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Executives

Chris Warnke - Manager, IR

Hossein Fateh - President and CEO

Mark Wetzel - EVP, CFO and Treasurer

Analysts

Jordan Sadler - KeyBanc Capital Markets

Michael Bilerman - Citi

Mark Montana - Citi

Chris Lucas - Robert Baird

Romeo Reyes - Jefferies & Company

Sri Anantha - Oppenheimer

Bill Crow - Raymond James

Ross Nussbaum - UBS

David Harris - Gleacher

Dave Rogers - RBC Capital Markets

DuPont Fabros Technology, Inc. (DFT) Q1 2010 Earnings Call Transcript May 5, 2010 10:00 AM ET

Operator

Good day and welcome to DuPont Fabros Technology's first quarter 2010 earnings conference call. Today’s conference is being recorded. At this time I'd like to turn the conference over to Chris Warnke, Investor Relations Manager for the company. Mr. Warnke you may begin your conference.

Chris Warnke

Thank you. Good morning everyone and thank you for joining us for DuPont Fabros Technology’s first quarter 2010 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 last night which is available in PDF format in the Investor Relations section of the company’s corporate website at www.dft.com. 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 our first quarter earnings call. As noted in last night’s press release, we again delivered a solid quarter of operating results which were at the high end of our first quarter expectations. We are very fortunate to have an extremely dedicated team and I thank them for their efforts and contributions to the company. Leasing remains a top focus for us and our sales and operating team has done a tremendous job to cultivate new tenants over the past two years and is continuing to pay off.

In the first quarter of 2010, we signed two new leases and seven additional leases on the second quarter. Nine leases represent six internet tenants, two enterprise tenants and one reseller. All are triple net with weighted average lease term of 8.6 years. Six of the leases are with new tenants and three are with existing tenants. Two of the leases are expected to commence in the second quarter of this year, two in the third quarter, four in the fourth quarter and one in the first quarter of 2011.

When you include leases executed in late 2009, commencing in 2010 and the recently executed leases expected to commence in 2010, they are expected to contribute incremental revenue of approximately $16 million in 2010. Because we anticipate that this revenue it was included in our 2010 guidance. More importantly the 2010 commenced leases and one that commences in 2011 are expected to contribute incremental revenue of approximately $42 million in 2011.

The contracts value of these leases to the company is approximately $358 million over the respected lease term. Last week we renewed a lease which was scheduled to expire April of 2011. This renewal was for an additional five years and included a 20% increase in base rent. This lease represents less than 1% of our annualized base rent. We take great pride when our tenants renew expiring leases with us.

Our three top tenants Microsoft, Yahoo! and Facebook represent 65% of our annualized base rent as of quarter end, down one percentage point from year end. We are very pleased that Phase 1 of Chicago is now 100% complete. We opened the facility in 2008 when not too many companies were making decisions from that point through most of 2009. We always knew the quality and efficiency of the asset would generate demand for the space and the leases would executed. As previously stated we expected the 12% unleveraged return on this asset and we have achieved that.

ACC5 Phase 1 in Ashburn Virginia is now 100% leased within eight months of its opening. Supply is limited or non existent in Northern Virginia for the types of high end quality products we develop. We are delighted to have Phase1 completely leased up within such short period of time. ACC5 Phase II development efforts remain on time and on budget to open in the fourth quarter of 2010.

As of today, we are 88% preleased on ACC5 Phase II. We expect to be 100% preleased by the time we open this year. Based on our cost to complete and anticipated rent, we expect our unleveraged return on both phases of ACC5 to exceed 15%. But Piscataway New Jersey development is on track and on budget to be completed in the fourth quarter of this year. We are actively preleasing this project, our pro forma assumptions are 12% unlevered return. We expect to be fully leased in 24 months from delivery.

We firmly believe that demand for our highly quality wholesale data centers remains promising in all our markets. We continue to remain a development growth story. We like Santa Clara and believe the market remains very good in this area. It is a logical next new development for us. Northern Virginia continues to experience a shortage of supply and in the near term, we don’t see rents softening for the quality of data centers we bring to the market.

We also would like to begin development of ACC6. Based on the new site layout, each phase of the ACC6 is expected to be 13 megawatts for a total of 26 megawatts of critical load. On both Santa Clara and ACC6 we expect construction for each will take approximately 12 to 14 months from commencement. We are currently working through the permit process for both projects, but timing remains open at this point.

We will not begin development of either projects until we are fully funded. We do look at acquisitions that may make sense, but our priority remained focused on prudent development of the entitled land we have on our balance sheet. For our future development, we expect to achieve unleveraged return of 12% to 15%. Now I will turn the call over to Mark who will take through our financial results.

