DuPont Fabros Technology Management Discusses Q3 2013 Results - Earnings Call Transcript

Oct.24.13 | About: DuPont Fabros (DFT)

DuPont Fabros Technology (NYSE:DFT)

Q3 2013 Earnings Call

October 24, 2013 1:00 pm ET

Executives

Christopher Warnke - Manager of Investor Relations

Hossein Fateh - Co-Founder, Chief Executive Officer, President and Director

Mark L. Wetzel - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Emmanuel Korchman

Gabriel Hilmoe - UBS Investment Bank, Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

William A. Crow - Raymond James & Associates, Inc., Research Division

Young Ku - Wells Fargo Securities, LLC, Research Division

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Jonathan M. Petersen - MLV & Co LLC, Research Division

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Operator

Good day, and welcome to the DuPont Fabros Technology's Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Chris Warnke, Investor Relations Manager for the company. Mr. Warnke, you may begin your conference.

Christopher Warnke

Thank you, Jeff. Good afternoon, everyone, and thank you for joining us today for DuPont Fabros Technology's Third Quarter 2013 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.

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 this morning. The release is available in PDF format in the Investor Relations section of the company's corporate website at www.dft.com. [Operator Instructions]

I will now turn the call over to Hossein.

Hossein Fateh

Thank you, Chris, and good afternoon, everyone. I'm happy that you could join us today as we discuss DFT's third quarter results.

As you noticed in our earnings release, we delivered strong financial results, increased our 2013 guidance and provided the low end guidance for next year. Mark will provide details on the numbers later in the call.

Now, I'd like to cover some of our leasing developments and balance sheet accomplishments. Let's start with leasing. During the quarter, we signed 3 new leases and one pre-lease, totaling 11.7 megawatts of critical load. This brings our total leased operating portfolio to 94% leased, which is up from last quarter's 91%.

On our last call, we spent a fair amount of time talking about New Jersey. Our work in this market is beginning to bear fruit. In the third quarter, we signed a 2.28 megawatts lease with a new Fortune 25 customer. This tenant has the right to occupy 2, 2.28 megawatts rooms during the term of their lease. They can utilize all or a portion of their remaining available critical load up to 4.55 megawatts. Should this occur, they would pay for the additional critical load at the then-escalated rate. If they don't utilize all the 4.55 megawatts of their critical load, we can migrate their remaining capacity to Phase 2.

This is a great win for us. It adds a new name to our tenant roster, which we have been eyeing for some time. We believe in this tenant, and we're hopeful that as their requirements grow, they will use DFT for their increased demand. New Jersey is now 52% leased.

Let's move to Virginia. As you know, Virginia has been and continues to be our best market. Our last development, ACC6, opened 100% leased. That left us with very limited inventory, most of which is in Virginia -- is in VA3. In the third quarter, one of our top 4 tenants leased 2.6 megawatts of critical load at VA3. This tenant occupies space in multiple buildings in 3 of our markets with varying degrees of tenancy.

This is a testament that one size does not fit all requirements. Regardless of the application and the processes a tenant is running, our portfolio can provide for the variable needs -- for their variable needs. Case in point, the same VA3 tenant leased 2.27 megawatts of additional space in Phase 1 of Santa Clara in the third quarter, which completely filled up the building. They also signed a pre-leased in the third quarter for 4.55 megawatts in Phase 2a of Santa Clara.

A discussion of leasing is not complete without addressing expiration. DFT's lease expiration are less than 2% in 2014 and less than 11% over the next 4 years. We prudently have staggered expiration dates and have been proactive with our tenants in discussing renewals. This approach has proven successful.

During the third quarter, we renewed 3 leases totaling 4.55 megawatts, which were scheduled to expire in 2014. These 3 leases are non-super wholesale tenants and require no CI and no free rent. For these 3 renewals, GAAP-based rent will increase 1%, and cash-based rent will decrease 11.5%.

If you simply compare the initial base rent at the start of the lease to the initial base rent at the start of the renewal, cash-based rent is basically flat. The key point is that cash rent for these renewals are in the range of $108 to $120 per kilowatt per month, which is very much in line with our expected returns.

Now let's talk about new developments. We are active in our top 3 markets: Northern Virginia, Santa Clara and Chicago. In May, we announced the commencement of ACC7. The initial phase will be 11.89 megawatts. We plan to deliver this capacity in the second quarter of 2014. The new development is moving along as planned and is on budget.

We have limited available inventory in Northern Virginia. Except for a small amount of space in ACC5, we're completely full in our Ashburn County. Some of our current tenants within the campus will likely have additional space requirements. We expect ACC7 will lease up in a similar fashion to our other Ashburn developments.

In September, we commenced the development of 9.1 megawatts in Santa Clara. We're calling this Phase 2a. Our ability to develop in smaller increments enables us to match supply and demand, decreasing our lease-up risk. The 4.55 megawatts of pre-leasing we have in place mitigates this risk. 50% of the space we are delivering is already pre-leased.

