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Executives

Chris Warnke - IR Manager

Hossein Fateh - President & CEO

Mark Wetzel - EVP, CFO & Treasurer

Analysts

Michael Bilerman - Citi

Jordan Sadler - KeyBanc Capital Markets

Brendan Maiorana - Wells Fargo

Sri Anantha - Oppenheimer

Jonathan Schildkraut - Evercore

Chris Lucas - Robert Baird

Dave Rodgers - RBC Capital Markets

Rob Salisbury with UBS

Sri Nagarajan - FBR Capital Markets

Todd Weller of Stifel, Nicolaus

Jonathan Atkin - RBC Capital Markets

John Stewart - Green Street Advisors

Nick Yulico - Macquarie

DuPont Fabros Technology, Inc. (DFT) Q3 2010 Earnings Call November 4, 2010 10:00 AM ET

Operator

Good day, everyone and welcome to the DuPont Fabros Technology Third Quarter 2010 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Chris Warnke, Investor Relations Manager of DuPont Fabros. Please go ahead, sir.

Chris Warnke

Thank you. Good morning, everyone, and thank you for joining us for DuPont Fabros Technology's third 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 third quarter earnings call. Leasing remained our primary focus, so let me begin with an update. We remain 100% leased at our stabilized operating properties. Currently, we are 75% leased at ACC5 Phase II and 22% leased at NJ1 Phase I. Four days ago, we placed both of these developments into service.

Focusing on New Jersey, high quality assets recently delivered in our newest market. We have executed three leases in NJ1, one in the third quarter and two to date in the fourth quarter. Two of the leases are with existing Northern Virginia tenants and the third is a new tenant in the financial services industry. The existing tenants include an enterprise tenant and a reseller. This reseller is in several of our Virginia properties, VA3, ACC4 and ACC5 Phase I. This tenant has grown with us and we have a very good working relationship with it. This tenant has a computer room in both Phase I and Phase II of ACC5.

Today we are interested in expanding their presence in the New Jersey market; we mutually agreed to take back into inventory this tenant's computer room in Phase II of ACC5. We need a small amount of available space in Virginia until ACC5 Phase I is delivered. Otherwise we could possibly miss out on a high-growth tenant that has an immediate need for space. Moving this tenant into NJ1 allows us to keep an extra 2.275 megawatt in ACC5 Phase II.

Some tenant opportunities begin with one or two megawatt of critical load but grow significantly in the future. This strategic move is great for us. This transaction also furthers our strategy in New Jersey. As I have said in the past, we would like to have one or two computer rooms leased to a reseller in all our multi-tenanted facilities. Not only does it offer organic growth, but also enables smaller tenants to benefit from efficiency, a large data center provides.

To finish up on NJ1, one lease commenced on November 1st, the second lease expected to commence later in the fourth quarter of this year, and the third is expected to commence in the second quarter of 2011. The three leases have an average lease term of 11.6 years. These lease commencements are in line with our pro forma, and we continue to expect NJ1 to be fully leased within 24 months of opening.

Traffic and tours remained solid, we continue to expect the 12% un-levered return on our invested capital. The Virginia market remains solid. We're selective on the tenants for this remaining 25% of available space. With additional space available in Phase II of ACC5, we expect to be 100% leased by the first half of 2011. When looking at the entire 36.4 megawatt, ACC5 is now 87.5% leased. We continue to expect a 15% un-levered return on both phases of ACC5.

All executed leases at ACC5 Phase II have commenced as of November 1st. No leases commenced during the third quarter, and we have only one 2011 lease expiration. This represents only 1% of our critical load.

Our top three tenants Microsoft, Yahoo!, and Facebook continue to represent 59% of our annualized base rent as of the end of the third quarter. Our top two tenants Microsoft and Yahoo! represent 44% of our annualized base rent compared to 86% at the IPO. The average combined remaining lease term with our top three tenants is 6.5 years, with the two top tenants at 5.6 years.

The average remaining lease term for our entire operating portfolio at September 30 is 6.5 years. Through our development efforts, we're happy to announce the opening of both ACC5 Phase II at Ashburn, Virginia; and New Jersey Phase I in Piscataway, New Jersey, which occurred on November 1, 2010, both on time and on budget within the range we provided. We're very pleased with the efforts of our development team, our employees, our general contractor and all our subcontractors. All have been an integral part and value component to the success of DFT.

As a reminder, we're fully funded to complete our latest two new developments. ACC6 Phase I in Ashburn, Virginia and Santa Clara Phase I. These two data centers would add 20% to our current megawatt operating portfolio. Construction teams are on site, and we expect each of these targets to be on budget and completed in the third quarter of 2011.

In the past month, we hired a regional vice president of leasing and a director of development for our Santa Clara facility to assist in leasing and on-site development. These two employees bring a vast amount of knowledge and experience in the data center space, and both will be based in Santa Clara.

As for our capital raising efforts, we issued our first ever perpetual preferred stock. We were very pleased with the level of interest in this new source of capital. We believe this new source of capital will serve us well into the future. We continue to see tenant interest in our CH1 Phase II development. Based on what we know today, it is likely this will be our next development. Given our current development schedule, ideally we would like to have this space available in the first half of 2012.

No date has been set because there are many variables. As stated earlier, we would not begin the development without securing the appropriate capital, which in this case may include utilizing our undrawn $100 million line, unsecured debt, perpetual preferred or some combination. At this point, we do not plan to issue common equity for this development. But the form of funding is always dependent on the condition of the capital market.

We believe the traffic and demand for our high quality wholesale data center space remains promising in all our markets. We have diversified our tenant base, expanded the number of markets in which we operate and strengthen our balance sheet by extending and staggering debt maturities. We are optimistic that these actions are beneficial as we work towards achieving investment-grade status, enabling us to obtain capital at a lower cost.

