 | $ | 105,907 | ||||||
Transfers from noncontrolling interests: |
||||||||||||
Net change in the Companys common stock and additional paid in capital due to the redemption of OP units and other adjustments to redeemable noncontrolling interests operating partnership |
(114,588 | ) | 1,439 | (130,017 | ) | |||||||
|
|
|
|
|
|
|||||||
$ | 42,611 | $ | 3,346 | $ | (24,110 | ) | ||||||
|
|
|
|
|
|
Earnings Per Share of DFT
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 using the two class method.
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 using the two class method.
Stock-based Compensation
We periodically award stock-based compensation to employees and members of our Board of Directors in the form of common stock, restricted common stock, options and performance units. For each common 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 a common unit. We estimate the fair value of the awards and recognize this value over the requisite service period. The fair value of restricted stock-based compensation is based on the market value of DFTs 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. Forfeitures of all stock-based compensation awards are recognized as they occur.
Compensation paid with Company common shares, which is included in general and administrative expense on our consolidated statements of operations, totaled $6.6 million, $5.3 million and $6.2 million for the years ended December 31, 2016, 2015 and 2014, respectively. We capitalized $0.9 million, $0.8 million and $0.7 million of compensation paid with Company common shares to our data centers under development for the years ended December 31, 2016, 2015 and 2014, respectively.
Foreign Currency
The U.S. dollar is the functional currency of our consolidated operations in the United States. The functional currency of our consolidated entities that operate outside of the United States is the principal currency of the economic environment in which the entity primarily generates and expends cash. We translate the financial statements of consolidated entities whose functional currency is not the U.S. dollar into U.S. dollars. We translate assets and liabilities at the exchange rate in effect as of the financial statement date and translate income statement accounts using the weighted average exchange rate for the period. We include foreign currency translation adjustments and the effect of exchange rate changes on intercompany transactions of a long-term investment nature as a separate component of stockholders equity or partners capital. We report gains and losses from the effect of rate changes on intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from remeasuring U.S. dollar transactions for non-U.S. functional currency entities, in other expenses on our consolidated statements of operations. For the year ended December 31, 2016, we had less than $0.1 million of foreign currency transaction losses.
24
Recently Issued Accounting Pronouncements
Revenue Recognition - In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standard Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The standards core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. We are required to apply the new standard in the first quarter of 2018 and expect to elect the modified retrospective method of application of the standard. Although the standard does not apply to leases, we have assessed the impact on our financial position and results of operations. The standard will change our method of recognizing revenue on service and installation contracts included in other revenue in the accompanying consolidated statements of operations from the completed contract method to a method that recognizes revenue over the course of the contract based on the goods or services transferred to date relative to the remaining goods or services promised under the contract. We do not expect that this change will have a material effect on our financial position or results of operations. In addition, we currently do not believe the standard will have a material impact on how we recognize revenues from tenants with respect to operating expense recoveries on our financial position or results of operations.
Leases - In February 2016, the FASB issued Accounting Standards Update No. 2016-02 - Leases (Topic 842). We are required to apply the new standard in the first quarter of 2019. The Companys leases consist of both lease components that will be accounted for under this standard and non-lease components such as operating expense recovery income that will be accounted for under ASU 2014-09, Revenue from Contracts with Customers. The standard does not fundamentally change the lessor accounting model, and we do not believe that the new standard will have a material impact on our financial position or results of operations.
Financial Instruments - In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. Under this guidance, a company will be required to use a new forward-looking expected loss model for trade and other receivables that generally will result in the earlier recognition of allowances for losses. We are required to apply the new standard in the first quarter of 2020 and do not believe that the new standard will have a material effect on our financial position or results of operations.
Statement of Cash Flows - In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The standard provides guidance on eight specific cash flow classification issues including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. We are required to apply the new standard in the first quarter of 2018 and do not believe that the new standard will have a material effect on our financial position or results of operations.
Statement of Cash Flows - Restricted Cash - In November 2016, the FASB issued Accounting Standards Update No. 2016-18 (Topic 230), Restricted Cash. The standard requires restricted cash to be included with cash and cash equivalents when reconciling the beginning and ending amounts in the statement of cash flows. We are required to apply the new standard in the first quarter of 2018 and do not believe that the new standard will have a material effect on our financial position or results of operations.
Business Combinations - In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The standard narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition of assets or a business. The guidance is effective for public entities for fiscal years beginning after December 15, 2017 and interim periods within those years. However, we will early-adopt the standard effective January 1, 2017. As a result of this new guidance, acquisitions may now result in an asset purchase rather than a business combination. We do not believe that the new standard will have a material effect on our financial position or results of operations.
Recently Adopted Accounting Pronouncements
Going Concern - In August 2014, the FASB issued Accounting Standards Update No. 2014-15 - Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. Under this guidance, management is required to perform a going concern evaluation similar to the auditors evaluation required by standards issued by the Public Company Accounting Oversight Board and the American Institute of Certified Public Accountants. This evaluation is required for both annual and interim reporting periods. We adopted the new standard in the fourth quarter of 2016, and there was no material effect on our financial position or results of operations.
25
Consolidation - In February 2015, the FASB issued Accounting Standards Update No. 2015-02 - Consolidation: Amendments to the Consolidation Analysis, which amends the criteria for determining variable interest entities (VIEs), amends the criteria for determining if a service provider possesses a variable interest in a VIE, and eliminates the presumption that a general partner should consolidate a limited partnership. We adopted this standard as of January 1, 2016, and there was no material effect on our financial position or results of operations.
Stock Compensation - In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new guidance affects two areas of our accounting. First, the guidance increases the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employers statutory income tax withholding obligation. An employer is now allowed to withhold shares up to the amount of tax potentially owed using the maximum statutory tax rate in each jurisdiction. Second, companies now have the ability to make a policy election to account for forfeitures as they occur versus recording a forfeiture estimate. We early-adopted this standard as of January 1, 2016 and elected to account for forfeitures as they occur versus recording a forfeiture estimate. Per the guidance, we used a modified retrospective transition method of adoption, with a cumulative effect adjustment to accumulated deficit on our consolidated balance sheet as of December 31, 2015 totaling less than $0.1 million (see below).
Change in Accounting Principle
Stock Compensation - As required by Accounting Standards Update No. 2016-09 issued in March 2016, described above, we made a cumulative-effect adjustment to accumulated deficit to eliminate the forfeiture estimate recorded as of December 31, 2015, with a corresponding adjustment to additional paid in capital. The following table presents the prior period amounts that have been impacted by the new guidance and retrospectively adjusted on the consolidated balance sheet as of December 31, 2015 for DFT (dollars in thousands):
As of December 31, 2015 | ||||||||||||
As Previously Reported |
Impact of Change in Accounting Principle |
As Adjusted and Currently Reported |
||||||||||
Additional paid in capital |
$ | 684,968 | $ | 74 | $ | 685,042 | ||||||
Accumulated deficit |
(79,871 | ) | (74 | ) | (79,945 | ) |
Because the consolidated balance sheet for the Operating Partnership includes capital accounts for the general partner and the limited partners, which each include a combination of partner capital and retained earnings (accumulated deficit), there was no adjustment required for the consolidated balance sheet for the Operating Partnership as of December 31, 2015.
26
3. Real Estate Assets
The following is a summary of our properties as of December 31, 2016 (dollars in thousands):
Property |
Location | Land | Buildings and Improvements |
Construction in Progress and Land Held for Development |
Total Cost (2) | |||||||||||||||
ACC2 |
Ashburn, VA | $ | 2,500 | $ | 156,480 | $ | 158,980 | |||||||||||||
ACC3 |
Ashburn, VA | 1,071 | 96,080 | 97,151 | ||||||||||||||||
ACC4 |
Ashburn, VA | 6,600 | 538,869 | 545,469 | ||||||||||||||||
ACC5 |
Ashburn, VA | 6,443 | 299,016 | 305,459 | ||||||||||||||||
ACC6 |
Ashburn, VA | 5,518 | 216,829 | 222,347 | ||||||||||||||||
ACC7 |
Ashburn, VA | 9,753 | 332,970 | 342,723 | ||||||||||||||||
CH1 |
Elk Grove Village, IL | 23,611 | 359,171 | 382,782 | ||||||||||||||||
CH2 |
Elk Grove Village, IL | 14,392 | 256,539 | 270,931 | ||||||||||||||||
SC1 Phases I-II |
Santa Clara, CA | 20,202 | 433,099 | 453,301 | ||||||||||||||||
VA3 |
Reston, VA | 9,000 | 179,694 | 188,694 | ||||||||||||||||
VA4 |
Bristow, VA | 6,800 | 149,614 | 156,414 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
105,890 | 3,018,361 | | 3,124,251 | |||||||||||||||||
Construction in progress and land held for development (1) |
330,983 | 330,983 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
$ | 105,890 | $ | 3,018,361 | $ | 330,983 | $ | 3,455,234 | |||||||||||||
|
|
|
|
|
|
|
|
(1) | Properties located in Ashburn, VA (ACC8, ACC9, ACC10, and ACC11), Elk Grove Village, IL (CH3), Santa Clara, CA (SC1 Phase III, formerly referred to as SC2), Hillsboro, OR (OR1 and OR2) and Vaughan, ON (TOR1). |
(2) | As of December 31, 2016, the total cost of long-lived assets located in the United States totaled $3,408.9 million, and the total costs of long-lived assets located in Canada totaled $46.3 million (TOR1 in Vaughan, ON). |
In February 2016, we acquired two parcels of undeveloped land in Ashburn, Virginia from entities controlled by our Chairman of the Board. One parcel is a 35.4 acre site that we purchased for $15.6 million, which we are using for the development of our ACC9 and ACC10 data center facilities. The other parcel is an 8.6 acre site that we purchased for $4.6 million. This parcel is being held for the future development of either a powered base shell or build-to-suit data center to be known as ACC11.
In June 2016, we completed the sale of our NJ1 data center for a gross purchase price of $125.0 million, and recorded a gain on sale of $22.8 million. We had previously recorded an impairment charge of $122.5 million during the fourth quarter of 2015.
In July 2016, we completed the acquisition of a 46.7 acre parcel of land in Hillsboro, Oregon for a purchase price of $11.2 million. This acquisition was treated as an asset purchase under GAAP. We are holding this parcel of land for future development in connection with our expansion plans.
In September 2016, we completed the acquisition of a shell building and associated land in Vaughan, Ontario for a purchase price of $54.3 million CAD ($41.6 million USD). This acquisition was treated as an asset purchase under GAAP. We are currently developing Phase I of TOR1 in this shell.
27
The following presents the major components of our properties and the useful lives over which they are depreciated:
Component |
Component Life (years) |
|||
Land |
N/A | |||
Building improvements |
40 | |||
Electrical infrastructurepower distribution units |
20 | |||
Electrical infrastructureuninterrupted power supply |
25 | |||
Electrical infrastructureswitchgear/transformers |
30 | |||
Fire protection |
40 | |||
Security systems |
20 | |||
Mechanical infrastructureheating, ventilating and air conditioning |
20 | |||
Mechanical infrastructurechiller pumps/building automation |
25 | |||
Mechanical infrastructurechilled water storage and pipes |
30 |
4. Intangible Assets and Liabilities
Leasing costs are classified as deferred costs and are amortized as amortization expense on a straight-line basis over the remaining life of the underlying leases. As of December 31, 2016, these assets have a weighted average remaining life of 6.9 years with estimated future amortization as follows (in thousands):
Year Ending December 31, |
||||
2017 |
$ | 4,200 | ||
2018 |
3,854 | |||
2019 |
2,778 | |||
2020 |
2,235 | |||
2021 |
1,752 | |||
2022 and thereafter |
4,981 | |||
|
|
|||
$ | 19,800 | |||
|
|
Lease intangible assets and liabilities are classified as lease contracts above and below market value, respectively, and amortized on a straight-line basis as decreases and increases, respectively, to rental revenue over the remaining term of the underlying leases. As of December 31, 2016, our net lease intangible assets have a weighted average remaining life of 6.9 years for above market leases and 3.5 years for below market leases with estimated net future amortization (as an increase (decrease) to rental income) as follows (in thousands):
Year Ending December 31, |
||||
2017 |
$ | 467 | ||
2018 |
35 | |||
2019 |
(480 | ) | ||
2020 |
(644 | ) | ||
2021 |
(570 | ) | ||
2022 and thereafter |
(1,116 | ) | ||
|
|
|||
$ | (2,308 | ) | ||
|
|
28
Tenant origination costs are included in buildings and improvements in our accompanying consolidated balance sheets and are amortized as depreciation expense on a straight-line basis over the average remaining life of the underlying leases. As of December 31, 2016, these assets have a weighted average remaining life of 1.6 years with estimated future amortization as follows (in thousands):
Year Ending December 31, |
||||
2017 |
$ | 1,243 | ||
2018 |
746 | |||
|
|
|||
$ | 1,989 | |||
|
|
5. Leases
For the years ended December 31, 2016, 2015 and 2014, the following customers comprised more than 10.0% of our consolidated revenues:
Microsoft | Fortune 25 Investment Grade-Rated Company |
|||||||||||
Year ended December 31, 2016 |
29.7 | % | 17.6 | % | 10.3 | % | ||||||
Year ended December 31, 2015 |
25.2 | % | 16.9 | % | 6.5 | % | ||||||
Year ended December 31, 2014 |
21.6 | % | 17.4 | % | 4.7 | % |
As of December 31, 2016, these three customers accounted for $(2.0) million, $38.5 million and $11.7 million of deferred rent and $13.5 million, $8.4 million and $5.2 million of prepaid rents, respectively. As of December 31, 2015, these three customers accounted for $(5.2) million, $42.5 million, and $8.5 million of deferred rent and $9.8 million, $6.8 million, and $3.2 million of prepaid rents, respectively. We do not hold security deposits from these customers. The majority of our customers operate within the technology industry and, as such, their viability is subject to market fluctuations in that industry.
As of December 31, 2016, future minimum lease payments to be received under noncancellable operating leases are as follows for the years ending December 31 (in thousands):
2017 |
$ | 365,642 | ||
2018 |
358,439 | |||
2019 |
292,355 | |||
2020 |
239,842 | |||
2021 |
219,023 | |||
2022 and thereafter |
751,080 | |||
|
|
|||
$ | 2,226,381 | |||
|
|
29
6. Debt
Debt Summary as of December 31, 2016 and December 31, 2015
($ in thousands)
December 31, 2016 | December 31, 2015 | |||||||||||||||||||
Amounts (1) | % of Total | Rates | Maturities (years) |
Amounts (1) | ||||||||||||||||
Secured |
$ | 111,250 | 9 | % | 2.3 | % | 1.2 | $ | 115,000 | |||||||||||
Unsecured |
1,150,926 | 91 | % | 4.9 | % | 5.1 | 1,100,000 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,262,176 | 100 | % | 4.7 | % | 4.8 | $ | 1,215,000 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fixed Rate Debt: |
||||||||||||||||||||
Unsecured Notes due 2021 |
$ | 600,000 | 47 | % | 5.9 | % | 4.7 | $ | 600,000 | |||||||||||
Unsecured Notes due 2023 (2) |
250,000 | 20 | % | 5.6 | % | 6.5 | 250,000 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Fixed Rate Debt |
$ | 850,000 | 67 | % | 5.8 | % | 5.2 | $ | 850,000 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Floating Rate Debt: |
||||||||||||||||||||
Unsecured Credit Facility |
50,926 | 4 | % | 2.4 | % | 3.6 | | |||||||||||||
Unsecured Term Loan |
250,000 | 20 | % | 2.3 | % | 5.1 | 250,000 | |||||||||||||
ACC3 Term Loan |
111,250 | 9 | % | 2.3 | % | 1.2 | 115,000 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Floating Rate Debt |
412,176 | 33 | % | 2.3 | % | 3.8 | 365,000 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,262,176 | 100 | % | 4.7 | % | 4.8 | $ | 1,215,000 | |||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Principal amounts exclude deferred financing costs. |
(2) | Principal amount shown excludes original issue discount of $1.7 million. |
Outstanding Indebtedness
Unsecured Credit Facility and Unsecured Term Loan
On July 25, 2016, we entered into an amended and restated credit agreement with a syndicate of banks (the Amended and Restated Credit Agreement) that includes the following:
| an unsecured revolving credit facility with a total commitment of $750 million (the Unsecured Credit Facility); and |
| an unsecured term loan facility, which has a total commitment and amount outstanding of $250 million (the Unsecured Term Loan). |
In November 2016, we added a Canadian dollar sublimit of up to $185 million (approximately CAD $250 million) to the Unsecured Credit Facility, which allows us to borrow in Canadian dollars to fund our TOR1 data center development in Vaughan, Ontario. In addition, the Canadian borrowings allow us to hedge our foreign currency investment risk by having these liabilities translate at the same exchange rates as our Canadian assets at the end of each period. In 2016, we designated all of the Canadian borrowings on our Unsecured Credit Facility, which totaled CAD $62.0 million as of December 31, 2016, as a net investment hedge of our Canadian assets. For the effective portion of these net investment hedges, the currency translation effects of these borrowings are reflected in accumulated other comprehensive loss within shareholders equity on our consolidated balance sheets, where they offset the currency translation effects of our investment in our Canadian assets. There was no ineffectiveness for our net investment hedges during 2016.
At our option, we may increase the total commitment under the Unsecured Credit Facility and the Unsecured Term Loan to $1.25 billion, if one or more lenders commit to being a lender for the additional amount and certain other customary conditions are met.
Prior to July 25, 2016, the Unsecured Credit Facility and the Unsecured Term Loan were outstanding under separate credit agreements.
30
The obligations under the Amended and Restated Credit Agreement are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and all of the Operating Partnerships subsidiaries that currently guaranty the obligations under the Unsecured Notes due 2021, listed below. Prior to July 25, 2016, the separate credit agreements that governed the Unsecured Credit Facility and the Unsecured Term Loan provided for substantially the same guarantees as the Amended and Restated Credit Agreement. We may prepay the Unsecured Credit Facility and the Unsecured Term Loan at any time, in whole or in part, without penalty or premium.
The Amended and Restated Credit Agreement requires that DFT, 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 limits on dividend payments, distributions and purchases of DFTs stock. In addition, the facility imposes financial maintenance covenants relating to, among other things, the following matters:
| unsecured debt not exceeding 60% of the value of unencumbered assets, subject to an increase up to 65% following a material acquisition; |
| net operating income generated from unencumbered properties divided by the amount of unsecured debt (net of unrestricted cash and cash equivalents) being not less than 12.5%, subject to a decrease to not less than 10.0% following a material acquisition; |
| total indebtedness not exceeding 60% of gross asset value, subject to an increase up to 65% following a material acquisition; |
| fixed charge coverage ratio being not less than 1.70 to 1.00; |
| tangible net worth being not less than $2.3 billion plus 75% of the sum of (i) net equity offering proceeds after July 25, 2016 (but excluding such net offering proceeds that are used within ninety (90) days following the consummation of the applicable equity offering for permitted equity redemptions) and (ii) the value of equity interests issued in connection with a contribution of assets to the borrower or its subsidiaries; and |
| until an investment grade unsecured debt credit rating has been achieved, unhedged variable rate debt not exceeding 30% of gross asset value. |
The Amended and Restated Credit Agreement 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.
We were in compliance with all covenants under the Unsecured Credit Facility and the Unsecured Term Loan as of December 31, 2016.
The Unsecured Credit Facility matures on July 25, 2020.
We may elect to have borrowings under the Unsecured Credit Facility bear interest at either the London Interbank Offered Rate (LIBOR) or a base rate, which is based on the lenders prime rate, in each case plus an applicable margin. Prior to our 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% |
1.55 | % | 0.55 | % | |||||
Level 2 |
Greater than 35% but less than or equal to 40% |
1.65 | % | 0.65 | % | |||||
Level 3 |
Greater than 40% but less than or equal to 45% |
1.80 | % | 0.80 | % | |||||
Level 4 |
Greater than 45% but less than or equal to 52.5% |
1.95 | % | 0.95 | % | |||||
Level 5 |
Greater than 52.5% |
2.15 | % | 1.15 | % |
31
The applicable margin is currently set at pricing Level 1. The terms of the Unsecured Credit Facility provide for the adjustment of the applicable margin from time to time according to the ratio of the Operating Partnerships total indebtedness to gross asset value in effect from time to time.
In the event we receive an investment grade credit rating, borrowings under the Unsecured Credit 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 Moodys |
0.85 | % | 0.00 | % | |||||
Level 2 |
Greater than or equal to BBB+ by S&P or Baa1 by Moodys |
0.90 | % | 0.00 | % | |||||
Level 3 |
Greater than or equal to BBB by S&P or Baa2 by Moodys |
1.00 | % | 0.00 | % | |||||
Level 4 |
Greater than or equal to BBB- by S&P or Baa3 by Moodys |
1.20 | % | 0.20 | % | |||||
Level 5 |
Less than BBB- by S&P or Baa3 by Moodys |
1.55 | % | 0.55 | % |
Following the receipt of such investment grade rating, the terms of the Unsecured Credit Facility provide for the adjustment of the applicable margin from time to time according to the rating then in effect.
The amount available for borrowings under the Unsecured Credit 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 Partnerships unsecured debt. Up to $35 million of the borrowings under the Unsecured Credit Facility may be used for letters of credit.
As of December 31, 2016, we had no letters of credit outstanding. As of December 31, 2016, we had USD $10.0 million and CAD $55.0 million outstanding on the Unsecured Credit Facility for a total of USD $50.9 million outstanding. As of February 23, 2017, we had USD $60.0 million and CAD $62.0 million outstanding on the Unsecured Credit Facility for a total of approximately USD $107.1 million outstanding.
The Unsecured Term Loan matures on January 21, 2022.
Under the terms of the Unsecured Term Loan, we may elect to have borrowings under the loan bear interest at either LIBOR or a base rate, which is based on the lenders prime rate, in each case plus an applicable margin. Prior to our 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% |
1.50 | % | 0.50 | % | |||||
Level 2 |
Greater than 35% but less than or equal to 40% |
1.60 | % | 0.60 | % | |||||
Level 3 |
Greater than 40% but less than or equal to 45% |
1.75 | % | 0.75 | % | |||||
Level 4 |
Greater than 45% but less than or equal to 52.5% |
1.90 | % | 0.90 | % | |||||
Level 5 |
Greater than 52.5% |
2.10 | % | 1.10 | % |
The applicable margin is currently set at pricing Level 1. The terms of the Unsecured Term Loan also provide that, in the event we receive an investment grade credit rating, borrowings under the loan 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 Moodys |
0.825 | % | 0.00 | % | |||||
Level 2 |
Greater than or equal to BBB+ by S&P or Baa1 by Moodys |
0.875 | % | 0.00 | % | |||||
Level 3 |
Greater than or equal to BBB by S&P or Baa2 by Moodys |
1.00 | % | 0.00 | % | |||||
Level 4 |
Greater than or equal to BBB- by S&P or Baa3 by Moodys |
1.25 | % | 0.25 | % | |||||
Level 5 |
Less than BBB- by S&P or Baa3 by Moodys |
1.65 | % | 0.65 | % |
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Following the receipt of such investment grade rating, the terms of the loan provide for the adjustment of the applicable margin from time to time according to the rating then in effect.