Mark Wetzel

Thank you, Hossein. Good morning everyone and thank you for joining us today. I want to cover four key topics today. Our first quarter results, our Q2 and full year 2010 guidance, the capital markets update and an update on our 2010 dividend. For the first quarter of 2010, the company’s FFO was $0.30 per share compared to $0.25 per share in the first quarter of '09. Revenues were up 22% in the same period. Specific to our first quarter results as compared to Q1 '09, the $0.05 per share of FFO increase represented $0.12 of increased operating income offset by $0.07 of higher interest expense.

Total interest cost expensed to the P&L in Q1 2010 amounted to 74% of overall interest incurred as compared to 79% last year. Quite simply we had higher overall debt balances. FFO for the first quarter of 2010 was at the high end of our published guidance range as Hossein previously mentioned. AFFO was $0.18 per share for the first quarter as compared to $0.19 per share a year ago. Cash rents increased quarter-over-quarter, but enough to offset the increased interest expense incurred.

Our Q2 FFO guidance range is projected at $0.30 to $0.34 per share. We are reaffirming our previous provided annual 2010 FFO guidance range of $1.25 to $1.45 per share and feel comfortable at that midpoint.

Now to a capital markets update, we continue to work, finalize an unsecured line of credit. As of today it looks to be an $85 million line commitment with an additional $15 million accordion feature available. We will provide the details when complete. As a reminder, we have less than $10 million of secured loan principal amortization over the next two years assuming a one year extension on the ACC4 secured loan, we have no debt maturities until October of 2012.

We are fully funded to finish both developments in New Jersey and Ashburn Virginia. As of quarter end, we had over 116 million of cash in short term securities on the balance sheet with approximately 125 million of cash required to complete both developments.

This 125 million includes the 23 million of construction cost payable on our balance sheet as of quarter end. As of today, we have approximately 140 million of cash on hand and will spend approximately 105 million to complete both projects.

Finally, we will continue to pay a quarterly 2010 cash dividend. Our policy is to meet the 100% taxable income level for retesting purposes.

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

Hossein Fateh

Thanks Mark. Our sub priorities at this point so far to continue to lease up Phase II of ACC5 and Phase I of New Jersey. To complete the development and open Phase II of ACC5 in the fourth quarter of this year. To complete the development and open Phase I of New Jersey in the fourth quarter of this year. To maximize property operations by taking great care of our current tenants hence providing organic growth for new leases.

And lastly, we begin Phase I of Santa Clara and Phase I of ACC6 when we have security available funds to do so. We will financially optimize what we believe is in the best interest of our bond holders and shareholders.

With that, we will be happy to open up the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

What’s the expected total cost of Santa Clara and then ACC6? And while you are at it yields, I know you have touched on it, but I missed it. And then how do you expect to fund it?

Hossein Fateh

Well let’s take it one at a time, the total cost of both is approximately $350 million additional.

Jordan Sadler - KeyBanc Capital Markets

$350 million?

Hossein Fateh

The expected yield are 12% to 15% on more large amounts, how we expect to fund is that we will optimize what we believe is in the best interest of our shareholders. But we know that we expect our line to be available for approximately a 100 million, and we have some cash left, so the delta of what we needed additional money for, approximately 200 million. And that 200 million we are going to optimize what we believe is in the best interest of everyone to get and for our bond holders and our share holders.

Jordan Sadler - KeyBanc Capital Markets

Okay and out of curiosity if you would have redo your bond deal and I guess it’s hard to sort of speculate after these results are out any further spread now, but to you know sort of replicate the transaction you did in December, where do you think it prices on the bond deal?

Hossein Fateh

Well I think, things keep on getting better, the market is getting better, I think for the time that is lost, I am extremely pleased on our execution. We are bond currently our trading I can tell you that, that about 7.8% if you look at up, that's what they are trading at right now. So I guess that's your answer.

Jordan Sadler - KeyBanc Capital Markets

Yes, that’s a good indication.

Hossein Fateh

Yes.

Jordan Sadler - KeyBanc Capital Markets

Okay, lastly just as you think about ACC6 and Santa Clara, I know you had done some preliminary work on Santa Clara, can you just maybe talk about the availability of power at both sites?

Hossein Fateh

Both sites it's going to be.

Jordan Sadler - KeyBanc Capital Markets

About Santa Clara and do you have remaining capacity in terms power in Northern Virginia as well?

