DuPont Fabros Technology (DFT) Christopher P. Eldredge on Q2 2016 Results - Earnings Call Transcript

| About: DuPont Fabros (DFT)

DuPont Fabros Technology, Inc. (NYSE:DFT)

Q2 2016 Earnings Call

July 28, 2016 11:00 am ET

Executives

Steven A. Rubis - Vice President-Investor Relations

Christopher P. Eldredge - President, Chief Executive Officer & Director

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Analysts

Colby Synesael - Cowen & Co. LLC

Jordan Sadler - KeyBanc Capital Markets, Inc.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Venkat Kommineni - Janney Montgomery Scott LLC

Lukas Hartwich - Green Street Advisors, LLC

Jonathan M. Petersen - Jefferies LLC

Operator

Good day, ladies and gentlemen, and welcome to the DuPont Fabros Technology Incorporated Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

I would now like to turn the conference over to your host for today, Steven Rubis, Vice President of Investor Relations. You may begin.

Steven A. Rubis - Vice President-Investor Relations

Thank you, Sonia. Good morning, everyone, and thank you for joining us today for DuPont Fabros Technology's second quarter 2016 results conference call. Our speakers today are Chris Eldredge, the Company's President and Chief Executive Officer; and Jeff Foster, the company's Chief Financial Officer.

Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities law. 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 and operating income as applicable are contained in the company's earnings release issued this morning. The release is available in PDF format in the Investor Relations section of the company's corporate website at www.dft.com.

To manage the call in a timely manner, we will limit questions to only two per caller. Should you have additional questions, you may return to the queue.

I will now turn the call over to Chris.

Christopher P. Eldredge - President, Chief Executive Officer & Director

Good morning. Thank you for joining the call. There are four main topics I'd like to cover today. The continuation of our strong leasing, the successful completion of the NJ1 sale and update on our geographic expansion to Toronto and Portland, and our perspective on key market demand drivers.

First, let's discuss leasing. Our strong trend exhibited in the previous two quarters continued in the second quarter of 2016. During the quarter, we leased 39% of our available space for a total of 12.5 megawatts. Let me put that in perspective. Given our second quarter performance, DFT has leased 45.6 megawatts in the first half of 2016, well above our historical annual average. Including our July month-to-date activity, we have leased 46.9 megawatts so far this year, a new record. Given the strength of demand for DFT's product and market, we are fast tracking 2017 developments. Two quick examples, we've accelerated the in-service date of ACC9 Phase I from Q3 to Q2. And we're moving delivery of SC1 Phase III forward to July 2017.

Our operations and development teams are sharply focused on speeding product to market. A great example of DFT's commitment to speed to market is the capacity we're adding to CH2 Phase III. When we delivered Phase III on July 1, our customers have purchased all available critical power and taken all for one computer room.

We saw an opportunity to bring power to the remaining room. The solution is under construction and will add 1.2 megawatts of capacity to this facility. Our sales funnel remains quite robust and includes both new and existing customers. A highlight of our second quarter leasing involved execution of our first full service lease with a significant hyperscale stock provider at ACC7. This important logo which had not taken any additional states with us since our IPO specifically chose us for the quality of our data centers and the flexibility of our new lease offering.

Two factors that will likely lead to additional business with them. Demand for our products is strong among existing customers and evidenced by our renewal activity. In the second quarter, we renewed four leases totaling 2.72 megawatts for an average of 2.3 years with positive rent growth. GAAP base rent increased by an average of 2.9% and cash base rents increased 3.5%.

A few comments now about NJ1, the completion of the sale of QTS represented a key highlight of the quarter. The $125 million sales price was well above our appraised value of $100 million. The sale proceeds allowed us to redeem our remaining Series B preferred stock with the balance available upon development.

Let's turn now to expansion of our geographic footprint. To-date, it revolves around developing projects in both Portland and Toronto. I am pleased to report that we've acquired land in the Portland market. We are preparing to develop Oregon Phase I targeted for 12 megawatts of critical load. Our delivery target for Phase I is the second half of 2018.

Additionally, we're under contract (05:35) Toronto, we expect to close this purchase in Q4 and to have products available for lease in Q1 2018, if not sooner. Both the Portland and Toronto projects will feature our 4.0 design. With this design, we can both speed our time to market and provide our customers with a more flexible range of power density, exactly what these customers are looking for. For all the excitement we feel about our recent achievement, we are more enthused about our future prospects. The macro environment for our business is strong and strengthening, based largely on two factors. First, the continued evolution to outsource IT, which consists of both the shift from on-premise to collocation, and the shift to public cloud.

