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DuPont Fabros Technology Inc. (NYSE:DFT)

Q3 2009 Earnings Call

November 4, 2009 10:00 A.M. ET

Executives

Chris Wamke – Manager Investor Relations

Hossein Fateh – President, CEO

Mark Wetzel – Executive Vice President, CFO and Treasurer

Analysts

Sri Anantha- Oppenheimer

Jordan Sadler – KeyBanc Capital Markets

Michael Bilerman – Citigroup

Bill Crow - Raymond James Financial

Christopher Lucas - Robert W. Baird

Tyuh Ukuveshanya (ph) - Jefferies and Co.

Jonathan Schildkraut - Jeffries and Co.

Ross Nussbaum (ph) – UBS

Brendan Maiorana – Wachovia

Presentation

Operator

Good day and welcome to DuPont Farbos Technology Inc. third quarter 2009 earnings conference call. Today’s conference is being recorded. At this time I would like to turn the conference over to Chris Wamke, Manger of Investor Relations. Please go ahead.

Chris Wamke

Thank you. Good morning everyone and thank you for joining us for DuPont Fabros Technology’s third 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.

Press 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 last night.

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.

I will now turn the call over to Hossein.

Hossein Fateh

Thank you, Chris. And good morning everyone. Thank you for joining us on the third quarter earnings call. As noted in last night’s press release I’m pleased to report that DuPont Fabros delivered another solid quarter in 2009.

These results were inline with our quarterly expectations. We have increased the lower end of our 2009 SSO guidance range by $0.04 per share and now expect a range of $1.09-$1.12 per share for the year. This is at the high end of the original range provided last February. We also increased our expected dividends range by $0.04 per share and expect to pay out of $0.24-$0.30 per share.

During the quarter we remained focus on leasing and taking care of our customers and the opening of our newest development ACC5 Phase 1.

Leasing activity continues to be favorable. Five leases were signed during the third quarter and one lease to date in the fourth quarter. We have executed 12 triple net leases year to date with contract values of $700 million. Including annual escalations. The average lease term on these leases is 10.2 years.

The five leases signed in the third quarter are with one new enterprise customer who signed two leases and three existing internet customers. The one leased signed in the fourth quarter was with an existing reseller customer.

I would like to thank the entire team, especially those in operations who continued to deliver outstanding customer service.

We have released a space for the one 2009 lease expiration at VA3 our Reston, Virginia building. The releasing of this VA3 space represents a 59% cash rent increase and no change in GAAP rent in 2010 over 2009. This data center will remain 100% leased as we enter into 2010. There is only one lease expiring in 2010 which is in the fourth quarter.

At the end of the third quarter our top two tenants, Microsoft and Yahoo represent 51% of our annual base rent. This is down from 63% at the end of the second quarter and down from 86% at our IPO in October 2007.

We’re working to further diversify our tenant base and expect this tenant concentration to continue to draw as we sign additional tenants.

The average combined remaining lease term with both these companies is 6.4 years with no out clauses. The average remaining lease term in our entire portfolio at September 30 is 7.3 years.

Let me now walk you through the two buildings in our portfolio that have available inventory. Chicago is 48% leased. We remain comfortable with a 24 month lease (inaudible) from Chicago’s opening in August of 2008 and continue to expect at 12% unleveraged return at stabilization.

Turning to Ashburn ACC5 Phase I is 73% leased as of today up 16% from the second quarter. ACC5 Phase II remains at 38% preleased.

We continue to see increased traffic for tours. Our pipeline of perspective tenants is very good. And we like what we are seeking and hearing. As to our immediate development pipeline and its funding and timing our decision process is consistent with what we have discussed in our second quarter call.

The lending environment remains challenging. We are however, in active discussions with lenders and reviewing several options for raising new funds. Our goal is to fund both ACC Phase II and New Jersey Phase I. We cannot and will not restart a development without new funds. The equity markets remain an option but of last resort.

The total projected cost of ACC5 Phase II in Ashburn Virginia is $145 million. We’re about $8 million per megawatts. We need $85 million of new funds and 8 to 10 months to complete Phase II.

Turning to New Jersey, we need $75 million of new funds and 6 to 8 months to finish Phase I. Respective tenants continue to show interest. We are confident that leases will start to flow once we raise the necessary funding and identify a completion date.

The development restart and the related financing costs that I have outlined are not included in our 2009 annual guidance range. We’re committed to each development; however, we plan to manage this growth carefully.

Now I will turn in 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. I want to cover five topics today; our third quarter results, our Q4 and full year ’09 guidance, a liquidity update, an update on our 2009 dividend and our 2010 guidance.

For the third quarter of ’09 the company’s FFO was $0.29 per share compared to $0.31 per share in the third quarter of ’08. Q3 revenues were $52 million, a 21% increase quarter-over-quarter.

Specific to our third quarter results and as compared to Q3 ’08, the FFO decrease of $0.02 per share is primarily due to greater interest expense from higher overall debt outstanding as well as capitalized interest, partially offset by increased operating income.