Hossein Fateh

We do, we are building a substation that we purchased the land that is dedicated to our campus and is expandable, so the (inaudible) of substation capacity not power from the high voltage lines and our substation as expandable so not a problem for us in Virginia at all. And in Santa Clara we have talked to the municipality and it's not a problem to get power there for both project.

Jordan Sadler - KeyBanc Capital Markets

Did you build the substation there as well?

Hossein Fateh

Well the substation is not built yet but, we have room for it and in Santa Clara the high tension line there again very close and the substation is going to be on our site. So there is no substation capacity problem in either location and both locations have power, high voltage power available.

Operator

Next we have from Brendan Maiorana with Wells Fargo.

Unidentified Analyst

Yes, good morning. This (inaudible) here for Brendan. Just had a question regarding your CH1 project. You said that the return was on an unlevered basis 12%. Now does that include carry costs?

Mark Wetzel

No. It’s really a stabilization.

Unidentified Analyst

Okay. And if you did include the carry cost what would unlevered return kind of be?

Hossein Fateh

Well the carry cost during the lease up, you mean during the lease up period?

Mark Wetzel

Yes.

Mark Wetzel

It was couple of pennies from August of ’08 till now in terms of that carried. So it was a little north of 12 so it might be little south of 12 but it’s in that 12% range. I mean I looked at the latest numbers. It will still hit a 12% return.

Unidentified Analyst

And could you also characterize in types of tenancy you have signed that in Chicago?

Hossein Fateh

We don’t get into details, but there is I think Mark what, he said shift this nine leases were six to internet, two enterprise and one re-seller. That was across both facilities. So that’s a similar mix in Chicago.

Unidentified Analyst

And just going to your leases for the capital projects, I mean the new developments. Could you explain why you guys haven’t pursued the equity offering option yet? Your stock is north of $23 now.

Mark Wetzel

I mean the focus was on leasing. That’s what we said we’re going to do and that’s what we wanted to do and that was our focus over the last 100 days. So, we didn’t want to get ahead of ourselves, we wanted to take the risk out of Chicago and that was the main objective.

Unidentified Analyst

So now that the Chicago has been fairly steady, you guys might be more open for such a route then?

Mark Wetzel

Well, it’s the same stage and we’ll look to optimize what’s the best decision for the shareholders in the bondholders we have evidence to consider we have shareholders to consider as well. So, if we just look at that over the next several months and see what we are at.

Unidentified Analyst

I don’t know Mark maybe you might have mentioned this but the new credit facility that you guys are looking at the $85 million. Did you say what the rate would probably be?

Mark Wetzel

No I did not its still in process, we are once we finalize all that we will look something else.

Operator

Next up we have from Michael Bilerman with Citi.

Michael Bilerman - Citi

If you and Lammot are selling stock personally does that have an indication that you are more willing to sell new stock to the market?

Hossein Fateh

I think that’s not an indication at all because Lammot and I mean we will issue equity at the appropriate time for the company. But has nothing to do with what the Lammot and I maybe doing personally, with Lammot and I each solved less than 5% of our total holding and we still each hold more than 4.5 million OP units so our interest of pulling the lines with shareholders. What we solved is just a pay off mortgages and pay some taxes and as well to speak with. So nothing to do with

Michael Bilerman - Citi

And then Mark in terms of the high yield you have some I guess required paydowns over the likes of the bond. Can you just walk through the cash that is earmarked for those paydowns and I guess a new high-yield bond deal, would that accelerate any of those pay downs?

Mark Wetzel

No the deal what we did in November, December was a 550 million deal. There is $125 million paydown in year six, $125 million in year seven and the remainder in year eight. So you are marking cash for that, I am more worried about the secured loans because they come in front of that.

Mark Montana - Citi

I am just interested on the ACC6, why the deviation away from the your flagship 18 megawatt facility into a 13 megawatt, is there something you're seeing there?

Hossein Fateh

No, the site layout didn't quite fit the layout that we wanted to put in and we didn't want to go two storeys, so we decided to just cut it a little bit on each side.

Mark Montana - Citi

You talked previously about how you become so efficient at this 18 megawatt?

Hossein Fateh

It is. The efficiency doesn't go hugely down going from 26 megawatt to 36 megawatt, it's still going to be a very efficient data center, still a very large data center.

Mark Wetzel

It's basically just one off each side.

Mark Montana - Citi

On the renewal that you recently completed and you mentioned 20% spread, when was that lease originally signed?

Hossein Fateh

It was signed pre-IPO

Mark Montana - Citi

Pre-IPO, okay, how many years before? Two or ten?

Hossein Fateh

It certainly wouldn't be 10. I would off the top of mind say five years ago. And frankly, the 20% was a cap that they had, so we could have increased that much more than that, but they had the cap that it couldn't go up more than 20%.