I will now turn the call over to Mark, who will go through our financial results.

Mark Wetzel

Thank you, Hossein. Good morning, everyone, and thank you for joining us. I want to cover four topics today: our third quarter results, our Q4 and full year 2010 guidance, the capital markets update and a quick comment on our 2011 revenue guidance.

For the third quarter of 2010, company's FFO was $0.37 per share, compared to $0.29 per share in the third quarter of '09, a 28% increase. Q3 revenues were 60 million, a 16% increase quarter-over-quarter. Specific to our third quarter results, as compared to Q3 2009, the FFO increase of $0.08 per share is primarily due to higher operating income from the lease up of CH1 and ACC5.

Sequentially to Q2 2010, FFO is up $0.04 per share, or 12%. Interest capitalized for our developments was $0.015 per share higher than we anticipated as it is based on the amount and timing of spend at each project. AFFO was $0.28 per share for the third quarter, $0.07 higher than a year ago and $0.07 higher sequentially to the second quarter. Year-to-date AFFO was $0.67 per share, compared to $0.61 per share a year ago, a 10% increase.

As to our capital markets update, although we have announced most everything in prior press releases, I will give you a quick review. Since our last earnings call, we increased our line of credit to 100 million, issued our first ever perpetual preferred and paid off our ACC4 secured loan which was to mature in 2011. Our next debt maturity is December of 2014.

Page 15 of our earnings release includes a pro forma of our debt summary, maturities schedule and capital structure as of September 30, 2010. We have 79% of our debt fixed, laddered our maturities and are at a low 24% debt-to-market capitalization level. We are also fully funded to develop and finish our two latest developments: ACC6 Phase I and SC1 Phase I. We believe our solid financial condition puts us in a great position to grow the company.

As you may recall, in April 2009 we filed a universal shelf registration statement with the SEC registering 500 million of securities. The May 2010 secondary common stock offering and the recent perpetual preferred offering have exhausted the amount available under that shelf registration statement.

This morning we filed a new universal shelf registration statement with the SEC registering securities for future issuance. We are now a well-known seasoned issuer commonly known as a WKSI, which allows us to file a registration statement without stating the amount of securities being registered and paying for offerings as they occur.

Our Q4 2010 FFO guidance range is projected at $0.30 to $0.34 per share, a midpoint of $0.32 per share. When we issued our prior guidance back in August, we expected a Q4 midpoint of $0.37 per share. This $0.05 reduction includes the $0.03 per share one-time charge for the write-off of the ACC4 unamortized loan cost and a $0.02 reduction related to the 400 basis points spread between the interest rate on the ACC4 loan and the preferred dividend rate.

We are, therefore, tightening our 2010 annual range from $1.30 to $1.40 per share to $1.30 to $1.34 per share. This update is recounted on page 16 of this quarter's press release. One key point to understand in our 2010 guidance range is the lowering of the top end of the total revenues. This resulted largely from direct electric cost which have been or will be refunded to us as part of our participation in the load management programs and rate setting initiatives of our electric utilities in Virginia and Chicago.

Refunds of approximately 5 million of direct electric cost caused us to revise our 2010 range from 245 million to 260 million to 245 million to 250 million. Although we passed through direct electric cost to our tenants under triple net leases with no markup, the amounts collected appears revenue and the cost appears operating cost, resulting in no impact to our net income or FFO. Because we were not able to predict the level of significance of these refunds, we adjusted our revenue guidance range.

Just to be clear, there is no effect on DFT's FFO. These refunds effectively lower the already attractive energy cost found in Virginia and Chicago, which represents a true benefit to our tenants, and we believe reconfirms the benefits of DFT's outsourced wholesale data center model. We will continue to work closely with the local utilities in our operating markets to provide our tenants with attractive utility rates which reduces their overall operating cost.

Also, in order to bridge the gap from our Q3 revenues in order to hit our 2010 annual range, let's walk through executed lease commencements again. The remaining 24% of Chicago leases commence in Q4. All leases commenced at ACC5 Phase II and 9.4% of leases commenced in New Jersey. One New Jersey lease totaling 12.5% commences in April 2011.

Finally, I'd like to announce revenue guidance for 2011. We expect total revenues to be in the range of 275 million to 325 million, an increase of approximately 12% to 30% over 2010. The low end covers all executed leases in hand and the upside is future lease outs. Leasing remains the driver for 2011. At this point, this is all we plan to disclose on our '11 guidance. We will provide all the details and all per share amounts on our year-end call which will be held in February of 2011.

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

Hossein Fateh

Thanks, Mark. I want to reemphasize that our primary focus is executing leases in New Jersey, Virginia and Santa Clara. We expect to complete construction on our two new developments in the third quarter of 2011.

The DFT story remains focused on our four strategic locations: Virginia, Chicago, New Jersey and Santa Clara. And a development pipeline for future growth. This strategy would drive our growth over the next several years. We have confidence in our business model and what the future holds for the company.

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

Question-and-Answer Session

Operator

(Operator Instructions) We'll hear first from Michael Bilerman of Citi.

Michael Bilerman - Citi

Hi, it's Mark Montandon in for Michael. Just first of all, given some concerns over the competitive landscape and wholesale data center marketplace, interested to hear any comments you might have on the pricing trends you're seeing in your core markets and your future core markets in Northern Virginia, Chicago, New Jersey and Santa Clara?

Hossein Fateh

Well, at Santa Clara we haven't really started on leasing yet but on Virginia and in New Jersey, we can tell you that we're hitting our returns but in Virginia we're going to have a 15% unlevered return on ACC5 and in New Jersey we're going to have a 12% unlevered return. The rents are somewhat similar in that New Jersey market will cost us a little bit more to construct and is a newer market for us. But other than that we see a lot of traffic in the wholesale space. Our traffic levels really have not slowed down at all, and have been consistently, we have two to three tours a week in each of the locations. And our leasing is lumpy, but that's what we always expect, and we're hitting all of our targets in terms of leasing that we expect.