ACC3 Term Loan
We have a $111.3 million term loan facility that is secured by our ACC3 data center facility and an assignment of the lease agreement between us and the customer of ACC3 (the ACC3 Term Loan). The borrower, one of our subsidiaries, may elect to have borrowings under the ACC3 Term Loan bear interest at (i) LIBOR plus 1.55% or (ii) a base rate, which is based on the lenders prime rate, plus 0.55%. The interest rate is currently at LIBOR plus 1.55%. The ACC3 Term Loan matures on March 27, 2018, and we may prepay the ACC3 Term Loan at any time, in whole or in part, without penalty or premium. The Operating Partnership has guaranteed the outstanding principal amount of the ACC3 Term Loan, plus interest and certain costs under the loan.
The ACC3 Term Loan imposes financial maintenance covenants relating to, among other things, the following matters:
| consolidated total indebtedness of the Operating Partnership not exceeding 60% of gross asset value of the Operating Partnership; |
| fixed charge coverage ratio of the Operating Partnership being not less than 1.70 to 1.00; |
| tangible net worth of the Operating Partnership 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; and |
| debt service coverage ratio of the borrower not less than 1.50 to 1.00. |
We were in compliance with all of the covenants under the ACC3 Term Loan as of December 31, 2016.
Unsecured Notes due 2021
On September 24, 2013, the Operating Partnership completed the sale of $600 million of 5.875% senior unsecured notes due 2021, which we refer to as the Unsecured Notes due 2021. The Unsecured Notes due 2021 were issued at face value and mature on September 15, 2021. We pay interest on the Unsecured Notes due 2021 semi-annually, in arrears, on March 15th and September 15th of each year.
The Unsecured Notes due 2021 are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and certain of the Operating Partnerships subsidiaries, including the subsidiaries that own the ACC2, ACC4, ACC5, ACC6, VA3, VA4, CH1 and SC1 data centers (collectively, the Subsidiary Guarantors), but excluding the subsidiaries that own the ACC3, ACC7, ACC9, ACC10, CH2, CH3 and TOR1 data centers, the ACC8, ACC11, OR1 and OR2 parcels of land, our taxable REIT subsidiary, DF Technical Services LLC and our property management subsidiary, DF Property Management LLC.
The Unsecured Notes due 2021 rank (i) equally in right of payment with all of the Operating Partnerships existing and future senior unsecured indebtedness, (ii) senior in right of payment with all of its existing and future subordinated indebtedness, (iii) effectively subordinate to any of the Operating Partnerships existing and future secured indebtedness and (iv) effectively junior to any liabilities of any subsidiaries of the Operating Partnership that do not guarantee the Unsecured Notes due 2021. The guarantees of the Unsecured Notes due 2021 by DFT and the Subsidiary Guarantors rank (i) equally in right of payment with such guarantors existing and future senior unsecured indebtedness, (ii) senior in right of payment with all of such guarantors existing and future subordinated indebtedness and (iii) effectively subordinate to any of such guarantors existing and future secured indebtedness
The Unsecured Notes due 2021 may be redeemed at the Operating Partnerships option, in whole or in part, at any time, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the 12-month period commencing September 15 of the years indicated below, in each case together with accrued and unpaid interest to the date of redemption:
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Year |
Redemption Price | |||
2016 |
104.406 | % | ||
2017 |
102.938 | % | ||
2018 |
101.469 | % | ||
2019 and thereafter |
100.000 | % |
If there is a change of control (as defined in the indenture governing the Unsecured Notes due 2021) of the Operating Partnership or DFT, we must offer to purchase the Unsecured Notes due 2021 at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. In addition, in certain circumstances we may be required to use the net proceeds of asset sales to purchase a portion of the Unsecured Notes due 2021 at 100% of the principal amount thereof, plus accrued and unpaid interest.
The Unsecured Notes due 2021 have certain covenants limiting the ability of or prohibiting the Operating Partnership and certain of its subsidiaries from, among other things, (i) incurring secured or unsecured indebtedness, (ii) entering into sale and leaseback transactions, (iii) making certain dividend payments, distributions, purchases of DFTs common stock and investments, (iv) entering into transactions with affiliates, (v) entering into agreements limiting the ability to make certain transfers and other payments from subsidiaries, (vi) engaging in sales of assets or (vii) engaging in certain mergers, consolidations or transfers/sales of all or substantially all assets. However, DFT may pay the minimum dividend necessary to meet its REIT income distribution requirements.
The Unsecured Notes due 2021 also require the Operating Partnership and the Subsidiary Guarantors to maintain total unencumbered assets of at least 150% of their unsecured debt on a consolidated basis. The Unsecured Notes due 2021 also have customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of ours or certain of our subsidiaries. Upon an event of default, the holders of the Unsecured Notes due 2021 or the trustee may declare the Unsecured Notes due 2021 due and immediately payable. We were in compliance with all covenants under the Unsecured Notes due 2021 as of December 31, 2016.
Unsecured Notes due 2023
On June 9, 2015, the Operating Partnership completed the sale of $250 million of 5.625% senior unsecured notes due 2023, which we refer to as the Unsecured Notes due 2023. The Unsecured Notes due 2023 were issued at 99.205% of par and mature on June 15, 2023. We pay interest on the Unsecured Notes due 2023 semi-annually, in arrears, on June 15th and December 15th of each year.
The Unsecured Notes due 2023 are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and the same Subsidiary Guarantors as those that guarantee the Unsecured Notes due 2021.
The ranking of the Unsecured Notes due 2023 and the guarantees of these notes are the same as the ranking of the Unsecured Notes due 2021 and the guarantees of those notes.
At any time prior to June 15, 2018, the Operating Partnership may redeem the Unsecured Notes due 2023, in whole or in part, at a price equal to the sum of (i) 100% of the principal amount of the Unsecured Notes due 2023 to be redeemed, plus (ii) a make-whole premium and accrued and unpaid interest. The Unsecured Notes due 2023 may be redeemed at the Operating Partnerships option, in whole or in part, at any time, on and after June 15, 2018 at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the 12-month period commencing June 15 of the years indicated below, in each case together with accrued and unpaid interest to the date of redemption:
Year |
Redemption Price | |||
2018 |
104.219 | % | ||
2019 |
102.813 | % | ||
2020 |
101.406 | % | ||
2021 and thereafter |
100.000 | % |
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If there is a change of control (as defined in the indenture governing the Unsecured Notes due 2023) of the Operating Partnership or DFT, we must offer to purchase the Unsecured Notes due 2023 at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. In addition, in certain circumstances we may be required to use the net proceeds of asset sales to purchase a portion of the Unsecured Notes due 2023 at 100% of the principal amount thereof, plus accrued and unpaid interest.
The Unsecured Notes due 2023 have certain covenants limiting or prohibiting the ability of the Operating Partnership and certain of its subsidiaries from, among other things, (i) incurring secured or unsecured indebtedness, (ii) entering into sale and leaseback transactions, (iii) making certain dividend payments, distributions, purchases of DFTs common stock and investments, (iv) entering into transactions with affiliates, (v) entering into agreements limiting the ability to make certain transfers and other payments from subsidiaries, (vi) engaging in sales of assets or (vii) engaging in certain mergers, consolidations or transfers/sales of all or substantially all assets. However, DFT may pay the minimum dividend necessary to meet its REIT income distribution requirements.
The Unsecured Notes due 2023 also require the Operating Partnership and the Subsidiary Guarantors to maintain total unencumbered assets of at least 150% of their unsecured debt on a consolidated basis. The Unsecured Notes due 2023 also have customary events of default, including, but not limited to, nonpayment, breach of covenants, and payment or acceleration defaults in certain other indebtedness of ours or certain of our subsidiaries. Upon an event of default, the holders of the Unsecured Notes due 2023 or the trustee may declare the Unsecured Notes due 2023 due and immediately payable. We were in compliance with all covenants under the Unsecured Notes due 2023 as of December 31, 2016.
A summary of our debt repayment schedule as of December 31, 2016 is as follows:
Debt Maturity as of December 31, 2016
($ in thousands)
Year |
Fixed Rate (1) | Floating Rate (1) | Total (1) | % of Total | Rates | |||||||||||||||
2017 |
| 8,750 | (4) | 8,750 | 0.7 | % | 2.3 | % | ||||||||||||
2018 |
| 102,500 | (4) | 102,500 | 8.1 | % | 2.3 | % | ||||||||||||
2019 |
| | | | % | | % | |||||||||||||
2020 |
| 50,926 | (5) | 50,926 | 4.1 | % | 2.4 | % | ||||||||||||
2021 |
600,000 | (2) | | 600,000 | 47.5 | % | 5.9 | % | ||||||||||||
2022 |
| 250,000 | (6) | 250,000 | 19.8 | % | 2.3 | % | ||||||||||||
2023 |
250,000 | (3) | | 250,000 | 19.8 | % | 5.6 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 850,000 | $ | 412,176 | $ | 1,262,176 | 100 | % | 4.7 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Principal amounts exclude deferred financing costs. |
(2) | The 5.875% Unsecured Notes due 2021 mature on September 15, 2021. |
(3) | The 5.625% Unsecured Notes due 2023 mature on June 15, 2023. Principal amount excludes original issue discount of $1.7 million as of December 31, 2016. |
(4) | The ACC3 Term Loan matures on March 27, 2018 with no extension option. Quarterly principal payments of $1.25 million began on April 1, 2016, increase to $2.5 million on April 1, 2017 and continue through maturity. |
(5) | The Unsecured Credit Facility matures on July 25, 2020 with a one-year extension option. |
(6) | The Unsecured Term Loan matures on January 21, 2022 with no extension option. |
7. Related Party Transactions
We leased space for our headquarters building from an affiliate of our Chairman of the Board and our former CEO. In addition, our Executive Vice President, Chief Development Officer, is a non-managing member of this entity, and her sole interest is an approximately 1% non-managing membership interest. Rent expense was $0.3 million, $0.4 million and $0.4 million for each of the years ended December 31, 2016, 2015 and 2014. This lease ended on September 30, 2016 and we have entered into a new office lease with an unrelated party.
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In February 2016, we acquired two parcels of undeveloped land in Ashburn, Virginia, from entities controlled by our Chairman of the Board. One parcel is a 35.4 acre site that we purchased for $15.6 million, which we are using for the development of our ACC9 and ACC10 data center facilities. The managers of the entity that sold us this site are a limited liability company owned solely by our Chairman of the Board, which also owns approximately 7% of the seller, and a limited liability company owned solely by our former CEO which also owns approximately 1% of the seller. In connection with the purchase of this parcel, the parties agreed that the party who began improvement work first on any portion of the property that is adjacent to the road would be responsible for certain improvements to the road required by the county and that the cost of these improvements would be shared between the parties. We were the first to begin improvements to the land adjacent to the road, and we have begun to make the necessary improvements to the road as required. As of December 31, 2016, $0.3 million was due to us from the seller for its share of these improvement costs.
The other parcel is an 8.6 acre site that we purchased for $4.6 million. This parcel is being held for the future development of either a powered base shell or build-to-suit data center to be known as ACC11. Our Chairman of the Board and our former CEO are the managers of the limited liability company that manages the entity that sold us this site. Our Chairman of the Board directly and indirectly owns approximately 23% of the seller, and our former CEO directly and indirectly owns approximately 18% of the seller. In addition, Frederic V. Malek, one of our independent directors, is a non-managing member of the entity that owned this site. Mr. Maleks sole interest in this entity is the ownership of an approximately 4% non-managing membership interest; he is neither an employee nor an executive officer of this entity. The purchase price for each site was based on an appraisal prepared for the Audit Committee of our Board of Directors by an independent appraisal firm.
8. Commitments and Contingencies
We are 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. We currently believe that the resolution of such matters will not have a material adverse effect on our financial condition or results of operations.
Contracts related to the development of ACC7 Phase IV, ACC9 Phases I-II, SC1 Phase III, CH3 Phase I and ACC10 data centers were in place as of December 31, 2016. These contracts are cost-plus in nature whereby the contract sum is the aggregate of the contractors cost to perform the work and to purchase the equipment 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 December 31, 2016, the control estimates were as follows for our projects under development:
| ACC7 Phase IV: $33.3 million of which $31.7 million had been incurred, and an additional $0.1 million has been committed under this contract. |
| ACC9 Phase I: $168.4 million of which $126.9 million has been incurred, and an additional $23.5 million has been committed under this contract. |
| ACC9 Phase II: $63.9 million of which $5.2 million has been incurred, and an additional $31.0 million has been committed under this contract. |
| SC1 Phase III: $149.0 million of which $78.6 million has been incurred, and an additional $17.1 million has been committed under this contract. |
| CH3 Phase I: $190.7 million of which $6.0 million has been incurred, and an additional $35.4 million has been committed under this contract. |
| ACC10 shell: $52.1 million of which $0.1 million has been incurred, and an additional $2.3 million has been committed under this contract. |
Concurrent with DFTs October 2007 initial public offering, we entered into tax protection agreements with some of the contributors of the initial properties including our Chairman of the Board and our former CEO. Pursuant to the terms of these agreements, if we dispose 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, we will indemnify the contributors for
36
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 January 1, 2017 without triggering the tax protection provisions is approximately 100% of the initial built-in gain of $667 million (unaudited). This percentage has increased each year by 10%, accumulating to 100% in 2017. As of December 31, 2016, none of the tax protection provisions have been triggered and no liability has been recorded on our consolidated balance sheet. If, as of January 1, 2017, the tax protection provisions were triggered, we would not be liable for protection on the taxes related to the built-in gain. Additionally, pursuant to the terms of these agreements, we must provide an opportunity for certain of the contributors of the initial properties to guarantee a secured loan and, if we fail to do so, we could be liable for protection on the taxes related to approximately $57 million (unaudited) of remaining minimum liability. The amount of our liability for protection on taxes could be based on the highest federal, state and local capital gains tax rates of the applicable contributor. Any sale by the Company that requires payments to any of DFTs executive officers or directors pursuant to these agreements requires the approval of at least 75% of the disinterested members of DFTs Board of Directors.
9. Redeemable noncontrolling interests operating partnership / Redeemable partnership units
Redeemable noncontrolling interests operating partnership, as presented in DFTs accompanying consolidated balance sheets, represent the OP units held by individuals and entities other than DFT. These interests are also presented in the Operating Partnerships consolidated balance sheets, referred to as redeemable partnership units. Accordingly, the following discussion related to redeemable noncontrolling interests operating partnership of DFT refers equally to redeemable partnership units of the Operating Partnership.
The redemption value of redeemable noncontrolling interests operating partnership as of December 31, 2016 and December 31, 2015 was $591.1 million and $479.2 million, respectively, based on the closing share price of DFTs common stock of $43.93 and $31.79, 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 DFTs common stock, if and when DFTs 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 DFTs common stock. DFT may elect to redeem tendered OP units for cash or for shares of DFTs common stock. During the years ended December 31, 2016, 2015 and 2014 OP unitholders redeemed a total of 1,618,048, 363,674, and 234,300 OP units, respectively, in exchange for an equal number of shares of common stock. See Note 2.
10. 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 (the 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.
On May 27, 2016, DFT redeemed 3,400,000 shares of its Series A Preferred Stock at a redemption price of $25 per share, plus accrued and unpaid dividends through the date of redemption. On June 9, 2016, DFT redeemed the remaining 4,000,000 shares of its Series A Preferred Stock at a redemption price of $25 per share, plus accrued and unpaid dividends through the date of redemption. Accordingly, for the year ended December 31, 2016, DFT wrote-off the original issuance costs related to the shares of Series A Preferred Stock totaling $6.4 million.
For the year ended December 31, 2016, DFT declared and paid a cash dividend on its Series A Preferred Stock, of which the OP paid an equivalent distribution on its preferred units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
4/1/2016 |
4/15/2016 | $ | 0.4921875 | $ | 0.4921875 | $ | 0.00 | |||||||||
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|
|
|
|||||||||||
$ | 0.4921875 | $ | 0.4921875 | $ | 0.00 | |||||||||||
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|
|
|
|
37
For the year ended December 31, 2015, DFT declared and paid the following cash dividends on its Series A Preferred Stock, of which the OP paid an equivalent distribution on its preferred units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
4/2/2015 |
4/15/2015 | $ | 0.4921875 | $ | 0.4921875 | $ | 0.00 | |||||||||
7/2/2015 |
7/15/2015 | 0.4921875 | 0.4921875 | 0.00 | ||||||||||||
10/2/2015 |
10/15/2015 | 0.4921875 | 0.4921875 | 0.00 | ||||||||||||
12/30/2015 |
1/15/2016 | 0.4921875 | 0.4921875 | 0.00 | ||||||||||||
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|
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$ | 1.9687500 | $ | 1.9687500 | $ | 0.00 | |||||||||||
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|
For the year ended December 31, 2014, DFT declared and paid the following cash dividends on its Series A Preferred Stock, of which the OP paid an equivalent distribution on its preferred units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
4/4/2014 |
4/15/2014 | $ | 0.4921875 | $ | 0.4921875 | $ | 0.00 | |||||||||
7/3/2014 |
7/15/2014 | 0.4921875 | 0.4921875 | 0.00 | ||||||||||||
10/3/2014 |
10/15/2014 | 0.4921875 | 0.4921875 | 0.00 | ||||||||||||
12/30/2014 |
1/15/2015 | 0.4921875 | 0.4921875 | 0.00 | ||||||||||||
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$ | 1.9687500 | $ | 1.9687500 | $ | 0.00 | |||||||||||
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Series B Preferred Stock
In March 2011 and January 2012, DFT issued an aggregate of 6,650,000 shares of 7.625% Series B Cumulative Redeemable Perpetual Preferred Stock (the Series B Preferred Stock), for $166.3 million in underwritten public offerings. The liquidation preference on the Series B Preferred Stock is $25 per share and dividends are scheduled quarterly. 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.
On June 9, 2016, DFT redeemed 2,650,000 shares of its Series B Preferred Stock at a redemption price of $25 per share, plus accrued and unpaid dividends through the date of redemption. On July 15, 2016, DFT redeemed the remaining 4,000,000 shares of its Series B Preferred Stock at a redemption price of $25 per share, plus accrued and unpaid dividends through the date of redemption. Accordingly, for the year ended December 31, 2016, DFT wrote-off the original issuance costs related to the shares of Series B Preferred Stock totaling $6.1 million.
For the year ended December 31, 2016, DFT declared and paid the following cash dividends on its Series B Preferred Stock, of which the OP paid an equivalent distribution on its preferred units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
4/1/2016 |
4/15/2016 | $ | 0.4765625 | $ | 0.4765625 | $ | 0.00 | |||||||||
7/1/2016 |
7/15/2016 | 0.4765625 | 0.4765625 | 0.00 | ||||||||||||
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$ | 0.9531250 | $ | 0.9531250 | $ | 0.00 | |||||||||||
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For the year ended December 31, 2015, DFT declared and paid the following cash dividends on its Series B Preferred Stock, of which the OP paid an equivalent distribution on its preferred units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
4/2/2015 |
4/15/2015 | $ | 0.4765625 | $ | 0.4765625 | $ | 0.00 | |||||||||
7/2/2015 |
7/15/2015 | 0.4765625 | 0.4765625 | 0.00 | ||||||||||||
10/2/2015 |
10/15/2015 | 0.4765625 | 0.4765625 | 0.00 | ||||||||||||
12/30/2015 |
1/15/2016 | 0.4765625 | 0.4765625 | 0.00 | ||||||||||||
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$ | 1.9062500 | $ | 1.9062500 | $ | 0.00 | |||||||||||
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For the year ended December 31, 2014, DFT declared and paid the following cash dividends on its Series B Preferred Stock, of which the OP paid an equivalent distribution on its preferred units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
4/4/2014 |
4/15/2014 | $ | 0.4765625 | $ | 0.4765625 | $ | 0.00 | |||||||||
7/3/2014 |
7/15/2014 | 0.4765625 | 0.4765625 | 0.00 | ||||||||||||
10/3/2014 |
10/15/2014 | 0.4765625 | 0.4765625 | 0.00 | ||||||||||||
12/30/2014 |
1/15/2015 | 0.4765625 | 0.4765625 | 0.00 | ||||||||||||
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$ | 1.9062500 | $ | 1.9062500 | $ | 0.00 | |||||||||||
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Series C Preferred Stock
In May 2016, DFT issued 8,050,000 shares of 6.625% Series C Cumulative Redeemable Perpetual Preferred Stock (the Series C Preferred Stock), for $201.3 million in an underwritten public offering that resulted in proceeds to the Company, net of underwriting discounts, commissions and other offering costs, of $194.3 million. The liquidation preference on the Series C Preferred Stock is $25 per share and dividends are scheduled quarterly. For each share of Series C Preferred Stock issued by DFT, the Operating Partnership issued a preferred unit equivalent to DFT with the same terms.
For the year ended December 31, 2016, DFT declared the following cash dividends on its Series C Preferred Stock, of which the OP will pay or has paid an equivalent distribution on its preferred units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
8/1/2016 |
8/15/2016 | $ | 0.4094618 | $ | 0.4094618 | $ | 0.00 | |||||||||
11/1/2016 |
11/15/2016 | 0.4140625 | 0.4140625 | 0.00 | ||||||||||||
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$ | 0.8235243 | $ | 0.8235243 | $ | 0.00 | |||||||||||
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Except in instances relating to preservation of our qualification as a REIT or in connection with our special optional redemption right discussed below, our Series C Preferred Stock is not redeemable prior to May 15, 2021. On and after May 15, 2021, we may, at our option, redeem our Series C Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of $25 per share, plus any accrued and unpaid dividends (whether or not declared) to, but not including, the date of redemption.
Upon the occurrence of a change of control, we have a special optional redemption right that enables us to redeem the Series C Preferred Stock within 120 days after the first date on which a change of control has occurred resulting in neither DFT nor the surviving entity having a class of common shares listed on the NYSE, NYSE MKT, or NASDAQ. For this special redemption right, the redemption price is $25 per share in cash, plus accrued and unpaid dividends (whether or not declared) to, but not including, the redemption date.
