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DuPont Fabros Technology, Inc. (NYSE:DFT)

Q1 2009 Earnings Call

May 5, 2009 10:00 am ET

Executives

Victoria Baker - IR

Hossein Fateh - CEO

Mark Wetzel - CFO

Analysts

Irwin Guzman - Citi

Jordan Sadler - KeyBanc Capital Markets

Brendan Maiorana - Wachovia

Garrett King - Truffle Hound Capital

Chris Lucas - Robert Baird

Todd Cohen - MTC Advisors

Paul Meierdierck - LaSalle Investment Management

Operator

Good day and welcome to the DuPont Fabros Technology first quarter 2009 Earnings Call. (Operator Instructions)

At this time, I'd like to turn the conference over to Vicky Baker of the Financial Relations Board. Please go ahead.

Victoria Baker

Good morning, everyone. Thank you for joining us for DuPont Fabros Technology's first quarter 2009 results conference call. Our speakers today are; Hossein Fateh, the company's President and Chief Executive Officer; and Mark Wetzel, the company's Chief Financial Officer and Treasurer.

This release is available in PDF format in the Investor Relations section of the company's corporate website at www.dft.com. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of Federal Securities Laws. These forward-looking statements are subject to certain risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue, because of subsequent events.

Additionally, this call contains non-GAAP financial information of which explanations and reconciliations to net income are contained in the company's earnings release issued earlier today.

To manage the call in a timely manner, questions will be limited to two per caller. If you have additional questions, please feel free to return to the queue.

Now, I will turn the call over to Hossein.

Hossein Fateh

Thank you, Vicky. Good morning, everyone. Thank you for joining us on our first quarter earnings call. As noted in last night's press release, we delivered a solid quarter of operating results. These results were in line with the high-end of our expectations for the quarter. I want to thank our entire team for their efforts and contributions for the quarter.

Looking ahead, we continue to believe we will benefit from the limited supply of high quality wholesale data center space coming on line over the next few years. We remain on track and on budget to open Phase I of ACC5 in Ashburn, Virginia in the third quarter of this year. And we have the capital secured to finish this facility.

The company's operating platform of five stabilized, wholesale data centers, comprising of 82 megawatts of critical load is now 100% leased. These properties continue to perform as expected without collection issues.

We are also very pleased with our leasing progress. We signed six new leases in the first quarter of 2009. This was a great effort by our sales and operation teams working together. The contract value of these leases for the company is approximately $337 million.

The six leases represent two Internet tenants, two enterprise tenants and two resellers. All six leases are triple-net and the weighted average lease term is 10.3 years, four of the leases with new tenants and two are with existing tenants.

Our two top tenants Microsoft and Yahoo!, now represent 63% of our annualized revenues, down from 86% at our IPO in October, 2007. We have now expanded our tenant base to 20 unique tenants, with 37 different lease expirations.

ACC4 is now 100% leased. This building includes 12 tenants with 36.4 megawatts of critical load.

Let me walk you through the two buildings that have space available to lease. ACC5 in Ashburn, Virginia is 57% pre-leased. We expect to continue to see very good organic growth from our existing Internet tenants in Northern Virginia. Therefore, we remain very comfortable with the 100% lease-up of ACC5 by the end of 2010 from its opening in Q3 of this year.

Chicago and Elk Grove, Illinois is 17% leased. This is a great asset located in the good long-term market. We continue to see qualified traffic. However, signing new leases with enterprise tenants is continuing to take more time in this economic environment. We remain comfortable with the 24-month lease-up from Chicago's opening last August.

We see a lot of tours and activity with respective tenants at both facilities. When these two data centers are 100% leased they will provide an additional $40 million or $0.60 of embedded FFO growth in addition to our 2009 $4 guidance midpoint. We expect to be at this run-rate by the end of 2010.

Restarting both development projects in New Jersey and Santa Clara continues to be of high importance to us. We believe the demand for data centers remains promising in both markets. As of today, we need approximately $80 million and six to eight months to finish New Jersey, and $175 million and 10 months to 12 months to finish Santa Clara. We have no definitive update at this point and neither development restarted included in our 2009 annual guidance range.

Now, I will turn the call over to Mark, who will take us through our financial results.

Mark Wetzel

Thank you, Hossein. Good morning everyone and thank you for joining us today. I want to cover four key topics today. Our first quarter results, our Q2 and full year '09 guidance, liquidity update and an update on our 2009 dividend.