And second, increasing needs for more advanced computing power like artificial intelligence, big data, machine learning, and the Internet of Things. We see hyperscale cloud providers remaining focused on maintaining a footprint that includes a mix of both leased and owned data centers. For example, in 2015, Amazon data center square footage represented a mix of roughly 72% leased and 28% owned, as hyperscale cloud providers continue to optimize their demand forecasting, they seek base and power with associated scale and agility, that demand is driving them to DFT.

There have been several recent announcements of cloud adoptions that we believe support our strategy. GE is moving the vast majority of their leased and owned data centers into the public cloud. Johnson & Johnson announced in July that it expects to have 85% of its applications running in the public cloud by 2018.

It's not just migration to the cloud that's driving demand, it also heavy data usage. According to Cisco's Visual Networking Index White Paper, global IP traffic will increase nearly three-fold over the next five years and will have increased nearly 100-fold from 2005 to 2020. Traffic from wireless and mobile devices will account for two-thirds of total IP traffic by 2020. The latest Uptime Institute's data center survey found that 50% of survey responded expect the majority of IP workloads to reside off-premise in cloud sites in the future. The survey also found only 9% of IP assets are located in the cloud today, a huge opportunity for DFT.

Microsoft recently reported that nearly 60% of the Fortune 500 companies had at least three of their cloud products. This is tangible proof that the shift to public cloud is not only real, but also illustrates a long adoption runway. DFT's expansion into new markets remains an important driver of attracting new logos and growth. Our development plan focuses on building strategic assets in Tier 1 markets such as Ashburn, Chicago and Santa Clara as well as establishing beachheads in key markets poised for growth, like Portland and Toronto.

All of our markets benefit from high connectivity and relatively low power costs. And certain markets benefit from attractive tax incentives.

Before I conclude my comment, there is another metric I'd like to review, the ROIs on our fully leased developments. CH2 Phase III has achieved an unlevered GAAP ROI slightly higher than our targeted 12%.

The GAAP ROI for ACC7 Phase III is 14%. That compares favorably with the 13% generated by the first two stages of ACC7 and our targeted ROI of 12%. The execution over the past 12 months shows the strength of our competitive positioning. I'm proud of the way our team has executed on our strategy. We're ahead of plan on leasing, development and pricing targets. While we are pleased with our success to date, we believe the future looks even brighter.

At this point, let me turn the call over to over to Jeff.

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Thanks, Chris. Before I review the results, I want to make sure that everyone saw that we added a new page to our supplement. Page 14 of the supplement summarizes our leasing and renewal statistics over the last five quarters and also gives booked but not billed statistics that should help each of you build out your model. Our backlog of booked but not billed totaled $48.5 million as of June 30, 2016, and included pre-leases at CH2 Phase III, which all commenced in July, pre-leases at ACC7 Phase IV, which were projected to commence in the fourth quarter of 2016, and the pre-lease of the entire 16 megawatts of SC1 Phase III, which is projected to commence in the third quarter of 2017. I hope you find these new disclosures helpful.

Today, I want to cover six topics. Our second quarter 2016 results, the capital markets review, a development update, our dividend, a positive provision for the estimated mark-to-market of our portfolio and our increased 2016 guidance.

During the second quarter, we achieved earnings of $0.49 per share compared to $0.30 a year-ago. The current quarter included a $0.26 per share gain on the sale of NJ1. This was partially offset by a $0.10 per share write-off of issuance costs associated with the preferred stock redeemed in the quarter, and $0.01 per share for termination cost of the NJ1 employee. New leases that commenced in 2015, in the first half of 2016 drove the remaining $0.04 per share increase. Normalized FFO excludes the NJ1 gain on sale, the write-off of the redeemed preferred stock issuance costs and the NJ1 employee severance and equity acceleration.

Our second quarter 2016 normalized FFO was $0.64 per share, the midpoint of our guidance. Our Normalized FFO increased $0.02 per share, 43% compared to the second quarter of 2015. Excluding the dilution, we experienced from the common stock offering in March, normalized FFO would have increased 15% from the prior year.