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Upon the occurrence of a change of control that results in neither DFT nor the surviving entity having a class of common shares listed on the NYSE, NYSE MKT, or NASDAQ, the holder will have the right (subject to our special optional redemption right to redeem the Series C Preferred Stock) to convert some or all of the Series C Preferred Stock into a number of shares of DFTs common stock equal to the lesser of (A) the quotient obtained by dividing (i) the sum of (x) $25, plus (y) an amount equal to any accrued and unpaid dividends, whether or not declared to, but not including, the date of conversion (unless the date of conversion is after a record date for a Series C Preferred Stock dividend payment and prior to the corresponding Series C Preferred Stock dividend payment date, in which case no additional amount for such accrued and unpaid dividend will be included in this quotient), by (ii) the price of DFTs common stock, and (B) 1.1723 (the Share Cap), subject to certain adjustments and provisions for the receipt of alternative consideration of equivalent value.
11. Stockholders Equity of DFT and Partners Capital of the OP
During the years ended December 31, 2016, 2015 and 2014:
| DFT issued an aggregate of 227,430, 565,162 and 163,187 shares of common stock, respectively, in connection with our annual grant of restricted stock to employees, the vesting of certain performance unit awards, the hiring of new employees and grants and retainers for our Board of Directors. The OP issued an equivalent number of units to the REIT. |
| OP unitholders redeemed a total of 1,618,048, 363,674 and 234,300 OP units, respectively, in exchange for an equal number of shares of DFTs common stock. |
For the year ended December 31, 2016, DFT declared and paid the following cash dividends totaling $1.91 per share on its common stock, of which the OP paid equivalent distributions on OP units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
04/01/2016 |
04/15/2016 | $ | 0.47 | $ | 0.26 | $ | 0.21 | |||||||||
07/01/2016 |
07/15/2016 | 0.47 | 0.26 | 0.21 | ||||||||||||
10/07/2016 |
10/17/2016 | 0.47 | 0.26 | 0.21 | ||||||||||||
12/30/2016 |
01/17/2017 | 0.50 | | | ||||||||||||
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$ | 1.91 | $ | 0.78 | $ | 0.63 | |||||||||||
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All of the $0.50 dividend paid in January 2017 (unaudited), will be included in 2017 common dividends.
For the year ended December 31, 2015, DFT declared and paid the following cash dividends totaling $1.73 per share on its common stock, of which the OP paid equivalent distributions on OP units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
04/02/2015 |
04/15/2015 | $ | 0.42 | $ | 0.42 | $ | | |||||||||
07/02/2015 |
07/15/2015 | 0.42 | 0.42 | | ||||||||||||
10/02/2015 |
10/15/2015 | 0.42 | 0.42 | | ||||||||||||
12/30/2015 |
01/16/2016 | 0.47 | 0.33 | | ||||||||||||
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$ | 1.73 | $ | 1.59 | $ | | |||||||||||
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Of the $0.47 dividend paid in January 2016, $0.14 (unaudited) was included in 2016 common dividends.
40
For the year ended December 31, 2014, DFT declared and paid the following cash dividends totaling $1.47 per share on its common stock, of which the OP paid equivalent distributions on OP units:
Record Date |
Payment Date | Cash Dividend | Ordinary Taxable Dividend (Unaudited) |
Nontaxable Return of Capital Distributions (Unaudited) |
||||||||||||
04/04/2014 |
04/15/2014 | $ | 0.35 | $ | 0.35 | $ | | |||||||||
07/03/2014 |
07/15/2014 | 0.35 | 0.35 | | ||||||||||||
10/03/2014 |
10/15/2014 | 0.35 | 0.35 | | ||||||||||||
12/30/2014 |
01/15/2015 | 0.42 | 0.39 | | ||||||||||||
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$ | 1.47 | $ | 1.44 | $ | | |||||||||||
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Of the $0.42 dividend paid in January 2015, $0.03 (unaudited) was included in 2015 common dividends.
In December 2014, the Board of Directors approved a common stock repurchase program to acquire up to $120.0 million of DFTs common shares in 2015. Under this program, which expired on December 31, 2015, DFT repurchased 1,002,610 shares of its common stock totaling $31.9 million. All repurchased shares were retired immediately, and the Operating Partnership retired an equivalent number of units. We did not have a repurchase program in 2016.
In March 2016, DFT completed a secondary underwritten public offering of 7,613,000 shares of common stock, at a public offering price of $37.75 per share. The total shares sold included 993,000 shares of common stock pursuant to the full exercise of the underwriters option to purchase additional shares of common stock. Net proceeds from the offering were approximately $275.5 million, after deducting the underwriting discount and other offering expenses, which DFT contributed to the Operating Partnership in exchange for OP units.
12. Equity Compensation Plan
In May 2011, our Board of Directors adopted the 2011 Equity Incentive Plan (the 2011 Plan) following approval from our stockholders. The 2011 Plan is administered by the Compensation Committee of our Board of Directors. The 2011 Plan allows us to provide equity-based compensation to our personnel and directors 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, 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.
As of December 31, 2016, 3,913,287 share equivalents were issued under the 2011 Plan, and the maximum aggregate amount of share equivalents remaining available for future issuance was 2,386,713.
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:
41
Shares of Restricted Stock |
Weighted Average Fair Value at Date of Grant |
|||||||
Unvested balance at December 31, 2013 |
303,964 | $ | 22.89 | |||||
Granted |
149,608 | $ | 25.63 | |||||
Vested |
(125,798 | ) | $ | 23.02 | ||||
Forfeited |
(3,785 | ) | $ | 23.98 | ||||
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|
|||||
Unvested balance at December 31, 2014 |
323,989 | $ | 24.10 | |||||
Granted |
171,475 | $ | 32.12 | |||||
Vested |
(138,585 | ) | $ | 23.87 | ||||
Forfeited |
(7,737 | ) | $ | 28.71 | ||||
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|
|||||
Unvested balance at December 31, 2015 |
349,142 | $ | 28.02 | |||||
Granted |
175,410 | $ | 33.96 | |||||
Vested |
(167,419 | ) | $ | 25.66 | ||||
Forfeited |
(47,958 | ) | $ | 30.41 | ||||
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|
|||||
Unvested balance at December 31, 2016 |
309,175 | $ | 32.30 | |||||
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During the years ended December 31, 2016, 2015 and 2014, we issued 175,410, 171,475 and 149,608 shares of restricted stock, respectively, which had aggregate values of $6.0 million, $5.5 million and $3.8 million, on the respective grant dates. These amounts will be amortized to expense over the respective vesting periods, which are typically three years. Also during the years ended December 31, 2016, 2015 and 2014, 167,419, 138,585 and 125,798 shares of restricted stock vested, respectively, at intrinsic values of $6.2 million, $4.3 million and $3.4 million on their respective vesting dates.
As of December 31, 2016, total unearned compensation on restricted stock was $6.4 million, and the weighted average vesting period was 1.1 years.
Stock Options
Stock option awards are granted with an exercise price equal to the closing market price of DFTs 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. During the year ended December 31, 2016, no options were granted to employees. The last grant of stock options occurred in 2013, and all stock option grants have fully vested.
A summary of our stock option activity for the years ended December 31, 2016, 2015 and 2014 is presented in the tables below.
Number of Options |
Weighted Average Exercise Price |
|||||||
Under option, December 31, 2013 |
2,099,910 | $ | 17.13 | |||||
Granted |
| $ | | |||||
Exercised |
(507,056 | ) | $ | 10.95 | ||||
Forfeited |
| $ | | |||||
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|
|||||
Under option, December 31, 2014 |
1,592,854 | $ | 19.09 | |||||
Granted |
| $ | | |||||
Exercised |
(362,642 | ) | $ | 21.87 | ||||
Forfeited |
| $ | | |||||
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|
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Under option, December 31, 2015 |
1,230,212 | $ | 18.28 | |||||
Granted |
| $ | | |||||
Exercised |
(478,733 | ) | $ | 22.12 | ||||
Forfeited |
| $ | | |||||
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Under option, December 31, 2016 |
751,479 | $ | 15.83 | |||||
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42
Shares Subject to Option |
Total Unearned Compensation |
Weighted Average Vesting Period |
Weighted Average Remaining Contractual Term |
|||||||||||||
As of December 31, 2014 |
1,592,854 | $ | 0.7 million | 0.5 years | 6.2 years | |||||||||||
As of December 31, 2015 |
1,230,212 | $ | 0.1 million | 0.2 years | 4.9 years | |||||||||||
As of December 31, 2016 |
751,479 | $ | million | 0.0 years | 3.6 years |
The following table sets forth the number of unvested options as of December 31, 2016, 2015 and 2014 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, 2013 |
684,111 | $ | 5.73 | |||||
Granted |
| $ | | |||||
Vested |
(381,787 | ) | $ | 6.28 | ||||
Forfeited |
| $ | | |||||
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|
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Unvested balance at December 31, 2014 |
302,324 | $ | 5.05 | |||||
Granted |
| $ | | |||||
Vested |
(263,553 | ) | $ | 5.10 | ||||
Forfeited |
| $ | | |||||
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|
|||||
Unvested balance at December 31, 2015 |
38,771 | $ | 4.75 | |||||
Granted |
| $ | | |||||
Vested |
(38,771 | ) | $ | 4.75 | ||||
Forfeited |
| $ | | |||||
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Unvested balance at December 31, 2016 |
| $ | | |||||
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The following tables set forth the number of exercisable options as of December 31, 2016, 2015 and 2014 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, 2013 |
1,415,799 | $ | 4.81 | |||||
Vested |
381,787 | $ | 6.28 | |||||
Exercised |
(507,056 | ) | $ | 3.54 | ||||
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Options Exercisable at December 31, 2014 |
1,290,530 | $ | 5.74 | |||||
Vested |
263,553 | $ | 5.10 | |||||
Exercised |
(362,642 | ) | $ | 6.34 | ||||
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Options Exercisable at December 31, 2015 |
1,191,441 | $ | 5.41 | |||||
Vested |
38,771 | $ | 4.75 | |||||
Exercised |
(478,733 | ) | $ | 6.46 | ||||
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Options Exercisable at December 31, 2016 |
751,479 | $ | 4.71 | |||||
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Exercisable Options |
Intrinsic Value | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
|||||||||||||
As of December 31, 2014 |
1,290,530 | $ | 19.3 million | $ | 18.27 | 5.8 years | ||||||||||
As of December 31, 2015 |
1,191,441 | $ | 16.3 million | $ | 18.14 | 4.9 years | ||||||||||
As of December 31, 2016 |
751,479 | $ | 21.1 million | $ | 15.83 | 3.6 years |
43
The intrinsic value of stock options exercised during the years ended December 31, 2016, 2015 and 2014 was $5.2 million, $3.7 million and $7.7 million, respectively.
Performance Units
Performance unit awards are awarded to certain executive employees and have a three calendar-year performance period with no dividend rights. Performance units are settled in common shares following the performance period as long as the employee remains employed with us on the vesting date following the last day of the applicable performance period. Performance units are valued using a Monte Carlo simulation and are amortized over approximately a three year vesting period from the grant date to the vesting date. The number of common shares settled could range from 0% to 300%. For performance unit award grants prior to 2014, the vesting amount is dependent on DFTs total stockholder return compared to the MSCI US REIT index over the three calendar-year performance period.
For performance unit grants awarded in 2014 and thereafter, one-half of the recipients performance unit award is dependent on DFTs total stockholder return compared to the MSCI US REIT index over the three calendar-year performance period. The other half of the performance unit award is dependent on DFTs total stockholder return compared to an index of five comparable publicly traded data center companies over the three calendar-year performance period. The following table summarizes the assumptions used to value, and the resulting fair and maximum values of, the performance units granted during the years ended December 31, 2016, 2015 and 2014.
2016 | 2015 | 2014 | ||||||||||
Number of performance units granted |
112,951 | 48,674 | 110,441 | |||||||||
Expected volatility |
24 | % | 24 | % | 30 | % | ||||||
Expected annual dividend |
6 | % | 5 | % | 5 | % | ||||||
Risk-free rate |
1.32 | % | 1.06 | % | 0.74 | % | ||||||
Performance unit fair value at date of grant |
$ | 38.08 | $ | 38.34 | $ | 33.50 | ||||||
Total grant fair value at date of grant |
$ | 4.3 million | $ | 1.9 million | $ | 3.7 million | ||||||
Maximum value of grant on vesting date based on closing price of DFTs stock at the date of grant |
$ | 10.7 million | $ | 4.7 million | $ | 8.5 million |
The following table sets forth the number of performance units outstanding and the fair value per unit at the date of grant as of December 31, 2016.
Grant Date |
Grant Date Fair Value per Unit |
Units Granted |
Units Vested |
Units Accelerated (1) |
Units Forfeited |
Units Outstanding |
Payout | Total Shares Issued |
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2/23/2012 (2) |
$ | 28.26 | 61,033 | (49,936 | ) | | (11,097 | ) | | | % | | ||||||||||||||||||||
2/21/2013 (3) |
$ | 25.59 | 60,468 | (10,995 | ) | (38,479 | ) | (10,994 | ) | | 300 | % | 148,422 | |||||||||||||||||||
2/21/2014 (4) |
$ | 33.50 | 110,441 | | (70,538 | ) | (1,785 | ) | 38,118 | (4 | ) | 207,365 | ||||||||||||||||||||
3/16/2015 |
$ | 38.34 | 48,674 | | (651 | ) | (2,440 | ) | 45,583 | 100 | % | 651 | ||||||||||||||||||||
1/5/2016 |
$ | 38.08 | 112,951 | | | | 112,951 | |||||||||||||||||||||||||
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393,567 | (60,931 | ) | (109,668 | ) | (26,316 | ) | 196,652 | 356,438 | ||||||||||||||||||||||||
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(1) | Represents accelerated vesting of performance units due to departure of certain executives. In connection with the departure of our former CEO in February 2015, 320,676 common shares were issued pursuant to the accelerated vesting of certain of his unvested performance units. $1.9 million was expensed during the first quarter of 2015 related to the accelerated vesting of these performance units. |
(2) | For the performance units granted in 2012, based on DFTs total stockholder return compared to the MSCI US REIT index return for the period from January 1, 2012 to January 1, 2015, no common shares were issued upon vesting on March 1, 2015. |
(3) | For the performance units granted in 2013, 115,437 common shares were issued due to the accelerated vesting of certain unvested performance units, which represented a 300% payout. Based on DFTs total stockholder return compared to the MSCI US REIT index return for the period from January 1, 2013 to January 1, 2016, 32,985 common shares were issued upon the vesting of these performance units on March 1, 2016, which represented a 300% payout. |
44
(4) | For the performance units granted in 2014, 205,240 common shares were issued, which represented a 300% payout, and 2,125 common shares were issued, which represented a 100% payout, due to the accelerated vesting of certain unvested performance units. Based on DFTs total stockholder return compared to the MSCI US REIT index return for half of the grant and an index of five comparable publicly traded data center companies for the other half of the grant for the period from January 1, 2014 to January 1, 2017, 57,177 common shares will be issued upon their vesting on March 1, 2017, which represents an aggregate payout of 150%. |
During the year ended December 31, 2016, no performance units were forfeited. During the year ended December 31, 2015, 4,225 performance units were forfeited with a weighted average fair value of $36.30 per unit. During the year ended December 31, 2014, no performance units were forfeited.
As of December 31, 2016, total unearned compensation on outstanding performance units was $3.7 million.
13. Earnings (Loss) Per Share of DFT
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):
Twelve months ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Basic and Diluted Shares Outstanding |
||||||||||||
Weighted average common shares basic |
73,003,164 | 65,184,013 | 65,486,108 | |||||||||
Effect of dilutive securities |
835,872 | | 600,271 | |||||||||
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Weighted average common shares diluted |
73,839,036 | 65,184,013 | 66,086,379 | |||||||||
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Calculation of Earnings per Share Basic |
||||||||||||
Net income (loss) attributable to common shares |
$ | 123,965 | $ | (25,338 | ) | $ | 78,662 | |||||
Net income allocated to unvested restricted shares |
(628 | ) | (599 | ) | (484 | ) | ||||||
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Net income (loss) attributable to common shares, adjusted |
123,337 | (25,937 | ) | 78,178 | ||||||||
Weighted average common shares basic |
73,003,164 | 65,184,013 | 65,486,108 | |||||||||
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Earnings (loss) per common share basic |
$ | 1.69 | $ | (0.40 | ) | $ | 1.19 | |||||
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Calculation of Earnings per Share Diluted |
||||||||||||
Net income (loss) attributable to common shares, adjusted |
$ | 123,337 | $ | (25,937 | ) | $ | 78,178 | |||||
Weighted average common shares diluted |
73,839,036 | 65,184,013 | 66,086,379 | |||||||||
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Earnings (loss) per common share diluted |
$ | 1.67 | $ | (0.40 | ) | $ | 1.18 | |||||
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The following table sets forth the amount of stock options and performance units that have been excluded from the calculation of diluted earnings per share (in millions):
Twelve months ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Stock Options |
| 0.6 | | |||||||||
Performance Units |
0.1 | 0.1 | 0.1 |
All of the stock options were antidilutive for the twelve months ended December 31, 2015 because of the net loss incurred during the year. The performance units presented above for the twelve months ended December 31, 2016, 2015 and 2014 were antidilutive because the vesting conditions for these awards were not met in each of these years.
45
14. Earnings (Loss) Per Unit of the Operating Partnership
The following table sets forth the reconciliation of basic and diluted average units outstanding used in the computation of earnings per unit:
Twelve months ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Basic and Diluted Units Outstanding |
||||||||||||
Weighted average common units basic (includes redeemable partnership units and units of general and limited partners) |
87,284,564 | 80,599,199 | 81,053,127 | |||||||||
Effect of dilutive securities |
835,872 | | 600,271 | |||||||||
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Weighted average common units diluted |
88,120,436 | 80,599,199 | 81,653,398 | |||||||||
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|||||||
Calculation of Earnings per Unit Basic |
||||||||||||
Net income (loss) attributable to common units |
148,213 | (31,331 | ) | 97,366 | ||||||||
Net income allocated to unvested restricted units |
(628 | ) | (599 | ) | (484 | ) | ||||||
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|||||||
Net income (loss) attributable to common units, adjusted |
147,585 | (31,930 | ) | 96,882 | ||||||||
Weighted average common units basic |
87,284,564 | 80,599,199 | 81,053,127 | |||||||||
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Earnings (loss) per common unit basic |
$ | 1.69 | $ | (0.40 | ) | $ | 1.19 | |||||
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Calculation of Earnings per Unit Diluted |
||||||||||||
Net income (loss) attributable to common units, adjusted |
147,585 | (31,930 | ) | 96,882 | ||||||||
Weighted average common units diluted |
88,120,436 | 80,599,199 | 81,653,398 | |||||||||
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Earnings per common unit diluted |
$ | 1.67 | $ | (0.40 | ) | $ | 1.18 | |||||
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The following table sets forth the amount of stock options and performance units that have been excluded from the calculation of diluted earnings per unit (in millions):
Twelve months ended December 31, | ||||||||||||
2016 | 2015 | 2014 | ||||||||||
Stock Options |
| 0.6 | | |||||||||
Performance Units |
0.1 | 0.1 | 0.1 |
All of the stock options were antidilutive for the twelve months ended December 31, 2015 because of the net loss incurred during the year. The performance units presented above for the twelve months ended December 31, 2016, 2015 and 2014 were antidilutive because the vesting conditions for these awards were not met in each of these years.
15. Employee Benefit Plan
We have a tax qualified retirement plan (401(k) Plan) that provides employees with an opportunity to save for retirement on a tax advantaged basis. Employees participate in the 401(k) Plan on their first day of employment and are able to defer compensation up to the limits established by the Internal Revenue Service. We match 50% of the employees contributions up to a maximum match contribution of 4% of the employees eligible compensation. Our contributions vest immediately. For the years ended December 31, 2016, 2015 and 2014 we contributed $0.6 million, $0.5 million and $0.4 million, respectively, to the 401(k) Plan.
16. Fair Value
Assets and Liabilities Measured at Fair Value
We follow the authoritative guidance issued by the FASB relating to fair value measurements that defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The guidance applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the guidance does not require any new fair value measurements of reported balances. The guidance excludes the accounting for leases, as well as other authoritative guidance that address fair value measurements on lease classification and
46
measurement. The authoritative guidance issued by the FASB emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entitys own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The authoritative guidance issued by the FASB requires disclosure of the fair value of financial instruments. Fair value estimates are subjective in nature and are dependent on a number of important assumptions, including estimates of future cash flows, risks, discount rates, and relevant comparable market information associated with each financial instrument. The use of different market assumptions and estimation methodologies may have a material effect on the reported estimated fair value amounts. Accordingly, the amounts are not necessarily indicative of the amounts we would realize in a current market exchange.
The following methods and assumptions were used in estimating the fair value amounts and disclosures for financial instruments as of December 31, 2016 and 2015:
| Cash and cash equivalents: The carrying amount of cash and cash equivalents reported in the accompanying consolidated balance sheets approximates fair value because of the short maturity of these instruments (i.e., less than 90 days). |
| Rents and other receivables, accounts payable and accrued liabilities, and prepaid rents: The carrying amount of these assets and liabilities reported in the accompanying consolidated balance sheets approximates fair value because of the short-term nature of these amounts. |
| Debt: As of December 31, 2016, the combined balance of the Unsecured Notes due 2021, Unsecured Notes due 2023, Unsecured Term Loan, Unsecured Credit Facility and ACC3 Term Loan, excluding the effect of deferred financing costs, was $1,260.5 million with a fair value of $1,291.0 million. The Unsecured Notes due 2021 and the Unsecured Notes due 2023 were valued based on Level 2 data which consisted of a quoted price from Bloomberg. The Unsecured Term Loan, the US dollar-denominated borrowings under the Unsecured Credit facility and ACC3 Term Loan were valued based on Level 3 data which consisted of a one-month LIBOR swap rate coterminous with the maturity of each loan plus a spread consistent with current market conditions. The Canadian dollar-denominated borrowings under the Unsecured Credit facility were valued based on Level 3 data which consisted of a one-month Canadian Dollar Offered Rate swap rate coterminous with the maturity of the Unsecured Credit Facility plus a spread consistent with current market conditions. |
As of December 31, 2015, the combined balance of the Unsecured Notes due 2021, Unsecured Notes due 2023, Unsecured Term Loan and ACC3 Term Loan, excluding the effect of deferred financing costs, was $1,213.1 million with a fair value of $1,237.2 million. The Unsecured Notes due 2021 and the Unsecured Notes due 2023 were valued based on Level 2 data which consisted of a quoted price from Bloomberg. The ACC3 Loan and the Unsecured Term Loan were valued based on Level 3 data which consisted of a one-month LIBOR swap rate coterminous with the maturity of each loan plus a spread consistent with current market conditions.