Like the Ashburn development, Santa Clara Phase 2a is scheduled for a second quarter 2014 delivery. This takes us to Chicago. In August, we acquired a 15-acre parcel of land in Elk Grove Village to develop our CH2 facility. This parcel is located across the street from our CH1 facility, which provides an optimal growth plan.

Experience shows us that tenants like to take additional space within our campus as their requirements grow. We have typically benefited from this embedded organic growth, and we are poised to capture similar growth in CH2.

We are working on the design of CH2. Due to the parcel shape, size and the largest single load the utility can deliver, we expect this building to approximately -- we expect this building to total approximately 26 megawatts of critical load. We expect to commence development in the second quarter of 2014 to accommodate future tenant demand and expect to deliver the building in the summer of 2015.

We will build the entire shell. Pre-leasing will determine how much space we will deliver. We will be deploying our version 3.0 design for both ACC7 and CH2 while incorporating design elements of version 3.0 in the Phase 2 of Santa Clara. This will increase the efficiency of the building and provide our tenants with flexible load solutions.

Let me give you an overview of our financial transactions. In September, we issued $600 million of unsecured bonds at 5.875%. Given the uncertainty around macro issues and interest rates, we believe it is best to act early, locking in a sub 6 rate rather than wait until December to replace our of $550 million, 8.25% unsecured notes. This issuance extends our maturity by 4.5 years -- sorry, by 4 years to 2021.

Additionally, we obtained a new unsecured term loan due 2019 totaling $250 million at LIBOR plus 1.75%. This is a great rate. Both of these loans have greatly decreased our cost of debt and hence, our cost of capital. Combined with our free cash flow, this provides us with enough capital to fund our new developments.

Let me take a final moment to discuss succession plans that we have announced in September. No company's future planning is complete without a solid succession plan. DFT is no exception. As part of our long-term planning, we've been considering deepening our bench. We have engaged a nationally recognized search firm to help us identify the best available candidates who can bring complementary strategic acquisition and business development strengths to our team and at the appropriate time, to take my role as CEO, and I would move to the Executive Chair. Our goal is to have a successful candidate in place as President by the end of first quarter 2014.

With that, I will turn over the call to Mark.

Mark L. Wetzel

Thank you, Hossein. Good afternoon, everyone. I want to cover 4 main topics today: our third quarter 2013 results, a capital markets update, a guidance update and lastly, our dividend.

For the third quarter of 2013, the company's FFO was $0.13 per share compared to $0.38 per share for the prior year quarter. The $0.25 decrease was primarily from the $0.38 charge for the early termination of a portion of the 2017 senior notes.

Normalized FFO for the third quarter of 2013 was $0.51 per share compared to $0.38 per share of the same quarter in 2012. The $0.13 increase is primarily due from the increased operating income, excluding depreciation. Normalized FFO, which is new for us, simply excludes the loss and debt extinguishment from FFO.

Adjusted FFO was $0.52 per share for the third quarter of 2013 compared to $0.32 per share in the prior year quarter, an increase of 63%. Our AFFO continues to increase as the ramp from previous lease signings burn off. As of today, we are 94% leased and 94% commenced with only a handful of recently commenced leases still in their free rent base period. In addition, for several of our existing mature leases, cash base rents exceed our GAAP base rents, driving the increase in AFFO.

Quarterly revenues were $96.3 million, our highest ever. This is an increase of $10.9 million or 13% quarter-over-quarter.

As to our capital markets update, there are several highlights I would like to discuss. The first one, which Hossein previously mentioned, was our 5.875%, $600 million senior notes due 2021. The proceeds of these -- of this issuance we used to fund the tender offer of our 8.5%, $550 million senior notes due 2017.

As of today, the old bond's tender and call process is complete and paid off in full. Q3 has a onetime charge of $0.38 per share, and the Q4 estimate is $0.11 per share. The annual interest savings with $50 million of additional notes outstanding is $11.5 million or approximately $0.14 per share as we start 2014.

In September, we entered into a $195 million unsecured term loan at LIBOR plus 1.75%, which matures in early 2019 with no extension. This loan included a delayed draw feature. We drew only $120 million in September, which was used to pay off $90 million on our unsecured line of credit. We exercised the accordion feature of this loan earlier this month and increased the term loan to $55 million, now totaling $250 million.

To date in the fourth quarter, we have drawn an additional $34 million. The remaining $96 million balance must be drawn by January 10, 2014.

We continue to improve our balance sheet. These 2 recent transactions have extended our debt maturities to 7.1 years and decreased our blended cost of debt to 4.8% with no debt maturities until 2018.

Our cash balance after today's call redemption is approximately $70 million. We have $96 million still to be drawn on the unsecured term loan. Our line of credit balance is 0. Therefore, we have the full $400 million available.

We have the capacity to fully fund the current developments, as well as the Chicago development, which we plan to start in the second quarter of 2014. Both current projects are on time and on budget.

