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

 

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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

 

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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

 

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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

 

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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

 

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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 partner’s 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

 

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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

 

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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

 

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DUPONT FABROS TECHNOLOGY, L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(unaudited and in thousands except unit data)

 

		Limited Partners’ Capital												General Partner’s 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

 

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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

 

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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

 

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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 Partnership’s 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 Partnership’s capital includes preferred units and general and limited common units that are owned by DFT and the other partners. DFT’s 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 Partnership’s consolidated financial statements and as “redeemable noncontrolling interests-operating partnership” in DFT’s 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 Management’s 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

 

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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 investment’s 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):

 

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		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

 

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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 customer’s 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 customer’s 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 DFT’s consolidated balance sheets, represent the OP units held by individuals and entities other than DFT. These interests are also presented on the Operating Partnership’s 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 DFT’s 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):

 

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		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 Company’s 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.

 

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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 DFT’s 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 standard’s 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 Company’s 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.

 

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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).

 

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(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
Total		$	1,407,819				100	%			4.5	%			4.4			$	1,262,176
Fixed Rate Debt:
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
Fixed Rate Debt		$	850,000				60	%			5.8	%			5.0			$	850,000
Floating Rate Debt:
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
Floating Rate Debt			557,819				40	%			2.5	%			3.5				412,176
Total		$	1,407,819				100	%			4.5	%			4.4			$	1,262,176

 

(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.

 

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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 Partnership’s 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 DFT’s 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 lender’s 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 Partnership’s total indebtedness to gross asset value in effect from time to time.

 

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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 Moody’s			0.85	%			0.00	%
Level 2		Greater than or equal to BBB+ by S&P or Baa1 by Moody’s			0.90	%			0.00	%
Level 3		Greater than or equal to BBB by S&P or Baa2 by Moody’s			1.00	%			0.00	%
Level 4		Greater than or equal to BBB- by S&P or Baa3 by Moody’s			1.20	%			0.20	%
Level 5		Less than BBB- by S&P or Baa3 by Moody’s			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 Partnership’s 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 lender’s 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 Moody’s			0.825	%			0.00	%
Level 2		Greater than or equal to BBB+ by S&P or Baa1 by Moody’s			0.875	%			0.00	%
Level 3		Greater than or equal to BBB by S&P or Baa2 by Moody’s			1.00	%			0.00	%
Level 4		Greater than or equal to BBB- by S&P or Baa3 by Moody’s			1.25	%			0.25	%
Level 5		Less than BBB- by S&P or Baa3 by Moody’s			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.

 

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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 lender’s 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 Partnership’s 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 Partnership’s 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 Partnership’s 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 guarantor’s existing and future senior unsecured indebtedness, (ii) senior in right of payment with all of such guarantor’s existing and future subordinated indebtedness and (iii) effectively subordinate to any of such guarantor’s existing and future secured indebtedness.

The Unsecured Notes due 2021 may be redeemed at the Operating Partnership’s 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 DFT’s 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 Partnership’s 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

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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 DFT’s 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	%
Total		$	850,000					$	557,819					$	1,407,819				100.0	%			4.5	%

 

(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

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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 contractor’s 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 DFT’s 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 DFT’s executive officers or directors pursuant to these agreements requires the approval of at least 75% of the disinterested members of DFT’s Board of Directors.

6. Redeemable noncontrolling interests – operating partnership / Redeemable partnership units

Redeemable noncontrolling interests – operating partnership, as presented in DFT’s accompanying consolidated balance sheets, represent the OP units held by individuals and entities other than DFT. These interests are also presented in the Operating Partnership’s 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 DFT’s 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 DFT’s common stock, if and when DFT’s 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 DFT’s common stock. DFT may elect to redeem tendered OP units for cash or for shares of DFT’s 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

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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 DFT’s 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 DFT’s 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 Company’s 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 DFT’s 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.

 

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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 DFT’s 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

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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 recipient’s performance unit award is dependent on DFT’s 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 DFT’s 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 DFT’s 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 DFT’s stock at the date of grant		$	9.9 million

 

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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):

 

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		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

 

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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 Partnership’s 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.

 

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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 partner’s 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

 

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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 partner’s 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

 

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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

 

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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

 

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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

 

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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