Operator

Thank you. Next we’ll hear from Chris Lucas with Robert Baird.

Chris Lucas - Robert Baird

I guess Mark, let me start with you. On the guidance, you pretty much at this point know the timing and the rate on lease up through the rest of year for you projects that have availability. What’s the wild cards in your mind in terms of why guidance wasn’t tightened up?

Mark Wetzel

Well it's first quarter, typically we have not changed guidance in Q1. We just locked these leases down literally in the last of couple of weeks. The issue of a solid one middle point is real. Interest expense is a factor, the capitalization of interest is a factor and then, the opening of the doors in the fourth quarter or the two buildings. So we will look to update probably Q2, a lot little more color.

Chris Lucas - Robert Baird

Hossein, can you give us some color on what you are seeing in New Jersey in terms of traction for the lease up there? I know it's early but just curious as to what you are seeing in the activity levels?

Hossein Fateh

The activity level is good. We’re pleased with it. We have tours once or twice a week. We had an open house and a whole load of brokers and kind of local data center people came to. Everyone is saying that it was the most impressive building built in New Jersey that they had ever seen. And there is excitement in the markets that this product is coming to market.

And also, there is a lack of overall data center space in the entire country. But having said that I am happy with you guys modeled this a two-year lease up and when we do better we do better. So these are very large assets and that's why they are still efficient because they are so large. So we feel very comfortable with the assets, but I am happy with you modeling it that way.

Chris Lucas - Robert Baird

Can I just ask a quick question just one the covenant side, I would appreciate if you could maybe include what your thoughts are even though the line is not done. If you could just give us a sense as to what your tightest covenant is that you think of when you are kind of figuring out what your optimal capital strategy is going to be and how you are going to work through that?

Mark Wetzel

The interest coverage ratio and the bond documents are probably tightest.

Chris Lucas - Robert Baird

That’s the one we need to look at

Mark Wetzel

Yes.

Operator

Our next question comes from Romeo Reyes with Jefferies & Company

Romeo Reyes - Jefferies & Company

First can you give us a sense of how quickly Chicago is going to ramp? When do you expect all the 100% capacities utilization, is it going to be towards the end of this year or do we have to wait until 2011? Then just also a quick follow-up on Jersey kind of shadow block. Do you have any LOIs or is there any sort of preliminary funnel that you can talk to Hossein?

Mark Wetzel

Specific to Chicago we laid out the commencement of the leases for all leases signed so for in the step up, specific to all the leases, we are not going to get granular on Chicago. But some of those leases start later this year, so it's really 11 that will ramp Chicago up from a pure cash flow perspective. And then regards to shadow there's constant demand.

Hossein Fateh

Romeo, are you referring to Chicago for shadow?

Romeo Reyes - Jefferies & Company

New Jersey.

Hossein Fateh

Well I think there is not much space available, the brokers over there were extremely impressed. The market is tight. We do think it's going to be smaller tight sub tenants meaning we are going to do a lot of 500 kilowatt type of tenants like for example in ACC5, we had 12 tenants or so taking the entire building. Here, we feel it's going to be more like 20 tenants and the building is laid out so we can easily accommodate that and we think the overall market is very tight and that's what we are hearing from our competitors as well and our product we believe is the best.

Romeo Reyes - Jefferies & Company

Following up on the credit facility, who is the issuer?

Mark Wetzel

It's not final yet so we are still working through it.

Romeo Reyes - Jefferies & Company

And you said it's going to be unsecured?

Mark Wetzel

Yes

Operator

Our next question comes from Sri Anantha with Oppenheimer.

Sri Anantha - Oppenheimer

Hossein, in your prepared remarks you mentioned, the available capacity in Northern Virginia is still very tight, at the same time demand is pretty strong. If you were to like guess estimate what the potential demand is going to be over the next two years especially in your key markets? What do you think it would be either in square foot or in terms of power?

Hossein Fateh

It's tough to say, I am always surprised because whenever we think well, this is being so much demand, the internet grows even faster. So we just need to be able to develop these buildings at 13 megawatt or 18 megawatt phases and be able to build the second phase very quickly.

I mean right now I'm comfortable with the demand we had left, I'm comfortable to tell you that we are going to be fully leased by the time we deliver the building. We’re very proud to deliver a building a 100% leased at delivery. But if you ask me, you wish to have a building ready in six months rather than a year, I would yes, I wish I had. But sometimes you are a little bit ahead, sometimes you are a little bit behind as far as leasing.