Total interest costs expense to the P&L in Q3 ’09 amounted to 80% of overall interest incurred. This compares to 50% expense in Q3 ’08, a difference of $0.06 per share or $3.8 million. Sequentially the Q2 ’09, the FFO of $0.01 per share increased primarily operating income.

As Hossein stated, FFO for the third quarter of ‘09 was at the high end of our guidance range. AFFO was $0.21 per share for the third quarter, $0.02 higher than a year ago, and the same sequentially as to the second quarter. Year-to-date AFFO was $0.61 per share compared to $0.60 a year ago.

Year-to-date cash earnings increased $14 million or $0.21 per share offsetting $14 or $0.21 per share of increased interest expense charged to the P&L. This increased interest expense is due to lower capitalized interest.

Our Q4 FFO guidance range is projected at $0.26-$0.29 per share. We are increasing the lower end of our previously provided annual 2009 FFO guidance range by $0.04 per share from $1.05-$1.12 per share to $1.09-$1.12 per share. This update is detailed on page 15 of this quarter’s press release.

With respect to our liquidity, we continue our strategy of collecting our rents, leasing our available inventory in Chicago and Virginia and serving our existing tenants. As of today we have $24 million of cash and $20 of line availability. We should end with a cash position in line availability of $35 million before dividends and assuming no capital proceeds.

We remain in active discussions with potential lenders regarding new debt proceeds and hope to announce something prior to the year end’s earnings call.

As to our dividend policy noted in our press release issued last night, we have increased by $0.04 per share the 2009 dividend range from $0.20-$0.26 cents per share to $0.24-$0.30 per share. This increase will satisfy the required minimum redistribution requirement. The board plans to meet and decide prior to year end when the dividend will be paid. Our current cash position is sufficient to cover the 2009 dividend.

Finally as to our 2010 guidance, we expect total revenues to be in the range of $230-$250 million, an increase of 15%-25% over 2009. At this point, that is all I plan to disclose. We will provide all the details and all (inaudible) amounts on our year end call in early February.

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

Hossein Fateh

Thanks Mark. Before I open up the call for questions I want to reemphasize that our primary focus is executing leases in both Chicago and Northern Virginia, and raising the right kind of capital for growth.

The DFD story remains focused on four strategic locations, northern Virginia, Chicago, New Jersey and Santa Clara, and a development pipeline of internal growth already on our balance sheet.

We fully expect to complete construction on ACC5 Phase II and New Jersey Phase I by the end of 2010. This strategy will drive our gross for the next several years. We have great confidence in our business model and what the future holds for the company.

With that, we’ll be happy to open up the call for questions.

Question-and-Answer Session

Operator

Thank you. The question and answer session will be conducted electronically. (Operator’s instructions) Our question comes from Sri Anantha from Oppenheimer.

Sri Anantha- Oppenheimer

Yes. Thank you and good morning. Hossein, I know you mentioned general comments that the sales pipeline remains pretty healthy. Could you guys update on Chicago data center, some of your peers seem to indicate that at least demand seems to be picking up within the Chicago data center. And I know you still remain comfortable. Is there a possibly based on the pipeline that you are seeing that that space could be leased up earlier than the 24 months? And secondarily, Mark, on the guidance for revenue for 2010 does it include – I would image there’s probably some contribution coming from ACC5 Phase II. If that’s the case maybe could you provide some color on that, thanks?

Hossein Fateh

I’ll take the first one. On the leasing activity, anything is possible. But I really don’t want to assume that we’re going to be leased up before August of 2010. However, we are confident with the August of 2010 being stabilized. In Virginia, we feel the leasing activity is faster than we thought but we still don’t want to make any prediction as to where it’s going to end up.

Sri Anantha- Oppenheimer

And there’s no change with the respect to returns that you’re assuming from either one of those.

Hossein Fateh

Virginia we’re assuming a 15% unlevered return. And in Chicago we’re assuming a 12% unlevered return.

Sri Anantha- Oppenheimer

Okay. Thanks.

Mark Wetzel

With regards to 2010 revenue guidance, no ACC5 Phase II we have not modeled anything in ’10 for that opening. The thought is that we would obtain funds to build it during ’10 and the preleasing that we have in place is effective 1/1/11.

Sri Anantha- Oppenheimer

Got it. Okay. Thank, Mark.

Operator

Our next question comes from Jordan Sadler from KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

Thanks, good morning. I just wanted to clarify the fourth quarter guidance a little bit. You’re basically guiding towards $0.26-$0.29. You did $0.029 in the third quarter. Can you maybe just give us some clarification in what the sequential changes might be?

Mark Wetzel

Yeah. The sequential changes are really twofold, Jordan. Other revenues which is a one time projects that we have that we do for perspective tenants that are executed leases will drop off and that’s probably a $0.01. And the interest expense really is the second component of the sequential difference. And the fact that we do not have any development in Q4 and that we maintain and follow a very conservative accounting policy with regards to interest capitalization we will be expensing all our interest incurred to the P&L in Q4. And that’s about $0.02, sequentially.