For the first quarter of '09, the company's FFO was $0.25 per share, compared to $0.34 per share in the first quarter of '08. Revenues were up 14% in the same period. Specific to our first quarter results, as compared to Q1 '08 and sequentially to Q408, the FFO decrease is primarily due to greater interest expense from higher overall debt outstanding, as well as less capitalized interest and $0.02 for a one-time loan payoff charge.

Total interest cost expensed to the P&L in Q1 '09 amounted to 79% of overall interest incurred. This compares to 42% in Q1 '08 and 57% in Q4 '08. As Hossein stated earlier, FFO for the first quarter of '09 was at the high-end of our guidance range.

AFFO was $0.19 per share for the first quarter, as compared to $0.20 per share a year ago. Cash rents increased quarter-over-quarter offsetting the increased interest expense charge to the P&L.

Our Q2 FFO guidance range is projected at $0.25 to $0.29 per share. We are reaffirming our previously provided annual 2009 FFO guidance range of $0.96 to a $1.12 per share. This was outlined in our February call and is detailed on page 15 of this quarter's press release.

With respect to our liquidity, I want to reiterate that we have no debt maturities until August, 2011, assuming we satisfy our quarterly financial covenants and extension conditions. I remain comfortable that we will continue to meet these covenants and conditions based on what I know today.

Despite our recent successful financing and ongoing leasing efforts, we continue to closely monitor our liquidity position.

Our overall 2009 sources and uses of cash remained as described in February. We plan to finish ACC5 and payoff all outstanding accrued construction commitments by the end of the third quarter. We should end the year with a cash position and line availability of about $25 million before cash dividend payment.

Finally, I'd like to review our current dividend policy. As noted in our press release issued last night, we did not declare our first quarter dividend and do not plan to declare one for the second quarter. We will revisit our dividend policy in the second half of this year. We continue to estimate a midpoint dividend of $0.20 per share in order to meet the 2009 redistribution requirement.

Going forward, and as we have done each quarter since going public, the Board will review all necessary factors regarding the dividend policy and will act appropriately.

With that, let me turn it back over to Hossein.

Hossein Fateh

Thanks Mark. The four priority areas of focus for 2009 remain. We will continue to focus on liquidity. As discussed, our next loan maturity is now August, 2011, which positions us well at this time. We will complete the development and opening of Phase 1 of ACC5 in the third quarter of this year. We will maximize property operations and we will continue to take great care of our current tenants, which provide organic growth for new leases.

Lastly, we will continue to focus on leasing the remaining available space in Chicago and ACC5. We have $0.60 per share of embedded earnings power with these two assets. This is significant when compared to our current FFO midpoint estimate of $1.04 per share. This earning power is meaningful at our current stock price.

Before opening up the call for questions, I would like to briefly address the REIT equity issuances that have occurred over the last 60 days or so. At this point, we continue to evaluate all opportunity to enhance liquidity and improve our balance sheet.

While we are paying close attention, right now, we believe, we are in good shape regarding our debt maturities, schedule and our debt coverage metrics. We will not hesitate to do what we believe is in the best long-term interest of our shareholders.

With that, I will be happy to turn over the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

We'll go first to Michael Bilerman with Citi.

Irwin Guzman - Citi

Mark, Hossein, good morning. It's Irwin Guzman here with Michael. My first question is on rents, can you talk about where the rents are on some of the leasing that you did in the first quarter relative to the leasing that you were doing last year? It looked like, just doing some rough math, the new leases on ACC4 might have been lower than the ones that you have been previously signing on a revenue per megawatt basis.

Hossein Fateh

They are slightly lower, however not significantly. Generally, if you take the then escalated rents of ACC4 and adjust 3% for the year that ACC5 was delivering, they increased year-by-year, they are approximately the same as the rents in 4, but escalated 3% for the '09 and then for '010. So tenants kept about the same base rents, but escalated year-over-year, so in '10, I would guess the rents in ACC4 would be similar to as rents in ACC5.

Irwin Guzman - Citi

But the incremental rents on ACC4 that were signed, they look like they were about 15% or 20% lower than what ACC4 revenue was sort of running at. Is that accurate?

Hossein Fateh

Rents in 5 were lower?

Irwin Guzman – Citi

The rents in 4 on the last

Hossein Fateh

I think they are slightly lower, but not in a significant way, for 5 we've have got slightly higher rent, but I wouldn't say it's hugely significant.

Irwin Guzman – Citi

Can you talk about the rents in Chicago as well in terms of where they are relative to your expectations for them to be?

Hossein Fateh

They were pretty much in line. As we said in our last earnings call, on ACC4 and 5, we expect to do approximately 15% un-levered returns, were previously we have thought we would do 12%. In Chicago, we still expect to do 12%, as we previously thought. So 4 and 5 we're doing better than we originally thought, Chicago, the current rents and the deal we're seeing, we're going to get to 12%.