AFFO for the quarter was $0.64 per share compared to $0.70 per share for the same quarter of 2015, a decrease of $0.06 per share or 9%. The decrease was primarily caused by a smaller add back of straight line revenue due to $0.04 per share of cash collected from net data centers in the year-ago quarter. This cash was not recorded as revenue as it reduced net data center straight line receivable. Also contributing to the smaller add back of straight line was that we had a higher straight line revenues to ACC2 in 2015 versus 2016. Additionally, we experienced higher sales commissions in Q2 2015.

Quarterly revenues were $128.5 million, an increase of $14.7 million or 13% from the previous year's quarter. The normalized FFO and revenue growth is in line with targets set out at our Investor Day. AFFO growth is projected to accelerate once more leases commence in Q3 and Q4 2016.

A quick comment on same store. This remains positive in Q2 as net operating income grew to 11% year-over-year and cash net operating income grew 8%. Same-store same capital is mixed, but net operating income growing at 1% and cash net operating income declining 2%. This statistic was negatively impacted by the sale of NJ1, which grew at 5% in Q4 2015, to Q1 2016 and is now excluded from the analysis since it was sold.

Let me comment briefly on our capital market activity. In May, we kept our preferred stock market and issued $201 million of Series C perpetual preferred stock and a dividend rate of 6.625%. Using proceeds from this offering, our common stock offering in Q1 in the sale proceeds from NJ1, we called all of our Preferred Series A and B totaling $351 million, which had raised of 7.875% and 7.625%, respectively.

We redeemed $251 million of the Series A and B shares in May and June, and we redeemed the remaining $100 million on July 15. Given the overlap of the Series B and the redemption dates of the Series A and B, we actually incurred an additional $153,000 of preferred dividends in Q2 versus the prior year and prior quarter.

In the third quarter, we will incur preferred dividends that are $3.3 million lower than the prior year. We have reduced our preferred stock balance by $150 million and on an annualized basis, preferred stock dividends have been reduced by $13.9 million or $0.15 per share.

Subsequent to quarter-end, we restructured our $700 million unsecured credit line and our $250 million unsecured term loan. The impact of this was to increase the line to $750 million and lengthen the maturity date of the credit line to 2020 and the unsecured term loan to 2022. This fits well with our maturity ladder and given the strength of our balance sheet, we were able to keep our interest rates flat. These efforts have further strengthened our already sound balance sheet.

As of today, we have no borrowings on our unsecured credit line, leaving the entire $750 million available. With our cash on hand, cash internally generated in the line of credit, we have the capacity to fund our entire five-year strategic plan. At this time, we have four projects in development and three others waiting in the on-deck circle.

So following are in development. ACC7 Phase IV, which is 8.2 megawatt of capacity and is 49% pre-leased based on critical load. This development is anticipated to come online in the fourth quarter of 2016.

CH2 Phase IV, which is the 1.2 megawatt anticipated to be placed in service in Q4 2016. This is the new CH2 capacity that Chris mentioned in his remarks. We are marketing this capacity today for pre-lease.

ACC9 Phase I, which is 14.4 megawatts of availability. We've accelerated this development and now expect it to come online Q2 2017. We are marketing this capacity today for pre-lease with early occupancy permitted in Q1 2017.

Last, SC1 Phase III, which is 16 megawatts of capacity and is 100% pre-leased. We anticipate placing this data center into service in July 2017.

We estimate that we still have $325 million to $350 million to spend on developments currently underway. About 50% of this spend will be in 2016 with the remainder in 2017.

Waiting in the wings are CH3, TOR1 and OR1. For CH3, We've started predevelopment activities and we'll commence development once the warehouses that are on the site today are cleared of tenant. As Chris stated, we have a contract on land in the Greater Toronto Area. We are still on track to place the first phase of TOR1 in service in the first quarter of 2018. We purchased plan in Oregon and plan to bring the first phase of OR1 into service in the second half of 2018.

Now, let's discuss the dividend. On July 15, we paid our quarterly dividend of $0.47 per share, which was in line with the prior quarter. The anticipated 2016 annualized dividend is $1.88 per share, which represents an estimated AFFO payout ratio of 67% at the midpoint of our guidance.

Next, a quick update on the mark-to-market assumptions we laid out at our November Investor Day. Our mark-to-market forecast assuming 9% decline for cash base rent and a 1% decline for GAAP base rent. This is based on our expectation that new lease pricing will increase 2% to 3% per year.

Since that time, our portfolio has seen new leases comprising 52.7 megawatt, renewals of 6.7 megawatt, and the sale of NJ1. We've renewed all of our leases that were schedule to expire in 2016 and only had 2% of annualized base rent still up for renewal in 2017.