47
17. Quarterly Financial Information (unaudited)
The table below reflects the selected quarterly information for the years ended December 31, 2016 and 2015 (in thousands except share data):
Three months ended | ||||||||||||||||
December 31, 2016 |
September 30, 2016 |
June 30, 2016 |
March 31, 2016 |
|||||||||||||
Total revenue |
$ | 141,688 | $ | 134,326 | $ | 128,538 | $ | 124,149 | ||||||||
Net income (1) |
43,227 | 40,966 | 60,557 | 36,697 | ||||||||||||
Net income attributable to common shares (1) |
33,734 | 28,524 | 37,299 | 24,408 | ||||||||||||
Net income attributable to common shares per common share-basic (1) |
0.45 | 0.38 | 0.50 | 0.36 | ||||||||||||
Net income attributable to common shares per common share-diluted (1) (2) |
0.44 | 0.37 | 0.49 | 0.36 | ||||||||||||
Three months ended | ||||||||||||||||
December 31, 2015 |
September 30, 2015 |
June 30, 2015 |
March 31, 2015 |
|||||||||||||
Total revenue |
$ | 115,923 | $ | 115,337 | $ | 113,826 | $ | 107,314 | ||||||||
Net (loss) income (3) |
(91,953 | ) | 30,393 | 31,141 | 26,333 | |||||||||||
Net (loss) income attributable to common shares (3) |
(79,871 | ) | 19,062 | 19,668 | 15,803 | |||||||||||
Net (loss) income attributable to common shares per common share-basic (3) |
(1.23 | ) | 0.29 | 0.30 | 0.24 | |||||||||||
Net (loss) income attributable to common shares per common share-diluted (3) |
(1.23 | ) | 0.29 | 0.30 | 0.24 |
(1) | Net income for the quarter ended June 30, 2016 includes a gain on sale of real estate of $22.8 million. |
(2) | Amounts do not equal full year results due to rounding. |
(3) | Net loss for the quarter ended December 31, 2015 includes an impairment on investment in real estate of $122.5 million. |
18. Supplemental Consolidating Financial Data for Subsidiary Guarantors of the Unsecured Notes
The Unsecured Notes due 2021 and the Unsecured Notes due 2023 are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by DFT and certain of the Operating Partnerships subsidiaries, including the subsidiaries that own the ACC2, ACC4, ACC5, ACC6, VA3, VA4, CH1 and SC1 data centers (collectively, the Subsidiary Guarantors), but excluding the subsidiaries that own the ACC3, ACC7, ACC9, ACC10, CH2, CH3 and TOR1 data centers, the ACC8, ACC11, OR1 and OR2 parcels of land, our taxable REIT subsidiary, DF Technical Services LLC and our property management subsidiary, DF Property Management LLC. The following consolidating financial information sets forth the financial position as of December 31, 2016 and December 31, 2015 and the results of operations and cash flows for the years ended December 31, 2016, 2015 and 2014 of the Operating Partnership, Subsidiary Guarantors and the Subsidiary Non-Guarantors.
48
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
(in thousands except share data)
December 31, 2016 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
ASSETS | ||||||||||||||||||||
Income producing property: |
||||||||||||||||||||
Land |
$ | | $ | 80,673 | $ | 25,217 | $ | | $ | 105,890 | ||||||||||
Buildings and improvements |
| 2,332,771 | 685,590 | | 3,018,361 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 2,413,444 | 710,807 | | 3,124,251 | ||||||||||||||||
Less: accumulated depreciation |
| (605,488 | ) | (56,695 | ) | | (662,183 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income producing property |
| 1,807,956 | 654,112 | | 2,462,068 | |||||||||||||||
Construction in progress and land held for development |
| 88,836 | 242,147 | | 330,983 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net real estate |
| 1,896,792 | 896,259 | | 2,793,051 | |||||||||||||||
Cash and cash equivalents |
31,781 | | 2,628 | | 34,409 | |||||||||||||||
Rents and other receivables |
1,390 | 4,743 | 5,400 | | 11,533 | |||||||||||||||
Deferred rent |
| 109,142 | 13,916 | | 123,058 | |||||||||||||||
Lease contracts above market value, net |
| 5,138 | | | 5,138 | |||||||||||||||
Deferred costs, net |
6,066 | 11,632 | 8,078 | | 25,776 | |||||||||||||||
Investment in affiliates |
2,713,096 | | | (2,713,096 | ) | | ||||||||||||||
Prepaid expenses and other assets |
3,463 | 27,341 | 10,480 | | 41,284 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 2,755,796 | $ | 2,054,788 | $ | 936,761 | $ | (2,713,096 | ) | $ | 3,034,249 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND PARTNERS CAPITAL | ||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Line of credit |
$ | 50,926 | $ | | $ | | $ | | $ | 50,926 | ||||||||||
Mortgage notes payable, net of deferred financing costs |
| | 110,733 | | 110,733 | |||||||||||||||
Unsecured term loan, net of deferred financing costs |
249,036 | | | | 249,036 | |||||||||||||||
Unsecured notes payable, net of discount and deferred financing costs |
837,323 | | | | 837,323 | |||||||||||||||
Accounts payable and accrued liabilities |
6,477 | 22,319 | 8,113 | | 36,909 | |||||||||||||||
Construction costs payable |
| 10,159 | 46,269 | | 56,428 | |||||||||||||||
Accrued interest payable |
11,578 | | 14 | | 11,592 | |||||||||||||||
Distribution payable |
46,352 | | | | 46,352 | |||||||||||||||
Lease contracts below market value, net |
| 2,830 | | | 2,830 | |||||||||||||||
Prepaid rents and other liabilities |
216 | 58,599 | 19,417 | | 78,232 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,201,908 | 93,907 | 184,546 | | 1,480,361 | |||||||||||||||
Redeemable partnership units |
591,101 | | | | 591,101 | |||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Limited Partners Capital: |
||||||||||||||||||||
Series C cumulative redeemable perpetual preferred units, 8,050,000 issued and outstanding at December 31, 2016 |
201,250 | | | | 201,250 | |||||||||||||||
Common units, 75,252,390 issued and outstanding at December 31, 2016 |
754,892 | 1,960,881 | 752,215 | (2,713,096 | ) | 754,892 | ||||||||||||||
General partners capital, 662,373 common units issued and outstanding at December 31, 2016 |
6,645 | | | | 6,645 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total partners capital |
962,787 | 1,960,881 | 752,215 | (2,713,096 | ) | 962,787 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities & partners capital |
$ | 2,755,796 | $ | 2,054,788 | $ | 936,761 | $ | (2,713,096 | ) | $ | 3,034,249 | |||||||||
|
|
|
|
|
|
|
|
|
|
49
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS
(in thousands except share data)
December 31, 2015 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
ASSETS | ||||||||||||||||||||
Income producing property: |
||||||||||||||||||||
Land |
$ | | $ | 84,258 | $ | 9,945 | $ | | $ | 94,203 | ||||||||||
Buildings and improvements |
| 2,399,016 | 337,920 | | 2,736,936 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 2,483,274 | 347,865 | | 2,831,139 | ||||||||||||||||
Less: accumulated depreciation |
| (522,096 | ) | (38,741 | ) | | (560,837 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income producing property |
| 1,961,178 | 309,124 | | 2,270,302 | |||||||||||||||
Construction in progress and land held for development |
| 25,545 | 275,394 | | 300,939 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net real estate |
| 1,986,723 | 584,518 | | 2,571,241 | |||||||||||||||
Cash and cash equivalents |
21,697 | | 5,318 | | 27,015 | |||||||||||||||
Rents and other receivables |
1,391 | 7,563 | 634 | | 9,588 | |||||||||||||||
Deferred rent |
| 122,830 | 6,111 | | 128,941 | |||||||||||||||
Lease contracts above market value, net |
| 6,029 | | | 6,029 | |||||||||||||||
Deferred costs, net |
3,236 | 14,250 | 6,288 | | 23,774 | |||||||||||||||
Investment in affiliates |
2,546,465 | | | (2,546,465 | ) | | ||||||||||||||
Prepaid expenses and other assets |
3,025 | 39,642 | 2,022 | | 44,689 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 2,575,814 | $ | 2,177,037 | $ | 604,891 | $ | (2,546,465 | ) | $ | 2,811,277 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
LIABILITIES AND PARTNERS CAPITAL | ||||||||||||||||||||
Liabilities: |
||||||||||||||||||||
Line of credit |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Mortgage notes payable, net of deferred financing costs |
| | 114,075 | | 114,075 | |||||||||||||||
Unsecured term loan, net of deferred financing costs |
249,172 | | | | 249,172 | |||||||||||||||
Unsecured notes payable, net of discount and deferred financing costs |
834,963 | | | | 834,963 | |||||||||||||||
Accounts payable and accrued liabilities |
4,516 | 23,615 | 4,170 | | 32,301 | |||||||||||||||
Construction costs payable |
43 | 293 | 21,707 | | 22,043 | |||||||||||||||
Accrued interest payable |
11,815 | | 6 | | 11,821 | |||||||||||||||
Distribution payable |
43,906 | | | | 43,906 | |||||||||||||||
Lease contracts below market value, net |
| 4,132 | | | 4,132 | |||||||||||||||
Prepaid rents and other liabilities |
12 | 62,630 | 4,835 | | 67,477 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,144,427 | 90,670 | 144,793 | | 1,379,890 | |||||||||||||||
Redeemable partnership units |
479,189 | | | | 479,189 | |||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Limited Partners Capital: |
||||||||||||||||||||
Series A cumulative redeemable perpetual preferred units, 7,400,000 issued and outstanding at December 31, 2015 |
185,000 | | | | 185,000 | |||||||||||||||
Series B cumulative redeemable perpetual preferred units, 6,650,000 issued and outstanding at December 31, 2015 |
166,250 | | | | 166,250 | |||||||||||||||
Common units, 65,443,277 issued and outstanding at December 31, 2015 |
594,927 | 2,086,367 | 460,098 | (2,546,465 | ) | 594,927 | ||||||||||||||
General partners capital, 662,373 common units issued and outstanding at December 31, 2015 |
6,021 | | | | 6,021 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total partners capital |
952,198 | 2,086,367 | 460,098 | (2,546,465 | ) | 952,198 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities & partners capital |
$ | 2,575,814 | $ | 2,177,037 | $ | 604,891 | $ | (2,546,465 | ) | $ | 2,811,277 | |||||||||
|
|
|
|
|
|
|
|
|
|
50
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31, 2016 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Revenues: |
||||||||||||||||||||
Base rent |
$ | 18,164 | $ | 270,357 | $ | 74,727 | $ | (18,226 | ) | $ | 345,022 | |||||||||
Recoveries from tenants |
| 142,863 | 26,805 | | 169,668 | |||||||||||||||
Other revenues |
| 1,668 | 12,388 | (45 | ) | 14,011 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
18,164 | 414,888 | 113,920 | (18,271 | ) | 528,701 | ||||||||||||||
Expenses: |
||||||||||||||||||||
Property operating costs |
| 144,935 | 27,338 | (18,209 | ) | 154,064 | ||||||||||||||
Real estate taxes and insurance |
| 16,916 | 3,264 | | 20,180 | |||||||||||||||
Depreciation and amortization |
100 | 88,321 | 19,360 | | 107,781 | |||||||||||||||
General and administrative |
22,009 | 52 | 982 | | 23,043 | |||||||||||||||
Other expenses |
1,564 | 45 | 10,234 | (62 | ) | 11,781 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
23,673 | 250,269 | 61,178 | (18,271 | ) | 316,849 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating (loss) income |
(5,509 | ) | 164,619 | 52,742 | | 211,852 | ||||||||||||||
Interest: |
||||||||||||||||||||
Expense incurred |
(56,318 | ) | 1,270 | 6,754 | | (48,294 | ) | |||||||||||||
Amortization of deferred financing costs |
(3,907 | ) | 79 | 116 | | (3,712 | ) | |||||||||||||
Gain on sale of real estate |
21,643 | | 1,190 | | 22,833 | |||||||||||||||
Loss on early extinguishment of debt |
(1,232 | ) | | | | (1,232 | ) | |||||||||||||
Equity in earnings |
226,770 | | | (226,770 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) |
181,447 | 165,968 | 60,802 | (226,770 | ) | 181,447 | ||||||||||||||
Preferred unit distributions |
(20,739 | ) | | | | (20,739 | ) | |||||||||||||
Issuance costs associated with redeemed preferred units |
(12,495 | ) | | | | (12,495 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income (loss) attributable to common units |
$ | 148,213 | $ | 165,968 | $ | 60,802 | $ | (226,770 | ) | $ | 148,213 | |||||||||
|
|
|
|
|
|
|
|
|
|
51
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31, 2015 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Revenues: |
||||||||||||||||||||
Base rent |
$ | 18,061 | $ | 268,433 | $ | 30,302 | $ | (18,211 | ) | $ | 298,585 | |||||||||
Recoveries from tenants |
| 127,877 | 11,660 | | 139,537 | |||||||||||||||
Other revenues |
| 1,787 | 12,621 | (130 | ) | 14,278 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
18,061 | 398,097 | 54,583 | (18,341 | ) | 452,400 | ||||||||||||||
Expenses: |
||||||||||||||||||||
Property operating costs |
| 131,644 | 16,598 | (18,191 | ) | 130,051 | ||||||||||||||
Real estate taxes and insurance |
| 19,942 | 1,393 | | 21,335 | |||||||||||||||
Depreciation and amortization |
43 | 94,371 | 9,630 | | 104,044 | |||||||||||||||
General and administrative |
17,574 | 57 | 433 | | 18,064 | |||||||||||||||
Impairment on investment in real estate |
| 119,267 | 3,205 | | 122,472 | |||||||||||||||
Other expenses |
6,151 | 133 | 10,725 | (150 | ) | 16,859 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
23,768 | 365,414 | 41,984 | (18,341 | ) | 412,825 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating (loss) income |
(5,707 | ) | 32,683 | 12,599 | | 39,575 | ||||||||||||||
Interest: |
||||||||||||||||||||
Expense incurred |
(50,021 | ) | 1,327 | 8,184 | | (40,510 | ) | |||||||||||||
Amortization of deferred financing costs |
(3,454 | ) | 107 | 196 | | (3,151 | ) | |||||||||||||
Equity in earnings |
55,096 | | | (55,096 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income |
(4,086 | ) | 34,117 | 20,979 | (55,096 | ) | (4,086 | ) | ||||||||||||
Preferred unit distributions |
(27,245 | ) | | | | (27,245 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (loss) income attributable to common units |
$ | (31,331 | ) | $ | 34,117 | $ | 20,979 | $ | (55,096 | ) | $ | (31,331 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
52
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31, 2014 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Revenues: |
||||||||||||||||||||
Base rent |
$ | 17,499 | $ | 267,454 | $ | 18,413 | $ | (17,650 | ) | $ | 285,716 | |||||||||
Recoveries from tenants |
| 115,185 | 9,668 | | 124,853 | |||||||||||||||
Other revenues |
| 1,657 | 5,489 | (123 | ) | 7,023 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total revenues |
17,499 | 384,296 | 33,570 | (17,773 | ) | 417,592 | ||||||||||||||
Expenses: |
||||||||||||||||||||
Property operating costs |
| 123,140 | 11,822 | (17,623 | ) | 117,339 | ||||||||||||||
Real estate taxes and insurance |
| 13,323 | 872 | | 14,195 | |||||||||||||||
Depreciation and amortization |
63 | 90,770 | 5,947 | | 96,780 | |||||||||||||||
General and administrative |
16,159 | 82 | 940 | | 17,181 | |||||||||||||||
Other expenses |
3,508 | 1,526 | 4,338 | (150 | ) | 9,222 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total expenses |
19,730 | 228,841 | 23,919 | (17,773 | ) | 254,717 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating (loss) income |
(2,231 | ) | 155,455 | 9,651 | | 162,875 | ||||||||||||||
Interest: |
||||||||||||||||||||
Expense incurred |
(41,107 | ) | 4,323 | 3,201 | | (33,583 | ) | |||||||||||||
Amortization of deferred financing costs |
(3,173 | ) | 273 | (80 | ) | | (2,980 | ) | ||||||||||||
Loss on early extinguishment of debt |
(1,701 | ) | | | | (1,701 | ) | |||||||||||||
Equity in earnings |
172,823 | | | (172,823 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
124,611 | 160,051 | 12,772 | (172,823 | ) | 124,611 | ||||||||||||||
Preferred unit distributions |
(27,245 | ) | | | | (27,245 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income attributable to common units |
$ | 97,366 | $ | 160,051 | $ | 12,772 | $ | (172,823 | ) | $ | 97,366 | |||||||||
|
|
|
|
|
|
|
|
|
|
53
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, 2016 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Cash flow from operating activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (60,010 | ) | $ | 265,244 | $ | 84,728 | $ | | $ | 289,962 | |||||||||
Return on investment in subsidiaries |
349,972 | | | (349,972 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by operating activities |
289,962 | 265,244 | 84,728 | (349,972 | ) | 289,962 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from investing activities |
||||||||||||||||||||
Proceeds from the sale of real estate |
| 120,086 | 3,459 | | 123,545 | |||||||||||||||
Investments in real estate development |
| (62,343 | ) | (232,421 | ) | | (294,764 | ) | ||||||||||||
Acquisition of real estate |
| | (53,105 | ) | | (53,105 | ) | |||||||||||||
Acquisition of real estate related party |
| | (20,168 | ) | | (20,168 | ) | |||||||||||||
Investments in subsidiaries |
(384,605 | ) | | | 384,605 | | ||||||||||||||
Return of investment in subsidiaries |
123,545 | | | (123,545 | ) | | ||||||||||||||
Interest capitalized for real estate under development |
(2 | ) | (1,269 | ) | (9,109 | ) | | (10,380 | ) | |||||||||||
Improvements to real estate |
| (4,739 | ) | (104 | ) | | (4,843 | ) | ||||||||||||
Additions to non real estate property |
(1,008 | ) | (220 | ) | (42 | ) | | (1,270 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by investing activities |
(262,070 | ) | 51,515 | (311,490 | ) | 261,060 | (260,985 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from financing activities |
||||||||||||||||||||
Line of credit: |
||||||||||||||||||||
Proceeds |
135,899 | | | | 135,899 | |||||||||||||||
Repayments |
(85,000 | ) | | | | (85,000 | ) | |||||||||||||
Mortgage notes payable: |
||||||||||||||||||||
Repayments |
| | (3,750 | ) | | (3,750 | ) | |||||||||||||
Payments of financing costs |
(5,841 | ) | | (25 | ) | | (5,866 | ) | ||||||||||||
Issuance of common units, net of offering costs |
275,470 | | | | 275,470 | |||||||||||||||
Issuance of preferred units, net of offering costs |
194,252 | | | | 194,252 | |||||||||||||||
Redemption of preferred units |
(351,250 | ) | | | | (351,250 | ) | |||||||||||||
Equity compensation proceeds |
7,623 | | | | 7,623 | |||||||||||||||
Parent financing |
| 68,571 | 316,034 | (384,605 | ) | | ||||||||||||||
Distribution to parent |
| (385,330 | ) | (88,187 | ) | 473,517 | | |||||||||||||
Distributions |
(188,961 | ) | | | | (188,961 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by financing activities |
(17,808 | ) | (316,759 | ) | 224,072 | 88,912 | (21,583 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net increase (decrease) in cash and cash equivalents |
10,084 | | (2,690 | ) | | 7,394 | ||||||||||||||
Cash and cash equivalents, beginning of period |
21,697 | | 5,318 | | 27,015 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents, ending of period |
$ | 31,781 | $ | | $ | 2,628 | $ | | $ | 34,409 | ||||||||||
|
|
|
|
|
|
|
|
|
|
54
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, 2015 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Cash flow from operating activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (55,999 | ) | $ | 278,557 | $ | 32,466 | $ | | $ | 255,024 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from investing activities |
||||||||||||||||||||
Investments in real estate development |
(415 | ) | (8,996 | ) | (207,928 | ) | | (217,339 | ) | |||||||||||
Acquisition of real estate |
| | (8,600 | ) | | (8,600 | ) | |||||||||||||
Investments in subsidiaries |
68,074 | (264,211 | ) | 196,137 | | | ||||||||||||||
Interest capitalized for real estate under development |
(27 | ) | (1,327 | ) | (10,210 | ) | | (11,564 | ) | |||||||||||
Improvements to real estate |
| (3,401 | ) | (58 | ) | | (3,459 | ) | ||||||||||||
Additions to non real estate property |
(93 | ) | (622 | ) | (38 | ) | | (753 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) investing activities |
67,539 | (278,557 | ) | (30,697 | ) | | (241,715 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from financing activities |
||||||||||||||||||||
Line of credit: |
||||||||||||||||||||
Proceeds |
120,000 | | | | 120,000 | |||||||||||||||
Repayments |
(180,000 | ) | | | | (180,000 | ) | |||||||||||||
Unsecured notes payable: |
||||||||||||||||||||
Proceeds |
248,012 | | | | 248,012 | |||||||||||||||
Payments of financing costs |
(4,715 | ) | | (25 | ) | | (4,740 | ) | ||||||||||||
Equity compensation proceeds |
249 | | | | 249 | |||||||||||||||
OP unit repurchases |
(31,912 | ) | | | | (31,912 | ) | |||||||||||||
Distributions |
(163,283 | ) | | | | (163,283 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) financing activities |
(11,649 | ) | | (25 | ) | | (11,674 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (decrease) increase in cash and cash equivalents |
(109 | ) | | 1,744 | | 1,635 | ||||||||||||||
Cash and cash equivalents, beginning of period |
21,806 | | 3,574 | | 25,380 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents, ending of period |
$ | 21,697 | $ | | $ | 5,318 | $ | | $ | 27,015 | ||||||||||
|
|
|
|
|
|
|
|
|
|
55
DUPONT FABROS TECHNOLOGY, L.P.
SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Year ended December 31, 2014 | ||||||||||||||||||||
Operating Partnership |
Subsidiary Guarantors |
Subsidiary Non-Guarantors |
Eliminations | Consolidated Total |
||||||||||||||||
Cash flow from operating activities |
||||||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (40,234 | ) | $ | 264,409 | $ | 20,339 | $ | | $ | 244,514 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from investing activities |
||||||||||||||||||||
Investments in real estate development |
(404 | ) | (111,791 | ) | (153,179 | ) | | (265,374 | ) | |||||||||||
Investments in subsidiaries |
5,654 | (146,188 | ) | 140,534 | | | ||||||||||||||
Interest capitalized for real estate under development |
(10 | ) | (4,323 | ) | (5,311 | ) | | (9,644 | ) | |||||||||||
Improvements to real estate |
| (1,850 | ) | (66 | ) | | (1,916 | ) | ||||||||||||
Additions to non real estate property |
(20 | ) | (257 | ) | (39 | ) | | (316 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used) in investing activities |
5,220 | (264,409 | ) | (18,061 | ) | | (277,250 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash flow from financing activities |
||||||||||||||||||||
Line of credit: |
||||||||||||||||||||
Proceeds |
60,000 | | | | 60,000 | |||||||||||||||
Unsecured term loan: |
||||||||||||||||||||
Proceeds |
96,000 | | | | 96,000 | |||||||||||||||
Payments of financing costs |
(3,514 | ) | | (315 | ) | | (3,829 | ) | ||||||||||||
Equity compensation proceeds |
4,363 | | | | 4,363 | |||||||||||||||
Distributions |
(132,932 | ) | | | | (132,932 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) financing activities |
23,917 | | (315 | ) | | 23,602 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net (decrease) increase in cash and cash equivalents |
(11,097 | ) | | 1,963 | | (9,134 | ) | |||||||||||||
Cash and cash equivalents, beginning of period |
32,903 | | 1,611 | | 34,514 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents, ending of period |
$ | 21,806 | $ | | $ | 3,574 | $ | | $ | 25,380 | ||||||||||
|
|
|
|
|
|
|
|
|
|
19. Subsequent Events
In February 2017, we entered into a purchase and sale agreement with an unrelated party to purchase 56.5 acres of undeveloped land in Mesa, Arizona for a purchase price of $12.2 million.
During the period from January 1, 2017 through February 23, 2017, OP unitholders redeemed a total of 1,409,147 OP units in exchange for an equal number of shares of DFTs common stock.
56
DUPONT FABROS TECHNOLOGY, INC.
DUPONT FABROS TECHNOLOGY, L.P.
SCHEDULE II
CONSOLIDATED ALLOWANCE FOR DOUBTFUL ACCOUNTS
DECEMBER 31, 2016
(in thousands)
Balance at Beginning of Period |
Charged to Operations (1) |
Other Accounts (2) | Deductions | Balance at End of Period |
||||||||||||||||
Allowance for doubtful accounts: |
||||||||||||||||||||
Twelve months ended December 31, 2016 |
$ | 5,241 | $ | (108 | ) | $ | 18,486 | $ | | $ | 23,619 | |||||||||
Twelve months ended December 31, 2015 |
8,520 | 372 | | (3,651 | ) | 5,241 | ||||||||||||||
Twelve months ended December 31, 2014 |
3,700 | 4,829 | | (9 | ) | 8,520 |
(1) | Amounts charged to operations are net of recoveries. |
(2) | Relates to an allowance on a $25.0 million note receivable which resulted from the settlement of our claim in a former customers bankruptcy proceedings in the fourth quarter of 2016 (see Footnote 2 to consolidated financial statements). |
57
DUPONT FABROS TECHNOLOGY, INC.
DUPONT FABROS TECHNOLOGY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2016
(in thousands)
Initial Cost at Acquisition / Placement into Service |
Costs Capitalized Subsequent to Acquisition / Placement into Service |
Gross Carry Amount at December 31, 2016 |
Accumulated depreciation at December 31, 2016 |
Year Built/ Renovated |
Year Acquired |
Life on which depreciation in latest income statements is computed |
||||||||||||||||||||||||||||||||||||||
Encum- brances |
Land | Building and improvements / Construction in progress |
Buildings & improvements |
Land | Building and improvements / Construction in progress |
Total | ||||||||||||||||||||||||||||||||||||||
Operating Properties |
||||||||||||||||||||||||||||||||||||||||||||
ACC2 (1) |
$ | | $ | 2,500 | $ | 157,100 | $ | (620 | ) | $ | 2,500 | $ | 156,480 | $ | 158,980 | $ | (57,184 | ) | 2005 | 2001 | 28.5 | |||||||||||||||||||||||
ACC3 (2) |
111,250 | 1,071 | 92,631 | 3,449 | $ | 1,071 | 96,080 | 97,151 | (36,136 | ) | 2006 | 2001 | 29.8 | |||||||||||||||||||||||||||||||
ACC4 (1) |
| 6,600 | 535,526 | 3,343 | $ | 6,600 | 538,869 | 545,469 | (176,477 | ) | 2007 | 2006 | 30.8 | |||||||||||||||||||||||||||||||
ACC5 (1) |
| 6,443 | 292,369 | 6,647 | $ | 6,443 | 299,016 | 305,459 | (71,347 | ) | 2009-2010 | 2007 | 29.7 | |||||||||||||||||||||||||||||||
ACC6 (1) |
| 5,518 | 215,235 | 1,594 | $ | 5,518 | 216,829 | 222,347 | (35,197 | ) | 2011-2013 | 2007 | 30.7 | |||||||||||||||||||||||||||||||
ACC7 |
| 9,753 | 328,520 | 4,450 | $ | 9,753 | 332,970 | 342,723 | (13,320 | ) | 2014-2016 | 2011 | 32.5 | |||||||||||||||||||||||||||||||
CH1 (1) |
| 23,611 | 357,194 | 1,977 | $ | 23,611 | 359,171 | 382,782 | (82,947 | ) | 2008-2012 | 2007 | 30.5 | |||||||||||||||||||||||||||||||
CH2 |
| 14,392 | 255,593 | 946 | $ | 14,392 | 256,539 | 270,931 | (7,239 | ) | 2015-2016 | 2013 | 30.7 | |||||||||||||||||||||||||||||||
SC1 Phases I-II (1) |
| 20,202 | 429,572 | 3,527 | $ | 20,202 | 433,099 | 453,301 | (53,697 | ) | 2011-2015 | 2007 | 31.7 | |||||||||||||||||||||||||||||||
VA3 (1) |
| 9,000 | 172,881 | 6,813 | $ | 9,000 | 179,694 | 188,694 | (72,725 | ) | 2003 | 2003 | 30.5 | |||||||||||||||||||||||||||||||
VA4 (1) |
| 6,800 | 140,575 | 9,039 | $ | 6,800 | 149,614 | 156,414 | (55,914 | ) | 2005 | 2005 | 31.1 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Subtotal |
111,250 | 105,890 | 2,977,196 | 41,165 | 105,890 | 3,018,361 | 3,124,251 | (662,183 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Development Properties |
||||||||||||||||||||||||||||||||||||||||||||
ACC8 |
| 3,786 | 466 | | 3,786 | 466 | 4,252 | | 2007 | |||||||||||||||||||||||||||||||||||
ACC9 |
| 8,469 | 138,561 | | 8,469 | 138,561 | 147,030 | | 2016 | |||||||||||||||||||||||||||||||||||
ACC10 |
| 7,343 | 1,872 | | 7,343 | 1,872 | 9,215 | | 2016 | |||||||||||||||||||||||||||||||||||
ACC11 |
| 4,773 | 6 | | 4,773 | 6 | 4,779 | | 2016 | |||||||||||||||||||||||||||||||||||
CH3 |
| 8,578 | 8,740 | | 8,578 | 8,740 | 17,318 | | 2015 | |||||||||||||||||||||||||||||||||||
OR1 |
| 5,775 | 1,328 | | 5,775 | 1,328 | 7,103 | | 2016 | |||||||||||||||||||||||||||||||||||
OR2 |
| 5,775 | 301 | | 5,775 | 301 | 6,076 | | 2016 | |||||||||||||||||||||||||||||||||||
SC1 Phase III (1) |
| 5,232 | 83,604 | | 5,232 | 83,604 | 88,836 | | 2007 | |||||||||||||||||||||||||||||||||||
TOR1 |
| 42,128 | 4,246 | | 42,128 | 4,246 | 46,374 | | 2016 | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Subtotal |
| 91,859 | 239,124 | | 91,859 | 239,124 | 330,983 | | ||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Grand Total (3) |
$ | 111,250 | $ | 197,749 | $ | 3,216,320 | $ | 41,165 | $ | 197,749 | $ | 3,257,485 | $ | 3,455,234 | $ | (662,183 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The subsidiaries that own these data centers and development properties are guarantors of the Unsecured Notes due 2021 and 2023, the Unsecured Credit Facility and the Unsecured Term Loan. |
(2) | The subsidiary that owns this data center is encumbered by our ACC3 Term Loan. |
(3) | The aggregate gross cost of our properties for federal income tax purposes was $2.78 billion (unaudited) as of December 31, 2016. |
58
DUPONT FABROS TECHNOLOGY, INC.
DUPONT FABROS TECHNOLOGY, L.P.
SCHEDULE III
CONSOLIDATED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2016
(in thousands)
2016 | 2015 | 2014 | ||||||||||
Real estate assets |
||||||||||||
Balance, beginning of period |
$ | 3,132,078 | $ | 3,066,297 | $ | 2,799,010 | ||||||
Additions - property acquisitions |
73,273 | 8,600 | | |||||||||
Additions - improvements |
344,960 | 221,588 | 267,357 | |||||||||
Deductions - write-offs, sales, impairments |
(95,077 | ) | (164,407 | ) | (70 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance, end of period |
$ | 3,455,234 | $ | 3,132,078 | $ | 3,066,297 | ||||||
|
|
|
|
|
|
|||||||
Accumulated depreciation |
||||||||||||
Balance, beginning of period |
$ | 560,837 | $ | 504,869 | $ | 413,394 | ||||||
Additions - depreciation |
102,614 | 97,988 | 91,545 | |||||||||
Deductions - write-offs, sales |
(1,268 | ) | (42,020 | ) | (70 | ) | ||||||
|
|
|
|
|
|
|||||||
Balance, end of period |
$ | 662,183 | $ | 560,837 | $ | 504,869 | ||||||
|
|
|
|
|
|
59
Exhibit 99.3
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Introduction
Penguins REIT Sub, LLC, which we refer to as Merger Sub, a wholly owned subsidiary of Digital Realty Trust, Inc., which we refer to as Digital Realty or DLR, plans to merge with and into DuPont Fabros Technology, Inc., which we refer to as DuPont Fabros or DFT, with Merger Sub continuing as the surviving corporation and a wholly owned subsidiary of Digital Realty. In addition, a subsidiary of DLRs operating partnership, Digital Realty Trust, L.P., which we refer to as DLR OP, plans to merge with and into DFTs operating partnership, DuPont Fabros Technology, L.P., which we refer to as DFT OP, with DuPont Fabros Technology, L.P. as the surviving partnership and a wholly owned subsidiary of Digital Realty Trust, L.P. We refer to these mergers collectively as the mergers. The mergers are part of the transactions contemplated by the Agreement and Plan of Merger entered into on June 8, 2017, which we refer to as the merger agreement, among Digital Realty, DuPont Fabros and certain of their subsidiaries. In addition, on June 8, 2017, in connection with the execution of the merger agreement, DLR entered into two separate commitment letters, pursuant to which the initial commitment parties agreed to (i) provide a senior unsecured bridge loan facility, which we refer to as the bridge facility, in the original principal amount of $1.4 billion and (ii) provide a mortgage loan facility of up to $104 million to one or more wholly-owned subsidiaries of DLR OP, which we refer to as the mortgage loan facility, in each case to potentially fund the repayment of DFT debt and transaction costs in connection with the mergers. We refer to the bridge facility and the mortgage loan facility collectively as the committed facilities.
The consummation of the mergers is subject to certain customary closing conditions, including, among others, approval by the holders of a majority of the outstanding shares of DFT common stock, approval of the issuance of DLR common stock by a majority of the votes cast by the holders of DLR common stock at a special meeting of Digital Realtys stockholders, the absence of certain legal impediments to the consummation of the mergers, the effectiveness of a registration statement on Form S-4 filed by Digital Realty in connection with the mergers, approval for listing on the New York Stock Exchange of the shares of DLR common stock to be issued in connection with the mergers, the absence of a material adverse effect on either Digital Realty or DuPont Fabros and compliance by the parties to the merger agreement with their respective obligations under the merger agreement. The obligations of the parties to consummate the mergers are not subject to any financing condition or the receipt of any financing by Digital Realty. As of the date of this Current Report on Form 8-K, the mergers are expected to be completed in the second half of 2017.
Pursuant to the terms and conditions in the merger agreement, at the effective time of the mergers, (i) each share of DFT common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive 0.545 shares of DLR common stock, which we refer to as the common consideration, and (ii) each share of 6.625% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value per share, of Dupont Fabros, which we refer to as the DFT series C preferred stock, will be converted into the right to receive one validly issued, fully paid and nonassessable share of 6.625% Series C Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share, of Digital Realty, which we refer to as the DLR series C preferred stock, having substantially similar rights, privileges, preferences and interests as the DFT series C preferred stock. In addition, (i) each outstanding share of restricted DFT common stock will vest and all restrictions thereon will lapse, and each such restricted share will be cancelled in exchange for the right to receive the common consideration, (ii) each outstanding award of performance stock units granted by DFT, which we refer to as DFT performance stock units, will vest and be cancelled and converted into the right to receive the common consideration and (iii) each outstanding and unexercised option to purchase shares of DFT common stock will be automatically converted into an option covering a number of shares of DLR common stock equal to the number of shares of DFT common stock subject to such option immediately prior to the effective time of the mergers multiplied by 0.545, rounded down to the nearest whole share, with an exercise price per share equal to the exercise price per share of such option immediately prior to the effective time of the merger, divided by 0.545, rounded up to the nearest whole cent.
At the effective time of the mergers, each common unit of limited partnership interest in the DFT OP, or DFT OP common units, issued and outstanding immediately prior to the effective time held by a limited partner of the DFT OP will be converted into the right to receive 0.545 common units of limited partnership interest in DLR OP, or the DLR OP common units. In the alternative, limited partners in the DFT OP may elect to redeem their DFT OP common units in order to receive the common consideration.
These unaudited pro forma condensed combined financial statements, which we refer to as the pro forma financial statements, were prepared using the acquisition method of accounting with DLR considered the accounting acquirer of DFT. Under the acquisition method of accounting, the purchase price is allocated to the underlying DFT tangible and intangible assets acquired and liabilities assumed based on their respective fair values with the excess purchase price, if any, allocated to goodwill.
The pro forma adjustments and the purchase price allocation as presented are based on estimates and certain information that is available as of the date of this Current Report on Form 8-K. The total consideration for the mergers and the assignment of fair values to DFTs assets acquired and liabilities assumed has not been finalized, is subject to change, could vary materially from the actual amounts at the time the mergers are completed and may not have identified all adjustments necessary to conform DFTs accounting policies to DLRs accounting policies. A final determination of the fair value of DFTs assets and liabilities, including intangible assets, will be based on the actual net tangible and intangible assets and liabilities of DFT that exist as of the closing date of the mergers and, therefore, cannot be made prior to the completion of the mergers. In addition, the value of the consideration to be paid by DLR upon the consummation of the mergers will be determined based on the closing price of DLRs common stock on the closing date of the mergers. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and additional analyses are performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the pro forma financial statements presented below. DLR estimated the fair value of DFTs assets and liabilities based on discussions with DFTs management, preliminary valuation studies, due diligence and information presented in DFTs public filings. Upon completion of the mergers, final valuations will be performed. Any increases or decreases in the fair value of relevant balance sheet amounts upon completion of the final valuations will result in adjustments to the pro forma balance sheet and/or statements of income. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.
The aggregate purchase price for financial statement purposes will be based on the actual closing price per share of DLR common stock on the closing date consistent with the requirements of Financial Accounting Standards Board Accounting Standards Codification 805, Business Combinations, which could differ materially from the assumed price per share of $112.95 (the last reported sales price of DLRs common stock on the New York Stock Exchange on June 30, 2017) used in the pro forma financial statements. If the actual closing price per share of DLR common stock on the closing date is higher than the assumed amount, the final purchase price will be higher; conversely, if the actual closing price is lower, the final purchase price will be lower.
Assumptions and estimates underlying the unaudited adjustments to the pro forma financial statements are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the pro forma financial statements to give effect to pro forma events that are: (1) directly attributable to the mergers, (2) factually supportable and (3) expected to have a continuing impact on the results of income of DLR following the mergers. The pro forma condensed consolidated statements of income for the three months ended March 31, 2017 and the year ended December 31, 2016 consolidate the historical consolidated statements of income of DLR and DFT, giving effect to the mergers as if they had been consummated on January 1, 2016, the beginning of the earliest period presented. The pro forma balance sheet combines the historical consolidated balance sheet of DLR and the historical consolidated balance sheet of DFT as of March 31, 2017, giving effect to the mergers as if they had been consummated on March 31, 2017. This information is presented for illustrative purposes only. It is neither indicative of the consolidated operating results that would have occurred or financial position that would have existed if such transactions had occurred on the dates described above and in accordance with the assumptions described below, nor is it indicative of future operating results or financial position.
The pro forma financial statements, although helpful in illustrating the financial characteristics of DLR following the mergers under one set of assumptions, do not reflect the benefits of expected cost savings (or associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result as a consequence of the mergers and do not attempt to predict or suggest future results. Specifically, the unaudited pro forma condensed combined statements of income exclude projected operating efficiencies and overhead synergies expected to be achieved as a result of the mergers. The pro forma financial statements also exclude the effects of costs associated with any restructuring or integration activities from the mergers as they are currently not known and, to the extent they occur, are expected to be non-recurring and will not have been incurred at the closing date of the mergers. However, such costs could affect DLR following the mergers in the period the costs are incurred or recorded. Further, the pro forma financial statements do not reflect the effect of any regulatory actions that may impact the results of DLR following the mergers.