As a reminder, the shell in Santa Clara is built, which is already funded and paid for at $60 million cost. We are completing the turnkey buildout of half of the completed shell with some funds spent in Phase 2b to ensure the redundancy of Phase 2a. Phase 2a cost estimate is approximately $12 million per megawatt or $108 million. Our pro forma estimate for Phase 2a is an unlevered return of between 9% and 9.5% on our invested capital based on the 50% pre-leased deal at hand.

In Ashburn, Virginia, we are building the complete shell in the parking lot for the entire 41.6 megawatts of ACC7 and the turnkey buildout of Phase 1 representing 11.9 megawatts or 29% of the available power. The overall cost estimate is $7.5 million per megawatt, excluding capitalized interest. We expect to spend about $170 million to complete the entire shell and the initial 11.9 megawatts phase. We have spent $68 million of this through September 30. Our pro forma estimate is an unlevered return of between 12% and 14% on this overall project.

A quick note on our stock repurchase plan. In September, our Board approved a new $80 million stock repurchase plan, which will now expire at the end of 2014. There have been no stock repurchases in the third quarter. Our strategy is simply to have this available as part of our overall capital allocation plan.

I now would like to discuss our fourth quarter and 2013 full year guidance and provide our 2014 low-end guidance. Our fourth quarter 2013 FFO guidance range is $0.43 to $0.45 per share, and our normalized FFO guidance range is $0.54 to $0.56 per share. The $0.11 difference is a result from the early termination charge from the call of the remaining 2017 senior notes.

The full year 2013 FFO guidance range is $1.43 to $1.45 per share, and our normalized FFO guidance range is $1.93 to $1.95 per share. The $0.50 per share difference represents $0.48 per share from the early termination of the 2017 senior notes and $0.02 per share from the Q1 secured loan payoff.

Introducing 2014 guidance, the full year low-end FFO guidance is $2.28 per share. The assumptions are disclosed in today's earnings release on Page 4. We expect revenues will exceed $400 million. EBITDA margins should remain constant at around 63%, and our free cash flow, after our common dividend and before development spend, should reach $100 million in 2014.

On October 15, we paid a $0.25 per share dividend to our shareholders. This represents annualized normalized FFO and AFFO payout ratios of 49% and 48%, respectively. As new leases commence and cash flow increases, our dividend will increase. It is still our company policy to distribute 100% of taxable income.

The thought I would like to leave you with, is our business is strong, our balance sheet is secure, and we are confident in our growth prospects.

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

Hossein Fateh

Thanks, Mark. Let me offer a few final comments and then we'll go to questions. We had a terrific quarter, and we're proud of our accomplishments. We've always said that leasing is lumpy, and our leasing results for the quarter proved that.

We're not going to rest on this success. We're going to work even harder to fill up our remaining space and pre-lease our new development.

The fundamentals of our business remain strong. The growth of the Internet is not slowing down. Only about 10% of data center requirements are outsourced. This leaves us a lot of business for our tenants to capture in which turn increases the demand for outsourced data center space.

My last comment today is to the DFT team. Thank you, all, for your hard work in leasing, in operating, in developing, in financing and growing our business. Your commitment means a lot to me.

With that, let's go to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Emmanuel Korchman with Citi.

Emmanuel Korchman

Hossein, going back to your comments on the President search. Maybe -- I know you mentioned that you're looking for someone that would be a good strategic and a business development sort of skill set. What else are you looking for in a candidate? Are you looking internally, Board members? Could you give us any more color as to kind of what you're looking at?

Hossein Fateh

Sure. We are -- we have a list of candidates that we've given to our search firm. It could be a real estate person, it could be an IT person, it could be a business development person. We would like to add someone that will broaden our management team. And with that, our search is primarily looking outside to broaden what we already have. I look forward to sharing my knowledge of data centers. We've been on the forefront of many things in data centers like looking at power per kilowatt, looking at construction cost per megawatt, latest is looking at rack density per vertical foot. But I also look forward to learning from this person some of the things that we could be better at like acquisitions. So we're excited to be able to have a new partner internally to work.

Emmanuel Korchman

Maybe your last point is an interesting one and given sort of the 5-month time frame from here on out, it's not a potential opportunity. But could M&A be the way you land someone or is that unlikely at this point?

Hossein Fateh

I mean, everything is possible, but we can't really comment on that.

Operator

Our next question is from Gabe Hilmoe with UBS.

Gabriel Hilmoe - UBS Investment Bank, Research Division

Mark, on the development at CH2, maybe I missed this. I think you talked about ACC7 in Santa Clara, but can you add any more color in terms of expected spend, pre-leasing needed for the buildout, anticipated yields, et cetera?

Mark L. Wetzel

Well, it's roughly a 25-megawatt building. Chicago tends to cost somewhere between Virginia and California. So probably $10 million a megawatt's the number. The buildout -- we'll build the complete shell probably at $150 a square foot on the shell and then the buildout of whatever we decide internally, it will be a smaller piece. You could call it anywhere from 25% to 40% of the buildout inside the building on a turnkey basis. So that's kind of the parameters around that. Returns, we would expect to be in that 12% -- 12% to 13%, 12% to 14% range similar to CH1.