Overall, in 2016, renewals have increased cash base rent by 3% and GAAP base rent by 3.4%. Also, lease pricing has increased 4% year-to-date in 2016.

Updating our July 1, 2016 portfolio's mark-to-market for these events, we now forecast an overall decline in cash-base rents of 7.5% and an increase in GAAP-base rent of 2.5%. This announcement still assumes future prices increase at 2% to 3% per annum. We will continue to monitor market development and update this forecast periodically.

I now would like to discuss our guidance. The full year 2016 normalized FFO guidance range is $2.76 to $2.82 per share. The midpoint of $2.79 per share is $0.03 higher than prior guidance. As a reminder, prior guidance did not forecast the sale of NJ1 in 2016, and by closing that sale in June, we lost $0.05 of FFO from NJ1 no longer being part of the portfolio.

This loss of $0.05 of FFO was overcome by net operating income of $0.05 per share from new leases signed in Q2 and Q3 and a reduction in preferred stock dividend of $0.03 per share, reflecting the completion of the redemption of Series A and B preferred stock. The high end of the guidance range given on the April call had $0.09 of speculative leasing and the current high end of the range has $0.03 of speculative leasing.

The AFFO range for 2016 was narrowed to $2.77 to $2.83 per share. The midpoint of $2.80 per share is the same as last quarter's midpoint. The $0.03 increase in normalized FFO was offset by a loss of $0.02 of straight-line revenue, primarily from the NJ1 sale and an extra $0.01 of sales commission from our record-setting lease.

Our third quarter 2016 normalized FFO guidance range is $0.72 to $0.74 per share. The midpoint of the range is $0.09 per share higher than Q2 as we begin to realize the fruit of our strong leasing result and our balance sheet improvement. Similarly, our third quarter AFFO midpoint is up $0.10 per share versus Q2 AFFO.

With that, let's go straight to your questions.

Question-and-Answer Session

Operator

Thank you. And our first question comes from Colby Synesael from Cowen & Company. Your line is now open.

Colby Synesael - Cowen & Co. LLC

Great. Thank you. So the backlog information is very helpful, the $48 million. When I look at your revenue run rate as it stands here in the second quarter and then take a high level look at that $48 million in backlog, it does look like you'll be in a position to see double-digit growth continue for some time. Is there anything that we should be aware of whether in terms of anticipated churn events or other perhaps price reduction that would suggest otherwise?

And then also when do you think it could be realistic that you would start to market the Toronto and Oregon facilities as they come online, I guess, in 2018?

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Okay, Colby. This is Jeff. I'll take the first part of your question. As you know, I don't comment on next year's double-digit growth yet, but we don't see any large churn event. We fully renewed all the 2016 leases. In 2017, there's only 2% of annualized base rent up for renewal, so there really could not be a major churn event between now and the end of 2017.

Pricing remains strong; it's up 4% year-over-year. And if you look at what we find in the quarter, the trend is even higher than that. So we're still very bullish on pricing.

Christopher P. Eldredge - President, Chief Executive Officer & Director

And, Colby, to answer your question about Toronto, I mean I see us marketing that next quarter. I mean, we're really excited about the market.

At our Investor Day, we outlined all the diligence that we did on the Toronto market specifically. I mean, we've talked to all of our existing customers. We talk to potential new customers in the market. We're excited to bring capacity online, so we're going to start marketing that as quickly as possible.

Colby Synesael - Cowen & Co. LLC

Thank you.

Operator

Thank you. And our next question comes from Jordan Sadler from KeyBanc Capital Markets. Your line is now open.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Thank you and good morning. I wanted to circle back to the lease at ACC7. I just wanted to confirm, that is not a new logo for you, correct? It's just a first time with this hyperscale cloud tenant that you've signed a full service lease, is that you were saying?

Christopher P. Eldredge - President, Chief Executive Officer & Director

I'll explain it to you first, Jordan. I had to get in before you did this time. So, yeah, it is a hyperscale cloud provider. I can't disclose the name. It's the first lease they've done with us since the IPO at 2017. We're really, really excited about it and we think they're going to grow with us in other locations and markets. So, it's not a new company.

Jordan Sadler - KeyBanc Capital Markets, Inc.

So can you elaborate on why this tenant or whether or not the old lease structure was a hindrance to incremental leasing with this customer? Did they obviously go to the full service lease and previously, they were on your triple net structure?