The following Unaudited Pro Forma Condensed Combined Financial Information is based on, and should be read in conjunction with:
| the accompanying notes to the pro forma financial statements; |
| the historical audited consolidated financial statements of DLR and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission, or the SEC, on March 1, 2017; |
| the historical unaudited condensed consolidated financial statements of DLR and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its quarterly report on Form 10-Q for the quarterly period ended March 31, 2017, as filed with the SEC on May 10, 2017; |
| the historical audited consolidated financial statements of DFT and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC, on February 23, 2017; and |
| the historical unaudited condensed consolidated financial statements of DFT and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its quarterly report on Form 10-Q for the quarterly period ended March 31, 2017, as filed with the SEC on April 27, 2017. |
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2017
(in thousands)
Historical | ||||||||||||||||||||
Digital Realty Trust, Inc. |
DuPont Fabros Technology, Inc. (See Note 1) |
Pro Forma Adjustments |
Note Reference |
Pro Forma Combined Company |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Investments in real estate: |
||||||||||||||||||||
Properties: |
||||||||||||||||||||
Land |
$ | 767,148 | $ | 179,648 | $ | 130,316 | 2(b) | $ | 1,077,112 | |||||||||||
Acquired ground leases |
11,489 | | | 11,489 | ||||||||||||||||
Buildings and improvements |
10,558,200 | 3,407,545 | 317,895 | 2(b) | 14,283,640 | |||||||||||||||
Tenant improvements |
532,168 | | | 532,168 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total investments in properties |
11,869,005 | 3,587,193 | 448,211 | 15,904,409 | ||||||||||||||||
Accumulated depreciation and amortization |
(2,792,910 | ) | (661,499 | ) | 661,499 | 2(c) | (2,792,910 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net investments in properties |
9,076,095 | 2,925,694 | 1,109,710 | 13,111,499 | ||||||||||||||||
Investment in unconsolidated joint ventures |
112,856 | | | 112,856 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net investments in real estate |
9,188,951 | 2,925,694 | 1,109,710 | 13,224,355 | ||||||||||||||||
Cash and cash equivalents |
14,950 | 44,980 | | 59,930 | ||||||||||||||||
Accounts and other receivables, net of allowance for doubtful accounts |
195,406 | 9,504 | | 204,910 | ||||||||||||||||
Deferred rent |
418,858 | 121,340 | (121,340 | ) | 2(d) | 418,858 | ||||||||||||||
Acquired above-market leases, net |
20,826 | 4,793 | 155,806 | 2(b) | 181,425 | |||||||||||||||
Goodwill |
757,444 | | 1,770,526 | 2(b) | 2,527,970 | |||||||||||||||
Acquired in-place lease value, deferred leasing costs and intangibles, net |
1,501,843 | 26,238 | 1,513,481 | 2(b) | 3,041,562 | |||||||||||||||
Restricted cash |
10,447 | | | 10,447 | ||||||||||||||||
Assets held for sale |
56,154 | | | 56,154 | ||||||||||||||||
Other assets |
164,669 | 45,463 | | 210,132 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 12,329,548 | $ | 3,178,012 | $ | 4,428,183 | $ | 19,935,743 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND EQUITY |
||||||||||||||||||||
Global revolving credit facility, net |
$ | 564,467 | $ | 197,819 | $ | (135,424 | ) | 2(a) | $ | 626,862 | ||||||||||
Unsecured term loan, net |
1,505,667 | 249,089 | (249,089 | ) | 2(a) | 1,505,667 | ||||||||||||||
Unsecured senior notes, net |
4,128,110 | 837,895 | (837,895 | ) | 2(a) | 4,128,110 | ||||||||||||||
Mortgage loans, including premiums, net |
3,085 | 109,592 | (5,592 | ) | 2(a) | 107,085 | ||||||||||||||
Bridge loan facility |
| | 1,400,000 | 2(a) | 1,400,000 | |||||||||||||||
Accounts payable and other accrued liabilities |
804,371 | 111,804 | | 916,175 | ||||||||||||||||
Accrued dividends and distributions |
| 46,426 | | 46,426 | ||||||||||||||||
Acquired below-market leases, net |
78,641 | 2,214 | 182,853 | 2(b) | 263,708 | |||||||||||||||
Security deposits and prepaid rents |
171,692 | 70,235 | | 241,927 | ||||||||||||||||
Obligations associated with assets held for sale |
3,070 | | | 3,070 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
7,259,103 | 1,625,074 | 354,853 | 9,239,030 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Redeemable noncontrolling interests operating partnership |
| 579,329 | (517,753 | ) | 2(e) | 61,576 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Equity: |
||||||||||||||||||||
Stockholders Equity: |
||||||||||||||||||||
Preferred Stock |
1,012,961 | 201,250 | | 1,214,211 | ||||||||||||||||
Common Stock |
1,584 | 78 | 350 | 2(e) | 2,012 | |||||||||||||||
Additional paid-in capital |
5,769,091 | 773,321 | 4,064,509 | 2(e) | 10,606,921 | |||||||||||||||
Accumulated dividends in excess of earnings |
(1,629,633 | ) | | (172,000 | ) | 2(e) | (1,801,633 | ) | ||||||||||||
Accumulated other comprehensive loss, net |
(122,540 | ) | (1,040 | ) | | (123,580 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total stockholders equity |
5,031,463 | 973,609 | 3,892,859 | 9,897,931 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Noncontrolling Interests: |
||||||||||||||||||||
Noncontrolling interests in operating partnership |
32,409 | | 698,224 | 2(e) | 730,633 | |||||||||||||||
Noncontrolling interests in consolidated joint ventures |
6,573 | | | 6,573 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total noncontrolling interests |
38,982 | | 698,224 | 737,206 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total equity |
5,070,445 | 973,609 | 4,591,083 | 10,635,137 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and equity |
$ | 12,329,548 | $ | 3,178,012 | $ | 4,428,183 | $ | 19,935,743 | ||||||||||||
|
|
|
|
|
|
|
|
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(In thousands, except share and per share data)
Historical | ||||||||||||||||||||
Digital Realty Trust, Inc. |
DuPont Fabros Technology, Inc. (See Note 1) |
Pro Forma Adjustments |
Note Reference |
Pro Forma Combined Company |
||||||||||||||||
Operating Revenues: |
||||||||||||||||||||
Rental |
$ | 404,126 | $ | 91,899 | $ | (2,705 | ) | 3(a) | $ | 493,320 | ||||||||||
Tenant reimbursements |
87,288 | 45,295 | | 132,583 | ||||||||||||||||
Interconnection and other |
57,225 | | | 57,225 | ||||||||||||||||
Fee income |
1,895 | | | 1,895 | ||||||||||||||||
Other |
35 | 2,290 | | 2,325 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating revenues |
550,569 | 139,484 | (2,705 | ) | 687,348 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating Expenses: |
||||||||||||||||||||
Rental property operating and maintenance |
169,339 | 40,240 | | 209,579 | ||||||||||||||||
Property taxes |
26,919 | 4,496 | | 31,415 | ||||||||||||||||
Insurance |
2,592 | 514 | | 3,106 | ||||||||||||||||
Depreciation and amortization |
176,466 | 28,207 | 57,211 | 3(b) | 261,884 | |||||||||||||||
General and administrative |
34,647 | 6,812 | | 3(c) | 41,459 | |||||||||||||||
Transactions |
3,323 | 512 | | 3,835 | ||||||||||||||||
Other |
| 2,144 | | 2,144 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
413,286 | 82,925 | 57,211 | 553,422 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
137,283 | 56,559 | (59,916 | ) | 133,926 | |||||||||||||||
Other Income (Expenses): |
||||||||||||||||||||
Equity in earnings of unconsolidated joint ventures |
5,324 | | | 5,324 | ||||||||||||||||
Loss on sale of property |
(522 | ) | | | (522 | ) | ||||||||||||||
Interest and other income |
151 | | | 151 | ||||||||||||||||
Interest expense |
(55,450 | ) | (12,284 | ) | 2,798 | 3(d) | (64,936 | ) | ||||||||||||
Tax expense |
(2,223 | ) | | | (2,223 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
84,563 | 44,275 | (57,118 | ) | 71,720 | |||||||||||||||
Net income attributable to noncontrolling interests |
(1,025 | ) | (5,712 | ) | 4,428 | 3(e) | (2,309 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to Digital Realty Trust, Inc. |
83,538 | 38,563 | (52,690 | ) | 69,411 | |||||||||||||||
Preferred stock dividends |
(17,393 | ) | (3,333 | ) | | (20,726 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income available to common stockholders |
$ | 66,145 | $ | 35,230 | $ | (52,690 | ) | $ | 48,685 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income per share available to common stockholders: |
||||||||||||||||||||
Basic |
$ | 0.42 | 0.46 | $ | 0.24 | |||||||||||||||
Diluted |
$ | 0.41 | 0.45 | $ | 0.24 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
159,297,027 | 76,670,425 | 42,835,402 | 3(f) | 202,132,429 | |||||||||||||||
Diluted |
160,421,655 | 77,651,406 | 42,835,402 | 3(f) | 203,257,057 |
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
(In thousands, except share and per share data)
Historical | ||||||||||||||||||||
Digital Realty Trust, Inc. |
DuPont Fabros Technology, Inc. (See Note 1) |
Pro Forma Adjustments |
Note Reference |
Pro Forma Combined Company |
||||||||||||||||
Operating Revenues: |
||||||||||||||||||||
Rental |
$ | 1,542,511 | $ | 347,512 | $ | (9,540 | ) | 3(a) | $ | 1,880,483 | ||||||||||
Tenant reimbursements |
355,903 | 169,668 | | 525,571 | ||||||||||||||||
Interconnection and other |
204,317 | | | 204,317 | ||||||||||||||||
Fee income |
6,285 | | | 6,285 | ||||||||||||||||
Other |
33,197 | 11,521 | | 44,718 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating revenues |
2,142,213 | 528,701 | (9,540 | ) | 2,661,374 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating Expenses: |
||||||||||||||||||||
Rental property operating and maintenance |
660,177 | 154,206 | | 814,383 | ||||||||||||||||
Property taxes |
102,497 | 18,102 | | 120,599 | ||||||||||||||||
Insurance |
9,492 | 2,078 | | 11,570 | ||||||||||||||||
Depreciation and amortization |
699,324 | 107,781 | 260,279 | 3(b) | 1,067,384 | |||||||||||||||
General and administrative |
152,733 | 23,043 | | 3(c) | 175,776 | |||||||||||||||
Transactions |
20,491 | 1,532 | | 22,023 | ||||||||||||||||
Other |
213 | 10,074 | | 10,287 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
1,644,927 | 316,816 | 260,279 | 2,222,022 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
497,286 | 211,885 | (269,819 | ) | 439,352 | |||||||||||||||
Other Income (Expenses): |
||||||||||||||||||||
Equity in earnings of unconsolidated joint ventures |
17,104 | | | 17,104 | ||||||||||||||||
Gain on sale of property |
169,902 | 22,833 | | 192,735 | ||||||||||||||||
Interest and other income (expense) |
(4,564 | ) | (33 | ) | | (4,597 | ) | |||||||||||||
Interest expense |
(236,480 | ) | (52,006 | ) | 4,964 | 3(d) | (283,522 | ) | ||||||||||||
Tax expense |
(10,385 | ) | | | (10,385 | ) | ||||||||||||||
Loss from early extinguishment of debt |
(1,011 | ) | (1,232 | ) | | (2,243 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
431,852 | 181,447 | (264,855 | ) | 348,444 | |||||||||||||||
Net income attributable to noncontrolling interests |
(5,665 | ) | (24,248 | ) | 20,054 | 3(e) | (9,859 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to Digital Realty Trust, Inc. |
426,187 | 157,199 | (244,801 | ) | 338,585 | |||||||||||||||
Preferred stock dividends |
(83,771 | ) | (20,739 | ) | | (104,510 | ) | |||||||||||||
Issuance costs associated with redeemed preferred stock |
(10,328 | ) | (12,495 | ) | | (22,823 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income available to common stockholders |
$ | 332,088 | $ | 123,965 | $ | (244,801 | ) | $ | 211,252 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income per share available to common stockholders: |
||||||||||||||||||||
Basic |
$ | 2.21 | $ | 1.69 | $ | 1.10 | ||||||||||||||
Diluted |
$ | 2.20 | $ | 1.67 | $ | 1.09 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
149,953,662 | $ | 73,003,164 | 42,835,402 | 3(f) | 192,789,064 | ||||||||||||||
Diluted |
150,679,688 | $ | 73,839,036 | 42,835,402 | 3(f) | 193,515,090 |
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. | Reclassifications of Historical DFT |
Financial information presented in the Historical-DuPont Fabros Technology, Inc. columns in the unaudited pro forma condensed combined balance sheet and income statement represents the historical balance sheet of DFT as of March 31, 2017 and the historical statement of operations of DFT for the three months ended March 31, 2017 and for the year ended December 31, 2016, respectively. Such financial information has been reclassified or classified to conform to the historical presentation in DLRs consolidated financial statements as set forth below. Unless otherwise indicated, defined line items included in the footnotes have the meanings given to them in the historical financial statements of DFT.
(in thousands) |
Before Reclassification |
Reclassification Amount |
After Reclassification |
|||||||||||||
Balance Sheet |
||||||||||||||||
Construction in progress and land held for development |
$ | 493,442 | $ | (493,442 | ) | (1 | ) | $ | | |||||||
Land |
103,304 | 76,344 | (1 | ) | 179,648 | |||||||||||
Building and improvements |
3,019,725 | 387,820 | (1 | )(5) | 3,407,545 | |||||||||||
Accumulated depreciation and amortization |
(689,099 | ) | 27,600 | (5 | ) | (661,499 | ) | |||||||||
Acquired above-market leases, net |
| 4,793 | (2 | ) | 4,793 | |||||||||||
Acquired in-place lease value, deferred leasing costs and intangibles, net |
24,560 | 1,678 | (5 | ) | 26,238 | |||||||||||
Other assets |
50,256 | (4,793 | ) | (2 | ) | 45,463 | ||||||||||
Accounts payable and accrued liabilities |
29,647 | 82,157 | (3 | ) | 111,804 | |||||||||||
Construction costs payable |
75,884 | (75,884 | ) | (3 | ) | | ||||||||||
Accrued interest payable |
6,273 | (6,273 | ) | (3 | ) | | ||||||||||
Acquired below-market leases, net |
| 2,214 | (4 | ) | 2,214 | |||||||||||
Security deposits and prepaid rents |
72,449 | (2,214 | ) | (4 | ) | 70,235 | ||||||||||
Income Statement - For the Three Months Ended March 31, 2017 |
||||||||||||||||
Rental |
$ | 91,268 | $ | 631 | (1 | ) | $ | 91,899 | ||||||||
Other revenue |
2,921 | (631 | ) | (1 | ) | 2,290 | ||||||||||
Real estate taxes and insurance |
5,010 | (5,010 | ) | (2 | ) | | ||||||||||
Property taxes |
| 4,496 | (2 | ) | 4,496 | |||||||||||
Insurance |
| 514 | (2 | ) | 514 | |||||||||||
Rental property operating and maintenance |
40,191 | 49 | (3 | ) | 40,240 | |||||||||||
Transactions |
| 512 | (3 | ) | 512 | |||||||||||
Other |
2,705 | (561 | ) | (3 | ) | 2,144 | ||||||||||
Income Statement - For the Year Ended December 31, 2016 |
||||||||||||||||
Rental |
$ | 345,022 | $ | 2,490 | (1 | ) | $ | 347,512 | ||||||||
Other revenue |
14,011 | (2,490 | ) | (1 | ) | 11,521 | ||||||||||
Real estate taxes and insurance |
20,180 | (20,180 | ) | (2 | ) | | ||||||||||
Property taxes |
| 18,102 | (2 | ) | 18,102 | |||||||||||
Insurance |
| 2,078 | (2 | ) | 2,078 | |||||||||||
Rental property operating and maintenance |
154,064 | 142 | (3 | ) | 154,206 | |||||||||||
Transactions |
| 1,532 | (3 | ) | 1,532 | |||||||||||
Other |
11,781 | (1,707 | ) | (3 | ) | 10,074 | ||||||||||
Interest and other income (expense) |
| 33 | (3 | ) | 33 |
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
Reclassification and classification of the Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2017:
(1) | Represents disaggregation and reclassification of Construction in progress and land held for development of $493.4 million to Land of $76.3 million and Buildings and improvements of $417.1 million. |
(2) | Represents reclassification of Other assets of $4.8 million to Acquired above-market leases, net of $4.8 million. |
(3) | Represents reclassification of Construction costs payable of $75.9 million and Accrued interest payable of $6.3 million to Accounts payable and other accrued liabilities of $82.2 million. |
(4) | Represents reclassification of Security deposits and prepaid rents of $2.2 million to Acquired below-market leases, net of $2.2 million. |
(5) | Represents reclassification of Buildings and improvements of $29.3 million and Accumulated depreciation and amortization of ($27.6) million to Acquired in-place lease value, deferred leasing costs and intangibles, net of $1.7 million. |
Reclassification and classification of the Unaudited Pro Forma Condensed Combined Income Statement for the three months ended March 31, 2017:
(1) | Represents reclassification of Other revenue of $0.6 million to Rental revenue of $0.6 million. |
(2) | Represents reclassification of Real estate taxes and insurance of $5.0 million to Property taxes of $4.5 million and to Insurance of $0.5 million. |
(3) | Represents reclassification of Other expense of $0.6 million to Rental property operating and maintenance of $0.1 million and to Transactions of $0.5 million. |
Reclassification and classification of the Unaudited Pro Forma Condensed Combined Income Statement for the year ended December 31, 2016:
(1) | Represents reclassification of Other revenue of $2.5 million to Rental revenue of $2.5 million. |
(2) | Represents reclassification of Real estate taxes and insurance of $20.2 million to Property taxes of $18.1 million and to Insurance of $2.1 million. |
(3) | Represents reclassification of Other expense of $1.7 million to Rental property operating and maintenance of $0.2 million and to Transactions of $1.5 million and to Interest and other income (expense) of $0.0 million. |
2. | Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments |
The unaudited pro forma condensed combined balance sheet reflects the effect of the following adjustments:
(a) | Summary of sources and uses for the mergers (in thousands): |
Sources of funds: |
||||
DLR common stock (1) |
$ | 4,837,679 | ||
DLR OP common units (1) |
732,693 | |||
DLR series C preferred stock (2) |
201,250 | |||
Global revolving credit and committed facilities (3) |
1,566,395 | |||
|
|
|||
Total sources of funds |
$ | 7,338,017 | ||
|
|
|||
Uses of funds: |
||||
DFT common stock and OP units (1) |
$ | 5,570,372 | ||
DFT series C preferred stock (2) |
201,250 | |||
DFT indebtedness(4) |
1,394,395 | |||
Transaction costs (5) |
172,000 | |||
|
|
|||
Total uses of funds |
$ | 7,338,017 | ||
|
|
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(1) | Reflects the issuance of 42.8 million shares of DLR common stock and 6.7 million DLR OP common units at an assumed price of $112.95 per share of DLR common stock and DLR OP common unit, the last reported sales price of DLRs common stock on the New York Stock Exchange on June 30, 2017. The number of shares of DLR common stock and DLR OP common units to be issued was determined based on the number of shares of DFT common stock, shares of restricted DFT common stock, DFT performance stock units, unexercised options to purchase shares of DFT common stock and DFT OP common units outstanding as of June 30, 2017. Such shares of DFT common stock and DFT OP common units are assumed to remain outstanding until the closing date of the mergers. Further, no effect has been given to any new shares of DFT common stock or DFT OP common units that may be issued or granted subsequent to June 30, 2017 and before the closing date of the mergers. A 10% increase (decrease) in the closing share price of DLR common stock would increase (decrease) the purchase price by approximately $560 million, which, in turn, would increase (decrease) the amount of goodwill recorded in connection with the mergers by the same amount. See Note 2(b) for additional information on our preliminary purchase price allocation, and see Note 2(e) for additional information on the issuance of DLR common stock and elimination of historical DFT equity balances. |
(2) | Reflects the conversion of DFT series C preferred stock into the right to receive one validly issued, fully paid and nonassessable share of DLR series C preferred stock. |
(3) | Reflects a $62.4 million draw under DLRs global revolving credit facility, a $1.4 billion draw under the bridge facility and a $104.0 million draw under the mortgage loan facility to repay DFT indebtedness and pay transaction costs in connection with the mergers. Subject to market conditions, DLR may fund a portion of such anticipated debt repayments and transaction costs using sources of debt financing other than DLRs global revolving credit or bridge facilities. See Note 3(d) for additional information on the interest expense associated with the assumed draw under DLRs global revolving credit and committed facilities. |
(4) | Includes the payoff of $197.8 million, $249.1 million, $837.9 million and $109.6 million outstanding under DFTs revolving credit facility, term loan, senior notes and mortgage loans, respectively, net of deferred financing costs. The debt has been eliminated from the unaudited pro forma condensed combined balance sheet, with a corresponding decrease to accumulated deficit. |
(5) | DLR estimates that the total transaction costs will be approximately $172.0 million. The actual amount may vary. DLR also expects to incur other financing costs and integration costs associated with the mergers. Given the uncertainty of the amounts involved, such financing costs and integration costs are not reasonably estimatable. |
(b) | Adjustment reflects the excess of the estimated purchase price as determined in Note 2(a) over the book value of the net tangible and intangible assets to be acquired. Under the acquisition method of accounting, the total estimated purchase price will be allocated to DFTs net tangible and intangible assets based on their estimated fair values at the date of the completion of the mergers. The following table sets forth the preliminary allocation of the estimated purchase price to DFTs net tangible |
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
and intangible assets and the adjustments to the historical book value of DFTs net tangible and intangible assets to reflect this preliminary allocation (in thousands): |
Preliminary estimate for allocation of the purchase price |
Historical DFT | Pro Forma Adjustment |
||||||||||
Land |
$ | 309,964 | $ | 179,648 | $ | 130,316 | ||||||
Buildings and improvements |
3,725,440 | 3,407,545 | 317,895 | |||||||||
Acquired above-market leases |
160,599 | 4,793 | 155,806 | |||||||||
Customer relationships |
961,400 | | 961,400 | |||||||||
In-place lease value |
520,713 | | 520,713 | |||||||||
Tenant origination costs |
50,906 | 26,238 | 24,668 | |||||||||
Non-compete |
6,700 | | 6,700 | |||||||||
Goodwill |
1,770,526 | | 1,770,526 | |||||||||
Acquired below-market leases |
(185,067) | (2,214) | (182,853) | |||||||||
Working capital and other |
(155,164) | (155,164) | | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 7,166,017 | $ | 3,460,846 | $ | 3,705,171 | ||||||
|
|
|
|
|
|
Upon closing of the mergers, the purchase consideration will be adjusted for working capital levels and other adjustments as stipulated in the merger agreement.
Upon completion of the fair value assessment, the final purchase price allocation may differ from the preliminary allocation provided above. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and the residual amounts will be allocated as an increase or decrease to goodwill. The goodwill recorded is due primarily to the synergies expected to be realized between the two companies and the assembled workforce acquired in connection with the mergers.
The fair value of investment in real estate acquired of $4.0 billion consists of land with an estimated fair value of $0.3 billion, building and improvements with an estimated fair value of $2.9 billion and construction in process, which is classified within building and improvements, with an estimated fair value of $0.8 billion. Investment in real estate is expected to be amortized on a straight-line basis over estimated remaining useful lives of 2 - 39 years.
The components of investment in real estate have been valued using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional and economic factors.
The fair value of definite life intangible assets acquired of $1.5 billion consist of customer relationships with an estimated fair value of $1.0 billion, in-place lease value with an estimated fair value of $0.5 billion, acquired above-market leases with an estimated fair value of $0.2 billion, acquired below-market leases with an estimated fair value of ($0.2) billion and tenant origination costs with an estimated fair value of $0.1 billion. The customer relationship value is expected to be amortized on a straight-line basis over an estimated useful life of approximately 19 years, in-place lease value is expected to be amortized on a straight-line basis over an estimated useful life of six years, acquired above-market leases is expected to be amortized on a straight-line basis over an estimated useful life of approximately four years, acquired below-market leases is expected to be amortized on a straight-line basis over an estimated useful life of approximately 12 years and tenant origination costs is expected to be amortized on a straight-line basis over an estimated useful life of seven years.
The fair value of intangible assets is determined primarily using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participants expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of the valuations include the estimated annual net cash flows for each indefinite lived or definite lived intangible asset (including net revenues, operating expenses, selling and marketing costs and working capital asset/contributory asset charges), the appropriate discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each assets life cycle, and competitive trends as well as other factors.
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(c) | Adjustment eliminates DFTs historical accumulated depreciation. |
(d) | Adjustment eliminates DFTs historical deferred rent receivable. |
(e) | Reflects the issuance of 42.8 million shares of DLR common stock and 6.7 million DLR OP common units at an assumed price of $112.95 per share of DLR common stock and DLR OP common unit, the last reported sales price of DLRs common stock on the New York Stock Exchange on June 30, 2017, as well as the elimination of all historical DFT common stock, additional paid in capital, redeemable noncontrolling interestsoperating partnership and noncontrolling interests in operating partnership balances and transaction costs. The following table sets forth the adjustments impacting common stock, additional paid in capital and distributions in excess of earnings (in thousands): |
Common stock |
Additional paid-in capital |
Accumulated dividends in excess of earnings |
Redeemable noncontrolling interests operating partnership |
Noncontrolling interests in operating partnership |
||||||||||||||||
Issuance of DLR common stock / DFT OP common units |
$ | 428 | $ | 4,837,830 | $ | | $ | 61,576 | $ | 698,224 | ||||||||||
Elimination of DFTs historical common stock / DFT OP common unit balances |
(78 | ) | (773,321 | ) | | (579,329 | ) | | ||||||||||||
Transaction costs of DLR |
| | (172,000) | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Adjustments |
$ | 350 | $ | 4,064,509 | $ | (172,000 | ) | $ | (517,753 | ) | $ | 698,224 | ||||||||
|
|
|
|
|
|
|
|
|
|
3. | Unaudited Pro Forma Condensed Combined Income Statement Adjustments |
The unaudited pro forma condensed combined income statements reflect the effect of the following pro forma adjustments:
(a) | Rental revenue for the three months ended March 31, 2017 is adjusted to: (i) remove ($1.7) million of DFTs historical straight-line rent; (ii) recognize $3.0 million of total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from January 1, 2016; (iii) remove $0.2 million of DFTs historical amortization of the asset or liability created from previous acquisitions of leases with favorable or unfavorable rents; and (iv) amortization of the asset or liability from the acquired leases with favorable or unfavorable rents relative to estimated market rents, including a reduction of $12.7 million from amortization of the asset and an increase of $5.5 million from amortization of the liability, both from January 1, 2016. Rental revenue for the year ended December 31, 2016 is adjusted to: (i) remove $0.1 million of DFTs historical straight-line rent; (ii) recognize $20.0 million of total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from January 1, 2016; (iii) remove $0.4 million of DFTs historical amortization of the asset or liability created from previous acquisitions of leases with favorable or unfavorable rents; and (iv) amortization of the asset or liability from the acquired leases with favorable or unfavorable rents relative to estimated market rents, including a reduction of $50.8 million from amortization of the asset and an increase of $21.7 million from amortization of the liability, both from January 1, 2016. We amortized the asset or liability from the acquired leases with favorable or unfavorable rents relative to estimated market rents using the remaining lease term associated with these leases, which approximated eight years. |
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(b) | Reflects the net impact on depreciation and amortization expense of the following adjustments: |
| An increase to depreciation and amortization expense of $7.8 million and $36.1 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, as a result of fair value accounting for investment in real estate and other fixed assets acquired in the mergers. |
| An increase to depreciation and amortization expense of $49.4 million and $224.2 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, as a result of fair value accounting for definite-lived intangible assets acquired in the mergers. |
For the three months ended March 31, 2017, real estate depreciation expense for the assets acquired in the mergers would have been $85.3 million and non-real estate depreciation expense would have been $0.1 million. For the year ended December 31, 2016, total real estate depreciation expense for the assets acquired in the mergers would have been $360.9 million and non-real estate depreciation expense would have been $7.2 million.
