DuPont Fabros Technology, Inc.’s (DFT) 4Q14 results and 2015 outlook suggest that data center fundamentals remain solid. That said, 2015 FFO/share guidance of ($2.27-$2.47) was below our estimate ($2.61) and consensus ($2.57). Light guidance was primarily driven by the announcement that a large tenant, Net Data Centers, has ceased making rent payments and DFT’s assumption that ACC2 (one of DuPont’s buildings) is not released in 2015 after Yahoo’s lease expiration in September. The stock, which significantly outperformed the Msciusreit Index (RMZ) in 2014, sold off materially on the 2015 guidance (-10.8% versus -1.8% for the RMZ since 2/4/2015).
We believe DFT’s guidance is conservative and creates a compelling buying opportunity. We believe that the recent stock decline was overly severe relative to the potential loss scenarios stemming from Net Data Centers. Contractual rent obligations of $0.12/sh for Net Data Centers represent roughly 4% of 2015E base rent; DFT guidance assumes a total loss. In our view, most workout situations would result in DFT recovering a portion of that amount in addition to operating expense reimbursements, which DFT continues to receive.
Aside from the tenant issue described above, there were no material changes to fundamentals for DFT in 4Q14. Leasing remains solid with 4.5 megawatts (MW) signed in 4Q14, inclusive of January. For the full year 2014, leasing volume was 30.8 MW versus 15.7 MW in 2013.
After an extensive search process, DFT selected Christopher Eldredge to be the next CEO & President. Mr. Eldredge has extensive technology and leadership experience.
We are lowering our 2015 adjusted FFO/sh estimate to $2.48 from $2.62, primarily reflecting lost revenue from Net Data Centers. Our estimate implies 3.7% YoY growth in 2015 and a 5yr CAGR of 4.6%; our 5yr CAD CAGR is 2.2% (down from 8.7%). We are lowering our price target to $42 from $43, which implies a 33% total return potential, including the current dividend yield. We maintain our overweight rating.
Ross L. Smotrich, Barclays Capital Equity Research, www.barcap.com, 212-526-2306, February 24, 2015