Jordan Sadler – KeyBanc Capital Markets

Okay. Now, the New Jersey and ACC5 Phase II projects that are on hold, are you no longer capitalizing interest on those or is that what you’re saying will happen?

Mark Wetzel

No. We are not – because we’re temporarily suspended so we are not capitalizing interest on that. We’re doing a little bit of projects in New Jersey so there’ll be some very small amounts. But the bulk of the capitalization during 2009 centered on Phase I of ACC5.

Jordan Sadler – KeyBanc Capital Markets

And just let’s saying you’re restarting those projects, if you were to get the financing during the fourth quarter and restart those projects for argument sake, what would happen accounting wise from a capitalization –

Mark Wetzel

We would – that’s a great point. We would upon funding, upon announcement that we would restart, we would then look to capitalize interest specific to the total amount funded for that particular phase, whether it be ACC5 and/or New Jersey.

Jordan Sadler – KeyBanc Capital Markets

Beginning on the recommencement date?

Mark Wetzel

Pretty much, yes. So if it’s – today’s what, the 4th, if it’s December 1, then you pick up one month of capitalization.

Jordan Sadler – KeyBanc Capital Markets

Okay. I will cut back in the queue. Thanks.

Operator

Our next question is from Michael Bilerman from Citi.

Michael Bilerman – Citigroup

Good morning. Mark McTenand’s (ph) on the phone with me as well. Can you just talk about the leases that you’ve signed for Chicago and ACC5, just talk a little bit about the term of those leases and how those compare rent wise what you had been doing in the past?

Hossein Fateh

Chicago we’re getting still inline to get our 12% unlevered return. And lease is longer than 10 years. In Virginia, I believe our average leases are 10 years. And the rent we’re getting higher than or just about higher than our 15% unlevered return on costs.

Michael Bilerman – Citigroup

If you take a look at your lease expiration schedule in your sup on Page 10, it would appear that there was two leases representing about 2.8 megawatts at critical load that were five year leases, your 2014 roll went up by that amount by two leases, 2.8 megawatts. And then the other four leases that were signed were all after 2018, representing the balance of the 16 megawatts. So it looks like there are at least 2.8 megawatts that are on a five year basis. And then –

Hossein Fateh

I agree. We have two leases in Virginia that were five year terms. But we’ve other leases that were longer. So our average is still at 10.2 years for the entire leases signed in the quarter.

Michael Bilerman – Citigroup

And so the two leases that were five year, those were two leases that were done in Virginia?

Hossein Fateh

Yes.

Michael Bilerman – Citigroup

And how do you price those relative to a longer term lease?

Hossein Fateh

Well, it’s not just a term. It’s also what we like about the credit of the tenant. And that how we feel about the tenant’s growth prospects. So generally they are a little bit more expensive. But our leases are all in line with getting our 15% unlevered return. And again – but we don’t really break that out as far as if we do a few leases. If we have a tenant that we feel is a high growth prospect, like we said, we’re not going to lose a deal over a five year deal, if we very much want a single tenant.

Michael Bilerman – Citigroup

And there’s one other thing in the lease roll schedule, it appears as though one lease shifted from 2013 to 2011 representing about 1.1 megawatts of critical load and about 5,300 square feet. And it would appear that the rent percentage went down. Did you guys do something there?

Mark Wetzel

Yes. There was one lease that we revisited in terms of the out. And we looked at it and revised the schedule.

Michael Bilerman – Citigroup

What do you mean you revised the out?

Mark Wetzel

Well, the lease as executed was – when the table was built last quarter it was at five years. And then after rereading the ability for that tenant to have expiration out that was the change.

Hossein Fateh

Or they had a penalty and ability to get out with a penalty. So decided that we’re going to go with a shorter term and the penalty.

Michael Bilerman – Citigroup

And did the rent that you showed change? Because the percent of annualized base rent dropped more in ’11 than it did for ’13 – dropped more in ’13 then it went up in 2011, does that make sense?

Mark Wetzel

It really shouldn’t have.

Michael Bilerman – Citigroup

Because all you did was just move the date?

Mark Wetzel

Yes.

Michael Bilerman – Citigroup

There was no recut of rent?

Hossein Fateh

No. There was no recut of rent.

Michael Bilerman – Citigroup

Okay. I’ll requeue. Thank you.

Operator

Our next question comes from Bill Crow from Raymond James.

Bill Crow - Raymond James Financial

A couple of questions. Most of the leasing activity took place very early in the quarter. As a matter of fact we discussed it, I think, in the last quarter call. Can you just talk about traffic generally as the quarter progressed?

Hossein Fateh

Traffic is very, very good. I can tell you our legal department is busy. But to tell you that every lease will come in. Our policy is not to announce any leases if they are not fully executed. We are busy working on leasing. But to promise you like I always say, it’s bounty as far as trying to get all the leases to come in right before the call.

Bill Crow - Raymond James Financial

No. I appreciate that. That’s why I’m looking at traffic.

Hossein Fateh

Bill, our traffic is busy. We are working. We are very optimistic about our prospects. We feel very good about our markets; especially in Virginia we’re cautiously extremely optimistic.