Gabriel Hilmoe - UBS Investment Bank, Research Division

And then I guess, Hossein, kind of a bigger high-level question but just looking at kind of framing price in your markets. I guess I'm trying to get a sense on when maybe you're going up against the competitor for deal and how is DFT competing in those deals?

Hossein Fateh

In which market?

Gabriel Hilmoe - UBS Investment Bank, Research Division

Santa Clara.

Hossein Fateh

In Santa Clara, the majority of the tenants we have in that building are super wholesale tenants. We are competing very well right now. We're 100% full, and we have leased 50% of the space we're delivering. So obviously, we've had enormous amount of success. We've done better than we've expected in competing for deals. We think our product is certainly superior, and we believe that our operations -- and that doesn't necessarily mean me, it means the guys on the ground running the building -- are superior to anything out there. And we've had experiences where tenants have gone to someone outside of the DFT when we initially competed for a deal, and now they're back because of the advantages that we provide.

Gabriel Hilmoe - UBS Investment Bank, Research Division

Okay, I guess has your ability to maintain price remained pretty flat over say, the last 6 months?

Hossein Fateh

Yes. I think that's correct. And in fact, we've had a little bit of an uptick in Virginia on price.

Operator

Our next question is from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Wanted to see if I could get a sense of guidance a little bit. You gave this low-end number, which is a healthy bar to be setting. But could you maybe frame up the opportunity, in terms of the high end, what that might look like if you were to actually assume some level of leasing?

Mark L. Wetzel

Well Jordan, obviously, that's what we're going to work on over the next 90 days. The issue is we don't have a lot of inventory to lease so we're bringing on 2 buildings in the second quarter of '14. So we're -- if they opened 100% full, we only have a half year run rate on those 2 buildings. And then a little bit of lease-up in VA3 will help. And then New Jersey probably similar to this year to '14, we may not put any guidance in there for '14 for New Jersey as we did this year. So the high end is still a work in progress. We wanted to get out there and put a low end because we're pretty comfortable with it. And as in the past several years, we had kind of goal post of $0.10 to $0.15. That's probably close. But we'll fine tune that over the next 90 days.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

What are the prospects -- so it sounded, Hossein, like in your commentary that New Jersey was picking up, I think, you were making reference to at least on the quarter. But is that -- you see something more behind that? And maybe could you also sort of frame up the traffic and potential to sort of backfill the rest of VA3?

Hossein Fateh

Sure. Let's start with New Jersey. Our experience has generally been that we delivered that building for financial tenants, and we delivered it in the midst of the financial crisis. So now, we've got more than 50% of the building leased. The second half of the building and always the second phase of each building leases faster than the initial phase of each building. And we're in that time frame where we're starting to see not only financial tenants be touring the building, but also we're seeing some traction from organically growing within our existing 9.1 megawatts. So I'm cautiously optimistic that the second half of the building will lease much faster than the first. And with reference to VA3, I think we barely have 3 megawatts of space left. And we have no space delivering in Virginia until probably close to end of the second quarter of next year. So with only approximately 3 megawatts, that's not much inventory to work with. I mean, in reality, I wish we had more space in Virginia because in the last year while we were optimizing the delivery of ACC7, we've certainly lost tenants due to having no space available.

Mark L. Wetzel

And, Jordan, we're on commenced leases. I mean, we commenced roughly 32 megawatts of capacity in 2012. With the lease that just commenced October 1, that put us at 94% commenced, we're at 30 -- we have 33 megawatts of leases commencing so far in '13. It's going to be hard to replicate that in '14 until we get this inventory out there and available.

Hossein Fateh

This is being our best quarter ever in terms of leases commenced.

Mark L. Wetzel

Best year.

Hossein Fateh

Best year ever in terms of leases commenced.

Operator

Our next question is from Jonathan Atkin with RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Yes, I'm interested in what you're seeing in terms of power densities requested by customers whether that's changed over time, and in particular whether there's any notable differences by markets. And I guess where I'm leading here is just how you deal with demand that maybe had a lower power density than what you've engineered the building for, and does that limit your revenue potential at particular sites and maybe influence some of your design decisions going forward?

Hossein Fateh

Well, I think we need to look at New Jersey separately from the other 3 markets. In the other 3 markets, we are seeing power density typically going higher and higher and higher. And we're now with the advent of the superthin server used, our buildings will remain the highest quality buildings, and they really are the most dense in the market as far as power density. So the longevity and usefulness of our buildings are the best in the market. In terms of New Jersey, yes, we're having -- we almost have too good a product in terms of power densities. But what we've managed to do engineering-wise is rent parts of the building out at lower densities, and then shift the available load to the Phase 2 of the building. That's what we did with this last tenant and it worked out extremely successfully. We can move both the cooling load and the electric load of the building, anything that remains in Phase 1, into Phase 2, assuming they don't use all of it in Phase 1. So all in all, we're in a great position, Jon.