Michael Bilerman - Citi

Okay, great. And then that takes me actually well into my second question, the lease that was relocated from Northern Virginia to New Jersey, you mentioned pricing trends are similar, just wondering the price and the structure, sort of the timing of commencement between the Virginia lease and what's going to happen in New Jersey?

Hossein Fateh

Well, we don't go into detail of each tenant's pricing because that would be bad for our business strategy. But all I can tell you it's similar, and we're hitting our returns.

Michael Bilerman - Citi

Okay.

Mark Wetzel

And the term is exactly the same, Mark, it was over 11 years in length.

Michael Bilerman - Citi

And is the commencement the same?

Mark Wetzel

Well, the one commencement was shifted to April 1, which is the one…

Operator

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

Jordan Sadler - KeyBanc Capital Markets

I just wanted to follow up also on the tenant move, but my curiosity is sort of the impetus for the move, did you call the tenant or did the tenant call you?

Hossein Fateh

Well, I think it was a mutual agreement. We speak to our tenants constantly, and it was a good deal for them and a good deal for us. And I mean I fully expect this tenant to sign another lease in ACC6 some time in 2011. So there's been really no slowdown for them, and it was something that made sense for them, they want to expand in New Jersey, other than that…

Jordan Sadler - KeyBanc Capital Markets

But in the decision to, they had a lease, I assume there was a lease that was cancelled on ACC5, and so my curiosity there is just, did you go to them, and say, hey look we could use the capacity here in Virginia, and they were receptive to your idea, or were they, did they say, somebody had to sort of initiate the discussion. I'm curious, who initiated it?

Hossein Fateh

I think it was mutual, Jordan, because we talk to them all the time, and I think that at one conversation, we said, hey, are you interested in New Jersey? They were like, yes, we're interested. So I don't remember like exactly who liked who first.

Mark Wetzel

And Jordan, traffic in New Jersey, we've seen a lot of interest in tenants in that range that would fit into a reseller's mold. So there was some interest to get a reseller early in New Jersey.

Hossein Fateh

Yes, we had seen a lot of 10, 20 rack customers so that was part of this discussion.

Jordan Sadler - KeyBanc Capital Markets

Okay. It seems like you're off to a good start in New Jersey, given sort of the 22%. I don't remember where Chicago was on the day of opening?

Hossein Fateh

I think Chicago was zero on the day of opening.

Jordan Sadler - KeyBanc Capital Markets

Right, right, so in arguably a tougher economic environment. Are your expectations for New Jersey ramping a little bit, given sort of where you are today?

Hossein Fateh

I think we want to be conservative and sticky; I mean this business is lumpy. I mean in Chicago we said we'll lease in 24 months in a very tough environment; we leased it in 21. So here given the lumpiness of our business, I'd still like every one to model that 24 month lease-up from opening.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Hossein Fateh

Now we could better, but I don't want to set expectations.

Jordan Sadler - KeyBanc Capital Markets

Okay. My last one is just on Chicago, it sounds like you're doing some thinking about a start there, but there seem to be, and I know your business is very lumpy. Obviously there seems to be plenty in the hopper from a product perspective between Santa Clara, ACC6 and New Jersey at this point. I know not a lot of that's out of the ground but for New Jersey, but what are you thinking or where are you thinking you'd like to be on the lease-up of the speculative space you have sort of under construction or at the ground ready -

Hossein Fateh

I don't think…

Jordan Sadler - KeyBanc Capital Markets

Before you start.

Hossein Fateh

Yes. I think we don't want to put a definite number in there, but we are three or four tenants that, I've always maintained the second phase of these data centers, it is a less risky business in that we have organic growth from the first phase. And that always happens to be true. So the money that goes in the second phase is much less risky. And we are talking to a number of our current tenants who are interested in that expansion.

When we get a decent enough feeling of expanded and of requirements, and we talk to them constantly, like biweekly, some of them may have signed leases, some of them may have LOIs that are, we don't disclose. When we feel that we have significant enough traction, we'll start the second Phase and what we said is that we'd like to have product at this time delivered in some time in the first half of 2012.

Operator

Our next question comes from Wells Fargo's Brendan Maiorana.

Brendan Maiorana - Wells Fargo

Mark, in terms of financing and doing the preferred, your loan at ACC4 didn't mature until later next year and you have the one-year provision to extend it if you wanted to and the rate is pretty low especially relative to the preferred issuance that you did. So can you just kind of walk through why you wanted to do the preferred issuance, is that with an eye towards borrowing more to fund some of your future development?

Mark Wetzel

It's a little circular. But the idea of a big bullet '11 maturity out there was right there, was on the top of everybody's list of questions, what are we going to do with that. So our thinking evolved over time of what's the right source of capital for the company, the fact that the perpetual preferred we have, was our first one, so we were interested in tapping that source of capital, and the fact that it has no bullet, no maturity is a very good thing. So it really evolved into, yes, it's a 400 basis point difference from the rate perspective, but the idea of not having any maturities out there till 2014 with speculative development on the list, we feel very good about that. The idea of talking to the rating agencies of where our balance sheet needs to get, we like that discussion and so we reached the same conclusion to take that loan out.

Hossein Fateh

Brendan, if we didn't pay it off, someone else on this call would be asking when are you going to be pay it off.

Brendan Maiorana - Wells Fargo

Well, fair enough, I suppose. So Hossein, in terms of tenants that you're targeting, it seems like, are you looking a little bit at some of the smaller tenants? Like it seems like the New Jersey tenant, not the one that moved over, but the other tenant that you signed in the quarter was a pretty small transaction. Are you looking to get more of a mix in your tenant base today as opposed to a lot of the larger ones that you've had historically?