Sri Anantha - Oppenheimer

In the past, you also talked about potential demand coming from the federal verticals and the financial services verticals, but still, it looks like majority of the demand still is being driven by internet services. Is this more like a lack of capacity in some of the other markets that they are looking for or what is take up in terms of?

Hossein Fateh

No, I think that there is a demand. We see it from the federal. We bid on it, but anything like with the government, they take a long time to make a decision. So while they’re thinking about this, the internet guys are gobbling it up and the federal demand is still out there, but they haven’t placed a lot of it. Yes.

Sri Anantha - Oppenheimer

Any change with respect to your sales cycles? I know in the past, you talked about heavy enterprise sales cycle feel pretty lumpy? Have you seen any improvement with the recent stabilization in the economy or is it still the same?

Hossein Fateh

This cost of stage because we do fix deals right. We do very large deals. So each company is different. We see cloud computing, growing at a very fast pace. We see internet video games growing at a very fast pace, the social network sites are growing very fast. The enterprise, we do see that it is opening up and decisions are being made in ‘010 when in ‘09 no decision has been made at all. So instead of no decision being made there are making a decision to be able to do something and do spend money on IT. So we see a little bit of that, but I am not sure all this ability is that clear because there is only based on two deals, up you know on (inaudible).

Sri Anantha - Oppenheimer

Mark in the past you talked about you know talking to rating agencies and getting a credit rating. Where do you stand on that process currently?

Mark Wetzel

Well we have, we just obtained ratings as you know with the bond transaction and we will be up to meet those guys over the next month and see where we go from here. But we need to take care of business on the leasing side and we did that and so we’ll be talking to them in our end review shortly.

Operator

Next we’ll hear from Bill Crow with Raymond James.

Bill Crow - Raymond James

I’ll also give my congratulations, heck of a leasing period here, is this thing could you just provide some details on the Santa Clara market your confidence level is partially sub goes of that development and whether there are expectations that maybe at leasing you’ve been quicker based on some comments we have heard on the market and…

Hossein Fateh

The market there is I would say the second best market in my view in the country after Northern Virginia. There is no large amount of supply, I did a survey recently there is no huge amount of supply available and not much coming online. Not the density of tenants in that market they had lot of them do require what we build which is 200 blocks per square foot and the density of our product is extremely competitive price wise if you look at (inaudible). So I am excited about the project and I wish we had it build it year and half ago. But you can't always pick which project goes first and doesn't. But again I want to remain cautious, and if you model the 18 to 24 month lease up and when we do better that would be great.

Bill Crow - Raymond James

Okay, great, that's helpful and then on Chicago, would there be anytime in the future you would have looked to add another project to Chicago is that market kind of just in your (inaudible)

Hossein Fateh

Terrific market to add on the Phase II of these project to us are extremely exciting because guess who is going to go on the Phase II, 80% of them (inaudible) just expanding. So we are all looking at that and we are considerate and we are talking to our current tenant and new tenants and at the appropriate time yes absolutely we’ll build Phase II of Chicago.

Operator

Next we here from Ross Nussbaum with UBS:

Ross Nussbaum - UBS

On your FFO guidance for the year, you didn't raise the guidance and I can drive a truck through the range. Why didn't you raise the guidance and what gets you to the low end versus the high end?

Hossein Fateh

Well I think the mid point is pretty solid. I mean obviously the $0.30 that we delivered as we think about Q2, Q3 and Q4, I guess historically I have not changed guidance in Q1, we were solidly at the middle as I said earlier with another question, there’s a few things that could change that, but its, we have projected a lot of this, come out of the block. So we were right there at midpoint.

Ross Nussbaum - UBS

And what do you have in your guidance range from a capital market perspective?

Hossein Fateh

No. Guidance assumes no new debt or equity issue.

Ross Nussbaum - UBS

Okay. And I understand the commentary that’s been made earlier in terms of optimizing the capital decisions for shareholders and bondholders which is the language that I find a little cryptic because I think its obvious that everybody on this phone that hundreds of millions of dollars of equity needs to be raised here to fund the growth. So why not perhaps be a little bit more clear as to exactly how much equity do you plan on issuing to get Santa Clara put a shovel on the ground in that project in the next year?

Mark Wetzel

Those decisions haven’t been made. So, that’s why it was meant to be cryptic. So when the decisions are made as far as timing, we’ll let you know.

Ross Nussbaum - UBS

And do you think that’s a decision that’s made this year?

Mark Wetzel

Yeah. I mean it still be sometime. It still work backwards we have said that we will want to deliver the building third quarter of next year. So they’ll take twelve months to bill so you can work out your numbers backwards from there.