(c) | DLR expects to incur additional general and administrative costs as a result of the mergers that will include, but are not limited to, incremental salaries and benefits, audit, tax and legal fees and other administrative costs. As DLR has not yet entered into contracts with third-parties to provide the services included within this estimate, these expenses do not appear in the unaudited pro forma condensed combined income statements. |
(d) | Reflects the net reduction in interest expense of $2.8 million and $5.0 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, due to the following adjustments: |
| An increase in interest expense of $9.5 million and $37.8 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, due to a $62.4 million draw under DLRs global revolving credit facility, which will bear interest at LIBOR plus 1.00% (estimated to be 2.22%), a $1.4 billion draw under the bridge facility, which will bear interest at LIBOR plus 1.10% (estimated to be 2.32%) and a $104.0 million draw under the mortgage loan facility, which will bear interest at 3.70%), to consummate the mergers. In addition, amortization of deferred loan fees related to the committed facilities would total $0.0 million and $9.3 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. A hypothetical 0.125% increase or decrease in the expected weighted average interest rate would increase or decrease interest expense associated with this additional debt by $0.5 million and $1.8 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. Subject to market conditions, DLR may fund a portion of the debt repayment and transaction costs using sources of debt financing other than DLRs global revolving credit or the bridge facilities. Such alternative debt financing may bear interest at a rate greater or less than DLRs global revolving credit or the bridge facilities, which would cause DLRs actual interest expense to exceed or be less than the interest expense reflected in the unaudited pro forma condensed combined income statements. |
| A reduction in interest expense of $11.5 million and $48.3 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, due to the payoff of DFT debt in connection with the mergers, and elimination of the associated deferred financing cost amortization of $0.8 million and $3.7 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. |
(e) | Adjustment reflects the noncontrolling interest portion of the adjustments to the unaudited pro forma condensed combined income statements. |
DIGITAL REALTY TRUST, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(f) | The calculation of basic and diluted income per common share was as follows: |
Three Months Ended March 31, 2017 | ||||||||||||
(in thousands, except for per share data) | ||||||||||||
DLR Historical |
DFT Historical |
Pro Forma Combined Company |
||||||||||
Net income from continuing operations available to common stockholders, basic and diluted |
$ | 66,145 | $ | 35,230 | $ | 48,685 | ||||||
Weighted average common shares outstanding, basic (1) |
159,297 | 76,670 | 202,132 | |||||||||
Weighted average common shares outstanding, diluted (1) |
160,422 | 77,651 | 203,257 | |||||||||
Net income per share available to common stockholders, basic |
$ | 0.42 | $ | 0.46 | $ | 0.24 | ||||||
Net income per share available to common stockholders, diluted |
$ | 0.41 | $ | 0.45 | $ | 0.24 | ||||||
Year Ended December 31, 2016 | ||||||||||||
(in thousands, except for per share data) | ||||||||||||
DLR Historical |
DFT Historical |
Pro Forma Combined Company |
||||||||||
Net income from continuing operations available to common stockholders, basic and diluted |
$ | 332,088 | $ | 123,965 | $ | 211,252 | ||||||
Weighted average common shares outstanding, basic (1) |
149,954 | 73,003 | 192,789 | |||||||||
Weighted average common shares outstanding, diluted (1) |
150,680 | 73,839 | 193,515 | |||||||||
Net income per share available to common stockholders, basic |
$ | 2.21 | $ | 1.69 | $ | 1.10 | ||||||
Net income per share available to common stockholders, diluted |
$ | 2.20 | $ | 1.67 | $ | 1.09 |
(1) | The pro forma weighted average common shares assume that the DLR shares issued to DFT stockholders in connection with the mergers were issued as of January 1, 2016. |
Exhibit 99.4
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Introduction
Penguins REIT Sub, LLC, which we refer to as Merger Sub, a wholly owned subsidiary of Digital Realty Trust, Inc., which we refer to as Digital Realty or DLR, plans to engage in a series of transactions pursuant to which DuPont Fabros Technology, Inc., which we refer to as DuPont Fabros or DFT, will merge with and into Merger Sub, with Merger Sub continuing as the surviving corporation and a wholly owned subsidiary of Digital Realty. In addition, a subsidiary of DLRs operating partnership, Digital Realty Trust, L.P., which we refer to as DLR OP, plans to merge with and into DFTs operating partnership, DuPont Fabros Technology, L.P., which we refer to as DFT OP, with DuPont Fabros Technology, L.P. as the surviving partnership and a wholly owned subsidiary of Digital Realty Trust, L.P. We refer to these mergers collectively as the mergers. The mergers are part of the transactions contemplated by the Agreement and Plan of Merger entered into on June 8, 2017, which we refer to as the merger agreement, among Digital Realty, DuPont Fabros and certain of their subsidiaries. In addition, on June 8, 2017, in connection with the execution of the merger agreement, DLR entered into two separate commitment letters, pursuant to which the initial commitment parties agreed to (i) provide a senior unsecured bridge loan facility, which we refer to as the bridge facility, in the original principal amount of $1.4 billion and (ii) provide a mortgage loan facility of up to $104 million to one or more wholly-owned subsidiaries of DLR OP, which we refer to as the mortgage loan facility, in each case to potentially fund the repayment of DFT debt and transaction costs in connection with the mergers. We refer to the bridge facility and the mortgage loan facility collectively as the committed facilities.
The consummation of the mergers is subject to certain customary closing conditions, including, among others, approval by the holders of a majority of the outstanding shares of DFT common stock, approval of the issuance of DLR common stock by a majority of the votes cast by the holders of DLR common stock at a special meeting of Digital Realtys stockholders, the absence of certain legal impediments to the consummation of the mergers, the effectiveness of a registration statement on Form S-4 filed by Digital Realty in connection with the mergers, approval for listing on the New York Stock Exchange of the shares of DLR common stock to be issued in connection with the mergers, the absence of a material adverse effect on either Digital Realty or DuPont Fabros and compliance by the parties to the merger agreement with their respective obligations under the merger agreement. The obligations of the parties to consummate the mergers are not subject to any financing condition or the receipt of any financing by Digital Realty. As of the date of this Current Report on Form 8-K, the mergers are expected to be completed during the second half of 2017.
Pursuant to the terms and conditions in the merger agreement, at the effective time of the mergers, (i) each share of DFT common stock issued and outstanding immediately prior to the effective time will be converted into the right to receive 0.545 shares of DLR common stock, which we refer to as the common consideration, and (ii) each share of 6.625% Series C Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value per share, of Dupont Fabros, which we refer to as the DFT series C preferred stock, will be converted into the right to receive one validly issued, fully paid and nonassessable share of 6.625% Series C Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share, of Digital Realty, which we refer to as the DLR series C preferred stock, having substantially similar rights, privileges, preferences and interests as the DFT series C preferred stock. In addition, (i) each outstanding share of restricted DFT common stock will vest and all restrictions thereon will lapse, and each such restricted share will be cancelled in exchange for the right to receive the common consideration, (ii) each outstanding award of performance stock units granted by DFT, which we refer to as DFT performance stock units, will vest and be cancelled and converted into the right to receive the common consideration and (iii) each outstanding and unexercised option to purchase shares of DFT common stock will be automatically converted into an option covering a number of shares of DLR common stock equal to the number of shares of DFT common stock subject to such option immediately prior to the effective time of the mergers multiplied by 0.545, rounded down to the nearest whole share, with an exercise price per share equal to the exercise price per share of such option immediately prior to the effective time of the merger, divided by 0.545, rounded up to the nearest whole cent.
At the effective time of the mergers, each common unit of limited partnership interest in the DFT OP, or DFT OP common units, issued and outstanding immediately prior to the effective time held by a limited partner of the DFT OP will be converted into the right to receive 0.545 common units of limited partnership interest in DLR OP, or the DLR OP common units. In the alternative, limited partners in the DFT OP may elect to redeem their DFT OP common units in order to receive the common consideration. In addition, each Series C preferred partnership unit in DFT OP, or DFT OP series C preferred units, will be converted into the right to receive one validly issued Series C preferred partnership unit in DLR OP, or DLR OP series C preferred units. DFT is the only holder of DFT OP series C preferred units.
These unaudited pro forma condensed combined financial statements, which we refer to as the pro forma financial statements, were prepared using the acquisition method of accounting with DLR OP considered the accounting acquirer of DFT OP. Under the acquisition method of accounting, the purchase price is allocated to the underlying DFT OP tangible and intangible assets acquired and liabilities assumed based on their respective fair values with the excess purchase price, if any, allocated to goodwill.
The pro forma adjustments and the purchase price allocation as presented are based on estimates and certain information that is available as of the date of this Current Report on Form 8-K. The total consideration for the mergers and the assignment of fair values to DFT OPs assets acquired and liabilities assumed has not been finalized, is subject to change, could vary materially from the actual amounts at the time the mergers are completed and may not have identified all adjustments necessary to conform DFT OPs accounting policies to DLR OPs accounting policies. A final determination of the fair value of DFT OPs assets and liabilities, including intangible assets, will be based on the actual net tangible and intangible assets and liabilities of DFT OP that exist as of the closing date of the mergers and, therefore, cannot be made prior to the completion of the mergers. In addition, the value of the consideration to be paid by DLR and therefore the consideration to be issued by DLR OP for DFT OP upon the consummation of the mergers will be determined based on the closing price of DLRs common stock on the closing date of the mergers. As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and additional analyses are performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the pro forma financial statements presented below. DLR OP estimated the fair value of DFT OPs assets and liabilities based on discussions with DFT OPs management, preliminary valuation studies, due diligence and information presented in DFT OPs public filings. Upon completion of the mergers, final valuations will be performed. Any increases or decreases in the fair value of relevant balance sheet amounts upon completion of the final valuations will result in adjustments to the pro forma balance sheet and/or statements of income. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.
The aggregate purchase price for financial statement purposes will be based on the actual closing price per share of DLR common stock on the closing date consistent with the requirements of Financial Accounting Standards Board Accounting Standards Codification 805, Business Combinations, which could differ materially from the assumed price per share of $112.95 (the last reported sales price of DLRs common stock on the New York Stock Exchange on June 30, 2017) used in the pro forma financial statements. If the actual closing price per share of DLR common stock on the closing date is higher than the assumed amount, the final purchase price will be higher; conversely, if the actual closing price is lower, the final purchase price will be lower.
Assumptions and estimates underlying the unaudited adjustments to the pro forma financial statements are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the pro forma financial statements to give effect to pro forma events that are: (1) directly attributable to the mergers, (2) factually supportable and (3) expected to have a continuing impact on the results of income of DLR OP following the mergers. The pro forma condensed consolidated statements of income for the three months ended March 31, 2017 and the year ended December 31, 2016 consolidate the historical consolidated statements of income of DLR OP and DFT OP, giving effect to the mergers as if they had been consummated on January 1, 2016, the beginning of the earliest period presented. The pro forma balance sheet
combines the historical consolidated balance sheet of DLR OP and the historical consolidated balance sheet of DFT OP as of March 31, 2017, giving effect to the mergers as if they had been consummated on March 31, 2017. This information is presented for illustrative purposes only. It is neither indicative of the consolidated operating results that would have occurred or financial position that would have existed if such transactions had occurred on the dates described above and in accordance with the assumptions described below, nor is it indicative of future operating results or financial position.
The pro forma financial statements, although helpful in illustrating the financial characteristics of DLR OP following the mergers under one set of assumptions, do not reflect the benefits of expected cost savings (or associated costs to achieve such savings), opportunities to earn additional revenue, or other factors that may result as a consequence of the mergers and do not attempt to predict or suggest future results. Specifically, the unaudited pro forma condensed combined statements of income exclude projected operating efficiencies and overhead synergies expected to be achieved as a result of the mergers. The pro forma financial statements also exclude the effects of costs associated with any restructuring or integration activities from the mergers as they are currently not known and, to the extent they occur, are expected to be non-recurring and will not have been incurred at the closing date of the mergers. However, such costs could affect DLR OP following the mergers in the period the costs are incurred or recorded. Further, the pro forma financial statements do not reflect the effect of any regulatory actions that may impact the results of DLR OP following the mergers.
The following Unaudited Pro Forma Condensed Combined Financial Information is based on, and should be read in conjunction with:
| the accompanying notes to the pro forma financial statements; |
| the historical audited consolidated financial statements of DLR OP and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the Securities and Exchange Commission, or the SEC, on March 1, 2017; |
| the historical unaudited condensed consolidated financial statements of DLR OP and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its quarterly report on Form 10-Q for the quarterly period ended March 31, 2017, as filed with the SEC on May 10, 2017; |
| the historical audited consolidated financial statements of DFT OP and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2016, as filed with the SEC, on February 23, 2017; and |
| the historical unaudited condensed consolidated financial statements of DFT OP and the related notes and Managements Discussion and Analysis of Financial Condition and Results of Operations included in its quarterly report on Form 10-Q for the quarterly period ended March 31, 2017, as filed with the SEC on April 27, 2017. |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2017
(in thousands)
Historical | ||||||||||||||||||||
Digital Realty Trust, L.P. |
DuPont Fabros Technology, L.P. (See Note 1) |
Pro Forma Adjustments |
Note Reference |
Pro Forma Combined Company |
||||||||||||||||
ASSETS |
||||||||||||||||||||
Investments in real estate: |
||||||||||||||||||||
Properties: |
||||||||||||||||||||
Land |
$ | 767,148 | $ | 179,648 | $ | 130,316 | 2(b) | $ | 1,077,112 | |||||||||||
Acquired ground leases |
11,489 | | | 11,489 | ||||||||||||||||
Buildings and improvements |
10,558,200 | 3,407,545 | 317,895 | 2(b) | 14,283,640 | |||||||||||||||
Tenant improvements |
532,168 | | | 532,168 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total investments in properties |
11,869,005 | 3,587,193 | 448,211 | 15,904,409 | ||||||||||||||||
Accumulated depreciation and amortization |
(2,792,910 | ) | (661,499 | ) | 661,499 | 2(c) | (2,792,910 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net investments in properties |
9,076,095 | 2,925,694 | 1,109,710 | 13,111,499 | ||||||||||||||||
Investment in unconsolidated joint ventures |
112,856 | | | 112,856 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net investments in real estate |
9,188,951 | 2,925,694 | 1,109,710 | 13,224,355 | ||||||||||||||||
Cash and cash equivalents |
14,950 | 40,765 | | 55,715 | ||||||||||||||||
Accounts and other receivables, net of allowance for doubtful accounts |
195,406 | 9,504 | | 204,910 | ||||||||||||||||
Deferred rent |
418,858 | 121,340 | (121,340 | ) | 2(d) | 418,858 | ||||||||||||||
Acquired above-market leases, net |
20,826 | 4,793 | 155,806 | 2(b) | 181,425 | |||||||||||||||
Goodwill |
757,444 | | 1,770,526 | 2(b) | 2,527,970 | |||||||||||||||
Acquired in-place lease value, deferred leasing costs and intangibles, net |
1,501,843 | 26,238 | 1,513,481 | 2(b) | 3,041,562 | |||||||||||||||
Restricted cash |
10,447 | | | 10,447 | ||||||||||||||||
Assets held for sale |
56,154 | | | 56,154 | ||||||||||||||||
Other assets |
164,669 | 45,463 | | 210,132 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total assets |
$ | 12,329,548 | $ | 3,173,797 | $ | 4,428,183 | $ | 19,931,528 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND EQUITY |
||||||||||||||||||||
Global revolving credit facility, net |
$ | 564,467 | $ | 197,819 | $ | (135,424 | ) | 2(a) | $ | 626,862 | ||||||||||
Unsecured term loan, net |
1,505,667 | 249,089 | (249,089 | ) | 2(a) | 1,505,667 | ||||||||||||||
Unsecured senior notes, net |
4,128,110 | 837,895 | (837,895 | ) | 2(a) | 4,128,110 | ||||||||||||||
Mortgage loans, including premiums, net |
3,085 | 109,592 | (5,592 | ) | 2(a) | 107,085 | ||||||||||||||
Bridge loan facility |
| | 1,400,000 | 2(a) | 1,400,000 | |||||||||||||||
Accounts payable and other accrued liabilities |
804,371 | 111,804 | | 916,175 | ||||||||||||||||
Accrued dividends and distributions |
| 46,426 | | 46,426 | ||||||||||||||||
Acquired below-market leases, net |
78,641 | 2,214 | 182,853 | 2(b) | 263,708 | |||||||||||||||
Security deposits and prepaid rents |
171,692 | 70,235 | | 241,927 | ||||||||||||||||
Obligations associated with assets held for sale |
3,070 | | | 3,070 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities |
7,259,103 | 1,625,074 | 354,853 | 9,239,030 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Redeemable partnership units |
| 579,329 | (517,753 | ) | 2(e) | 61,576 | ||||||||||||||
Commitments and contingencies |
||||||||||||||||||||
Capital: |
||||||||||||||||||||
Partners capital: |
||||||||||||||||||||
General Partner |
6,783,636 | 6,537 | 4,970,975 | 2(e) | 11,761,148 | |||||||||||||||
Limited Partners |
37,244 | 962,857 | (207,892 | ) | 2(e) | 792,209 | ||||||||||||||
Accumulated distributions in excess of earnings |
(1,629,633 | ) | | (172,000 | ) | 2(e) | (1,801,633 | ) | ||||||||||||
Accumulated other comprehensive loss |
(127,375 | ) | | | (127,375 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total partners capital |
5,063,872 | 969,394 | 4,591,083 | 10,624,349 | ||||||||||||||||
Noncontrolling interests in consolidated joint ventures |
6,573 | | | 6,573 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total capital |
5,070,445 | 969,394 | 4,591,083 | 10,630,922 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total liabilities and capital |
$ | 12,329,548 | $ | 3,173,797 | $ | 4,428,183 | $ | 19,931,528 | ||||||||||||
|
|
|
|
|
|
|
|
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2017
(in thousands, except unit and per unit data)
Historical | ||||||||||||||||||||
Digital Realty Trust, L.P. |
DuPont Fabros Technology, L.P. (See Note 1) |
Pro Forma Adjustments |
Note Reference |
Pro Forma Combined Company |
||||||||||||||||
Operating Revenues: |
||||||||||||||||||||
Rental |
$ | 404,126 | $ | 91,899 | $ | (2,705 | ) | 3(a) | $ | 493,320 | ||||||||||
Tenant reimbursements |
87,288 | 45,295 | | 132,583 | ||||||||||||||||
Interconnection and other |
57,225 | | | 57,225 | ||||||||||||||||
Fee income |
1,895 | | | 1,895 | ||||||||||||||||
Other |
35 | 2,290 | | 2,325 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating revenues |
550,569 | 139,484 | (2,705 | ) | 687,348 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating Expenses: |
||||||||||||||||||||
Rental property operating and maintenance |
169,339 | 40,240 | | 209,579 | ||||||||||||||||
Property taxes |
26,919 | 4,496 | | 31,415 | ||||||||||||||||
Insurance |
2,592 | 514 | | 3,106 | ||||||||||||||||
Depreciation and amortization |
176,466 | 28,207 | 57,211 | 3(b) | 261,884 | |||||||||||||||
General and administrative |
34,647 | 6,812 | | 3(c) | 41,459 | |||||||||||||||
Transactions |
3,323 | 512 | | 3,835 | ||||||||||||||||
Other |
| 2,144 | | 2,144 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
413,286 | 82,925 | 57,211 | 553,422 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
137,283 | 56,559 | (59,916 | ) | 133,926 | |||||||||||||||
Other Income (Expenses): |
||||||||||||||||||||
Equity in earnings of unconsolidated joint ventures |
5,324 | | | 5,324 | ||||||||||||||||
Loss on sale of property |
(522 | ) | | | (522 | ) | ||||||||||||||
Interest and other income |
151 | | | 151 | ||||||||||||||||
Interest expense |
(55,450 | ) | (12,284 | ) | 2,798 | 3(d) | (64,936 | ) | ||||||||||||
Tax expense |
(2,223 | ) | | | (2,223 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
84,563 | 44,275 | (57,118 | ) | 71,720 | |||||||||||||||
Net income attributable to noncontrolling interests in consolidated joint ventures |
(121 | ) | | | (121 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to Digital Realty Trust, L.P. |
84,442 | 44,275 | (57,118 | ) | 71,599 | |||||||||||||||
Preferred units distributions |
(17,393 | ) | (3,333 | ) | | (20,726 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income available to common unitholders |
$ | 67,049 | $ | 40,942 | $ | (57,118 | ) | $ | 50,873 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income per unit available to common unitholders: |
||||||||||||||||||||
Basic |
$ | 0.42 | 0.46 | $ | 0.24 | |||||||||||||||
Diluted |
$ | 0.41 | 0.45 | $ | 0.24 | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Weighted average common units outstanding: |
||||||||||||||||||||
Basic |
161,474,901 | 89,095,663 | 49,562,275 | 3(e) | 211,037,176 | |||||||||||||||
Diluted |
162,599,529 | 90,076,644 | 49,562,275 | 3(e) | 212,161,804 |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
(in thousands, except unit and per unit data)
Historical | ||||||||||||||||||||
Digital Realty Trust, L.P. |
DuPont Fabros Technology, L.P. (See Note 1) |
Pro Forma Adjustments |
Note Reference |
Pro Forma Combined Company |
||||||||||||||||
Operating Revenues: |
||||||||||||||||||||
Rental |
$ | 1,542,511 | $ | 347,512 | $ | (9,540 | ) | 3(a) | $ | 1,880,483 | ||||||||||
Tenant reimbursements |
355,903 | 169,668 | | 525,571 | ||||||||||||||||
Interconnection and other |
204,317 | | | 204,317 | ||||||||||||||||
Fee income |
6,285 | | | 6,285 | ||||||||||||||||
Other |
33,197 | 11,521 | | 44,718 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating revenues |
2,142,213 | 528,701 | (9,540 | ) | 2,661,374 | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating Expenses: |
||||||||||||||||||||
Rental property operating and maintenance |
660,177 | 154,206 | | 814,383 | ||||||||||||||||
Property taxes |
102,497 | 18,102 | | 120,599 | ||||||||||||||||
Insurance |
9,492 | 2,078 | | 11,570 | ||||||||||||||||
Depreciation and amortization |
699,324 | 107,781 | 260,279 | 3(b) | 1,067,384 | |||||||||||||||
General and administrative |
152,733 | 23,043 | | 3(c) | 175,776 | |||||||||||||||
Transactions |
20,491 | 1,532 | | 22,023 | ||||||||||||||||
Other |
213 | 10,074 | | 10,287 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total operating expenses |
1,644,927 | 316,816 | 260,279 | 2,222,022 | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Operating income |
497,286 | 211,885 | (269,819 | ) | 439,352 | |||||||||||||||
Other Income (Expenses): |
||||||||||||||||||||
Equity in earnings of unconsolidated joint ventures |
17,104 | | | 17,104 | ||||||||||||||||
Gain on sale of property |
169,902 | 22,833 | | 192,735 | ||||||||||||||||
Interest and other income (expense) |
(4,564 | ) | (33 | ) | | (4,597 | ) | |||||||||||||
Interest expense |
(236,480 | ) | (52,006 | ) | 4,964 | 3(d) | (283,522 | ) | ||||||||||||
Tax expense |
(10,385 | ) | | | (10,385 | ) | ||||||||||||||
Loss from early extinguishment of debt |
(1,011 | ) | (1,232 | ) | | (2,243 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
431,852 | 181,447 | (264,855 | ) | 348,444 | |||||||||||||||
Net income attributable to noncontrolling interests in consolidated joint ventures |
(367 | ) | | | (367 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to Digital Realty Trust, L.P. |
431,485 | 181,447 | (264,855 | ) | 348,077 | |||||||||||||||
Preferred units distributions |
(83,771 | ) | (20,739 | ) | | (104,510 | ) | |||||||||||||
Issuance costs associated with redeemed preferred units |
(10,328 | ) | (12,495 | ) | | (22,823 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income available to common unitholders |
$ | 337,386 | $ | 148,213 | $ | (264,855 | ) | $ | 220,744 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Net income per unit available to common unitholders: |
||||||||||||||||||||
Basic |
$ | 2.21 | $ | 1.69 | $ | 1.09 | ||||||||||||||
Diluted |
$ | 2.20 | $ | 1.67 | $ | 1.09 | ||||||||||||||
|
|
|
|
|
|
|||||||||||||||
Weighted average common units outstanding: |
||||||||||||||||||||
Basic |
152,359,680 | $ | 87,284,564 | 49,562,275 | 3(e) | 201,921,955 | ||||||||||||||
Diluted |
153,085,706 | $ | 88,120,436 | 49,562,275 | 3(e) | 202,647,981 |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. | Reclassifications of Historical DFT |
Financial information presented in the Historical-DuPont Fabros Technology, L.P. columns in the unaudited pro forma condensed combined balance sheet and income statement represents the historical balance sheet of DFT OP as of March 31, 2017 and the historical statement of operations of DFT OP for the three months ended March 31, 2017 and for the year ended December 31, 2016, respectively. Such financial information has been reclassified or classified to conform to the historical presentation in DLR OPs consolidated financial statements as set forth below. Unless otherwise indicated, defined line items included in the footnotes have the meanings given to them in the historical financial statements of DFT OP.