Hossein Fateh

I think that we signed in New Jersey, one 0.5 megawatt tenant, one 1.1 and one 2.2. I do think New Jersey will have like for example, the ACC5 has like in the whole 36 megawatt, 12 or 13 tenants. And I think New Jersey will probably have in the range of about double that about, in the whole 36 megawatts, we'll probably have 24, 25 tenants. And so they will be probably about half the size, but still the average size, if you average it out; 36 divided by 25 is going to be one and change.

Brendan Maiorana - Wells Fargo

And just lastly, just how are the economics on some of the smaller tenants as opposed to your larger wholesale tenants, outside of the market differential between Northern Virginia and New Jersey, but just in the same market, are the economics any different?

Hossein Fateh

Not really much different, the smaller tenants sometimes also are believe it or not, better credit tenants and more diversified credit because sometime they happen to be enterprise versus Internet and more public companies guys like a pharmaceutical and so on. So the rents are similar but better credit and they're smaller. So we take kind of less credit risk but we're gaining on diversity and on credit versus the price. So the price has turned to be similar, so we're hitting our 15% and 12% unlevered returns.

Operator

We'll hear next from Sri Anantha with Oppenheimer.

Sri Anantha - Oppenheimer

Mark, if I am looking at your base rental rates either on a sequential on a year-over-year basis, especially on occupied square foot. Why is that not growing especially this quarter when I look at that rate, it seems to have declined sequentially, is this more of a timing issue as it relates to some of the leases or maybe if you could shed some light on that?

Mark Wetzel

Sure, Sri. I don't think it declined sequentially; we had no lease commencements in Q3. We have a list which I went through for leases in Q4, so it's just a start date for GAAP and we didn't have any Q3. There was a little bit of increase in base rent. I'm sure that has to do with the couple of tenants with your annual escalations.

Sri Anantha - Oppenheimer

Got it. Because I'm just calculating based on the numbers you guys are disclosing, because your occupied square foot is 1,532, which has been flat from last quarter. Your base rental is 38,519, so I am just dividing that by 1,532. If I do the similar math for 2Q, it seems to have declined sequentially. You know, so I wasn't clear what was going on there?

Hossein Fateh

Well, on a gross number basis, Q2 was 379, Q3 was 385 specific to any renewals or any escalations. Maybe I look at this and we can chat offline on that.

Sri Anantha - Oppenheimer

Sure. And Hossein on that particular lease that were shifted from Virginia to New Jersey, I understand, definitely, I think it's more desirable for you guys to get that excess space given the demand you are seeing. But when that customer initially signed in Virginia, was he expecting some demand to kick in for him for his managed services and hence he was looking for more space and now the demand didn't come through, so he was shifting his requirement more to New Jersey.

Hossein Fateh

No, I think that he already has a small amount of stake left in Virginia. And when we talked about it on the opportunity to go to New Jersey, he did. I don't think it really means anything. Unlike I said, I fully expect them to sign another lease in ACC6 and his lease didn't commence I believe until January 1, was his rent commencement in ACC5. And he'll probably sign a lease sometime in 2011. And so I don't think it really means anything in overall global demand at all; in the retail segment.

Sri Anantha - Oppenheimer

Got it. And just with the respect to the comparative environment, clearly, I think some of your peers more on the retail side have talked about seeing increased competition from wholesale data center providers. Is that impacting DFT in any form or fashion in any of the markets that you currently serve or is it business as usual? Thank you.

Hossein Fateh

Well, I think what you're saying is that the retail is seeing competition from wholesale. We're the guys causing the competition. Because tenants have realized that look if you go into their wholesale space, you get reimbursements on power. I mean, we are so far on a 50 or one Megawatt customer, we are significantly lower priced, but we don't do the handholding. So if you don't need the handholding, we're the ones probably causing the competition for the retail and it's becoming obvious for the tenant that's hitting 50 racks to 100 racks, that look if we're willing to do our own hand holding, we're going to save a significant amount of money.

So, I mean, as tenants realize that there will be more of a pressure on retail customers. I think that's always been the case. And we haven't really, we've always competed very efficiently on that space. So it's not affecting us at all.

Operator

And our next question comes from Jonathan Schildkraut of Evercore.

Jonathan Schildkraut - Evercore

All right. Thank you for taking the questions. One housekeeping question upfront and you may have mentioned this and I missed it. But did you do a power upgrade at ACC3?

Mark Wetzel

Yes, we did. It's roughly 900, I think its 900 kilowatts of power and it was a small upgrade for that particular building.

Hossein Fateh

And the tenants paid for that upgrade themselves which made our space more competitive for the tenants.

Jonathan Schildkraut - Evercore

All right, great. Could you give us a sense as to how the selling effort works, you know last quarter. Hossein, you talked about how everybody in the firm is part of the sales organization. I was wondering how often you use like a channel partners or agents to help fill your space and maybe give us a sense as to how much demand comes through each channel. And then my final question has to do with, believe it or not your credit rating. And I see that based on our calculations your debt-to-EBITDA is going to drop from around six times to around four times because of the equity raise and how do you feel that this positions you relative to your goals of investment grade? Thanks.

Hossein Fateh

I'll take the second question first is that on our rating I think the agencies rate us once a year and review it. I think we have done everything that we've promised to the agencies and more, in terms that we told them we've raised 200 million equity, we raised 300, but everything that was in our business plan, we executed well. And if you look at where our bonds trade now close to about 7% yield to maturity, we're trading right now at, which is a fact about a notch, or a notch on a half higher than what we've rated.

So you can make your own expectations as to when there is a review what should or what could happen. But I don't want to, it may or may not, I can't tell what they're going to do. But that's where we're trading as far as our bonds are trading. And we've executed on all our clients.

Jonathan Schildkraut - Evercore

Great.

