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DuPont Fabros Technology (NYSE:DFT)

Q3 2011 Earnings Call

November 02, 2011 10:00 am ET

Executives

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

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

Christopher Warnke - Manager of Investor Relations

Analysts

Emmanuel Korchman

Ross T. Nussbaum - UBS Investment Bank, Research Division

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

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

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Phil Wilhelm - Stock Investments

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Christopher R. Lucas - Robert W. Baird & Co. Incorporated, Research Division

David Rodgers - RBC Capital Markets, LLC, Research Division

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Young Ku - Wells Fargo Securities, LLC, Research Division

Robert Stevenson - Macquarie Research

Operator

Good day, and welcome to the DuPont Fabros Technology Third Quarter 2011 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 of DuPont Fabros. Please go ahead, sir.

Christopher Warnke

Thank you. Good morning, everyone, and thank you for joining us today for DuPont Fabros Technology's Third Quarter 2011 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 call -- 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 2 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 2011 earnings call. As noted in last night's press release, we continued to deliver solid quarterly financial results which Mark will discuss later in the call.

Since leasing is our primary focus and catalyst for growth, I would like to begin with the leasing update. Since the beginning of the first quarter to date, we have executed 5 leases totaling 6.7 megawatts of critical load. We have signed 3 leases within the third quarter totaling 5 megawatts. One lease is for 570 kilowatts in Phase I of New Jersey and is with a new social media tenant. The second lease is for 540 kilowatts in Phase I of ACC6 and is with an existing Internet tenant. The third is a pre-lease for 3.9 megawatts. This pre-lease is with an existing tenant in our Chicago facility. To date, we have pre-leased 71% of Phase II of Chicago expect to achieve a 12% unlevered return. We have no secured debt on the facility.

Currently Chicago, is the market that is leasing up the fastest. Our data center provides tenants who need to be in the Midwest with an optimal and scalable solution to their requirements while being able to serve a vast geographical area.

Subsequent to the third quarter, we signed 2 leases at New Jersey totaling 1.7 megawatts. 1 lease is for 1,140 kilowatts and is with a new cloud hosting tenant. The second lease is for 570 kilowatts that is with a new financial services tenant. These new leases bring New Jersey to 34% leased; ACC6, 8% leased; Chicago Phase II, 71% pre-leased; and Santa Clara remains at 13% leased.

Since the beginning of the year, we have executed 13 new leases totaling 23.6 megawatts of available critical load with an average lease term of 7.9 years. To date, we have leased more megawatts in 2011 than we did in all of 2010. Our sales and leasing teams have been working diligently to establish new relationships with perspective tenants, particularly in New Jersey and Santa Clara area. We continue to nurture and expand upon existing relationships in Ashburn and Chicago. We're tracking reasonable demand in each of these market as evidenced by the amount of tours and interest by perspective tenants.

On October 1, we delivered SC1 in Santa Clara. The majority of the available data center states in this market is within SC1. Tenants are drawn to Santa Clara because of the reduced power cost Silicon Valley Power provides when compared to the surrounding areas. We remain confident with the demand in this market and believe in the long run we're in excellent position to capitalize on it.

Due to some recent activity within Santa Clara market, we're seeing slightly lower rents within the range of 10% to 12% unlevered return in Santa Clara. We have no secured debt on this facility. Back to Northern Virginia, we delivered ACC6 on September 1. Ashburn Corporate Campus allows for tenants within the existing building to organically grow into the newly delivered building. We can do this without duplicating any personnel enabling cost savings for our tenants. We're seeing our current tenants demand grow and we are also seeing new tenants come to the market. We expect to achieve a 15% unlevered return on this asset. Wholesale data center outsourcing remains a logical and cost effective solution from those companies. Having just-in-time inventory enables a company to better plan for their data center requirements. It also optimizes the company's available capital. We look to provide our tenants with the most reliable, scalable and cost efficient computing environment in the industry. We believe there is sufficient demand in all 4 markets to absorb our inventory. We have an outstanding track record of leasing available space and we're confident in our ability to lease the space we have.

Our year-end leasing targets remain obtainable but we are focused on our 100% lease up target. We continue to expect to fully lease up New Jersey by the end of 2012 and both Santa Clara and ACC6 within 18 months of opening.

In summary, we continue to make good progress -- leasing our biggest -- leasing is our biggest opportunity to produce cash flow and realize value. This continues to be everyone's relentless focus. Now, I will turn the call over to Mark who will take you through our financial results.

Mark L. Wetzel

Thank you, Hossein. Good morning, everyone, and thank you for joining us. I want to cover 3 main topics today: our third quarter results; balance sheet update; and the 2011 guidance update.

As for our third quarter results for 2011, the company's FFO was $0.44 per share compared to $0.37 per share in the third quarter of 2010, an increase of 19%. The result is primarily from increased operating income from new lease commencements. Quarterly revenues were $73.8 million, our highest ever. This increase of $13.5 million, 22% over the third quarter of 2010. Leases commenced Q3 towards the end of the quarter and we already have commenced 2 leases in Q4 so you will see additional revenue growth in Q4.