Operator

Our next question comes Tayo [indiscernible] with Jefferies.

Unidentified Analyst

Couple of questions. How should we be thinking about dividend policy going forward? Again you guys, have to have a lot of capital in place for all your development needs, but at the same time you do a have fairly low dividend payout ratio and fairly low dividend yields you know versus some of your comps.

Mark Wetzel

Obviously the $0.08 a quarter we are going to stay cash dividend so that’s issue one. We are going to meet a 100% of tax alluding comp number two is [liable] to assume that thing will have to go up next year in your after based and on the leases which is signed. So it is a function of keeping an eye on what that is and don’t expect the change for Q2 but as we look later in the year and we did sortify our numbers up, it will increase.

Hossein Fateh

When we speak to some of our shareholders they are not buying our stocks for the dividend. The dividend is very nicely (inaudible) but in reality with our growth and our return on equity and our return on project cost, the cost of that dividend is extremely high if you if you give it out. Though it makes relative to re-invest.

Unidentified Analyst

I mean I understand that I was just curious whether you are on the attractable earnings that will. It will kind of still remain so low, just given the large amount of depreciation that you guys take for taxable purposes.

Mark Wetzel

No there’ll be a step up as you think about the next couple of years.

Unidentified Analyst

Okay that’s helpful. And then the second question can you talk a little bit generally what you are seeing one in regards to just the market rates in some of your key markets how rates have been changing for over the past six months. And then also you did mention that you may look at acquisition if it makes sense, I was hoping you could talk a little bit about under what circumstances it would make sense and two for whatever deal flow you seen kind what of Cap rates be the sellers are asking for?

Mark Wetzel

Sure, I think on the first point we kept our rents pretty much steady with annual of 3% escalator. And when demand goes up we just lease up the space faster. And the reason for that is we don't want to jam, so much of our tenant base is existing and growth of our existing customers, we don't think we are doing them justice at every time space is tightly rents on customer that is expanding with it. So we just lease up the space faster and demand goes up. Some customers are of course with just a little bit lower credit we get higher rent.

With regard to, what was the second question?

Unidentified Analyst

The second question is on an acquisitions front. Under what circumstances?

Hossein Fateh

[Three] deals that are trading, we are told around 10% cap rate that are going from private guys who to have no exit, and we have seen some of that but to us there are no way in quality as good as our asset. The lease structure is not as good as our asset. And in some cases the tenants are not as good. So for us it's less interesting to buy these assets. Now if some day we find an exception we’ll certainly look at it.

Unidentified Analyst

And so I mean just kind of give me a strategy then of just increasing rent by CPI, would you say if you look at the end place rising our portfolio versus what you are thinking market rent saw, would you see you are under market and if so by how much?

Mark Wetzel

We’re increasing rents at 3% or so per annum. We also are getting better at building these things. So we’re lowering construction costs where possible. So some of our returns may go up by that much. So I think our tenants are very happy and sometimes our competition is not happy. So that’s a good position to be in.

Operator

(Operator Instructions). We’ll now hear from Jordon Sadler with KeyBanc Capital Markets.

Jordon Sadler - KeyBanc Capital Markets

Mark, could you provide a little bit more clarity on the commencements. You started sort of talking about them and went pretty quick. So I didn't catch them entirely. And so maybe you could review them real quickly. And then can you break it out by property, or just give us a sense of when this stuff is starting. Obviously it's very chunky and it effects how we model them and more so than it does most of your counterparts in the REIT space.

Mark Wetzel

What we stated in Hossein's talk was two of the leases commenced right now in the second quarter, two in the third quarter, four in the fourth quarter and one in the first quarter of 2011. Those are all the leases that we signed.

Jordon Sadler - KeyBanc Capital Markets

In the fourth quarter of '11 or first quarter?

Mark Wetzel

First quarter of ’11. The incremental revenues for all those commenced leases is around $16 million and that’s just for the last nine months of this year.

Jordon Sadler - KeyBanc Capital Markets

The contribution to 2010 will be 16 million.

Mark Wetzel

Correct. From Q2 forward.

Jordon Sadler - KeyBanc Capital Markets

Right and then you said if you add a full year of those plus the one that starts in 1Q 2011, $42 million?

Mark Wetzel

Correct that's the incremental for 2011 over the 2010 base.

Jordon Sadler - KeyBanc Capital Markets

And that is also over the 331 number of $144 million of base rent that you had on page eight of the supplemental.

Mark Wetzel

That is correct.