Bill Crow - Raymond James Financial

Okay, great. And then on the financing side, Mark, maybe you can tell us how negotiations are going on the debt front? Last I heard I think you were dealing with many a Middle Eastern bank or group of banks. Any update there?

Mark Wetzel

Bill, obviously we can’t really speak to anything of substance. We are in active discussions. It’s very challenging. Data centers are not the easiest to finance. But when we lay out the executed leases, we lay out the quality of the tenants; we lay out the lease terms, the cash flow. We start to get people comfortable. But these are – it’s a challenging environment. We hope to have something between now and the next earnings call in terms of announcing something.

Bill Crow - Raymond James Financial

Perfect. That’s what I’m looking for. Thanks guys.

Operator

Our next question comes from Brendan Maiorana.

Brendan Maiorana – Wachovia

So, the 38% prelease that you’ve got for ACC5 II, it seems like you need to get that project started by February or March to deliver it by January 1, 2011. Does the tenant have an out if you guys don’t get that project started in a certain time frame?

Hossein Fateh

I think all tenants were. But we’ve got enough of a cushion there that we’re frankly not worried about it at all. I’m not worried about that at all. We will get the project down and we’ll be on time. In fact, we’ll probably be early.

Brendan Maiorana – Wachovia

So, enough of a cushion – just trying to understand, in terms that you’re talking timing, you have enough of a cushion?

Hossein Fateh

We have a cushion beyond that date. But we’re not really frankly worried about it. We’re absolutely very confident that the project will be delivered on time.

Mark Wetzel

And Brendan, another point is that the 38% is three specific rooms. And if we don’t have another lease in Phase I we could in fact move that tenant into one of the open spaces in Phase I. So it’s a staged capacity planning issue for this tenant of what their growth story is. So it’s not like they’re going to start building pods on day one on January 1, of ’11, all three pods simultaneously.

Brendan Maiorana – Wachovia

Sure. But for the full 38% given the leasing that you did in ACC5 I know you don’t have enough remaining capacity in ACC5 I to satisfy all of their needs?

Hossein Fateh

No. But we’re again, we’re extremely comfortable. Let’s face it, the equipment from Santa Clara that we’re moving there and with the underground work that’s already completed, we only need $85 million to finish it. And the leasing already on the 38% done, that’s already at ‘10 capital most on just the preleased space, just on that amount. So we’re very comfortable with finishing the project by January 1, 2011.

Brendan Maiorana – Wachovia

So I just want to make sure I understand that comment. So you’re saying you’re at 10 Cap on the 38% of the total projected cost?

Hossein Fateh

No. Of the new money going in.

Brendan Maiorana – Wachovia

Right. Okay, okay, got it.

Hossein Fateh

Of the new money going in it’s like a 9% or 10% cap. On the new money going in if you assume just only the 38% as preleased.

Brendan Maiorana – Wachovia

On the additional funds that you needed to spend to complete it?

Hossein Fateh

Exactly.

Brendan Maiorana – Wachovia

I’ve got it.

Hossein Fateh

It’s $85 million. So we feel very comfortable where we are. That project will be completed and we’ll complete it on time.

Brendan Maiorana – Wachovia

Okay. No, that’s helpful. And then second question is the $106 million of base cash, base rent that you have today, the projected over the next 12 months. How much of that is attributable to CH1 and ACC5 I?

Mark Wetzel

I’m not sure we’re going to get that detailed on the call. Maybe we can follow up afterwards. But I don’t have that in front of me.

Brendan Maiorana – Wachovia

Okay. I was just interested to find out how much cash is being generated from those two assets to see today if you can encumber those assets at a given Cap rate and a given LTV. So I’ll jump back in. Thanks.

Operator

Our next question is from Chris Lucas from Robert W. Baird.

Chris Lucas - Robert W. Baird

Just kind of follow up on a comment that you made, Hossein, related to the Santa Clara equipment, what’s the anticipated delivery scheduled for that equipment to ACC5 Phase II?

Hossein Fateh

It’s not really an issue. Most of it is sitting on the second Phase of our Chicago Data Center. So as soon as we get the financing within a couple of days it could be here in Virginia.

Chris Lucas - Robert W. Baird

Okay. And then I guess the other question just is what the plan B is right now if the financing doesn’t materialize to the degree that you’re expecting?

Hossein Fateh

If it doesn’t then we only build one of the two projects, either New Jersey or ACC5 Phase II.

Mark Wetzel

But, Chris, from a financing prospective, we’re looking at all the options. There’s straight debt, there’s – the convert market seems to be open. And obviously equity is an option of last resort as you’ve seen stated.

Chris Lucas - Robert W. Baird

So what would be the time frame under which you would sort to have to kind of move off here?

Hossein Fateh

I mean, obviously we would have to make a decision by March or so of 2010.

Chris Lucas - Robert W. Baird

Okay. Great, thanks. I’ll get back in the queue.

Operator

Our next question is from Tyuh Ukuveshanya from Jefferies and Co.