Christopher P. Eldredge - President, Chief Executive Officer & Director

With a full service lease, the OpEx is predictable. They like predictable model and it works for them and it actually helps us to accelerate the sale. So they felt it was positive for them, we felt it was positive for us and, obviously, there's risk-adjusted premium built into the lease.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Okay. That's helpful. And then, as it relates to the backlog, how do we think about the flow-through, Jeff, I mean in terms of the margin on that? And then, I mean, most of it...

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Can you clarify what you mean?

Jordan Sadler - KeyBanc Capital Markets, Inc.

Most of it is probably, you're right, triple net. So with 100%, plus or minus, the $48.5 million just flow through as those leases commence.

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Okay.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Is that how should be modeled?

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

It's all triple net because the one full service lease we had commenced, so all the backlog is triple net. And the way to think about it would be property by property. So for CH1 Phase III, that's the third phase of that building coming online. We will get some increased operating expenses to offset that revenue but, as you know, we put most of our operating expenses in the early phases. So we would do better than our normal 50% on average EBITDA margin with that property.

With ACC7 Phase IV, that property is 50% leased versus CH2 Phase III, which is 100% leased. So there will be some under-covered operating expenses associated with that. And I don't have a number to give you, but that margin would be less than what I just described at CH2 Phase III.

And SC1 Phase III, again that's 100% leased. We're not anticipating adding a lot of operating cost, so it'd be greater than our 60% EBITDA margin for the flow-through. Hopefully that helps.

Jordan Sadler - KeyBanc Capital Markets, Inc.

That's great. Last question and then I'll yield the floor. On the backlog, I mean, Chris, you described the business is strong and strengthening and it's been pretty strong in the last few quarters. Can you maybe just give us an update or characterization of the backlog here?

Christopher P. Eldredge - President, Chief Executive Officer & Director

Well, I can talk about the pipeline. The pipeline is...

Jordan Sadler - KeyBanc Capital Markets, Inc.

Pipeline, yeah.

Christopher P. Eldredge - President, Chief Executive Officer & Director

Yeah. The pipeline is strong as it's ever been. I mean, I keep saying that every quarter, but there's so much growth out there with the hyperscale cloud providers. We're at the very early stages in that game. That's the reason why we're accelerating a lot of these developments because we're really seeing a need for additional capacity in this market from not only our customers, but new customers as well.

Jordan Sadler - KeyBanc Capital Markets, Inc.

Okay. Thank you.

Christopher P. Eldredge - President, Chief Executive Officer & Director

You're welcome.

Operator

Thank you. And our next question comes from Manny Korchman from Citigroup. Your line is now open.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Hey. Good morning, guys.

Christopher P. Eldredge - President, Chief Executive Officer & Director

Good morning.

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Hey, Manny.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Chris, if we sort of look at your development pipeline now with the concentration of sort of space in further route development, especially if we think about Oregon and Toronto, which sounds like late 2018, early 2019 projects at this point. How does that lack of space change the conversation with tenants who were probably more focused on their space needs now versus thinking out two years from now and say, oh, yeah, let me get into a contract now for pre-lease that I'm not going to get my hands on for two years?

Christopher P. Eldredge - President, Chief Executive Officer & Director

Well, there's two things, Manny. We talk about Toronto coming in the first quarter of 2018, and I just said in my prepared remarks, if not sooner. We also talked about Portland coming in the second half of 2018.

If you look at the historical leasing we've had over the last couple of quarters, we're seeing an uptick in pre-lease. So customers that want to reserve that space, to make sure that they have the capacity there, are going to do that. So, you also look at what we're doing with ACC9, we've accelerated that, we're bringing it in a quarter sooner, right. So tenants can get early access in the first quarter. We're working through CH3. So, we're bringing a lot of capacity online to satisfy their needs as market, because the supply and demand dynamics aren't in our favor in those markets, and we know we got to bring products to market quicker to satisfy the demand.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Thanks. And if we look at the lease expansions you did, it looks they're for a sort of shorter terms than I would have expected. What's driving that shortness in extension term?

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

That was just what the customers desired. I don't – wouldn't view that as a trend, every customer has different feel for how long they want it to extend. And the ones we were dealing with now – how long did it advance, so for that, and there's – we're looking at it as the longer extension when you account that – what was still under the lease term. And I was expecting that we won't do a couple of years at a time. I think for some of our customers, just like we talk about for retail customers, they may go to the cloud one day. So, we'll pick that growth back up on the cloud side.