Irwin Guzman – Citi

On liquidity market, Hossein you mentioned what to spend on New Jersey and Santa Clara, assuming you are able to fully lease-up ACC5 and encumbered the asset, would you feel comfortable restarting construction on either of the two assets before some of those 2011 maturities were refinanced or addressed in someway?

Hossein Fateh

Sort of depends on the timing, Irwin. If we lease what we need to do in the next six quarters, it's very logical to attack the redevelopment, the restart of one of both of those developments, but encumbering those ACC5 and Chicago would be obviously logical and '11 maturities are right around the corner. So we're looking at that, the restart is going to be tied in to some pre-leasing, so we'll look at that as we progress each quarter, but leasing is priority one right now for the next quarter or two.

Irwin Guzman – Citi

Can you talk a little bit about how the conversations are going with your lenders, particularly on the line for the 2011 maturities, it is at this point almost fully drawn and so are you in active conversations on that and how are those going?

Hossein Fateh

I mean frankly, August, 11, how many of the bankers are even still going to be there. We have talked about it, we talked to the lead bank. There are reasonable good conversations going on. Everyone seems to be pretty much cooperating. Of course, one or two of the lenders are no longer there, and one lender no longer gets the votes because they are no longer in existence. So, after we've these preliminary conversations we feel cautiously optimistic that we can work through it and that's why we're not really worried about it right now.

Operator

We will go next to Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

I just wanted to follow-up on your last comment. Hossein, on equity, you said right now you are good, you are in good shape. You said, you did the best thing for long-term shareholders and I'm just looking at your overall sort of capital position, you said, you'd have $25 million at the end of this year, assuming all goes according to plan, before the dividend payment I think. I'm just curious given sort of the credit markets, which now seem to be loosing up materially, how would you plan to otherwise sort of develop or complete New Jersey and/or Santa Clara without considering an equity raise here?

Hossein Fateh

I think, when I said that certainly management's long-term interests are aligned with shareholders and management holds so much equity, we will do whatever is necessary to start New Jersey and Santa Clara, but we don't see that as been eminent today. Right now with the two assets leasing up, we can get appropriately 60% growth in FFO. We don't believe we're going to be paid by getting a higher growth rate then that or it.

So, at the moment the thought is to get through this leasing and with debt maturity there are tweedy two sides when you look at leverage, one side is income, the other side is the amount of debt. Although, the amount of debt maybe reduced slightly, we believe our income is going to go up significantly, but our leverage will decreased with that. And at the right time, we may have some pre-leasing done in New Jersey and Santa Clara to be able to put some leverage on it.

Don't forget in New Jersey, we spend something like a $150 million, and we only need $85 million to finish it. Even $85 million of debt assuming we're leased elsewhere, doesn't seem to be an enormous amount of leverage on that particular project.

Jordan Sadler - KeyBanc Capital Markets

So should we assume, absent significant pre-leasing in Jersey or Santa Clara that you would look to permanently finance ACC5 once they came online and/or Chicago would that be the objective?

Hossein Fateh

I think when ACC5 and Chicago are stabilized, we absolutely want to put some kind of permanent debt on there, and some of the proceeds will be used to pay down our revolver and some of the proceeds will be used to start the other projects.

Jordan Sadler - KeyBanc Capital Markets

Okay. Can you maybe give us a little bit of color surrounding leasing, the pace in Chicago, as well as any prospects in Santa Clara, New Jersey?

Hossein Fateh

In Chicago, the leases are trickling in. We did 7% the last quarter and they will continue to trickle in. So we feel and we have very good activity. In fact, our activity in tours have slightly increased, so we feel good about it. We think it's a great long-term asset. Many tenants that have toured it have said that this is one of the best data centers they have ever seen.

Many of the tenants that are touring are tenants were they would otherwise build their own data center. Now that they see that this asset is available, they are having second thoughts and they understand the math that a large data center is much more efficient to operate. So, we feel good about the projections of stabilizing by August, 2010.

Jordan Sadler - KeyBanc Capital Markets

Are there any big tenants still looming around

Hossein Fateh

I think there are some big tenants and some tenants that want for example, 1.3 megawatts, which is 7%, with an option to expand to a second and the third part. So we do feel good about meeting our third quarter 2010 lease-up. To go to New Jersey, in New Jersey the tenants are 2 megawatts typically what we see and we've turned down a couple of tenants, because we couldn't have this time commit to finishing the project, but the leases are there.