Tyuh Ukuveshanya (ph) - Jefferies and Co.

A couple of questions in regards to traffic, both with CH I and ACC5, could you give a sense of the mix of potential tenants you’re seeing? Is it more enterprise guys? Is it more internet guys?

Hossein Fateh

Like in Virginia it remains to be consistently maybe 70-80% internet. We have one or two financials and maybe one enterprise. In Chicago it’s 50-50 between enterprise and internet.

Tyuh Ukuveshanya - Jefferies and Co.

And are there any potential in new tenants or is it exist tenants just looking for new space?

Hossein Fateh

In Virginia it’s about 60 – of the deals we’ve done it’s almost like 80% new tenants. And the new deals we’re working on its maybe 50% or so new, 50% from existing tenants. In Chicago I would say its pretty much all new tenants that we’re looking and some expansions of – maybe one or two expansions of existing tenants.

Tyuh Ukuveshanya - Jefferies and Co.

Great. Then next question, New Jersey I, you said you needed $75 million to complete it. But could you give us what the overall estimated costs of that project will be?

Mark Wetzel

It’s roughly between $200 and $215 million was our estimated cost. So $208 is a mid point.

Tyuh Ukuveshanya - Jefferies and Co.

And you need $75 more. Okay. Is anything going on at Santa Clara I at this point? I know it’s not the most immediate project but you kind of have on our plate. But what’s going on there?

Hossein Fateh

It’s very clearly going to be the third project we do. But we want to grow carefully and with the right kind of money. And we have plenty of growth with ACC5 Phase II. And with ACC Phase II and with New Jersey. So it’s going to be right after those two are sorted and up and running we’re going to be actively seeking to optimize Santa Clara. But at this time we don’t have it in any of our numbers. But we want to make sure that we’re a little bit further leased on Chicago, kind of further leased on ACC5 Phase I and II. So when the leasing picks up there we’re going to look at Santa Clara. And meanwhile if we have a prelease coming we can divert our attention.

Tyuh Ukuveshanya - Jefferies and Co.

Great. One last question. The line of credit, could you just remind us what the customary conditions are to get it extended it an additional year?

Mark Wetzel

There’s a list of six items, paying a fee, is probably – maintaining our covenant as they are in place. So we’ve been in initial discussion with the lead bank on that. And so at this point we don’t see that being an issue.

Tyuh Ukuveshanya - Jefferies and Co.

Okay. Thank you.

Mark Wetzel

Congratulations on your new role.

Tyuh Ukuveshanya - Jefferies and Co.

Thank you.

Operator

Our next question is from Jonathan Schildkraut from Jefferies and Company

Dave Raff - Jefferies and Co.

Good morning. This is Dave Raff from Jonathan Schildkraut. You guys have success with manage hosting providers. I was wondering if this is a vertical you would explore further and how you would go about targeting opportunities?

Hossein Fateh

Well, I think the cloud computing platform on the whole is going to grow to outsourcing. The whole point of cloud computing is they’ll be diversified data centers for those doing it, whether it’s Amazon or rack space of an HP or all those or an IBM. The whole platform is going to increase the amounts of outsourced data centers. And they all seem to have pretty decent credit and we’ve got good relationships with all of them.

When you go in a very large data center like 18-36 megawatt data center, you’re operating costs are significantly lower than in a 6 megawatt data center. So it makes sense for those guys to have , three, four data centers around the country and be geographically diversified and be part of a very large data center and their cloud platform being in a prior level processing, they take the redundancy in geography. So we see that part of the business as a potential growth action for us and we’re excited about it.

Dave Raff - Jefferies and Co.

Right. And then second question I had was, the recent Q2S transaction appears to have some positive implications on valuation that it could potentially impact the competitive landscape. We were wondering how you viewed the transaction.

Hossein Fateh

What do you mean by Q2S?

Dave Raff - Jefferies and Co.

Q2S data centers recently General Atlantic invested in them?

Hossein Fateh

Oh, I know very little about that transaction. So I think the competitive landscape as far the wholesale data centers is so far in the markets that we are the supply – the demand very much outsets supply. So it’s on all the markets that we’re at we’re very dominant and we like our competitive landscape. We haven’t really seen anything significant. And it takes like a year to design a data center and a year to build it and maybe six months to find the land get it on the contract. So – I mean, even, listen, at the moment two big competitors that are public and the wholesale space, and there is room for five or six. So we’re not really worried about it.

Dave Raff - Jefferies and Co.

Gotcha. Okay. Thank you very much.

Operator

Our next question comes from Vic Vitale (ph) from UBS.

Ross Nussbaum (ph) – UBS

It’s actually Ross Nussbaum here at UBS. Here’s a question for you. I don’t necessarily understand some of the comments that have been made on the capital plans, specifically as it relates to debt versus equity. Because as I’m sitting here today your stock has rebounded off of the disastrous performance it had last year with the exception of maybe three months worth of trading after you went public your stock’s never been higher. You’re trading at, at least on consensus number in 8.5 FFO yield and 6% AFFO yield. If I think about what the market is saying as to your cost of equity versus what the cost of long term debt maybe today, it would seem to me like given the growth plans you’ve got you should be raising equity here and having lower leverage on these assets.