FFO was $0.37 per share in the third quarter compared to $0.28 per share for the third quarter of 2010, an increase of 32%. AFFO continues to increase faster sequentially than FFO to ramp periods on new leases burn-off. AFFO was up $6.1 million or 25% quarter-over-quarter sequentially. Cash rents and lower interest expense drove these increases. Year-to-date, revenues increased 21% from $177 million to $213 million. FFO per share for the same period increased 24%. The only remaining development currently in progress is Chicago Phase II. We anticipate using our cash on hand and a portion of the hundred million revolving line of credit to fund this development through completion. As of today, there are no borrowings against the line.

As for our cash CapEx development spend for the remainder of the year, we plan to spend approximately $55 million in Q4. Total spend for the year will be approximately $370 million.

We continue to closely watch the capital markets relating to our next capital event. We will not start another development until leasing catches up. $75 million capital raised discussed in the last call remains an option, but not a requirement. As of today, we may wait to raise additional capital into early 2012. At this point, we would use the majority of any such proceeds to simply pay down the expected line of credit balance we used to complete our Chicago development, with any remainder for general corporate purposes.

We will continue to keep our leverage low and expect to improve on key debt covenants. In summary, our balance sheet is in great shape.

Our FFO guidance range for the fourth quarter of 2011 is $0.35 to $0.37 per share. As noted in our press release FFO's projected to dip $0.08 per share sequentially. This results from an additional interest expensed to stop capitalization of interest on both ACC6 and SC1 toward the end of the third quarter. Our full-year FFO guidance midpoint remains unchanged at $1.60 per share which represents a 20% increase over 2010. Details of our 2011 guidance can be found on Page 15 of our press release. We will provide our 2012 revenue and FFO guidance on the year-end earnings call which will take place in early February.

In September, Moody's raised our corporate and senior unsecured bond credit ratings from Ba2 to Ba1 and raised our preferreds from Ba3 to Ba2. Key components for us achieving investment grade remains diversification, both geographically and tenant concentration. This will happen over time and remains a strategic goal for us.

We believe our solid balance sheet and financial condition give us great flexibility which will enable us to continue to grow the company in a prudent and consistent way for the benefit of our shareholders. With that, let me turn it back over to Hossein.

Hossein Fateh

Thanks, Mark. Before we open up for questions, let me offer a few final comments. Last week, it was announced that the company co-founder, Lammot du Pont, stepped down as Executive Chairman. He will remain as Chairman of the company's Board of Directors. We are grateful for his leadership and all that he's contributed for DFT and look forward to his continued involvement as our Chairman.

Our focus remains on leasing as we believe it's the key to the -- to increasing shareholder value. We continue to see demands in all of our markets. Which we believe can absorb our current inventory. We will complete Phase II of Chicago on time and on budget and we'll be deliberate in starting any new development. We know we have a lot of work in front of us but are confident in our ability to lease our available inventory within the timelines provided. With that, we'll be happy to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll first go to Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

I wanted to just follow up on a couple things as it relates to sort of lease up demand and timing. I noticed in your prepared remarks and in the press release, you characterized demand as reasonable in all of your markets rather than previous quarters you've talked about it as being good. I'm curious if that's a purposeful downgrade in terms of the demand outlook or feeling condition today. And maybe just some commentary as to why you think ACC6 and Santa Clara, even though they're only recently opened, why the pace at those assets seems to be a little bit slower, maybe at the margin relative to at least the interim targets you laid out for year-end?

Hossein Fateh

As far as -- I want to first address -- yes I am worried little bit about the macro-world environment. In that sense, we wanted to change it to reasonable. Data centers are still probably one sector in real estate that's frankly growing at a -- one of the sectors that's fastest growing because the demand is generally driven by the Internet. I want to be tempered because I'm worried about the world around us. As it relates to Santa Clara and Northern Virginia, I think they're 2 different markets. Northern Virginia continues to be our best market. Leasing has always been lumpy, and will continue to be lumpy but we are working on a handful of very large deals for ACC6, and probably 2 handfuls of smaller deals on ACC6. So I have 0 concerns with ACC6 as it relates to leasing. In Santa Clara we did lower, slightly, our rental assumptions, because like I've said before, there are a couple of private players on the market that I felt had done deals that we wouldn't want to do. I wanted to be tempered with our rental rates in that market. Our year -- our fully leased up targets which is 18 months from opening are still achievable in that market. Now ACC6 will probably be faster than our original targets, meaning our fully-leased targets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

And just -- if you could just characterize the demand similar to the way you did on ACC6, you said a handful of larger deals, 2 handles of smaller deals, maybe just a similar type of color around SC1.