In Santa Clara the tenants are larger, but we need approximately $175 million to finish the project. So, everyday we kind of think about, do we go to New Jersey or do we go to Santa Clara. The Santa Clara market is as strong as Northern Virginia. So I would rate Santa Clara, Northern Virginia together, next New Jersey, the third best market Chicago.

Jordan Sadler - KeyBanc Capital Markets

You said Chicago is going to finish or stabilize, sounds like a quarter before ACC5? That's the timeframe laid out?

Hossein Fateh

Currently, that's what it is. Now Jordan, you know as well as I do, these things are bumpy. You can get whole load of leases and you may not get one, one quarter. I think if you think about the third quarter 2010 having stabilized projects, we feel good about that.

Jordan Sadler - KeyBanc Capital Markets

Lastly for Mark, can you just reconcile the liquidity need, I know you took a different cut at it, but just can you reconcile? Today's liquidity, I think you said $58 million in the press release in total between the revolver available, unrestricted and restricted cash. How does that compare to today's spending commitments as opposed to the 3/31 spending commitments?.

Mark Wetzel

It's pretty consistent. I mean the cash on the balance sheet was roughly $33 million. We have $20 million of restricted cash that we will draw down to finish ACC5, cash flow by quarter, round number $10 million to $11 million. As compared to uses, focused on their construction cost payable, was $34 million down from the $82 at 12/31.

So, we paid off a considerable amount of that in Q1. Then the ACC5 funds that we need to finish is roughly a net of about $20 million, because there is $9 million sitting in the construction cost payable for ACC5. So, the net of those two is roughly the sources and uses, netted.

Operator

We will go next to Brendan Maiorana with Wachovia.

Unidentified Analyst

This is (inaudible) Brendan. My question is in regards to 2.6 megawatts lease expiring in '09. Could you give us a bit more information on that in terms of what you're expecting for rent if that lease?

Hossein Fateh

That 2.6 megawatts, actually expires January 01,'10. We feel very good about this. This is 1% of our revenue. The tenant is not renewing, which is very positive for us, because the cash-wise, we can double the cash intake to the company. So we feel very positive at this point. The tenant actually originally asked us if we would pay them to get out. And we said no, and they still decided to consolidate and not renew. So, that's very positive for us, because that was the first deal we ever did, and they're not renewing, which is perfect, because we can essentially get double the cash that we are getting now.

Unidentified Analyst

Thank you. And Mark, regarding capitalized interest. Could you remind us whether you guys capitalized project specific debt or do you use a weighted average (debt or higher debt)?

Mark Wetzel

It's a little bit of both, because the specific debt on ACC5, the $25 million is project specific, so we would direct that as all capitalized and then weighted average after that.

Brendan Maiorana - Wachovia

Mark, it is Brendan. I just wanted to follow-up on Jordan's questions. If I am just hearing your comments correctly, it sounds like you guys are going to pursue a strategy of leasing Chicago and ACC5 as quickly as you can and pursue secure debt on those assets to address the 2011 maturities and then try to get some type of capacity on the revolver or some construction loans to address the Santa Clara and New Jersey, is that the strategy that you are pursuing currently? And then if that doesn't work out in 2010, or in the end of this year, then you'll look to maybe fill that gap via kind of potential equity issuance?

Mark Wetzel

We are keeping our options open. I mean, there's a lots of strategies. We talk about it everyday. The issue of logically in '09 was resolving what we did in the first quarter. As we look into Q2, Q3 and Q4 this year, leasing Chicago, finishing 5, potentially putting secured debt on 5 is (inaudible) to us. We think that's the right answer.

The equity raise; we are not saying we are going to do it. We are not saying, we are not going to do it. It's just another tool that we have in the tool box that we would like. We found a shelf, we are in the process of going through that, and so we're looking at all angles, but at a $9, $10 stock price from a dilution perspective, the raise of funds that we need, we think there is better choices.

Hossein Fateh

If there is a compelling reason to do it right away, we would. At the moment, we don't see a compelling reason, but if there is a compelling reason, we would absolutely pursue that.

Brendan Maiorana - Wachovia

Do you think pursuing the secured financing will get you the capital that you need through 2011?

Mark Wetzel

I think that secured route on a ACC5 Phase I, could raise $100 million $125 million, which would in essence be enough to finish out New Jersey. But the idea of raising money tomorrow to build a spec in New Jersey is not something we want to undertake this quarter.

Taking additional vacancy off the table, here in Northern Virginia, as well as in Chicago will help de-lever the company right there, and so that's sort of strategy one. We talk about it everyday, and we are just trying to make the right decision for that long-term shareholder.