Operator

Our next question is from Bill Crow with Raymond James.

William A. Crow - Raymond James & Associates, Inc., Research Division

Mark, could you just close the gap of -- you gave us the low end of guidance for next year, and you talked about paying out 100% of taxable income. Where does that put the dividend next year at a 100% taxable income based on the low end of guidance?

Mark L. Wetzel

It's a pretty strong increase at this point, Bill. We've got drafts of what we think that is. I'm not going to stick a number out there yet. But at a 50% payout ratio, assuming that's the right track, you can do the math to get there. But it's -- it'll be a sizable increase as we think about dividend for next year.

William A. Crow - Raymond James & Associates, Inc., Research Division

Okay. And then, Hossein, one more time. I think we've discussed this before, but I think you said 9.5% unlevered return on the second Santa Clara project. Is that correct?

Hossein Fateh

That's about right, but also it's important to note what our return will be on the new invested money because we've already have $60 million invested in the shell and the underground features and parts of the substation in Phase 2. So the new money invested in Phase 2 will give us approximately 14% unlevered money.

William A. Crow - Raymond James & Associates, Inc., Research Division

No, I guess I understand that, but you got to put it against the total expenditure.

Hossein Fateh

Sure. Absolutely. If you look at the total, 9% to 9.5% is about right.

William A. Crow - Raymond James & Associates, Inc., Research Division

So as you think about future capital allocation, would you tend to aggregate your investments more in the Midwest and Virginia where you can still reach unlevered returns of 11% or 12% or 13%? I mean, why allocate -- beyond this next phase, why go into California if it's going to be 9.5%?

Hossein Fateh

Well, I think returns will go up and down based on market vacancy and based on demand. Those things will shift. I think, it's important for our customers that we're active across the country. As you've known in the past, we have many tenants that rent with us in 3 of -- 3 of the 4 markets. And those customers like signing one deal and with one handshake and having a platform to be able to expand across the country.

William A. Crow - Raymond James & Associates, Inc., Research Division

Right. Okay. And then finally is -- did I understand correctly that at least over the last few quarters, rental rates that you're seeing out there whether they're in the market, your portfolio or other, is it fair to say that rents have at least stabilized here, that we're not seeing continued pressure downward?

Hossein Fateh

We're certainly seeing that, yes.

Operator

Our next question comes from Young Ku with Wells Fargo.

Young Ku - Wells Fargo Securities, LLC, Research Division

Maybe this question's for Hossein. We've been hearing that there is a major tenant of yours that subleases their space or at least looking to sublease their space. Just wondering if you can comment on the subleased kind of trend and how that has trended recently and whether you see that as a potential long-term risk.

Hossein Fateh

I'm glad you asked that question because we're seeing some of that noise in the market, and I wanted to differentiate markets. In California, it's well-publicized that Facebook has a significant amount of market space on the sublease market in Northern California. And -- but for us, we have leased approximately 15 megawatts of space since that time to other tenants. Subleased space, it is difficult to lease out because it really, in many instances, needs a tri-party agreement between the landlord, the old tenant and the new tenant. So it's a little bit more difficult. It's certainly more difficult than renting out primary space in mission-critical space like data centers. Now let's go to Virginia. In Virginia, we haven't seen any of that tenant looking for -- putting any space into the market. In fact, that tenant is having a difficult time keeping up with their own demand on the East Coast. I think that answers your question.

Young Ku - Wells Fargo Securities, LLC, Research Division

Okay, now, that's helpful, but just following up on that. So the yields in Santa Clara at 9% to 9.5% is lower than kind of Virginia and Chicago at 12% to 14%. And it looks like there's a sublease kind of flag in Santa Clara then even if you got that 50% pre-leased deal at SC1 Phase 2, I mean, does it make sense to spend your incremental capital there?

Hossein Fateh

I think that is exactly the question that was asked. I believe yes, it does. We did get that pre-leased and 50%. So the way we're analyze -- the way we're dealing with our risk is to build in smaller increments. We're building 9.1 megawatts where half of it is pre-leased. What our customers really want is the -- what our customers really want is a platform to build across the U.S. in each market where they can take space in multiple markets. Also bear in mind that the new money invested in Santa Clara is going to earn a 14% return because we've already have $60 million invested in that market.

Young Ku - Wells Fargo Securities, LLC, Research Division

Sure, okay. That's helpful. And did I hear you correctly that rents in Virginia actually went up?

Hossein Fateh

I mean, it's tough to say when we're talking about a such a small subset. But we have seen that rents have stabilized, and they're ticking up, yes.

Young Ku - Wells Fargo Securities, LLC, Research Division

Okay. So they are picking up. What do you think is driving that? Is that kind of demand accelerating or is there kind of lack of supply in that market?

Hossein Fateh

I think maybe a bit of both.

Operator

Our next question comes from Rob Stevenson from Macquarie Capital.