Hossein Fateh

SC1, I would say, there are a handful of smaller deals and 1 or 2 like 2 megawatt-type deals that we're looking at. So it's not -- we believe that ACC6 will outperform our 100% lease up targets, and Santa Clara will perform as we expected.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Just as a follow-up, the -- so sort of given this context that we're all immediately focused on the lease up of these developed and recently completed assets. But just -- maybe just give us a little bit more of a strategic view of DFT 2 to 3 years out from now. Mark touched on not launching new development, until you're further along in the leasing. Just trying to get some context in terms of [indiscernible] to you.

Hossein Fateh

Sure.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

And then really your plan for the company beyond the lease up of these 4 assets.

Hossein Fateh

Well I think our long-term is extremely bullish because, don't forget, I've always maintained the Phase I of these assets is the most difficult phases to lease up. Once the Phase I has leased up, our Phase II generally have an embedded tenant base that have more -- that have a organic growth and more demand built up -- pent-up demand because the Phase IIs are there. It just so happens, just like Chicago right now, we're delivering the Phase IIs, are currently 71% pre-leased. Now in 3 year's time, we'll have Phase IIs of 3 other assets at least to be developed. Now depending on pre-leasing, I'm generally much more bullish on the Phase IIs than I am on the Phase Is. But once the Phase Is are committed or we feel pretty much close to committed we'll develop the Phase IIs of these assets which will have a -- typically a faster lease uptake and less risk involved.

Operator

Then next up, Brendan Maiorana with Wells Fargo.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

So a question just in terms of how you think the lease up pace will likely materialize into actual occupancy? Because if you look at the expectations for next year to get New Jersey done by the end of the year in terms of leased, and I guess you kind of have the same expectations for SC1 and ACC6 as well. How do you think that -- do you think there is likely to be more of a delay in terms of taking occupancy versus leased rates similar to what you have at CH1 with the tenant that -- the 20% of the space, but isn't going to be in until, kind of, Q3 or Q4 of next year and then early 2013?

Hossein Fateh

I think it typically will be similar to CH1, in that when we lease up a space, typically the tenants take about 1 year to absorb -- 1 year to sometimes 18 months to absorb the space they have. Now depending on accounting, we may straight line that GAAP income, the first we will straighten the line -- that GAAP income on these commencements. But typically, they have a ramp of about a year.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

So I mean, there's a ramp of a year and you've got a significant amount of leasing that you're expecting to get done in both Q4 of this year through the 4 quarters of next year. If I kind of compare that to what you've got in terms of your Q4 '11 expectations of a midpoint of $0.36 a share -- $0.35 to $0.37, annualized at somewhere, call it, $1.40 to $1.50. And then you've got a capital raise starting in next year, it seems like, kind of, to get up to where a lot of folks are expecting the run rate for next year, you've got to do a fair amount of leasing to, kind of, bridge that gap, is that sort of a fair assessment, big picture, as we look out to next year?

Mark L. Wetzel

Yes, Brendan. If we -- it is -- plus it's a function of development. If leasing goes as we think it will in certain markets, the Phase II will be on the table. We'll talk about 2012 in February but it's a Catch-22 between we're not going to just start development just so we can just capitalize on interest, were going to match it up with demand in the marketplace and be prudent about where go Phase IIs. So if you just think of FFO, interest capitalization does affect it next year but in terms of where EBITDA's going, and where we're taking this company from a cash-returns perspective, we're doing everything right. So the Phase II's developments will be a function of how leasing goes, and if we have -- you do the math on the quote available inventory. And if we average 6, 7, 8 megawatts a quarter, it depends on how -- when those hit. If it happens early in the year, we will be starting Phase II developments. If it happens later in the year, we'll delay it.

Operator

We'll go next to Dave Rogers with RBC Capital Markets.

David Rodgers - RBC Capital Markets, LLC, Research Division

Mark, can you give little bit of color specifically on the GAAP perspective leasing that you got at Chicago Phase II. And just given what you've said, it looks like you got a pretty wide range of estimates out there for 2012. I think a lot of that relates to when the GAAP commencements will actually occur for Chicago. So will you start most of that pre-leasing as of the completion of that asset? Or can you give us some color on the specifics there?

Mark L. Wetzel

Yes, assuming we open the doors in the middle of Q1, I believe 50% of that commences immediately. The 17 [ph] -- the remaining 21% that we just signed, we laid out in the press release window that leasings commences. 50% of building commences on day one of opening.

David Rodgers - RBC Capital Markets, LLC, Research Division

And what was your target for pre-leasing on the day of opening? Did you expect a number there?

Hossein Fateh

Well, I think we assumed 25% or something on a...

Mark L. Wetzel

Well, we put a shovel on the ground at 30%, so we didn't really -- I mean, we're way ahead of where we thought we'd be from the pre-leasing of Chicago.

Hossein Fateh

And again, primarily because of the Phase II asset.