Brendan Maiorana - Wachovia

Do you feel like the secured debt that's rolling in '11 and the NOI that's being generated from those properties is efficient in today's market where you could satisfy the full maturity?

Hossein Fateh

Repeat that question Brendan

Brendan Maiorana - Wachovia

The secured debt that you've got rolling in '11, is the NOI from those properties efficient to support the full repayment of that principle if you are just pursuing new secured debt at today's market?

Mark Wetzel

One of those things to think about is, we will probably have to reduce the amount of that debt, it's probably available at some level, but we'll probably have to reduce the amount of that debt. If I had to guess right now, it would be somewhere between $50 million and $100 million.

Hossein Fateh

Again, Brendan that August, '11 is the line of credit. So from a capacity perspective, we would look to renegotiate with those banks. Depends on, as you can read everyday, the lines of credit are being tightened or reduced, so we're planning for that liquidity issue.

Operator

We'll take our next question from [Garrett King of Truffle Hound Capital].

Garrett King - Truffle Hound Capital

Does the annualized base rent on a cash basis, as of April 1, 2009, of $95.3 million, does that include the pre-leases on ACC5?

Mark Wetzel

No, it does not. It includes just those operating assets.

Garrett King - Truffle Hound Capital

Then also I would like to say that given the company's outstanding liquidity situation and the current valuation, we think that shareholders would react very negatively to any additional equity issuance, whether it's in the form of secondary offering or a dividend, and it seems like this is your different attitude and we believe that it's a right attitude, given the share price and the company fundamentals?

Hossein Fateh

Like I said, there is compelling reason that it would increase shareholder value. We would pursue equity issuance. The management's incentives and the management's interest is completely in line with the current shareholders?

Operator

We'll go next to Chris Lucas with Robert Baird.

Chris Lucas - Robert Baird

Just a point of clarification. Can we walk through again just your expected stabilization for ACC5 and then Chicago 1? I am just a little confused on that.

Hossein Fateh

Sure. For ACC5, we think probably from its delivery in third quarter, we're saying 18 months is typical in ACC5. Of any of our data centers we start saying 18 months from the time of its delivery. Frankly, management feels that with the current progress it's probably going to be sooner than that, but we'd like to outperform our projection. So, we're still sticking with the 18 months. So, we're saying ACC5 at the end of 2010. On Chicago, we've increased our projection to two years from the 18 months, a few quarters back, and that would give us a stabilized property by August, 2010.

Chris Lucas - Robert Baird

Okay. So, just following up then, on the ACC5 (inaudible) targets, is that just for Phase I or is that for the entire project?

Unidentified Company Representative

Both of them are for Phase I. All the development projects, our first 18.2 megawatts and then the balance of the project is the second 18.2 megawatts. That at the moment is just going to be shell.

Chris Lucas - Robert Baird

Okay. So again, trying to figure this out, you are 57% pre-leased in May, 2009, and you think it will take you another additional 17 months to finish off the leasing?

Hossein Fateh

Well, we think 18 months from delivery and don't forget these things are bumpy. You get one big lease it can take you up. But, we feel to be conservative. We prefer to beat our expectations rather than to tighten them up at this time. But we feel very good about meeting our projections of August, 2010.

Chris Lucas - Robert Baird

Okay. And then I guess, I hate to beat the dead horse here, but just on the sources and usage in your plans for finishing off projects already started. I guess, the real question I have is that, given the activity in the respective markets and the amount of capital that is already invested in those two markets that is currently unproductive, how do you weigh the opportunity cost of essentially debt capital invested versus the opportunity that is in the market right now with current leasing activity, both at Santa Clara and New Jersey?

Hossein Fateh

I think, the way you look at the top debt capital, it is just sitting under the mattress.

Chris Lucas - Robert Baird

But you've invested the money and it is generating zero return right now.

Hossein Fateh

Sure, absolutely. So we have the assets, it's sitting there and so we don't think we are going to get rewarded by more growth then the 60% we have right now. So when we are closer in, when we've done more leasing in the other two projects, at that time it would work well to kick start the other two projects, because at that time also when one or two of the other projects are stable, we can finish, for example New Jersey with debt.

Mark Wetzel

We're just trying to be a little more prudent here, Chris, in terms of where we are going this summer. And if we get on the call early August with you and we go from somewhere between 57 and a 100, then we would visit that. But sitting here today, with the building not finished, yes we are having tours, and yes, we have demand, but we are just being cautious at this early stage.