Hossein Fateh

As far as sales go, let's face it, I think, if the tenant is represented by a broker or by an agent. Absolutely we always pay that agent and we encourage them if they need representation to help the tenant figure out the per kilowatt cost. Sometimes those agents bring huge value to the tenants, because some tenants may not understand the per kilowatt model, there so they may be used to the per square foot model, which doesn't really make sense in the wholesale space.

So if they're represented we absolutely use them, but typically if a tenant needs a megawatt of power in a market that's 4,000 servers, 100 racks, that tenant always finds us because there are only like three players in the market.

So we don't necessarily use a reselling agent because anyone with sense, with knowledge of what they need or know that we're one or two of the known players there.

Jonathan Schildkraut - Evercore

Right.

Hossein Fateh

I hope that answers your question.

Jonathan Schildkraut - Evercore

Absolutely. Please one more in there...

Mark Wetzel

Yes.

Jonathan Schildkraut - Evercore

You mentioned that Chicago was a market that you could consider for expansion into 2012. You know, we've heard that you guys are actually looking at space in the Pacific Northwest, are you always kind of considering other markets, just from a scouting perspective or are we incorrect in our information?

Hossein Fateh

Well, we're not disclosing which are the markets we're interested in, but we're always looking at new markets. We track power rates, sales tax rates, personal property tax rates in all the markets all the time, nationally and internationally. But we're not going to comment on where is going to be our next expansion. But where we have made a comment on is that Phase II of Chicago is an obvious next expansion for us.

Operator

Our next question comes from Chris Lucas of Robert Baird.

Chris Lucas - Robert Baird

Hey, Mark, can you give us sort of a follow-up question on the rating agency. But just sort of your thoughts about your capital structure in terms of how you think about preferred as a component of your balance sheet and the unsecured as a component of your balance sheet?

And then sort of second of that is, how do you get to the investment grade, given the juggling of the equity versus the debt, as well as just your scale and concentration, how do you get there?

Mark Wetzel

Well, I think let's attack that question first, because it's a function of, when we met with them a year ago, there was three things; one is geographic diversity, tenant diversity, and third is be around a little longer. And so we've attacked, we've opened New Jersey, we have Chicago 100% leased. We are opening Santa Clara next summer. So we're getting the geographic diversity we had discussed and promised.

The tenant diversity is happening simultaneously. With that, we would still expand with our top three tenants, if they want to grow with us. So that's all at the discussion point, how we get there from a balance sheet perspective. We like, or I like laddered maturities of debt. We like riding sources of capital. Secured debt honestly is a little too short-term in my mind, but we'll always look at that.

The issue of perpetual preferred are while it's going to be 100, probably 100 basis point difference between an unsecured piece of paper and a preferred. You know the idea of not having bullet maturities is something we like.

So I think it's just a mix because I don't think there is any magic to, should we have a little secured, unsecured and perpetual. We like all three and the issue of raising more equity is not on the table right now, but as we think about the next two to five years. We will look to do that, but in terms of rates, specific criteria; debt to EBITDA is a benchmark, fixed charge coverage is a benchmark. Those are things we pay attention to model out.

Chris Lucas - Robert Baird

Okay. And then Hossein, on Santa Clara. Obviously it's early to think about the pre-leasing activity but when does the marketing push really, really get started in earnest? And how far along do you have to be and when in the calendar you think that begins?

Hossein Fateh

I think where we just hired a sales guy and so, and we feel a lot of confidence in his abilities and the rest of the team is pushing as well. So I think at the moment you model 18 months to two years for a lease up. We do feel better about that market than the Chicago, New Jersey because we have a lot of the tenant relationships from the Virginia market out there.

So, it's too early to really tell, we're about a year off in delivery, nine months off to delivery. So it's really too early to tell, but as a guestimate I would put it not as good as Virginia and in between kind of Chicago and Virginia, as far as the strength of the market and the dynamic of the tenants. But I think it is a very important market. The Bay Area always has new businesses being developed. I think it's an exciting market. It's one of these markets that it's not unusual to suddenly get a six megawatt lease, especially because we're in Santa Clara, and Santa Clara power pricing is less expensive than the rest of California.

Operator

We will hear next from Dave Rodgers of RBC Capital Markets.

Dave Rodgers - RBC Capital Markets

Hey, Hossein, just a follow-up, I guess, on that question, more on the supply side of the equation. What are you hearing or what are seeing in the market in terms of supply and competitive completion relative to yours? Whether those might be on track, how they're tracking and what types of absorption they've been able to see to this point?

Hossein Fateh

Well, I think that what (inaudible) have done on their one site was tremendous. They got enormous rents on that one building, much higher than the rent that we were projecting. Shows in their X11, they got one rent at $150 per kilowatt triple net, which is public information. So it's, we think it's a tremendous market.

We think from a supply standpoint, I don't think it's fair for people when they look at supply, or I don't think it's realistic to look at a supply of powered base shelf as compared with a turnkey data center. When you look at that supply of a turnkey data center, it's actually much lower. Don't forget that power based shelf may cost, depending on land, somewhere between 100 to $140 per square foot. And a data center what we build costs $1,000 a square foot. So they're two very different elements. A power based shelf is more like having an empty piece of land. So on a fully developed building, I think the market is tight and it is tight for all of us. I think all of us are going to do very well, and it's plenty big enough for all the wholesale players and the retail ones in fact.

Dave Rodgers - RBC Capital Markets

And then a second question, I didn't hear if you had addressed it earlier, but did you talk about any mix shift in the backlog? Whether it be from a reseller perspective, it seems like resellers are maybe a bigger piece of the business today, as well as obviously some of the social networking, peer-to-peer type things. If you just could talk more about that?