David Rodgers - RBC Capital Markets, LLC, Research Division

Right. And with respect to either new markets or new starts, maybe Chicago comes to mind as well where you could use more land in advance of any other starts that you're talking about putting a shovel on the ground, should we expect to see you a little bit more aggressive in the next 6 months looking for additional, either new markets or land purchases?

Hossein Fateh

Well, I think, David, we have an enormous amount of growth ahead of us in our current leasing. Now having said that, Chicago is one market that, yes, we are looking but we were going to be careful about when we start that. We don't want to leave our tenants without anywhere to go in Chicago. So I think we will need to get something going in Chicago but everywhere else, I think, that unless we've got big amount of pre-leasing we're not going to put a shovel in the ground.

David Rodgers - RBC Capital Markets, LLC, Research Division

Okay. And last question, any back filling on the executive ranks? Or do you -- should we expect to see any hires or any impact to G&A going forward given the Lammont announcement?

Hossein Fateh

No.

Operator

We'll go next to Rob Stevenson with Macquarie.

Robert Stevenson - Macquarie Research

Can you, guys, give us an update on the Secure Financial Transaction access center at NJ1 and talk about maybe the terms there and how much of a factor that may have been with the financial services tenant that you signed there?

Hossein Fateh

We think long-term having the feisty note [ph] of the New York Stock Exchange, it's a definite positive -- the data center. One of our tenants in place will be using that facility and we expect that some of the tenants that are not in the building also are interested in it, some of the people that we're talking to. That was really something that adds value to the building and we expect more and more tenants will start using it. But I can't really put a number on it.

Robert Stevenson - Macquarie Research

Okay, and what was -- I mean, what did you, guys, have to pay to get that?

Hossein Fateh

I don't think we've disclosed that.

David Rodgers - RBC Capital Markets, LLC, Research Division

Okay. And then can you guys talk about how you're approaching, today the, lease up of ACC6 versus the upcoming vacancy at VA3? I mean you talked previously different types of tenants there. Are you seeing more interest in one over the other at this point?

Hossein Fateh

No. I mean, it's like having 2 children. I don't really have a favorite between them. It's a -- no, the reason is one is very different to the other. One is a low density type of building that will really be best suited to a different type of tenant than the high-density space. But I think they will both lease up well, in the past we have always leased VA3 very well, and we do see, once in a while, a tenant of ACC6 that cannot use 200 watts of square foot, if you have any lower-density space then we always point them towards VA3. So I feel very good about Virginia, it remains the best market in the country and we're the dominant player there. So we expect to do well in both of them.

Robert Stevenson - Macquarie Research

Okay. And last quarter, you guys had talked about being 40% back filled there by the time that the tenant moved out. Are you still feeling comfortable with that today?

Mark L. Wetzel

I think it's a -- that was -- where we hope to, I'd say we're -- sitting here today...

Hossein Fateh

I think it's still very possible, it depends on where we want to move some tenants. Some tenants between ACC6 and the VA3 and we just have one tenant who was interested in taking some space there now and we asked one tenant whether they would move out earlier. So some of these assumptions we do are just simply lines in the sand. If the space was available now, I think we could put someone in, certainly in 25% of it immediately. So it depends, I feel -- I still feel that's a reasonable assumption that I want to be...

Mark L. Wetzel

We'll talk further in February about that.

Hossein Fateh

Yes.

Operator

The next is Ross Nussbaum with UBS.

Ross T. Nussbaum - UBS Investment Bank, Research Division

On Santa Clara, the 10% to 12% range you talked about in terms of unlevered returns, that's still a reasonably wide range considering the asset is completed. So you know what the construction costs are, so what's the variable there in terms of the low end and the high end in achieving those returns?

Hossein Fateh

Well, I think I did discuss a little bit earlier in the -- and on the last call, I mentioned that there is 1 or 2 private players that are in that market that I think have done deals where us public players would not do. And to me those deals didn't make sense. And where those deals come in, they were lower than what we expected rent to be. Now the majority of those spaces have now been leased up. So whether the rents will ratch up where we expect them to be or remain lower I'm uncertain of. That's why I wanted to be tempered in our assumptions.

Mark L. Wetzel

And, Ross, the range can fluctuate between somebody taking down 6, 8 megawatts versus somebody taking down 1 or 2 depending who the tenant is and the growth story around them. So I guess what we're saying is we're not looking to lose a deal out there in terms of what we see out there.

Ross T. Nussbaum - UBS Investment Bank, Research Division

I just want to make sure I'm understanding. So the low end of the range would assume that these deals that were done by one of these private competitors, effectively, those rents remain sort of steady in the market. The high end of the range assumes that rents, perhaps, are now back up to where they were?

Hossein Fateh

Now back to where they were. Yes. That's a fair way of it -- that's a fair way putting it.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Okay. On New Jersey, can you give us a sense of where the recent leases are, from a rent-per-kilowatt perspective, as opposed to the ones you that had signed late last year and early this year?