Hossein Fateh

We are looking at all our options. And we want to optimize the cost of new capital. That’s all we can say at this moment. We’re looking at all our options but we want to optimize. And over (inaudible) and I own, so much of the company that we look at it every day and we will optimize and get the lowest cost of funds knowing how much our growth is and being comfortable with our leasing. Also you have to bear in mind that when you look at even the current levels of debt, we will deleverage by the time, if you run your numbers and look at ACC5 Phase II and when you look at New Jersey and the rest of our portfolio being leased up, I mean, assuming even the same level of debt we will deleverage by leasing by assuming all those projects are leased, we’ll be at somewhere around 4.5 EBITDA on leverage. Which we think is extremely conservative. So by just leasing we’re going to get there anyway.

Ross Nussbaum - UBS

Thank you.

Operator

Our next question is from Jordan Sandler from KeyBanc Capital Market.

Jordan Sadler – KeyBanc Capital Markets

Just some follow ups. The 2010 expirations, any guidance there on what you’re expecting, maybe going with the timings of those expirations and 3.1% of rent?

Hossein Fateh

Yeah. Again, like you said it’s 3.1% of rent. And it’s too early to look at it right now. It’s still like a year left. But we’re comfortable with releasing at slightly higher rent. But again the GAAP rent wont really change because they’re all mark-to-market anyway. But the cash rent will go up.

Jordan Sadler – KeyBanc Capital Markets

The cash rent will go up. It’ll vacate though, you expect the tenant to –

Hossein Fateh

We don’t know yet. We haven’t done anything. But either the leases will be – we’re very comfortable with the cash rent going up. And being released back up.

Jordan Sadler – KeyBanc Capital Markets

And what’s the timing and the expiration?

Mark Wetzel

It’s 10/31, Q4.

Jordan Sadler – KeyBanc Capital Markets

Okay. The other question is just the leases that are in place and signed, particularly on ACC5 Phase I and then maybe in Chicago, I’m just curious on timing. Because these tend to be pretty chunky from a revenue standpoint. When are the commencement dates?

Mark Wetzel

There are a couple that commenced, obviously, right when we opened the building on September 1. There are two that will commence right at the end of this year. And so it’s minimal revenue in ’09 for those couple of new ones. But 2010 there’s the commencement of the leases executed – they will commence by early ’10.

Jordan Sadler – KeyBanc Capital Markets

So the 16% signed on ACC5 Phase it will be 12/31 of this year? Or 1/1?

Mark Wetzel

Yes. It’s in December so, 1/1, is kind of –

Jordan Sadler – KeyBanc Capital Markets

And then the Chicago is fully up and running? All that rent is flowing though throughout the whole quarter?

Mark Wetzel

There’s a staged lease up – no, it’s not full in Q4. In 2010 it will kick in.

Jordan Sadler – KeyBanc Capital Markets

Can you give us a rough percentage of how much of maybe Chicago, it’s 48% leased?

Mark Wetzel

Yeah. That last big lease that we saw during the quarter, obviously, which has been announced by the tenant that it has a staged lease up. So GAAP wise – there’s a GAAP cash difference, obviously, as they ramp up.

Jordan Sadler – KeyBanc Capital Markets

Okay. And then I’m just curious about construction costs. Anybody who’s building anything has been talking about 15% reductions in construction costs. Can you maybe speak to that a little bit?

Hossein Fateh

As data centers we don’t really find it that way. And there are a couple of things with data centers. First of all, in all the markets we’re at, the labor is unionized. So obviously that’s not going down. And our rough number is 50% of the construction cost of the data center is labor. So that part is not coming down. On the equipment, say, for example, the pre-cash concrete is down significantly. But things like poured concrete and sand and gravel and those things are not really down because they just shut the plants down.

So on data centers I wouldn’t say it’s significantly lower than 10 or 15%. There’s some savings. What’s most exciting about the data center is when two years ago the labor was not available, when you had to pay overtime labor now the labor is available and you can easily get 350 electricians to attack a data center. So I would say it’s less relevant for us. However, we’re very comfortable with our construction team. Every data center that we’ve built has come in on time and significantly below our budgets.

Jordan Sadler – KeyBanc Capital Markets

Thank you.

Operator

Our next question is from Michael Bilerman from Citi.

Michael Bilerman – Citigroup

Just wanted to come back – Hossein, I think you said the leases that got renewed expiring this year were renewed with cash rents up 59%, the GAAP rent rates flat because you had already mark-to-market releases at the time of the IPO. Is that effectively saying that rents haven’t moved from your expectation at the IPO?

Hossein Fateh

The rents are going up at the IPO. We’ve always maintained rents are going up 3% a year or something. And we’re getting those rent increases. And don’t forget the building that the rent is coming up is 2002 construction compared to our new buildings per kilowatt. So the new buildings being much larger, the operating costs are also significantly lower on the larger buildings. So I would say if you think about it a 3% increase in rent is what we’ve achieved. Which is not significant since we only went public two years ago.