Hossein Fateh

Yes, resellers for us have always been somewhere, give or take a few percentage points, about 10 to somewhere between 6 to 15% of our buildings, no more than that. And so right now in Chicago, it's about 14%. In ACC, five are resellers, I think are all-in around, I would say 15%. ACC4 is around 6% of the building. So VA3 did go one room out of 10. So I think on the reseller markets, it's in that range for us, and we'd like to keep it there.

On the social networking sites and the players that work around social networking sites, their video games or so on, they have, we have seen a big growth in that in the last, in the '09, '010 market. We've seen big growth in social networking sites. But that's indicative of the business. As the internet grows, like seeing, in 2004, we saw a huge growth in search engines. And then it was the Web 2.0 company, and then it was the social networking sites. So there are trends that we're seeing, and, but on the reseller side has always been in the 10 to 15% range of each building. For us, that's for DuPont Fabros.

Dave Rodgers - RBC Capital Markets

And last question. Is there any one, I guess, conspicuously absent, or any customer segment continuously absent today that might be able to kind of come back to the market in the next year or so that you anticipate seeing incremental demand through?

Hossein Fateh

We haven't, it's hard to say, which specific, but we do like I said, there are trends. We think cloud computing is growing very rapidly both on the private cloud and on the managed cloud. That's the region that's growing. Healthcare, we see growing very rapidly. Video on demand, we're waiting for that to happen and hit in a big way. The advent of the 4G network will bring more and more hand-held type of devices, whether it's AT&T, Yellow Pages or others that are used as people use more and more hand-helds and more and more 4G devices and palm, like the iPad or iPad look-alike type models come in. We will see more and more demand from that type of segment.

Operator

We'll hear next from Rob Salisbury with UBS.

Rob Salisbury with UBS

Just had two quick questions. One, Hossein, can you give us an estimate of the space utilization? So in other words, how much of the power that's been leased to your tenants is currently being utilized?

Hossein Fateh

Well, in general, we can't. We are not allowed to comment on specific tenants. I see tenants growing very rapidly in the building. But we are not, by tenant, by where we are on our confidentiality agreement with our tenants, we cannot comment on individual tenants. What I can tell you, generally what we see in a large building in like ACC format is that, it goes up to about 70% of the critical load. Because there are always some tenants in the financial industry that are so conservative, they don't use all their load. And there are others that use 90, 95% of the loads. So, generally, a building tops out, on a multi-tenanted building, that's about 12 or 13 tenants in it, around 70% of the critical load. And when it hit 70%, they move on to the next load.

Rob Salisbury with UBS

And so, I guess, my question is really just speaking to that. Just today, are we close to that number or is there still some room?

Hossein Fateh

On the stabilized buildings, yes, absolutely. On the buildings that are not stabilized, meaning just put in production, it generally takes 18 months to two years from the opening of that building to reach that ramp.

Rob Salisbury with UBS

Got it, okay. Last question, can you just remind us what the PUE ratio is for your new data centers that are being constructed right now and sort of how that relates to both the industry as a whole and then may be just your overall portfolio?

Hossein Fateh

Ours are very efficient on the POE, generally POE the ratio works that if the utilization of the power is low, then the POE won't be that high, right. Because it's the overall ratio, how much of the building is getting used. But when it reaches about 70% total load, we'll be in the low 1.4s.

Rob Salisbury with UBS

Wow. And so what you think the industry would be? May be closer to the high one range or one and half?

Hossein Fateh

I think 1.6 is not unusual at all for data centers. 1.6 would be deemed very good for some data centers. We're very much on the lower range.

Operator

Our next question comes from Sri Nagarajan from FBR Capital Markets.

Sri Nagarajan - FBR Capital Markets

Hey, thanks and good morning. A question, as you see the prospects in traffic and you commented a lot on the lumpiness of the lease signings, when you lose your prospects to others, where are the others, meaning that are they going to other wholesalers or are they building on their own, and are they going to more retailers, and how has this changed in the past two years and if you can comment on trends that may be positive for wholesalers versus retail that would be interesting.

Hossein Fateh

We don't really see losing, I mean, I think it's more of a business management issue. It's, like I said before, if a tenant needs a lot of hand holding, they're better off going to a retailer or maybe going to a cloud-type formation. If a tenant is, wants to, long-term, has a long-term business plan, they're better off finding a long-term lease. For example, if a tenant is a small tenant, I mean any large tenant between 50 racks and 15 megawatts, they're better off coming to a wholesaler like us or one of our competitors.

On the very smaller tenants, maybe 40, 50 racks, if their business plan is flipping their company and selling it, sometimes it's better off going to a cloud because then they're not making a long-term commitment and they can flip their company and sell it. So, I think the market is well big enough for all of us. And some tenants like a, if they're in the CDN business, they need to be with a retailer because that retailer will have all the networks that a content delivery business needs. So, the market is really plenty big enough for all of us. We each carve out our niche share. If a tenant wants to, long-term, be in the business that they are and grow and there are 50 racks or so and they've got some technical expertise and they want to have one or two of their own employees permanently on-site, well, they'll come to someone like us or one of our competitors.

Sri Nagarajan - FBR Capital Markets

So in your, just to sum it up, you have not seen any distinct change in patterns of more do-it-yourselfers coming to wholesalers or the other way. It goes both directions depending on the size of the tenant as you outlined.

Hossein Fateh

Yes, exactly.

Sri Nagarajan - FBR Capital Markets

Okay. One question on the Phase II, I mean, Phase II projects, obviously you talked a lot about Chicago Phase II. On your supplemental, or your earnings release rather, you outline the cost, estimated total cost, I mean, obviously it's not the, the 17.5 million that you list here is not the complete cost, what would be, again, any scale differences in terms of Phase I versus Phase II in terms of what costs you would incur in Phase II.