Hossein Fateh

To put on additional risk right now, we don't think we'll get rewarded for it. But if the other two projects are a little bit more leased up, we would get rewarded and we would think about how we would restart them. And how things work out when the other two projects are stabilized. It's a cheaper source of money to be able to put some leverage on it, start one or two of the other projects.

Chris Lucas - Robert Baird

As you think about when you need to restart those other projects, beside the leasing in Chicago and ACC5, is there a pre-leasing level that you would feel comfortable at either of the two projects, to go ahead and really contemplate kick-starting the finish of the projects?

Hossein Fateh

I don't want to put a number on it, because it depends on the credit. It depends on the rent. It depends on the relationship with the tenant. Data center tenant in generally, unless you have huge relationship with them, do not want to fine leases with a pre-lease.

In Virginia, pretty much all of them except one we've good relationships with. So in New Jersey, I doubt if we'll get enormous amount of pre-leasing. But having said that, in Santa Clara, some of our current customers are there, it's possible to get some pre-leasing.

So where do I feel good about it? That's 25% to 50% we would feel good, but how the data center market works, we may not be there and we may have to start the project. And just like ACC5, if we started the project and then almost immediately if I am starting it, it was over 50% pre-leased, so just kick starting it starts activity, because otherwise no one wants to sign a lease with a project that never gets done.

Operator

We'll take our next question from [Todd Cohen with MTC Advisors].

Todd Cohen - MTC Advisors

Good morning. I got on the call a little late, so I missed a couple of things as you were just starting to discuss them. A reference was made to a certain level of earnings power, incrementally I think is it related Chicago and ACC5?

Hossein Fateh

Yes.

Todd Cohen - MTC Advisors

Could you reiterate that number?

Hossein Fateh

Sure. The math kind of works like this, the two projects were at somewhere approximately with net of about $50 million together, with net $50 million to FFO. Actually $10 million of the $50 is already included in the $4 FFO. So $40 million is not included in the FFO number, once those projects are 100% stabilized. So $40 million divided by 67 million shares and OP Units is $0.60 a share. So with no additional money, we could have $0.60 a share of additional FFO growth.

Todd Cohen - MTC Advisors

Okay. Great and then could you also, as it relates to New Jersey and Santa Clara, refresh me on how much capital is already been committed to both of those and then what you need to complete them, and ready to go again?

Mark Wetzel

I'll take that. This is Mark. Again, we build this in a Phase I completion in a Phase II shell. So the money specific to New Jersey is about $128 million for Phase I and another $15 million to $20 million for Phase II. So, about $150 million up in New Jersey and we need $80 million to finish that asset.

Todd Cohen - MTC Advisors

So you have a $128 million, plus $15 million already committed?

Mark Wetzel

Yes.

Todd Cohen - MTC Advisors

Okay. Then $80 million to complete both phases?

Mark Wetzel

No, to complete Phase I only. Then specific to Santa Clara, we have about $85 million in Phase I, and roughly $20 million in Phase II, and we need about $175 million to finish Santa Clara Phase I.

Todd Cohen - MTC Advisors

Okay. I don't know the square footage figures, but at the end of the day, when you do get these things complete, what is the approximate dollar amount per square foot that is being spent on these projects.

Mark Wetzel

Its north of a $1000 a square foot.

Hossein Fateh

You should really start to think about these things on a cost per megawatt basis, because that's how they generate revenue. All of these data centers are 216 watts per square foot where many of our competitors are 120 to 150 watts per square foot. The tenants, what they care about is how much power and cooling they get, not how many square feet they get, because the power and cooling is what drives the servers.

Todd Cohen - MTC Advisors

I understand, so this is what you're saying that then, that your facilities are substantially more efficient?

Mark Wetzel

Well, not. What I'm saying is that, if you are a tenant and you have 4000 servers, you need 1 megawatts of critical load. You don't care if the 1 megawatt is in 10,000 square feet or in 5,000 square feet, what you care about is that, that is available on redundant power and that we have the ability to cool it. But we do-do both of those. Now we believe the higher densities are slightly more efficient to build and we believe that the bigger buildings are more efficient to run. The efficiency is driven by the scale of the buildings, not by necessarily the density. The density makes it more efficient to build.

Todd Cohen - MTC Advisors

That just sounded like, if you are able to run more watts per square foot at the end of the day it would be more productive?

Hossein Fateh

But we charge them per megawatt as well, per kilowatt of power available.

Todd Cohen - MTC Advisors

At the end of the day, you are also getting more per square foot?

Hossein Fateh

Yes. Absolutely.

Operator

(Operator Instruction) We'll go next to (inaudible).