Christopher P. Eldredge - President, Chief Executive Officer & Director

And Manny, if you look at the new leases, I mean last quarter the average lease was about 13.5 years. And I think this quarter, it's like 11.5 years. So, from the new leases we're signing, we're actually seeing longer contracts.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

And maybe if you allow me to go over my limit here for a second. If we think about the triple net lease versus the full service lease, how much of the risk for opportunity, however you want to take that, is there existing customers now coming to you and saying, hey look, we heard that you're doing this for X and Y, or you had this customer that was a relationship then wasn't and then is, how many customers do we expect to switch?

Christopher P. Eldredge - President, Chief Executive Officer & Director

We haven't seen any of our existing customers except the one hyperscale cloud provider switch. The customer's who really understands the triple net lease structure love it, because as a building gets stabilized, the OpEx is being driven down, right. So, they benefit from a lot of the efficiencies in our facility. So, we really don't see much risk with that. What we've found through a lot of our diligence and while we introduced the full service lease is that some of these new customers, they're just not familiar with triple net leases, they're not real estate people. They're technologists, and it was hindering the sales cycle. And that's why we introduced this. And as I mentioned earlier, there is a risk adjusted premium with a full service lease.

Emmanuel Korchman - Citigroup Global Markets, Inc. (Broker)

Thanks, guys.

Operator

Thank you. And our next question comes from Jonathan Schildkraut from Evercore ISI. Your line is now open.

Unknown Speaker

Hi, this is Rob for Jonathan. Thanks for taking my question. I have two questions. I was wondering if you could review the dollar value of commencements year-to-date versus the annualized rental value. And secondly if you could talk a little bit more about the importance of speed to market and what you've been realizing in terms of delivery time.

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Hey Rob, this is Jeff. On your first part, on the commencement, we don't really believe that as a public disclosure dollar value to commencement, we're trying to put out the backlog to kind of look into the future. So, I don't really have a number to give you there at this point.

Christopher P. Eldredge - President, Chief Executive Officer & Director

As far as speed to market, we know it's important, there's a tremendous amount of demand in the markets we're in and we believe that there are 100 supplies, but we've identified some improvements in our design and in our process which is going to help us deliver product to market a lot quicker. As I mentioned with Toronto, I said the first quarter of 2018, if not sooner, we've accelerated ACC9. Hence, we're going to be able to have early access in the first quarter.

So, we're doing everything possible to accelerate bringing products to market. If you look at our historical timeframes of delivery, it was anywhere between 12 months to 18 months. Now, we're seeing it at the lower end. So, we're working hard to bring products to market as quickly as possible.

Unknown Speaker

Great. Thank you.

Operator

Thank you. And our next question comes from Matthew Heinz from Stifel. Your line is now open.

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Thanks. Good morning. Just wondering if you could share any progress you've made with kind of the remaining numbers with the hyperscale cloud community that are not on your customer list today and perhaps that those conversations are happening in existing markets or new markets or maybe a mix. And then just as a follow-up, we've heard about some private and I guess non-traditional players that are either adding to their footprint or bringing on new capacity in Virginia. I'm just curious if you're seeing any sort of intensifying competition specifically in that market and whether you sense there's an increase in spec building activity.

Christopher P. Eldredge - President, Chief Executive Officer & Director

Hey, Matt, I'll take the first question about the hyperscale cloud providers first. We're talking to everybody. I mean we're really excited about that lease with the major hyperscale cloud provider that we signed this quarter, but we're meeting with everyone. That's the reason why we introduced the full service lease, because there's one hyperscale cloud provider that if you don't do full service lease, they're not going to do business with you. S

So, we're having those discussions. I was actually out on the West Coast meeting with, I can't tell you the specific names of the customers, a couple of weeks ago, but every major hyperscale cloud provider. So we're really excited about the future prospects of us doing business with them.

The second is Virginia. There is a lot of activity in the market right now that we're seeing, I mean some of the private folks, Sabey, you see RagingWire has property. There is activity going on in the market, but we still feel that the market is under supplied. That's why we're accelerating the delivery of ACC9. Last year, there were 63 megawatts worth of capacity secured in this market alone. 70% of global IP traffic runs through (37:00); we're really bullish on the market. We think there is enough demand for all of us to do pretty well in this market.