Mark Wetzel

Yes, Sri, the costs in those buckets are the costs of just that Phase II shelf, the land and the building are allocated to that, obviously. So we quoted anywhere from 8.5 to 11 million a megawatt to build out. So you'd back out what we spent to date and that's sort of the round number. So a Chicago Phase II 18 megawatts, if we can build that for 180 million, we've spent 18, so we need 160.

Operator

Our next question comes from Todd Weller of Stifel, Nicolaus.

Todd Weller of Stifel, Nicolaus

Yes, thanks. Good morning, guys. Just a high level question as you think about future demand drivers, a lot of talk about government data center refresh and consolidation initiatives, talk about maybe what you see is an opportunity there and how maybe, if you are focused on that opportunity, you're aligned with systems integrators that are a key selling point of the Government's? Thanks.

Hossein Fateh

You know, we always partner up with systems integrators and bid on some of these things. But we can't comment on when you're going to hit the government tenant. On our already existing data centers though, what's happened over the years is we've always bid on these government opportunities, but before the government opportunities make up their mind, we have a fully-leased building. So they never get to it, because the leasing by the Internet sector and the wholesale sector has been so fast, and, at least with us, that we've leased that up before the government opportunity makes up their mind. But having said that, we do have a few government-related tenants.

Operator

Jonathan Atkin of RBC Capital Markets has our next question.

Jonathan Atkin - RBC Capital Markets

Yes. A couple of questions: one, clarification. You made a comment on Santa Clara not as strong as Virginia and in between Chicago and I think you meant New Jersey. Was that a comment on just overall demand or pricing? And then on the supply side, I wonder if you can comment just in general terms among Santa Clara, Chicago, Virginia, New Jersey, in terms of truly competitive supply, which markets you see as relatively more versus less competitive.

Hossein Fateh

Well, on the supply side, we think actually Chicago is very tight right now. On the demand side, we have embedded demand in Virginia because we have a significant amount of organic growth. New Jersey is a newer market for us, that's why we think it is going to take a couple of years, two years to lease that up. And then Santa Clara, we feel good about supply, we feel good about demand, but it's a new market for us so we're being cautious and saying 18 months.

Jonathan Atkin - RBC Capital Markets

Okay. And then, so basically New Jersey, 24 months, Santa Clara, 18 months to lease up, is that accurate?

Hossein Fateh

Yes, thereabouts. Santa Clara, I think I hedged it and said 18 months to two years, but that's about right, I mean, it's a little bit early to tell because we don't deliver until third quarter of 2011.

Jonathan Atkin - RBC Capital Markets

And then the current kind of tour activity that's going on in New Jersey, I'm assuming that will be a little bit more in enterprise, maybe less social networking but...

Hossein Fateh

Yes. Absolutely. There's more enterprise, more New York-centric, New York-based companies, a little bit smaller, we see a lot of 50 racks, 100 racks-type customers and we have two or three tours a week.

Jonathan Atkin - RBC Capital Markets

And in terms of the competition there, is, are you competing against other regions, supplying in other regions?

Hossein Fateh

No. It's regional. The competition is very much regional there.

Operator

We'll move next to John Stewart of Green Street Advisors.

John Stewart - Green Street Advisors

A couple of quick ones. Hossein, just following up on that point, is the smaller tenant size in New Jersey, is that really specific to that market or if you had to handicap the eventual tenant list at Santa Clara and Chicago Phase II, do you expect to see and closer to New Jersey than ACC5?

Hossein Fateh

No, not at all. The New Jersey market that is smaller, it's because it's New York-based enterprise and financial industry tenants. The Santa Clara market is, and Virginia I would say, is 70%, 75%, sometimes even 80% Internet space, so those will always be larger tenants. In Chicago, our tenant size has ranged between 1.3 megawatts to 4 megawatts of critical load. So it is very much our, my comment on New Jersey being smaller is very much based on the regional New Jersey market. Santa Clara, there may be some of the newer start-ups, so I would guess Santa Clara would probably be about 1 to 2 megawatts average.

John Stewart - Green Street Advisors

Okay, that's helpful. Thank you. And then, Mark, just following up on your point that you think (inaudible) is generally too short-term. Is it available other than just a floating rate term loan that is put together by your bank group? Could someone other than DuPont get secured financing today?

Mark Wetzel

Depends on the security, the amount of NOI off the asset. I mean, to get speculative secured loans right now, I think, are pretty tough. Obviously the size we need requires a syndicated group, so not one bank is going to loan us 180 million. So it takes a lot of effort to get that, 3 to 5 year money is, from our debt maturities, if you look at our schedule, we don't really want anything maturing in that window of time from 2014 to 2017. So that's probably more of my comment on the secured money, but I think if it's stabilized NOI, secured money is available to build data centers, I think it's pretty tough.

Hossein Fateh

I mean, for others, if they are doing an IPO, they will probably be able to twist some of the investment bankers to give them the loan just to make them a book run. But other than that, it's tough to get secured loans. And frankly, for us, our unsecured loans are cheaper than where we would get secured.

Operator

Our next question comes from Rob Stevenson of Macquarie.

Nick Yulico - Macquarie

Hey, guys. This is actually Nick Yulico on with Rob. I just wanted to see if you could talk a little bit more about New Jersey. Some brokers are calling this a tenants' market for wholesale and co-location space, and I'm just wondering if you would sort of agree with that, or if competitors are pushing harder on price in that market? Thanks.

Mark Wetzel

We're getting all the prices that we expect. I think brokers talk like brokers do. But we're getting what we expect, and we're on track. So I can't really comment on anybody else.

Nick Yulico - Macquarie

Just one other follow up was on, I just want to know, curious what you guys thought about the Goldman Sachs investments Sovalas?

Hossein Fateh

I mean I have no comments on it.

Nick Yulico - Macquarie

Just wondering, because then it seems like it's an example of some capital going to some of the private builders, just I mean it's not readily prevalent, but it was sort of a recent example.