Michael Bilerman – Citigroup

Right. I was just thinking if you had mark-to-market at that point it was the rents that you expected then –

Hossein Fateh

What I’m saying is two years ago even if you’re talking a mark-to-market it’s a decrease increase of 6% on that building.

Michael Bilerman – Citigroup

You’ve talked a lot – I think you’ve mentioned a few times on this call about looking for the right kind of money.

Hossein Fateh

Yeah, yeah.

Michael Bilerman – Citigroup

And I don’t – I’m just trying to get my arms around what that means to you in terms of getting this $150 million that you need to finish the construction and sort of where you mindset is. Are the lenders coming to you? Is it a rate perspective? Is it corporate guarantees? Is it equity that they want? I mean, what is it that I guess maybe holding you back in terms of finding in your mind what you believe are the right kind of money?

Hossein Fateh

I think we’d like a longer term as possible. There is no equity but all of the above that you mentioned. I mean exact equity, we want – the only thing you didn’t mention is term. So I would take out equity add term and everything else that you said.

Michael Bilerman – Citigroup

In terms of what is being put on you?

Hossein Fateh

Exactly.

Michael Bilerman – Citigroup

And how do you think on the dividend which will be, let’s call it a $16-$20 million payment that you will have to make at some point towards the end of the year or early next year. How does that factor in to your view of stock versus cash knowing that you need at a minimum you need $75 million or you’re going to start getting tight on ACC5 Phase II with the leasing that you have in place?

Hossein Fateh

I think we’ll make that decision after we raise the funds on ACC5 Phase I and II. The dividend is always preferred that it’s going to be paid in cash. But we’re going to discuss it with the board at the later time.

Michael Bilerman – Citigroup

Well, just going back to your comment that you and Lammont own so much of the company and believe so much in the prospects, wouldn’t you want to take more equity in the company at this price?

Hossein Fateh

I would love to. But I also personally need the cash too.

Michael Bilerman – Citigroup

We all would love more cash.

Hossein Fateh

Exactly. And stock (inaudible) have access too. So either way I kind of wouldn’t mind the cash. But reality I have to think about the best, what’s best for the shareholders and I mean everyone seems to think a cash dividend it’s the right move to make. But we’re going to make that decision later.

Michael Bilerman – Citigroup

And then, Mark, just on the GAAP versus cash. The GAAP for Chicago Phase I and ACC5 Phase I, the GAAP effectively all starts regardless of when they’re build out occurs, correct?

Mark Wetzel

Yeah. We look at the lease term, use straight line at across with escalations backwards, that’s correct.

Michael Bilerman – Citigroup

And so effectively the 8 megawatt from a GAAP perspective in Chicago is effectively will all be in the numbers and the 13 megawatts you planned in ACC5 will all be in the numbers, part of that starting in the fourth quarter; part of it already was in the third quarter?

Mark Wetzel

That is correct.

Michael Bilerman – Citigroup

But all of it in your estimate for the number you threw out, the $230 million of a GAAP revenue number, that’s assuming all the in place today plus only the leases that were signed on a GAAP basis, correct?

Mark Wetzel

That’s correct. The executed leases in hand as of today with – obviously the range has a little bit of upside with other projections that we have. But the in place is all in that ‘10 number.

Michael Bilerman – Citigroup

And that’s effectively what you list in your sup, $133 million of GAAP rents plus the recoveries?

Mark Wetzel

Correct.

Michael Bilerman – Citigroup

Gets you to $230.

Mark Wetzel

Plus a little bit of one time fees that we hope or expect to get in ‘10 as well from the other income line.

Michael Bilerman – Citigroup

(Inaudible) like $5 million, I mean it can’t be that much?

Mark Wetzel

Yeah. Exactly. It’s less than – on average less than a million a month.

Michael Bilerman – Citigroup

And then, do you have the cash number, just so that we’re thinking about how things line up for next year? Because everything else should be pretty simple, right?

Mark Wetzel

Right. The straight line rent for ’10, we’ll talk that in detail at year end. I don’t have that at my finger tips for ’10. And I want to – we’re still working some things that will affect that.

Michael Bilerman – Citigroup

Okay. And then just lastly the ACC5 Phase II, how does that – just right you have greater than 100% you have greater than 18.2 megawatts leased. Which would – at least I though would force you to have the build ACC5 under all costs. But it sounds like you have the ability to put them in only into that remaining space if you don’t sign anybody else. Because it’s basically phased over three years in thirds, is that the way we should think about it?

Hossein Fateh

No. I mean, what Mark was suggesting is we could maybe move one of the rooms into – if its little bit delayed we could move one of the rooms into Phase I and build the space a little bit later for them. Or one or two of the rooms we’ll move them into Phase I. So but, on the whole we’re very comfortable that we’re going to be able to build that.

The whole building only has $25 million of debt on it. We could also move that debt out to maybe New Jersey and put – we only need $85 million of new money on a data center which is 38% leased on the second Phase and 73% leased on the first Phase. So $85 million for a building that is costs over $300 million to finish and already on just Phase I being fully leased could generate $26 million of income. It is not a highly leveraged deal. So we’re very comfortable in finishing that building.