Unknown Analyst

This is Van Kett [ph] in for Rob. Your renewals this quarter had lease terms between 3 and 5 years, and the new leases were around 6 years. Just wondering is 3 to 6 years where the tenants are driving lease length these days or is there something peculiar about this quarter?

Hossein Fateh

Well, I think -- I'm glad you asked that question, Rob, in that the particular tenants you're talking about is a 5-year lease. But they have an early termination in year 3 with a penalty. So because of the size of that penalty, we counted it as a 3-year lease. So I don't think there's anything new with that. Lease terms are a function of price and credit and how much we want that new tenant. All in all, we do believe that the large multi-tenant buildings can accommodate lower lease terms. And if our tenants really want lowered lease terms to be able to outsource their requirements, that's where we should be going. And that gets the tenant to be able to approve these leases with a lower level of approvals than going all the way to the CEO or the Board. If it's a 3- or 5-year lease, it's a lower commitment for that company than a 10- to 15-year lease. And that with -- so they can take advantage of outsourcing, and we're an outsourcing company.

Operator

Our next question comes from Jonathan Schildkraut with Evercore.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

I guess the first question, I just wanted to get this right, Mark. Was in terms of thinking about where we are today to bridging to your bottom end of the guidance for next year, I'm looking -- I think you only have like 1.7 megawatts of stuff that was sold and not commenced. And maybe you indicated in the call that something had commenced in the beginning of October. So I'm just trying to get a sense as to what is not commenced at this point, and then maybe to help us understand what's going on, maybe give us a sense as to what's moving from a noncash to kind of the cash pay on the commencement side? And then my second question has to just do with kind of sort of connectivity. I noticed that you guys placed somebody on the Open-IX Board and just wondering what your perspective on Open-IX is? As well as maybe interconnecting your facilities either within region or across regions as some of your competitors are doing.

Mark L. Wetzel

Sure, Jonathan. Well, Q4 is what it's going to be a $0.55, multiply that by 4, and that's $2.20. So to get to $2.20 is not really big stretch. The -- we are 94% leased and commenced as of October 1. So we have the 4.5 -- 4.55 megawatts commencing the day we open the doors in Santa Clara, which we hope to be either April 1, May 1, worst case June 1. So that will commence immediately and run the rest of the year. The escalations around all the leases that we have are in place. The capitalized interest for Q4 should on a run-rate basis match the overall capitalization for 2014. It's heavily weighted in Qs 1 and 2 because of these 2 developments, but those are the main drivers to get to where we need to be and then obviously, the interest savings overall.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Yes, I was wondering about that. If you're going to be launching construction of Chicago in the middle of the year, why would capital interest -- capitalized interest be taking such a big step down?

Mark L. Wetzel

Because all we're capitalizing on is the 15 million of land, and then the Bell curve spend doesn't really start until July. So we're spending money on designing the building, but the big -- the heavy lifting doesn't take place until the building starts to go vertical and the equipment is ordered, which honestly will be in the second half, late in the second half of the year.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

All right. I understand. And maybe Hossein or Mark, if you can offer some color commentary on the Open-IX and interconnection stuff that'd be great.

Hossein Fateh

We certainly believe that it's the right thing for the U.S. market to endorse some form of Open-IX. It makes a lot of sense. Many of the customers are demanding it. If you look at the Board of Open-IX it's really who's who of the Internet is on there. And we believe some form that makes absolute sense, and we are working to try and get some of the European exchanges and some of our data centers. And be on hold for announcements that we'll make in that regard.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Great. And the interconnecting of facilities either across your campuses, say, in Nova or across the U.S. as some of the competitors have done, have you guys considered that at all?

Hossein Fateh

Well, that's exactly the announcement I was referring to.

Operator

[Operator Instructions] Our next question comes from Jon Petersen with MLV & Company.

Jonathan M. Petersen - MLV & Co LLC, Research Division

Just a quick modeling question. In terms of straight-line rents they went positive in the quarter, which really helps to boost your AFFO. I'm just trying to get a idea, is there anything one time in there that we need to consider? And then going forward with all the leases you signed. Is there any free rent up front or anything like that to consider as we look at straight-line rent over the next 4 quarters or so?

Mark L. Wetzel

Yes, there's still a little bit of burn-off on some additional leases, but AFFO has turned. It should stay that way as we think about the next couple of quarters. But it's really a function of the commenced. The one commenced lease at October will affect a little bit of Q4 and then there's some burn off of some additional ones that will happen as we think about the first quarter of next year.

Jonathan M. Petersen - MLV & Co LLC, Research Division

Okay. And in the new leases you signed is there any free rent in any of them, the 11.7 megawatts?

Mark L. Wetzel

Well 4.5 of that was pre-leased starting in Q2 of '14, but there's none on that. So the super wholesale tends to not have any, but a couple of them -- several of them have a couple of months free, but that's about it.