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(in thousands) |
Before Reclassification |
Reclassification Amount |
After Reclassification |
|||||||||||
Balance Sheet |
||||||||||||||
Construction in progress and land held for development |
$ | 493,442 | $ | (493,442 | ) | (1) | $ | | ||||||
Land |
103,304 | 76,344 | (1) | 179,648 | ||||||||||
Building and improvements |
3,019,725 | 387,820 | (1)(5) | 3,407,545 | ||||||||||
Accumulated depreciation and amortization |
(689,099 | ) | 27,600 | (5) | (661,499 | ) | ||||||||
Acquired above-market leases, net |
| 4,793 | (2) | 4,793 | ||||||||||
Acquired in-place lease value, deferred leasing costs and intangibles, net |
24,560 | 1,678 | (5) | 26,238 | ||||||||||
Other assets |
50,256 | (4,793 | ) | (2) | 45,463 | |||||||||
Accounts payable and accrued liabilities |
29,647 | 82,157 | (3) | 111,804 | ||||||||||
Construction costs payable |
75,884 | (75,884 | ) | (3) | | |||||||||
Accrued interest payable |
6,273 | (6,273 | ) | (3) | | |||||||||
Acquired below-market leases, net |
| 2,214 | (4) | 2,214 | ||||||||||
Security deposits and prepaid rents |
72,449 | (2,214 | ) | (4) | 70,235 | |||||||||
Income Statement - For the Three Months Ended March 31, 2017 |
||||||||||||||
Rental |
$ | 91,268 | $ | 631 | (1) | $ | 91,899 | |||||||
Other revenue |
2,921 | (631 | ) | (1) | 2,290 | |||||||||
Real estate taxes and insurance |
5,010 | (5,010 | ) | (2) | | |||||||||
Property taxes |
| 4,496 | (2) | 4,496 | ||||||||||
Insurance |
| 514 | (2) | 514 | ||||||||||
Rental property operating and maintenance |
40,191 | 49 | (3) | 40,240 | ||||||||||
Transactions |
| 512 | (3) | 512 | ||||||||||
Other |
2,705 | (561 | ) | (3) | 2,144 | |||||||||
Income Statement - For the Year Ended December 31, 2016 |
||||||||||||||
Rental |
$ | 345,022 | $ | 2,490 | (1) | $ | 347,512 | |||||||
Other revenue |
14,011 | (2,490 | ) | (1) | 11,521 | |||||||||
Real estate taxes and insurance |
20,180 | (20,180 | ) | (2) | | |||||||||
Property taxes |
| 18,102 | (2) | 18,102 | ||||||||||
Insurance |
| 2,078 | (2) | 2,078 | ||||||||||
Rental property operating and maintenance |
154,064 | 142 | (3) | 154,206 | ||||||||||
Transactions |
| 1,532 | (3) | 1,532 | ||||||||||
Other |
11,781 | (1,707 | ) | (3) | 10,074 | |||||||||
Interest and other income (expense) |
| 33 | (3) | 33 |
Reclassification and classification of the Unaudited Pro Forma Condensed Combined Balance Sheet as of March 31, 2017:
(1) | Represents disaggregation and reclassification of Construction in progress and land held for development of $493.4 million to Land of $76.3 million and Buildings and improvements of $417.1 million. |
(2) | Represents reclassification of Other assets of $4.8 million to Acquired above-market leases, net of $4.8 million. |
(3) | Represents reclassification of Construction costs payable of $75.9 million and Accrued interest payable of $6.3 million to Accounts payable and other accrued liabilities of $82.2 million. |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(4) | Represents reclassification of Security deposits and prepaid rents of $2.2 million to Acquired below-market leases, net of $2.2 million. |
(5) | Represents reclassification of Buildings and improvements of $29.3 million and Accumulated depreciation and amortization of ($27.6) million to Acquired in-place lease value, deferred leasing costs and intangibles, net of $1.7 million. |
Reclassification and classification of the Unaudited Pro Forma Condensed Combined Income Statement for the three months ended March 31, 2017:
(1) | Represents reclassification of Other revenue of $0.6 million to Rental revenue of $0.6 million. |
(2) | Represents reclassification of Real estate taxes and insurance of $5.0 million to Property taxes of $4.5 million and to Insurance of $0.5 million. |
(3) | Represents reclassification of Other expense of $0.6 million to Rental property operating and maintenance of $0.1 million and to Transactions of $0.5 million. |
Reclassification and classification of the Unaudited Pro Forma Condensed Combined Income Statement for the year ended December 31, 2016:
(1) | Represents reclassification of Other revenue of $2.5 million to Rental revenue of $2.5 million. |
(2) | Represents reclassification of Real estate taxes and insurance of $20.2 million to Property taxes of $18.1 million and to Insurance of $2.1 million. |
(3) | Represents reclassification of Other expense of $1.7 million to Rental property operating and maintenance of $0.2 million and to Transactions of $1.5 million and to Interest and other income (expense) of $0.0 million. |
2. | Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments |
The unaudited pro forma condensed combined balance sheet reflects the effect of the following adjustments:
(a) | Summary of sources and uses for the mergers (in thousands): |
Sources of funds: |
||||
DLR OP common units (1) |
$ | 5,570,372 | ||
DLR series C preferred units (2) |
201,250 | |||
Global revolving credit and committed facilities (3) |
1,566,395 | |||
|
|
|||
Total sources of funds |
$ | 7,338,017 | ||
|
|
|||
Uses of funds: |
||||
DFT OP common units and other (1) |
$ | 5,570,372 | ||
DFT series C preferred units (2) |
201,250 | |||
DFT indebtedness(4) |
1,394,395 | |||
Transaction costs (5) |
172,000 | |||
|
|
|||
Total uses of funds |
$ | 7,338,017 | ||
|
|
(1) | Reflects the issuance of 49.5 million DLR OP common units at an assumed price of $112.95 per DLR common unit, the last reported sales price of DLRs common stock on the New York Stock Exchange on June 30, 2017. The number of DLR OP common units to be issued was determined based on the number of DFT OP common units (including DFT OP common units held by DFT) outstanding as of June 30, 2017, as well as the number of shares of restricted DFT common stock, DFT performance stock units and unexercised options to purchase shares of DFT common stock outstanding as of June 30, 2017, which will be converted into the right to receive the common consideration and result in the issuance of an equal number of DLR OP |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
common units to DLR. Such DFT OP common units, shares of restricted DFT common stock, DFT performance stock units and unexercised options to purchase shares of DFT common stock are assumed to remain outstanding until the closing date of the mergers. Further, no effect has been given to any new DFT OP common units, shares of restricted DFT common stock, DFT performance stock units and unexercised options to purchase shares of DFT common stock that may be issued or granted subsequent to June 30, 2017 and before the closing date of the mergers. A 10% increase (decrease) in the closing share price of DLR common stock would increase (decrease) the purchase price by approximately $560 million, which, in turn, would increase (decrease) the amount of goodwill recorded in connection with the mergers by the same amount. See Note 2(b) for additional information on our preliminary purchase price allocation, and see Note 2(e) for additional information on the issuance of DLR OP common units and elimination of historical DFT capital balances. |
(2) | Reflects the conversion of each DFT OP series C preferred unit into the right to receive one validly issued DLR OP series C preferred unit. |
(3) | Reflects a $62.4 million draw under DLR OPs global revolving credit facility, a $1.4 billion draw under the bridge facility and a $104.0 million draw under the mortgage loan facility to repay DFT OP indebtedness and pay transaction costs in connection with the mergers. Subject to market conditions, DLR OP may fund a portion of such anticipated debt repayments and transaction costs using sources of debt financing other than DLRs global revolving credit or bridge facilities. See Note 3(d) for additional information on the interest expense associated with the assumed draw under DLR OPs global revolving credit and committed facilities. |
(4) | Includes the payoff of $197.8 million, $249.1 million, $837.9 million and $109.6 million outstanding under DFT OPs revolving credit facility, term loan, senior notes and mortgage loans, respectively, net of deferred financing costs. The debt has been eliminated from the unaudited pro forma condensed combined balance sheet, with a corresponding decrease to accumulated deficit. |
(5) | DLR OP estimates that the total transaction costs will be approximately $172.0 million. The actual amount may vary. DLR OP also expects to incur other financing costs and integration costs associated with the mergers. Given the uncertainty of the amounts involved, such financing costs and integration costs are not reasonably estimatable. |
(b) | Adjustment reflects the excess of the estimated purchase price as determined in Note 2(a) over the book value of the net tangible and intangible assets to be acquired. Under the acquisition method of accounting, the total estimated purchase price will be allocated to DFT OPs net tangible and intangible assets based on their estimated fair values at the date of the completion of the mergers. The following table sets forth the preliminary allocation of the estimated purchase price to DFT OPs net tangible and intangible assets and the adjustments to the historical book value of DFT OPs net tangible and intangible assets to reflect this preliminary allocation (in thousands): |
Preliminary estimate for allocation of the purchase price |
Historical DFT | Pro Forma Adjustment |
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Land |
$ | 309,964 | $ | 179,648 | $ | 130,316 | ||||||
Buildings and improvements |
3,725,440 | 3,407,545 | 317,895 | |||||||||
Acquired above-market leases |
160,599 | 4,793 | 155,806 | |||||||||
Customer relationships |
961,400 | | 961,400 | |||||||||
In-place lease value |
520,713 | | 520,713 | |||||||||
Tenant origination costs |
50,906 | 26,238 | 24,668 | |||||||||
Non-compete |
6,700 | | 6,700 | |||||||||
Goodwill |
1,770,526 | | 1,770,526 | |||||||||
Acquired below-market leases |
(185,067 | ) | (2,214 | ) | (182,853 | ) | ||||||
Working capital and other |
(155,164 | ) | (155,164 | ) | | |||||||
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Total |
$ | 7,166,017 | $ | 3,460,846 | $ | 3,705,171 | ||||||
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DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
Upon closing of the mergers, the purchase consideration will be adjusted for working capital levels and other adjustments as stipulated in the merger agreement.
Upon completion of the fair value assessment, the final purchase price allocation may differ from the preliminary allocation provided above. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and the residual amounts will be allocated as an increase or decrease to goodwill. The goodwill recorded is due primarily to the synergies expected to be realized between the two companies and the assembled workforce acquired in connection with the mergers.
The fair value of investment in real estate acquired of $4.0 billion consists of land with an estimated fair value of $0.3 billion, building and improvements with an estimated fair value of $2.9 billion and construction in process, which is classified within building and improvements, with an estimated fair value of $0.8 billion. Investment in real estate is expected to be amortized on a straight-line basis over estimated remaining useful lives of 2 - 39 years.
The components of investment in real estate have been valued using a combination of the income approach, the market approach and the cost approach, which is based on current replacement and/or reproduction cost of the asset as new, less depreciation attributable to physical, functional and economic factors.
The fair value of definite life intangible assets acquired of $1.5 billion consist of customer relationships with an estimated fair value of $1.0 billion, in-place lease value with an estimated fair value of $0.5 billion, acquired above-market leases with an estimated fair value of $0.2 billion, acquired below-market leases with an estimated fair value of ($0.2) billion and tenant origination costs with an estimated fair value of $0.1 billion. The customer relationship value is expected to be amortized on a straight-line basis over an estimated useful life of approximately 19 years, in-place lease value is expected to be amortized on a straight-line basis over an estimated useful life of six years, acquired above-market leases is expected to be amortized on a straight-line basis over an estimated useful life of approximately four years, acquired below-market leases is expected to be amortized on a straight-line basis over an estimated useful life of approximately 12 years and tenant origination costs is expected to be amortized on a straight-line basis over an estimated useful life of seven years.
The fair value of intangible assets is determined primarily using the income approach, which is a valuation technique that provides an estimate of the fair value of an asset based on market participants expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of the valuations include the estimated annual net cash flows for each indefinite lived or definite lived intangible asset (including net revenues, operating expenses, selling and marketing costs and working capital asset/contributory asset charges), the appropriate discount rate that appropriately reflects the risk inherent in each future cash flow stream, the assessment of each assets life cycle, and competitive trends as well as other factors.
(c) | Adjustment eliminates DFT OPs historical accumulated depreciation. |
(d) | Adjustment eliminates DFT OPs historical deferred rent receivable. |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
(e) | Reflects the issuance of 49.5 million DLR OP common units at an assumed price of $112.95 per DLR OP common unit, the last reported sales price of DLRs common stock on the New York Stock Exchange on June 30, 2017, as well as the elimination of all historical DFT OP general partners capital, limited partners capital and redeemable partnership units balances and the incurrence of transaction costs. The following table sets forth the adjustments impacting general partner capital, limited partner capital, distributions in excess of earnings and redeemable partnership units (in thousands): |
General partners capital |
Limited partners capital |
Accumulated distributions in excess of earnings |
Redeemable partnership units |
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Issuance of DLR OP common units |
$ | 4,977,512 | $ | 553,715 | $ | | $ | 61,576 | ||||||||
Elimination of DFT OPs historical capital balances |
(6,537 | ) | (761,607 | ) | | (579,329 | ) | |||||||||
Transaction costs of DLR OP |
| | (172,000 | ) | | |||||||||||
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Adjustments |
$ | 4,970,975 | $ | (207,892 | ) | $ | (172,000 | ) | $ | (517,753 | ) | |||||
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3. | Unaudited Pro Forma Condensed Combined Income Statement Adjustments |
The unaudited pro forma condensed combined income statements reflect the effect of the following pro forma adjustments:
(a) | Rental revenue for the three months ended March 31, 2017 is adjusted to: (i) remove ($1.7) million of DFT OPs historical straight-line rent; (ii) recognize $3.0 million of total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from January 1, 2016; (iii) remove $0.2 million of DFT OPs historical amortization of the asset or liability created from previous acquisitions of leases with favorable or unfavorable rents; and (iv) amortization of the asset or liability from the acquired leases with favorable or unfavorable rents relative to estimated market rents, including a reduction of $12.7 million from amortization of the asset and an increase of $5.5 million from amortization of the liability, both from January 1, 2016. Rental revenue for the year ended December 31, 2016 is adjusted to: (i) remove $0.1 million of DFT OPs historical straight-line rent; (ii) recognize $20.0 million of total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from January 1, 2016; (iii) remove $0.4 million of DFT OPs historical amortization of the asset or liability created from previous acquisitions of leases with favorable or unfavorable rents; and (iv) amortization of the asset or liability from the acquired leases with favorable or unfavorable rents relative to estimated market rents, including a reduction of $50.8 million from amortization of the asset and an increase of $21.7 million from amortization of the liability, both from January 1, 2016. We amortized the asset or liability from the acquired leases with favorable or unfavorable rents relative to estimated market rents using the remaining lease term associated with these leases, which approximated eight years. |
(b) | Reflects the net impact on depreciation and amortization expense of the following adjustments: |
| An increase to depreciation and amortization expense of $7.8 million and $36.1 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, as a result of fair value accounting for investment in real estate and other fixed assets acquired in the mergers. |
| An increase to depreciation and amortization expense of $49.4 million and $224.2 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, as a result of fair value accounting for definite-lived intangible assets acquired in the mergers. |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
For the three months ended March 31, 2017, real estate depreciation expense for the assets acquired in the mergers would have been $85.3 million and non-real estate depreciation expense would have been $0.1 million. For the year ended December 31, 2016, total real estate depreciation expense for the assets acquired in the mergers would have been $360.9 million and non-real estate depreciation expense would have been $7.2 million.
(c) | DLR OP expects to incur additional general and administrative costs as a result of the mergers that will include, but are not limited to, incremental salaries and benefits, audit, tax and legal fees and other administrative costs. As DLR OP has not yet entered into contracts with third-parties to provide the services included within this estimate, these expenses do not appear in the unaudited pro forma condensed combined income statements. |
(d) | Reflects the net reduction in interest expense of $2.8 million and $5.0 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, due to the following adjustments: |
| An increase in interest expense of $9.5 million and $37.8 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, due to a $62.4 million draw under DLR OPs global revolving credit facility, which will bear interest at LIBOR plus 1.00% (estimated to be 2.22%), a $1.4 billion draw under the bridge facility, which will bear interest at LIBOR plus 1.10% (estimated to be 2.32%) and a $104.0 million draw under the mortgage loan facility, which will bear interest at 3.70%), to consummate the mergers. In addition, amortization of deferred loan fees related to the committed facilities would total $0.0 million and $9.3 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. A hypothetical 0.125% increase or decrease in the expected weighted average interest rate would increase or decrease interest expense associated with this additional debt by $0.5 million and $1.8 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. Subject to market conditions, DLR OP may fund a portion of the debt repayment and transaction costs using sources of debt financing other than DLR OPs global revolving credit or the bridge facilities. Such alternative debt financing may bear interest at a rate greater or less than DLR OPs global revolving credit or the bridge facilities, which would cause DLR OPs actual interest expense to exceed or be less than the interest expense reflected in the unaudited pro forma condensed combined income statements. |
| A reduction in interest expense of $11.5 million and $48.3 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively, due to the payoff of DFT OP debt in connection with the mergers, and elimination of the associated deferred financing cost amortization of $0.8 million and $3.7 million for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. |
(e) | The calculation of basic and diluted income per common unit was as follows: |
Three Months Ended March 31, 2017 | ||||||||||||
(in thousands, except for per unit data) | ||||||||||||
DLR OP Historical |
DFT OP Historical |
Pro Forma Combined Company |
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Net income from continuing operations available to |
$ | 67,049 | $ | 40,942 | $ | 50,873 | ||||||
Weighted average common units outstanding, basic (1) |
161,475 | 89,096 | 211,037 | |||||||||
Weighted average common units outstanding, diluted (1) |
162,600 | 90,077 | 212,162 | |||||||||
Net income per unit available to common unitholders, basic |
$ | 0.42 | $ | 0.46 | $ | 0.24 | ||||||
Net income per unit available to common unitholders, diluted |
$ | 0.41 | $ | 0.45 | $ | 0.24 |
DIGITAL REALTY TRUST, L.P. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (continued)
Year Ended December 31, 2016 | ||||||||||||
(in thousands, except for per unit data) | ||||||||||||
DLR OP Historical |
DFT OP Historical |
Pro Forma Combined Company |
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Net income from continuing operations available to |
$ | 337,386 | $ | 148,213 | $ | 220,744 | ||||||
Weighted average common units outstanding, basic (1) |
152,360 | 87,285 | 201,922 | |||||||||
Weighted average common units outstanding, diluted (1) |
153,086 | 88,120 | 202,648 | |||||||||
Net income per unit available to common unitholders, basic |
$ | 2.21 | $ | 1.69 | $ | 1.09 | ||||||
Net income per unit available to common unitholders, diluted |
$ | 2.20 | $ | 1.67 | $ | 1.09 |
(1) | The pro forma weighted average DLR OP common units outstanding assume that the DLR OP common units issued in connection with the mergers were issued as of January 1, 2016. |