Michael Bilerman – Citigroup

And just getting the money at –

Hossein Fateh

Yeah. Exactly. One other thing I wanted to mention that you mentioned earlier, I mean our motive to always get 10 year leases. But to get in a 36 megawatt building to have 10%-15% five year or seven year leases is actually a good thing because it breaks up the lease expiration. And if we really want, like, a tenant that’s in a new industry or a tenant that’s very high credit, or for example, a government tenant that is working on a five year government contract. It’s a huge positive to break up the lease expiration and have 10%-15% of the leases being shorter term. That’s a huge positive in a multi tenant building.

Michael Bilerman – Citigroup

Yup. Thank you.

Operator

(Operator’s instructions) We’ll take our next question from Brendan Maiorana from Wells Fargo.

Brendan Maiorana – Wells Fargo Securities

So, Hossein or Mark, I just on the $25 million ACC5 loan, if you take out mortgage financing on ACC5, does that trigger repayment of the $25 million?

Hossein Fateh

I mean, legally absolutely it does. But we have a very good relationship with the lender. And if we wanted to move it to another asset like New Jersey we feel comfortable we could do so.

Brendan Maiorana – Wells Fargo Securities

Okay. That’s helpful. And then Hossein, just a broader question for you, from a personnel standpoint you’ve prided yourself on the design of your data center and how these are a competitive advantage. Your development activity has been reduced a little bit just given the capital constraints of the company. Do you risk losing some of your design personnel because your development activity has been reduced a little bit or do you feel comfortable with the personnel, where you stand and maintaining that competitive advantage?

Hossein Fateh

No. We’re very, very comfortable with what we have at the moment. Our designs are complete, frankly on New Jersey and ACC5. And on New Jersey, on ACC5 and on Santa Clara. So our pipeline on design, that work is done and paid for. So at this time that design is perfectly done. And we’re going to start to ramp up – as we get closer and closer to raising the additional funds, we actually may ramp up on some new design personnel.

Brendan Maiorana – Wells Fargo Securities

Okay. All right. Thank you.

Operator

Well take our next question from Chris Lucas from Robert W. Baird.

Christopher Lucas – Robert W. Baird

Just a quick follow up related to the preleasing issues at ACC5. What rights does the tenant have to cancel or exit all or part of the lease given if today the inability to finance that project to completion? So what is the time frame under which they pressure you to make a decision about the financing?

Hossein Fateh

They obviously can’t cancel any of the leases in Phase I. The tenants very much want the space. So the Phase II leases, we either need to move them to Phase I or part or all of it. But if there are months and months and months of delays we’ll, yeah, they could cancel. But again, like I said, if we would never sign that deal if we weren’t comfortable. And there’s no recourse back to the company. We are very comfortable on getting the space built and meeting the tenants’ obligations by January 1, 2011.

Christopher Lucas – Robert W. Baird

But there’s no time frame before that delivery time that they should expect or have an out or some sort of construction progress type metric to meet?

Hossein Fateh

No. None of that.

Christopher Lucas – Robert W. Baird

Okay. Great. Thank you.

Operator

Our next question is from Sri Anantha from Oppenheimer.

Sri Anantha- Oppenheimer

Hey Mark or Hossein, I know you guys have talked about previously obtaining a rating from the rating agencies. Maybe could you guys update on where you stand on that? And a lot of companies have also talked about increased demand from the federal government for data center space. Are you guys seeing any of that especially in the DC area? Thank you.

Hossein Fateh

On the rating question, all I can say is we’re looking at all available financing options available to us. On the federal government, yes, we have seen some demand. Most of the deals coming to us are coming through a system integrator. And whereby, for example, it’s not IBM where the government will sign a deal with an IBM and the IBM would come to us. We’re seeing some of that demand through that. And we’re seeing very good activity with the government. But the government does take a long time making decisions. In fact, much longer than internet companies do. So this space that we have is mostly getting leased up to, in Virginia, to internet companies because by the time the government wants to make a decision the internet companies have gobbled it up.

Sri Anantha- Oppenheimer

Got it. And you know longer term, Hossein, when we think about cloud or different kinds of managed hosting services. Do you think down the road does it make sense that at some point for DuPont Fabros to potentially partner either with a large IT services company or a system integrator? Thank you.

Hossein Fateh

We thought about it over time. We haven’t – again, it’s kind of a – it’s very fast moving. I’m not sure how I would effect us in the (inaudible) scenario on good income for (inaudible). But at this time we want to stick to what we’re doing and develop data centers, not for one cloud computing partner but for all of them.

Sri Anantha- Oppenheimer

Okay. Thanks a lot.

Operator

We have no questions in queue. We’ll go back to Hossein Fateh for any closing remarks.

Hossein Fateh

Thank you for joining us today. We look forward to seeing some of you at NARI. Thank you everyone.

Operator

This concludes today’s conference call. Thank you for your participation.

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