Jonathan M. Petersen - MLV & Co LLC, Research Division

Okay. And then just a question for Hossein. In terms of your some of the larger like Internet super wholesale tenants, obviously, a headwind is a lot of these guys building their own data centers. It's been talked about time and time again. Facebook is out there subleasing space, but from what the market says Microsoft is one of the people that recently signed a lease with you guys. I know you won't talk about specific tenants but just wanted to get your thoughts on some of these Internet super wholesale tenants why when they are building some of their own data centers, why they're also leasing from you guys? And maybe kind of highlight some of the benefits they get from leasing your locations versus maybe some of the locations that they're in secondary and tertiary markets. Just trying to get a sense of how these guys think from your conversations with them.

Hossein Fateh

Sure. First of all, from any company also has an internal charge when they build their own of the cost of their own money. That's not -- that charge typically is much higher than what they are earning in the cash sitting in the bank. So that's how they internally look at it. From one of my conversations with one of our super wholesale tenants, I'm told what we're charging them in a super wholesale rate, it comes to about the same as what they internally charge themselves. But we're giving them more flexibility in many instances. Sometimes, in terms of a 5-year lease, sometimes it's in terms of a just-in-time inventory. That we build -- whatever -- 50 megawatts across our platform where they may not be building 50 megawatts. Suddenly if they have a spike of demand and they have an acquisition and they have a product that takes off, they can come to us and get space immediately as just in time. There are other times that they need to be in a geographical location that they're not in, and that geographical location because of some latency issues is where they want to be. And they don't necessarily have space in that location. So all in all, I think that outsourcing is here to stay with the large tenants, as well as the small tenants.

Jonathan M. Petersen - MLV & Co LLC, Research Division

Okay, how important do you think the location, the geographical location is? Because you look at where a lot of them are building in Prineville, Oregon, North Carolina, it's not the main data center hub markets that you guys are located in. How important is that?

Hossein Fateh

It depends on application, right? Some applications need to be right there, call it trading. Some applications need to be within a city's geographical location. Some applications can be up and down the East Coast. So it really depends what application they're running, which will determine where how sensitive that location is.

Operator

Our next question comes from Dave Rodgers with Baird.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Yes Hossein, if you could address this, if you did already, I apologize but I didn't hear it. Can you talk about kind of what the acquisition market looks like today, given kind of what happened to the data center REIT stocks this year? I mean does that had any kind of change in how the private market has viewed data centers just kind of given the relative comp? And I guess I'd also say is there any relative change given DLR's recent announcement of the credit tenant trade that they had put out there?

Hossein Fateh

I actually have very little to say about that because we really have not done anything so far in that market. I think, I mean, the only thing I can say is that the -- any acquisition that would happen under private market, the public guys look at what their valuations are, and look at their multiples. And of course, they'll want to have some incremental accretion to their own stock when they make those acquisitions. And obviously we all know the multiples are not what they were 5 years ago. So -- but having said that, we've seen very little activity in the last 6 months to speak of. So with so little activity, I can't really say -- I don't really have much data on it.

Mark L. Wetzel

Dave, this is Mark. We've seen a few packages come across our desk on a sale-leaseback basis, but they tend to be single-tenanted buildings. So it's really just quality of the building obviously, but the price as well. Does it make sense and how long of the lease can we get? But as you can appreciate, single-tenanted buildings have a different set of risk factors than our multi-tenanted. We like multi-tenanted, and that's been a strategy since the IPO.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then if I could on the CEO search, I mean, the announcement in itself a little bit unusual in that you're essentially finding a replacement as opposed to a successor kind of in my view. And I'm wondering in terms of has the Board put out any packages in term of strategic alternatives? Have they had any discussions around strategic alternatives, have you thought about that? And maybe asked it a different way, why is the successor route a better opportunity right now than a strategic alternative for DFT?

Hossein Fateh

Well, we believe that the company is a great time for growth right now. It's a great time right now for our company. As a core founder, as a cofounder of the company, I think of DFT as really one of my own children. In the last 6 years, we have built a campus environment in 4 geographical locations. In that campus, we survived the financial crisis. We issued no dilutive equity during the financial crisis. We have issued bonds recently, have a very strong balance sheet that we're issuing bonds below 6%. Our version 3.0 data centers are just coming out, which we've worked the last 5 years in getting. So it's with all these things done, the next step of having a great company is to have a good succession plan in place. So that's where I can really comment on that the timing of the succession is right because we've done everything else correctly so far. With reference to strategic alternatives, we feel it's a great time for growing our business, and we're focused on that.

Operator

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

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

I just wanted to circle back to the succession plan a little bit if I could. Hossein, I think you gave a little bit of color in terms of the type of person. You said it sounds like it's definitely an external search in terms of trying to broaden or deepen the bench. So could you confirm that, #1? And then separately, does this person have real estate experience or is it TMT experience? What sort of requisite, what does this person bring to bear that diversifies the skill set? What would -- that you've told the search firm to look for?