Hossein Fateh

They're about the same. They're about the same, and we still expect to reach a 12% unlevered return. So rents really have not changed on the 2, 3 recent deals that we've done. And every tenant has a lease term, a credit standpoint. Some credit is better, some leases are longer-term, but from a perspective of how we feel rents are in that market, we feel it's really unchanged and more and more people and tenants are realizing the quality of our asset is far superior to anything else in the market. And once they come and see us and tour us in these type of data centers, seeing is believing and once they bring their engineers through, they feel more and more confident that it's the best product in that market.

Ross T. Nussbaum - UBS Investment Bank, Research Division

Do you get any questions from tenants around the topic of density? And do they say, "Hey, I get the rent-per-kilowatt, makes sense, but the rent-per-square foot looks a little high relative to others?" How do...

Hossein Fateh

We -- that's a question we've dealt with from day one, but frankly, when you point them to the feeling and say, "Why don't you go to an 8-foot rack? Why don't you go to a 9-foot rack?" If they say "Oh, you can cool that?" And we say, "Absolutely, we can cool that. The building is designed for that. Let me show you 5 other tenants that are using 8-foot and 9-foot rack. What you care about is the amount of power, not necessarily the amount density." So as we talked them through the density, we have less and less resistance.

Operator

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

Christopher R. Lucas - Robert W. Baird & Co. Incorporated, Research Division

Mark, could you provide some color on the backlog as of the third quarter in terms of megawatts. In other words, what's the amount of leased space versus what has commenced off of those leases. What do you have left that's out there?

Mark L. Wetzel

As of today, all the leases that we have are commenced, including the lease in Santa Clara, including the couple of leases we just signed in New Jersey. And so the only thing that has not commenced is out in Chicago. 50% of which will lease -- will commence as of the day we open the building and the remaining 21% commence as I disclosed in the press release.

Christopher R. Lucas - Robert W. Baird & Co. Incorporated, Research Division

Okay, and then in terms of New Jersey, Hossein, if you could, you had previously guided to, I think, to be at 50%, I think, by year-end. You're at 34%, how comfortable are you at this point in terms of getting to your end goal?

Hossein Fateh

I mean, those assumptions of year-end were simply the midpoint of where we think the leasing will be on the -- it was a straight line, and we looked at where we were going to be 100%, and then prorated it to where we're going to be on a straight line basis year-end. Now absolutely, some markets were going to be at way ahead of that. Some markets may slightly lag, although I do think, as I said in my prepared remarks that all the year-end -- previously stated year-end assumptions are possible, very likely that we'll be way ahead on a couple and maybe lagging on 1 or 2 because there were simply lines in the sand. But we are very confident on our 100% leasing assumptions.

Christopher R. Lucas - Robert W. Baird & Co. Incorporated, Research Division

Okay, and then -- and quickly, just -- it appears to me it sounds like from last quarter to this quarter there has been a greater divergence in terms of how you're think about the market. Is that a fair assessment?

Hossein Fateh

It's a little bit on Santa Clara as I'm thinking about it. But generally I am a little bit about worried more about the macro world market. Now, previously, that has not necessarily affected data centers because they continued to grow. But I'm worried about some of the decision-making based on what's happening in the world, so I want to be tempered. But having said that, typically, we've also seen that, in the past, when our biggest competitors in the world of data centers is tenants doing it themselves. It's not necessarily the other reason [ph]. And in a world that is uncertain, we also see many tenants decide to outsource rather than doing it themselves. So, I may be wrong and it may have a positive impact on us.

Operator

We'll go next to Michael Bilerman with Citi.

Emmanuel Korchman

It's Manny here with Michael. Hossein, maybe you can give us some anecdotal examples or evidence of tenants or potential tenants that have come through and made commitments but you don't have anything out in pre-lease form or even LOI form that you think will help you hit those year-end targets.

Hossein Fateh

Like I said, the -- we are working on a number of tenants in the Virginia market, a handful of very large and maybe 2 handfuls of smaller tenants. But depending on both, we could very well exceed in Virginia where we are staking [ph]. But having said that, I'm much more now focused on leasing up the entire building rather than just trying to hit, what I've described in the past, as a line in the sand in 2 months.

Emmanuel Korchman

I mean, what's the hesitation on the tenants' part from signing those leases? Is it just they're not ready today, and it'll be ready next week? Or is there some broader issue at hand?

Mark L. Wetzel

No, Manny, this is Mark. The -- I mean, the inventory's available obviously, so it's not that. The decision-making internally at some of the companies, it takes longer than maybe it has in the past. So...

Hossein Fateh

But again I want to be -- the original estimates we gave you were simply a straight line -- in a straight line estimate of where we thought we would be 100% leased. There was no magic assumption to those year-end assumptions.

Mark L. Wetzel

And the key point, Manny, is that we, from an FFO perspective, we are exactly where we were we said we're going to be at the beginning of the year. So we didn't have a lot of EBITDA or FFO in terms of the new leases started. It was just that as the run rate of '12 would look to give you a little bit of color where we're going? So whether we hit those in the next 60 days is -- we're working hard on it.