Unidentified Analyst

I wanted to touch on the valuation issue and also your competitor DLR. It appears at DLR the insiders have sold pretty much everything that they've owned over the last year. They had about a 1.3 million shares in the company a year ago, and they are down to 116,000 shares now, and the stock is still trading north of 15 times FFO.

They appear to have a lot of older facilities then you guys do, and the issue of course is, like Hossein was just saying, it's driven by megawatts, and I don't know a lot about their buildings and about how they are going to affect the competitive framework with what appears to be older facilities and far inferior facilities, but at some point in time, it seems like the market is going to go say, DFT is the leading edge provider of leasable megawatts in the data center space and is going to award you a valuation north of what they are getting right now, which is 16 times FFO. And if you are looking at a 16% increase of FFO right now to $1.64, you are looking at share price north of $24 a share just on what you have got currently in the development stage and finish.

How do you guys do that, and what impact do you see DLR is having as far as their older data centers. Obviously, the management team certainly doesn't believe in the company. When do you think the market is going to shift their perspective of DLR being such a play, which is up today, and you guys being the play, in this space, and how do you see that whole competitive framework unraveling?

Hossein Fateh

DLR is a worthy competitor. They have a lot of capital. They build decent buildings. I have nothing negative to say about them, or the management.

Unidentified Analyst

Why do you think the management team sold all of their stock?

Hossein Fateh

That's their business. I don't know, maybe they wanted to buy a new boat or new house. I don't know.

Unidentified Analyst

But they own nothing actually.

Hossein Fateh

So I think in the framework of their business, we compete with them and we feel they are worthy, decent competitor. Now I do feel that they've very good management and they've been public longer then we have and they've performed very, very well, so I have really nothing but good things to say about them.

As far as us, we feel that our buildings are extremely efficient. How the math works? When they are leased up, they are the most efficient buildings in the country, but because of their scale they take longer to lease-up, for the tenants they do work very efficiently better than the smaller buildings than anybody else have. Now the market doesn't reward us until they are fully leased up, so for the tenants, they work very, very well and we're proud of what we build and the tenant seem to like it.

Unidentified Analyst

If you could put a ballpark FFO on the development of all of the phases that you've got in your perspectives right now, do you have any idea, I know that's tough to do, because the cost of capital and how you're going to raise that capital, if you did it, based on FFO divided by megawatts for last year, you'd be up over $4 and possible if it is high $5 in FFO?

Hossein Fateh

Well, I think you can do that math, just as well as we can, at the moment I'd like to say that we'll be with the current development that we have. That if fully funded it will be at a $1.62 when it's a 100% leased, and we're proud of that. What I do think is the that next chapter or while we're doing the other two buildings is, our New Jersey and Santa Clara when you add them both together, we spent approximately 50% of the money. So those two assets, when we finish them, is like buying something at $0.50 on a $1 and we will get very good returns on them, while today we're getting no value for those buildings.

So, I don't want to go and say everything that we have, because we could always buy new assets or something, but the $1.62, we feel comfortable about, and the other two assets, we're generally getting 12% to 15% unleveraged type of returns. The other two assets, because we spent half the money, you could think of it as we are going to get 24% to 30% on the new money invested in the other assets.

Unidentified Analyst

Which would take the FFO up roughly just a gestimate ballpark range?

Mark Wetzel

Well, if you just focus on the three Phase II's, ACC5 Phase II, Chicago Phase II from a pro-forma perspective it's roughly $24 million, $25 million of NOI for each phase.

Hossein Fateh

So, if you want to take that in hand it's approximately $0.30 in addition, if you add new, but you have to take out some of the debt expense. But without that you could add $0.30 to $0.32 for each New Jersey and Santa Clara and then you got to take off the debt expense on that.

Operator

We'll take our next question from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

I just want to follow-up on a previous question, which is, it sounded like, in response to Chris's question about starting up New Jersey or Santa Clara that you feel like you have to deliver product in order for the market to be there, were suggested to me that maybe you would reignite New Jersey for instance before there would be any pre-leasing. And my only comment, and I am interested in your response is that, you've already invested $130 million in New Jersey. So clearly customers in that market can see that you are out of the ground and you mean business. What more would you have to do to really demonstrate, to ignite that product before people would believe that you are committed?

Hossein Fateh

Well, I think we have to announce that we are starting construction.

Mark Wetzel

We have to promise a delivery date.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Hossein Fateh

And customers they generally have a time limit as when they need it.

Jordan Sadler - KeyBanc Capital Markets

Great, but can't you commensurate it with a lease agreement?