Hossein Fateh

We're having a very broad search, and that's one of the reasons we think it will take some time to find the right person. We have -- it's mostly regarded externally because we want to deepen our capabilities. And as far as -- we're looking for the right candidate. We want to make sure that, that candidate blends in well with the culture and with the rest of the management here. And we are -- we have given some names ourselves to the search firm, and those names, some of those guys are real estate guys. Some of those guys are business development guys. Some of those guys are more in the IT or data center world. So we want to make sure it's the right person. Of course, real estate and data center experience will help. But until -- it's a little bit, Jordan, like a looking for a wife. So when you have the right person, we'll know it. But beforehand, it's difficult to put the...

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

To spell out all the characters.

Hossein Fateh

Exactly. To develop all the categories.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

That's fair I guess. So the other question I had, and I may have missed this. I apologize. On the upcoming lease roll, the remaining 4 leases in '14, are those expected to see a similar trend to the ones that were renewed in the quarter, the plus 1% GAAP, down 11.5% cash?

Mark L. Wetzel

Yes. Jordan. There's 3 tenants, it's 4 leases. One of them expires on November 30. The other 3 on 12/31. So it's really no effect on '14. It's really about '15, and we would -- they're non-super wholesale. So there's some smaller tenants. We would expect it to be similar.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Similar, okay. And it sounds like you have a pretty good bead on them right now because you're saying you expect to renew them all.

Mark L. Wetzel

Yes.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So I assume you've had discussions and it's going well.

Mark L. Wetzel

It's early in the game, but we -- they're using the space, they're pulling power, they are refreshing their rooms. So we feel good about it.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay, okay. And then lastly, Hossein, could you maybe speak to the land valuation in Chicago? I know you took down this piece of land to develop it. And on a per acre basis, it kind of seems like a significant number, and yet this is not necessarily big enough acreage to build the blueprint, the prototype development so you've got to sort of alter the design a little bit. Can you maybe just...

Hossein Fateh

Well, I mean, the location for a data center is nearly as strategic. Being directly across the street, you could throw a tennis ball from this side of the street to the other and hit it. That's where we really want to be. Did we maybe a little bit pay a premium to get it from ProLogis? Yes, probably. Do I feel that it was worth the premium because it was strategic? Yes, absolutely. The campus environment of the data center where we have consistent organic growth from one campus, one data center to the other is where the leasing becomes easier and where we create. And that's where we need the easy money and the low hanging fruit. To pay for that low hanging fruit when the cost of land is less than 3% of the overall cost of the data center, the strategic nature of it, it's definitely worthwhile to pay a little bit more and get the location you need.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. And that's -- is that a raw land price?

Hossein Fateh

I'm sorry. Could you repeat that.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Is that the price for raw land?

Hossein Fateh

Yes, exactly.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay, okay, there's no, I mean, there is no improvements, right?

Hossein Fateh

No, no. It's raw land. There was a building on there. It's being taken down. So it's raw land.

Operator

Our next question is from Emmanuel Korchman with Citi.

Emmanuel Korchman

Hey, Hossein, a couple of questions. One, when you talk about your super wholesale deals especially with large Internet tenants or your current tenant base, you mentioned that depending on the application that would drive their location, et cetera. So when they come to you, do they typically sort of talk to you about a specific application? Try to get into a specific asset or do they internally bundle and say, "Yes, we need to put a search engine in this facility, and we need to put a picture hosting engine in this facility, and we need to do a mapping application in this facility." And they come to you and say, "We, as user XYZ, need this much space."

Hossein Fateh

Well, sometimes we know the application, sometimes we don't. That depends on the tenants and depends on who we're talking to. And some of these guys change from one tenant to the other. So sometimes, we have that visibility, and sometimes, we don't. Typically, after the fact that the tenant occupy after a year or 2 of our people working together, we have a better concept of what application is in there.

Emmanuel Korchman

Got it. And then as we sort of look at your portfolio, you're certainly geographically concentrated in your core markets. And we've spoken at length in previous conversations about new potential markets, is that something that's sort of possible in the near term or is it as open as it's ever been?

Hossein Fateh

Not in the near term. I mean, at the moment right now, we're in a very exciting time to capture low hanging fruit. This is the moment that Lammot and I set out to be in 6 years ago when we went public, where we have a mature campuses across 4 geographic locations. We can expand right now in 3 of the 4 locations, and we'll have organic growth from our other tenants. So this is really the time to reap the benefits of the low hanging fruit. So at the moment, if we have a solid pre-lease, we may go to a new market. Otherwise, we're focused on picking up those low hanging fruits.

Emmanuel Korchman

And so looking forward, we should kind of be modeling 1 to 2 new developments in existing markets a year, is that sort of appropriate?

Mark L. Wetzel

Not new markets, the existing markets.

Mark L. Wetzel

Yes, That's correct.

Hossein Fateh

In the near term.

Operator

There appears to be no further questions at this time, so I'd like to turn the conference back over to Hossein Fateh for closing comments.

Hossein Fateh

Thank you, all, for joining us today.

Operator

Thank you very much. The conference has now concluded. Thank you for attending. You may now disconnect.

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