Hossein Fateh

And also, don't forget that we've leased more megawatts in the last year until now than we did all of last year the entire year.

Michael Bilerman - Citigroup Inc, Research Division

Mark, what's -- this is Michael Bilerman speaking. In terms of the cap interest at 27 or 29 for the year that implies $3 million to $5 million for the fourth quarter? And I'm just curious, I guess when you look at the only project that I guess you're going to be capping in the fourth quarter will be Chicago which is $160 million. You got $30 million to $40 million left to spend. So how should we think about -- because that's pretty wide range for cap interest, if it's just that one project. So what's going on in terms of that forecast and how should we think about things moving around for the fourth quarter?

Mark L. Wetzel

It is, to clarify, it is just the 1 project. It is a function of -- we do it monthly based on the draws that we fund the development. So as we hit each calendar month, we capitalize interest on what's been expended not on this total projected. So it moves around based on when things are completed inside that building.

Michael Bilerman - Citigroup Inc, Research Division

You're capping at your 7.4% average rate or are you capping at a different rate?

Mark L. Wetzel

Specific to -- some of the assets was specific to the bond debt at 8.5% and -- but I think Chicago is the average, that one.

Michael Bilerman - Citigroup Inc, Research Division

So if it's at $5 million, if you annualize at it at -- you're talking about $270 million of the cap balance which just exceeds the construction cost, right? If you just take $5 million, annualize it and then 7.4% rate, you get to $270 million?

Mark L. Wetzel

It is, but the money expended at Chicago, at the average rate for 1 month. So if the math is -- I still think we're inside the range that I had projected on the last page.

Michael Bilerman - Citigroup Inc, Research Division

Okay. And then I guess, when you look towards next year, obviously, there is -- it's not just Chicago that's a moving piece, but Santa Clara leasing up, ACC6 leasing up and where you get to on New Jersey, all will greatly impact FFO and the ramp depending on when those leases hit. And so you've been pretty specific on Chicago in terms of opening 50% in the first quarter. And then assuming no other leasing, you get to 57% in the third quarter, 64% by the fourth quarter and then 71% by 1Q '13. And then any other leasing that you do between now and then that takes up space would be additive to FFO, I guess how should we think about the NOI impact for the other projects as we start to wrap our heads around what FFO and the trend line is heading into next year?

Mark L. Wetzel

I think we'll talk in detail in February with regards to 2012. It's absolutely a leased up story for us as we think about quarterly sequential growth at the FFO line. And then whether we start a new development or we not affects that number, because we do have a very conservative capitalization policy. So it's hard to sit here today and say sequentially, quarter-by-quarter, we are hustling to lease and nothing will change.

Operator

The next question comes from Tayo Okusanya with Jefferies & Co.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Couple of questions. Santa Clara, again, just going back to this new 10% to 12% development yield. Again, the sense I got from that market, again, the private guys are really progressive in the third quarter, but based on them being really aggressive, they've pretty much leased up their space. So I'm just kind of curious why you may end up in a world where rates will remain as low as those guys were offering in third quarter and things then kind of bounce back towards where market pricing was before that?

Hossein Fateh

Well I think you're right, they seem to be leased up. But if it does bounce back and I answered it I think when Rob asked, it'll be at 12. If it doesn't bounce back, it'll be at 10.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

But I think I won't -- yes, but I think at one point when we're talking about that asset giving you more like 12% to 14% or 12% to 15% type yields?

Hossein Fateh

No. No, we've always maintained 12% on that asset. And Virginia is the one that we thought...

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Well, I'm sorry. Yes. Okay, that's helpful. And then New Jersey, again it's -- you, guys, have done some additional leasing. We had pretty bullish commentary from one of your competitors about New Jersey, but yet you still have this backdrop of a lot of the leasing expected from financial service companies who all seem to be pulling back. So I guess I'm just trying to understand why your competitor, as well as yourself, sounds cautiously optimistic about that market, but everything we see in regards to who your demand should be coming from, they all seem to, kind of, be pulling back somewhat.

Hossein Fateh

I think New Jersey is coming along. I mean, we've -- we seem to be doing -- it's incremental, we have some incremental leasing that's good. And don't forget, what we have is we put on the market 18.2 megawatts. Our competitors may put on the market 2 megawatts. So the business model we have, which I like as a building owner, is where once the buildings are leased up they are so efficient that it's tough to compete for that building. But to -- but it does take 2 years to lease up these massive buildings. So that's a different business strategy as a long-term owner of the building, I think it's the right decision for us.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Got it. I guess I was just referring to one of your competitors, saying they're now tracking 42 megawatts of demand in that market versus 24 megawatts of power last quarter, where the sudden jump is coming from?