Hossein Fateh

They want to kind of know when we are delivering it. At the moment we can't give any solid commitment. So they don't want to give up the solid commitment. But meanwhile, , for example, we lost two customers because we couldn't give them a solid commitment and they had to make other plan.

Jordan Sadler - KeyBanc Capital Markets

Okay. My other question relates to investment opportunity outside of development, it sounds like there maybe some assets available. Are you seeing anything attractive out there in the investment market?

Hossein Fateh

No. Not really. We are seeing one or two deals, pre-lease deals that's we are tracking, that looks to be interesting. The quality of the assets is important to us and we do believe we have a superior quality assets and any legacy building would not be as good quality as what we have today. So that's one of the reasons we are not running to raise money, because we don't really see anything on the radar that would be very attractive to buy and the yields that we like.

Jordan Sadler - KeyBanc Capital Markets

What would be a yield you would like for a stabilized acquisition versus developing?

Hossein Fateh

I think it would still be the same as our development yields.

Jordan Sadler - KeyBanc Capital Markets

Even though there is arguably greater risk in it?

Hossein Fateh

There is greater risk, but we kind of feel like the development started leasing up anyway. And frankly, when you look at it, don't forget, when the development started, we have already spent half the money, and the new money invested would yield, if you calculate the yields on the new money invested is significantly higher than the 12% to 15%.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Mark Wetzel

Jordan, if there is a strategic asset in a strategic location, whether it be here in the US or overseas that came in at 100% leased and it made sense strategically, we will look at that, but as of today we are not seeing anything.

Hossein Fateh

I mean there are some that we track, but they haven't really come to give fruit yet.

Operator

We will go next to Paul Meierdierck with LaSalle Investment Management.

Paul Meierdierck - LaSalle Investment Management

Can you just clarify, on the leases signed in Q1 at CH1 and ACC4 are they rent-paying at this point?

Hossein Fateh

Did you say ACC5?.

Paul Meierdierck - LaSalle Investment Management

No, ACC4, you leased up the remainder of ACC4, then you had to re-sign in CH1, I'm just wondering if that's reflected?

Hossein Fateh

One of them in ACC4 has started and second one starts this summer. And Chicago has already started.

Paul Meierdierck - LaSalle Investment Management

Okay. So in terms of backlog you just have one at ACC4 that starts this summer?

Hossein Fateh

Yes.

Paul Meierdierck - LaSalle Investment Management

What percentage of that?

Hossein Fateh

I don't have that off the top of my head.

Paul Meierdierck - LaSalle Investment Management

Okay. Could you give the rent at ACC4 of the lease just signed?

Mark Wetzel

We don't disclose the rent per tenant.

Mark Wetzel

We did disclose that ACC4 is yielding 15% un-levered return.

Paul Meierdierck - LaSalle Investment Management

Okay. I guess, I asked just because I think Jordan or somebody else earlier mentioned that the rental was lower than what it has been, but as you said, it's pretty much on par.

Hossein Fateh

No, I think they were saying the opposite, I think the person who earlier said was just reiterating that ACC5's rent were significantly higher than 4, and we said it's not significantly higher but slightly higher.

Paul Meierdierck - LaSalle Investment Management

Okay. Then just one last thing, you just have one lease expiration in 2009?

Hossein Fateh

Yes, that's correct. Well at the end of '09 it's really the beginning of '10.

Paul Meierdierck - LaSalle Investment Management

Okay. Is that what you mentioned before? You said it's January 2010?

Hossein Fateh

At the end '09, but its like December 31, '09, but it's the beginning of '10.

Paul Meierdierck - LaSalle Investment Management

That was with the tenant that you think is going to move out and you will be able roll up rent significantly.

Hossein Fateh

Exactly, but it's only 1% of our revenue, so I wouldn't go crazy on it.

Operator

We'll go next to Todd Cohen with MTC Advisors.

Todd Cohen - MTC Advisors

Just a quick follow-up, again the incremental phases at both ACC5 in Chicago, when you are able to do them, you said each of those would generate $25 million, that's for each one or together?

Mark Wetzel

Of each phase for roughly 18.3 megawatts, we perform at roughly a $20 million or $25 million NOI for that size of building. So it's per each phase.

Operator

That does conclude today's question-and-answer session. At this time, I would like to turn the call back to Hossein Fateh for any additional or closing remarks.

Hossein Fateh

Thank you for joining us today, and we hope to see you at (inaudible) in New York in early June. Any of the analysts who have any further questions feel free to call myself or Mark. Thank you every one.

Operator

That does conclude today's conference. We thank you for your participation.

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