Jordon Sadler - KeyBanc Capital Markets

So you will have a run rate of $186 million roughly of base rent coming on at some point. When would you expect all of the cash, all of that to be sort of cash paying? Just throw a number at it. Throw a date at it.

Mark Wetzel

It's going to be in 2011. All the leases are different. Some start to pay day one. Most, if not all start to pay day one on passthrough cost. Some of the basis is provided a step up over the three to six month window. But it would be 2011 that that would kick in.

Jordon Sadler - KeyBanc Capital Markets

Not necessarily January but over the course of 2011.

Mark Wetzel

Yes, it's not January 1.

Jordon Sadler - KeyBanc Capital Markets

Would it by June of 2011, would a 100% of it be cash bang or pretty close?

Mark Wetzel

I don’t know. I have to look at the details, but that’s probably a fair statement..

Jordon Sadler - KeyBanc Capital Markets

And then, just coming back to New Jersey again. I know you mentioned and you talked about this before, the fact that it could be smaller tenants, 500 kW and what not, but is there the potential for a larger user? Are you talking to any larger users in the markets and maybe just more broadly can you talk about who's out there?

Hossein Fateh

We are not going to say who is out there, but there is. What happens each time we build one of these data centers, we spend an extra $15 million building extra corridors and being able to accommodate a much more smaller tenant and then what's happened every single time is we get one tenant that takes a third of the building.

In ACC4 that happened, in ACC5 that happened, in Chicago that happened. So we are always surprised of how the internet grows, we design these things and be prudent and spend a little extra money, putting corridor so their rooms could be split and then we end up using it twice.

Jordon Sadler - KeyBanc Capital Markets

Are there internet type users looking in New Jersey?

Hossein Fateh

Not necessarily internet, but we have seen, we've got some indications from Cloud computing platform, they want to be closer to Manhattan. We have seen some of that, so I am not sure if you call that internet or not.

Jordon Sadler - KeyBanc Capital Markets

Yes, it's sort of an internet, well they have an IT services.

Hossein Fateh

IT services outsourcing, we are seeing some of that.

Operator

Our next question comes from David Harris with Gleacher.

David Harris - Gleacher

The leasing that you achieved which are obviously very commendable, seems to be a lot shorter in duration than the terms that I was looking at a couple of years ago when I think 10 years was pretty standard across most of your leases then?

Hossein Fateh

And it is and the reason we did one or two leases as an exception that was a five-year term and the one or two leases that we did as a five-year term brought down the average.

I think it was one or two leases that we did over our five year term and that brought down the average to like 8.6. There you need to bring down an average when you do one or two.

David Harris - Gleacher

Your preference would still be to go for a ten in most circumstances?

Mark Wetzel

Well there’s a balance David. Just like our debt maturities, we want to manage the lease exploration table. So we don’t want it all chunky and matched up all at once. Two, some of the enterprise guides that we’re meeting with, when you look at the total commitments that they have to get approved, certain levels below the board maybe quicker to get it done. So we look at that too.

Hossein Fateh

But David I think we’re okay. The reason we were doing such a long-term leases before was, we were all running on secured debt. Now that we are not running on secured debt and decisions could be made much faster at enterprise companies when lease is five years, we said all through in out 2009 that will entertain a 5 year lease. If there’s a tenant that has good credit and we believe long term will be staying with us anyway, why not, sometimes, we’re okay with that.

Mark Wetzel

And all those have extensions with them?

David Harris - Gleacher

A question on the LEED certification for ACC5. My idea of a green data center probably means using 95 megawatt as opposed to 100 megawatt. What does it involve in terms of the difference between getting LEED certification in terms of the cost and what it means in terms of the building functionality?

Hossein Fateh

But to be honest it’s a great as a marketing issue, it’s a good marketing issue to be LEED certified. But LEED's standards are not set up for data center, and we are trying to talk to various people to improve, we had a letter out that we signed together with Google and a few other of our competitors that LEED is not set up for data center. The way you get points in LEED, we could put in a chilled water system that is extremely efficient and cost millions more and we get zero LEED points.

We put in a dynamic UPS that has no back, no acid/lead batteries and only spends 5% electricity versus nine we get zero LEED points. But you put in a bike rack you get two LEED points. So they are not set up for a data center and hopefully that will change long term, but for some corporations it's important to have LEED certifications, so we do it.

David Harris - Gleacher

All right, it sounds like it's a story that will develop over the next few years, particularly if you retain your development focus.

Hossein Fateh

Exactly but our data centers are so efficient. So we are truly getting the efficiencies to economics that whatever standard they will come, that standards will change and will be at the top of that standard in terms of power produced versus cooling list.