Hossein Fateh

I can't comment on where they see. I just see it as a good, solid market, and we're still tracking plenty of tours and plenty of interest, people coming through the building and seeing what a great asset it is.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And then lastly, I guess it seems there's a lot of buzz nowadays about built-to-suit opportunities out there. Is that a business that you could see yourselves getting more involved in? And are you looking at those kind of opportunities?

Hossein Fateh

We certainly are, but the more what we see potentially doing is talking to some of our relationships to build an 18-megawatt building whereby we would lease 8 to 10 megawatts of it already, and whereby the operating expenses of the building for everyone would ratch down when the entire building is leased. That kind of replicating our model maybe somewhere else. But that would be the opportunity but we're not ready to announce anything.

Operator

We'll go next to Jonathan Schildkraut with Evercore.

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

So the first thing I was hoping that you might give us some color on, Hossein, is the competitive dynamic from market to market as we look at the West Coast. Clearly, Jim has created some competition for you in the Santa Clara area over the last few months. But now, as we look at potentially choosing other markets outside of San Francisco versus your Santa Clara, how competitive is it across geography there? And I guess, in particular, I was surprised to see Net2EZ sign a deal with DLR?

Hossein Fateh

I think Net2EZ in L.A. have always signed with DLR. That's not a new lease for them. They have a long-standing relationship, and if they will need space in L.A, we certainly don't have any space, and I think DLR is a good product out there. So that's nothing new. The -- I think on market-to-market I would say Virginia and Chicago remain our best 2 markets. Then I would rank the New Jersey as our third and the fourth best market would be California or Santa Clara. And on Santa Clara, I feel that it is a long-term, Silicon Valley so there will always be tenants out there, but I certainly feel that some of the deals that were done are deals that we're not willing to do and the other public players are not willing to do. And we will simply wait until they're leased up, and it sounds like they are going to be and I'm also -- we're not willing to go to some of the extent, and I'm happy to talk to you offline, of where some of the concessions those guys are willing to give. And I'm certainly not sure about what their exit strategy is going to be because I'm not interested in buying those buildings.

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

All right. I'll follow up offline on that. In terms of the renewal, you had a fairly large renewal in the quarter. Can you give us some color around that? I think the renewal that you had in Q2 was one of those leases that was above market, and so probably came into market. Is there any incremental color on the lease renewal for the third quarter?

Hossein Fateh

We have NDAs with all of our tenants, and most people in the industry do. And because we have such few leases those renewals could be tracked back to which tenants we're talking about. And so we're really not at liberty to break our NDAs and give specifics on those.

Mark L. Wetzel

And Jonathan, that's the same renewal we talked about on the last call.

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

Okay. Okay. All right, a little confusion there. Hossein, did you give the average remaining lease life across your -- across the footprint at this point?

Hossein Fateh

I think I want to say it's 7.9 but, Mark, please correct me.

Mark L. Wetzel

Yes, it was 7.9 for the leases signed this year, I think for the whole portfolio it's like 6.9.

Operator

We'll go next to Sloan Bohlen with Goldman Sachs.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Just got a quick one, just not to pile on, on the competition question. But out in California with the deals that private guys are doing that you aren't. Can you talk maybe a little bit more about why you think they can offer lower rates, whether it's their bases, whether they're expecting lower returns and maybe kind of quantify that gap and whether that gap is widening or narrowing? And maybe just add a little bit of color there?

Hossein Fateh

I really can't give you color why they're doing it. That's really not for me to say.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

I mean it's an important question, though, right? If rates in your markets are falling a little bit, maybe just offer a little bit of comfort around where you think those rates could go prospectively.

Hossein Fateh

Well, I think this -- from a space standpoint, we see that space now leased up. So the only question I have right now is whether they remain as is, or if they will move back up again. And that's the question that's been asked a couple of times on the call and I don't know the answer to.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Okay. And do you feel like that's a situation that was pretty much isolated to California at this point? Or do you feel like private equity players or other private players might look to build in other of your markets?

Hossein Fateh

At the moment, I would say it's absolutely isolated to California. We haven't seen it anywhere else so I can't comment on that.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Okay. And then just one last question. You guys talked about levels of pre-leasing for new developments. Can you maybe put a number on what that would be to go ahead with a new project?

Hossein Fateh

Well, it depends on the location. Like in some locations, for example, where -- if it was a new location, not in the 4 markets we're at, we will want to be significantly pre-leased, meaning, call it out of 18 megawatts, 6 to 10 megawatts pre-leased. On the current locations, we have less of a need, especially, if it's phase 2 asset because we have an embedded tenant base that we are confident that we would grow into it.

Operator

We'll go next to Phil Wilhelm with UBS O'Connor.

Phil Wilhelm - Stock Investments

Two questions. The first one, given the commentary you provided earlier, it seems as if your initial yield expectations for your developments remains similar to your original underwriting and it's more or less just the timing aspect that's perhaps changed. That's question 1, and then just as a follow up, if true, there should be $70 million-plus of incremental NOI coming from your pipeline. And is that -- does that sound like it's right -- in the right ballpark provided that you hit your...