Hossein Fateh

Well, I think it's, it makes sense. I don't know the terms of that investment. We also see General Atlantic investing in QTS. I think that the data center is a, in this economy that a lot of places, there is no growth. In this sector, we have growth, we have real demand, we have tightness in supply in many of the markets. So you would think that smart money was invested in this sector. But are we worried about it? No, because the market is plenty big enough for all of us.

Operator

We have a follow-up question from Michael Bilerman with Citi. Please go ahead.

Michael Bilerman - Citi

I'm sure it hasn't escaped you that short interest on your stock is risen up to almost 10 million shares, 16% of float, that's up about 4% in June. And I guess as you look at that, and I know earlier this year, you were under your 10b5-1 plan selling some of your stock, you're obviously having a major shareholder on the unit side. But I guess as you think about where the stock is, you look at the short interest that's substantial, at what point do you as both CEO and as a major shareholder think personally about stepping in and buying the stock or even taking it one step further, have the company do a share repurchase program. If you are under the belief that the shares are meaningfully undervalued? And I'm just trying to understand the dynamics of what's going through your head.

Hossein Fateh

Well, what I do goes through my head is how do I build and develop and lease data centers. I, what happens to the stock, we're long-term owners of stock, we may sell a little bit every year to pay for my vacations and toys. But other than that, we mean to run a long-term business, and shorts do what they do and longs do what they do, but we're leasing up space and continuing our business. Mark, would you...

Mark Wetzel

Yes, I would echo that. We focus on it, on the development, the raising of the capital and the lease up. Those are our priorities right in front of us.

Hossein Fateh

So, I mean I'll have some fun when we announce a big lease, but we don't want to talk about any of that.

Michael Bilerman - Citi

Right, but I mean if you have the confidence in the business prospects and you have confidence in the leasing and the financing, and you certainly believe that you want to make money in this world and you have excess capital. Why wouldn't you personally be buying the stock at this point?

Hossein Fateh

Because I don't have that much excess capital.

Michael Bilerman - Citi

You can take all the dividends you receive and roll that back into the stock?

Hossein Fateh

I'm not going to comment on my personal net worth and where I'm diversified; it's all publicly disclosed. We feel a huge amount of confidence in the business, and I just need to run the business.

Operator

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

Jordan Sadler - KeyBanc Capital Markets

Yes, Mark, I just wanted to dig into the guidance a little bit. You gave us revenue guidance of 2.75 to 3.25 for next year. Looking at what you have done year to date, and in this quarter, and it looks like you're ramping up revenues by about 15% headed into just 4Q 2010. Is that right?

Mark Wetzel

Yes, we should hit...

Jordan Sadler - KeyBanc Capital Markets

$71 million versus the $60 million, you did this quarter.

Mark Wetzel

Yes, we will hit, if you just extrapolate the 176 year to date and the 245ish range and then carry that into 2011, that's executed leases in hand. When we walk into 2011, all the leases were commenced except for the one in New Jersey.

Jordan Sadler - KeyBanc Capital Markets

Right. Although, I'm saying, my point at the midpoint of the 2010 guidance, you're saying $71 million is going to happen in the fourth quarter of this year, the annualized at 71, I'm getting to 285. Is there anything that would weigh on revenues next year?

Mark Wetzel

The other revenues are not contractual. So there is 10 million there that we'll study between now and year end in terms of what we put out in guidance. But that's not contractual.

Jordan Sadler - KeyBanc Capital Markets

Okay. So this 2.75 to 3.25 excludes other revenues?

Mark Wetzel

Correct.

Jordan Sadler - KeyBanc Capital Markets

Okay. And then, I know you mentioned some of the timing of the leases, but can you just give us a little bit more color on what started, on the timing of the leases that started 3Q? And then the timing of the leases that start 4Q, is it mid quarter or is it closer to the end of the quarter because it's obviously pretty chunky?

Mark Wetzel

It is chunky. No leases started in Q3. Obviously, all the leases at ACC5 Phase II started November 1st. Chicago lease, of the remaining 24%, starts November 1st. And the New Jersey leases, the 9% starts November 1st.

Jordan Sadler - KeyBanc Capital Markets

9% New Jersey November 1 as well, and Chicago is 24%?

Mark Wetzel

Yes.

Jordan Sadler - KeyBanc Capital Markets

That's November 1? Okay.

Mark Wetzel

Right.

Operator

Our next question comes from Brendan Maiorana with Wells Fargo. Please go ahead, sir.

Brendan Maiorana - Wells Fargo

Thanks. Just a follow-up on Jordan's questions about the other revenue that declined sequentially and it seems like the implied guidance for other revenue in Q4 is also pretty conservative. Mark, you've tended to give a pretty conservative guidance outlook and then tended to do pretty well on that line item in a lot of quarters. Is there anything that drove that number down in Q3? What might we sort of expect on a go-forward basis for that?

Mark Wetzel

I think other revenues are driven off of lease openings, lease commencements from a (inaudible) perspective. So, it's just timing because those are all completed contract recognition of revenue and we think we hit that 8 million to 10 million for the year. So I was really just timing of when we recognized that.

Brendan Maiorana - Wells Fargo

Okay. So I guess as we look out to next year, they are not included in the 2.75 to 3.25. You've got lease commencements at New Jersey and then anything else would be on top of that but it could be...

Mark Wetzel

Well, the 2.75, as I said in my prepared remarks, are executed leases in hand that is that the low end. So, we fully expect to have other revenues in 2011. But sitting here today, there's nothing that we contractually have in place that we'll hit. So, it's really just a function of clarification.

Operator

And there are no further questions. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Hossein Fateh

Thank you for joining us today. We look forward to seeing some of you NAREIT later this month in New York City. Thank you.

Operator

And that concludes today's teleconference. Thank you for your participation.

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