David Harris - Gleacher

And how strong is the effort that you are putting in with the tenant to lobby LEED to get some rules specifically in your area?

Hossein Fateh

Well I think people are lobbying some of the other agencies to change the standard and we are looking at them, we are talking to them, but it's slow they are more concerned with office building to do than data center.

Unidentified Analyst

That will certainly place your assets at a considerable advantage to the rest of the market, there some progress (inaudible)

Hossein Fateh

You are absolutely right but the tenants that we of our end customer, we've got Mark what 20 something tenant?

Mark Wetzel

Yes.

Hossein Fateh

Our 20 something tenants that we do are all larger customers that understands what is coming out of their pocket in terms of rents and expenses. So when they see our business model, they understand what we build is the highest points of efficiency.

Operator

We have a follow up question from Michael Bilerman with Citi

Michael Bilerman - Citi

Hossein, what's lead time right now on generators and cooling equipments?

Hossein Fateh

Has gone down. It's gone down and that it's not what it used to be but we can get generators in three months or so, it's not huge problem (inaudible) but I think overall time to build the datacenter of this size its 12 to 14 months is that what you are asking.

Michael Bilerman - Citi

Yeah, I am just wondering at what point do you have to put in your contract to order the equipment for Santa Clara and ACC6?

Hossein Fateh

We have enough time to deliver it so when we help them when we wanted. That's not going to be hold up factor.

Michael Bilerman - Citi

Have you gone hard on that equipment already?

Hossein Fateh

We have not.

Michael Bilerman - Citi

And then just as you still and specifically in Northern Virginia is younger and efficient in the campus, how much of those construction savings are you passing along to tenant versus how much are you reaping for DFT shareholders?

Hossein Fateh

I think we are keeping our rents consistent and by the way, the, as far the equipment we’re not our points we have not crossed any points in the delivery of the equipment that is going to delay. And we have such a large wire of this equipment that sometimes we get [priority] on the equipment we get. As far as construction costs, thins like pre-cast concrete are down 10%, but labor from two years ago goes up with inflation because of full of the union labor. 50% of the cost of building a data center is labor and that goes up with inflation and the last time we did a project was like two years ago right?

Our basic project such as this. So that goes up. The cost of generators haven’t really moved. So overall, if you balance of the labor versus some of this inflation, some of the commodities and the lowering of cost of pre-cast concrete and some of the other things. I mean if we hold cost steady, we are happy with it.

And with that, we generally want to get a little bit like the inflation adjusted rents every year.

Michael Bilerman - Citi

Right.

Hossein Fateh

And we are hitting all the turns. So

Michael Bilerman - Citi

And is there anything just as ACC6 or smaller that would reduce that return relative to ACC5?

Hossein Fateh

No it's still comfortable with the 15% un-leverage return on that asset.

Operator

Next we have Dave Rogers with RBC Capital Markets.

Dave Rogers - RBC Capital Markets

Hossein, you mentioned in your comment acquisitions, and it was a passing comment and I think it was meant to be that way. But with regard to the acquisition topic have you been an active bidder or are you now an active bidder on existing property. How do you think about the returns relative to your development if you are, and then also on the land front have you also been active looking for more land?

Hossein Fateh

On the land front no we have got of plenty of land right now for our development, on the acquisitions well, like I said well we are seeing prices that are around 10% deals versus our 12 to15 with lower quality assets and work lease structure. And that’s why acquisitions haven’t been that interesting, but we are looking at all the assets that come up we get the packages. We go to the first or second round and decided that’s not for us. So there is something usually opportunity marked we’ll certainly look at it.

Operator

We have a follow up question from (inaudible).

Unidentified Analyst

Hi just in regards to New Jersey a year ago one of the main drivers or main sources of demand for that, for that building was financial services in New York possibly you know outsourcing to data centers or requiring most storage or our processing speed just kind of given everything that will happen on Wall Street and then the financial services sector would you save that feel true or are you seeing less demand opportunities or less you know inquiries in regards to New Jersey from the financial services sector.

Hossein Fateh

No I think what this crisis has done is put more pressure on outsourcing and as far as outsourcing we are the best model out there, that's quality model for a CTO or CIO of any of those organization, specially with Cloud computing platform they could go to two, three locations and geographically diversify between us and some of our competitors and not build for themselves, so I think what meant after this crisis is we are going to see more and more outsource.

Operator

And there no further question. I’ll turn the conference over to our presenters.

Hossein Fateh

Okay, thank you for joining us today.

Mark Wetzel

Thank you everyone.

Operator

And that concludes today's conference call. Thank you for your participation. You may now disconnect.

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