Hossein Fateh

Well, let me answer the first part and I'll wait for Mark to answer the second part. From a return standpoint even from a timing standpoint, from 100% lease up, we have not really changed our assumptions when we're going to be 100% leased. Where we're going to be 50% leased on some projects we're going to be ahead, some projects we may lag slightly and then maybe catch up at the end. So our final lease, up is we remain confident that we're going to hit those targets. And then, Mark, I'll turn it over to you for the second part.

Mark L. Wetzel

Yes. In terms of -- so if we lease up everything we have from an inventory perspective, your number's not far-off in terms of -- it's just a question of when we get there. And we can get there with no new debt and no new capital raise which is a beautiful thing.

Operator

[Operator Instructions] We'll go next to Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Two clarification points, did you say where the demand was coming from in terms of -- in Northern Virginia, is it the bigger tenants you're seeing from within the existing park? Or are there some new tenants kicking around?

Hossein Fateh

I think both, Jordan, we're talking to a couple of existing tenants interested in expanding and also a couple of -- from the larger tenants, and a couple of new tenants that we have not done deals with that are looking. And then similar to the smaller tenants, probably the first handful would be newer tenants and then there's a handful of older tenants. And as I said, we have already done deals with in the park.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Across the portfolio and in North Virginia tenants -- is it fair to say that there just aren't as many -- you're not seeing as many larger tenants in the market, new larger tenants?

Hossein Fateh

Well, I would say in Chicago and Virginia, we are seeing larger tenants. In...

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

New to the portfolio?

Hossein Fateh

Yes, new to the portfolio. We are seeing larger tenants in Chicago and in Virginia new to the portfolio. On the -- in Santa Clara -- and my definition of large would be maybe, say, 4 megawatts and bigger? The -- in Santa Clara and New Jersey, we're generally dealing with smaller-sized tenants which are like 500 kilowatts to 2 megawatts.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. And then, Mark, just on the debt deal, I know you touched on it. Are you saying that's still embedded in the, sort of, midpoint being affirmed here in the range of $1.59 to a $1.61, you still have $75 million debt deal in those numbers.

Mark L. Wetzel

No. I mean, we -- I always had that debt deal late in Q4, basically the month of December. And now I don't have it in there.

Operator

We'll go next to Young Ku with Wells Fargo.

Young Ku - Wells Fargo Securities, LLC, Research Division

Just a quick question for Mark. Your in-place based gap rents went down $3 million sequentially. Is that just merely driven by your Yahoo! lease? Or what else is going on there?

Mark L. Wetzel

And that's a primary thing, the Yahoo! lease that expired -- it will expire.

Operator

We go next to Chris Lucas with Robert Baird.

Christopher R. Lucas - Robert W. Baird & Co. Incorporated, Research Division

Just a quick question. Just in terms of thinking about the future development starts. Is it fair to assume that you're more comfortable in a market that you have already density. So Ashburn would be an easier market for you to get comfortable with in terms of not only the Phase II part, but just in general thinking about future assets. But as I'm thinking about sort of the risk in your profile, isn't it sort of heading down in the sense that you're -- you've got 3 projects that are Phase I, and then going forward, those 3 will be moving to Phase II. So how should we be thinking about the hurdles to get to new starts?

Hossein Fateh

I think you're absolutely right, and I wish I had been more clear on that on my prepared remarks. What I was trying to get to, and again, I tried to answer it earlier on the call, is yes, now is the time of higher risk in the portfolio because we're leasing Phase I. And yes, the Phase II, we have significantly less risk, and yes, our next phases of expansion, again, will be in the current -- I mean, unless we've got significant pre-leasing, our next phases of expansion will again be -- will be in the 4 markets that we're established in. So yes, again, the -- we feel that down the road, our risks on the new expansions will be significantly less.

Operator

And we'll go next to Jonathan Schildkraut with Evercore.

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

Mark, you talked in your prepared remarks about not initiating on any new phase deployments, so new construction until you saw maybe an improvement in some of the lease up trends. I was just trying to get a sense of that comment in the context of kind of where your plans were maybe a year ago? So are you delaying construction is, I guess, my question, or is it just that you're continually evaluating?

Mark L. Wetzel

Well, I think it's a continual evaluation. The phase -- we've said historically that we'd like to start 2 phases a year. And that still could happen depending on lease up. But as Chris just alluded to, the risk profile is with Phase Is are right in front of us and we're going to deal with it first. The Phase IIs -- we have 49 megawatts of Phase IIs sitting on the table we can bring those to market in a 7 to 9 month window if we need to. And so the idea of starting those in 2012 is absolutely right in front of us. We would like to do that, but we're going to do it in a prudent fashion.

Operator

And there are no further questions at this time.

Hossein Fateh

Thank you for joining us today.

Operator

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

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