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Yes. And just add on to that. I mean we've opened the last two phases of ACC7, 100% pre-lease at above our return – yeah, we got a return that was above our target also. So, we're seeing still very robust demand, and we a hard time keeping things in stock, ACC7 Phase IV is already 50% pre-leased.

Matthew Heinz - Stifel, Nicolaus & Co., Inc.

Okay. That's helpful color. Thank you.

Christopher P. Eldredge - President, Chief Executive Officer & Director

You're welcome.

Operator

Thank you. And our next question comes from Rob Stevenson from Janney. Your line is now open.

Venkat Kommineni - Janney Montgomery Scott LLC

Good morning. This is Venkat on for Rob. Just had quick question on the 15% expense growth for those same-stores and capital properties, it looks like operating costs were up 15% and real estate taxes were up 21%. Can you talk about what's driving that and when will we start to see that growth moderate?

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Sure. It's Jeff, I'll take that. So, on the real estate taxes, in some earnings calls last year, we noted real estate tax increases in Santa Clara and also at one of our Virginia properties. So, that increase you see relates to tax increases that incurred in the second half of 2015 that are not in the comparative first half results at this point.

The property operating costs are up due to opening new properties, but even more significantly, we saw a tremendous power usage by our customers in Q2 of this year. And I've been stating when people ask about the hyperscale and is it just people buying in advancements and it's going to take them years to deploy all this. We're seeing them take the power right away and you can see that in our Q2 results. So, while our EBITDA margins stayed at its normal 60%, it probably would have had a little upside to that as there wasn't so much power flowing through as a direct pass-through in the revenue in the expense line item.

Venkat Kommineni - Janney Montgomery Scott LLC

Okay. Great. Thank you. That's it for me.

Operator

Thank you. And our next question comes from Lukas Hartwich from Green Street Advisors. Your line is now open.

Lukas Hartwich - Green Street Advisors, LLC

Great. Thank you. Good morning, guys.

Christopher P. Eldredge - President, Chief Executive Officer & Director

Good morning.

Lukas Hartwich - Green Street Advisors, LLC

So, Ashburn continues to be a really strong market. I was hoping you could maybe comment on your other market and then also just touch on market rent trends in your market.

Christopher P. Eldredge - President, Chief Executive Officer & Director

Sure. I mean I'll comment on Ashburn first, probably talk a lot about it. It's a great market, Chicago is a tremendous market where we feel the supply and demand dynamics are in our favor. Last one is the Santa Clara, which is a market that we got a 16 megawatt pre-lease, it's a market that's grossly undersupplied, pretty difficult to get land in that market. I'll talk about the new markets, Toronto and Portland, we did a tremendous amount of diligence on those markets. I mean we talk to all of our existing customers. We talk to potential new customers. We analyze RFPs over the last five years. We had third-party research. So, we believe supply and demand dynamics in those markets are in our favor.

There's other markets out there like New Jersey, there really hasn't been a lot of activity since 2013 with construction. We believe that's a market that's, quite frankly, oversupplied, and that's why we divested ourselves with NJ1. We monitor Dallas and Phoenix pretty closely, because we think there's a chance of those two markets to be oversupplied as well. But if you look at our core markets, we're very optimistic about the future and that's why we're accelerating a lot of these developments.

Lukas Hartwich - Green Street Advisors, LLC

Great. That's helpful. And then, could you maybe touch on the rent trends and market rent trends?

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Yes, we don't give that out, Lukas, market by market, but so far this year, for the leases we signed, base rent per kW is $105, and that compares to $101 last year, $95 a year before and $85 a year before that. So, they continue to go up. Second quarter was better than the first quarter, so it's continuing to trend upward.

Lukas Hartwich - Green Street Advisors, LLC

That's helpful and just a kind of follow-up on that, so the mix – the demand side of the equation seems to be pretty strong and you'd think you'd start to see rent spikes in some of your markets, and I'm just curious, if there is rent growth but there is not rent spikes, is that because supply has kind of – maybe just slightly missing demand, is it just barely keeping up or why aren't we seeing rent spikes?

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

I think its nature of the customer, I mean we're seeing a lot of demand from the big guys, the hyperscale cloud guys and they do have some purchasing power, and there is no need for someone – at least not for us to try to gouge someone on one transaction and lose the rest of their business on a go-forward basis. We try to price it fair.

Christopher P. Eldredge - President, Chief Executive Officer & Director

And then, they're not just customers of ours, it's a partnership between us and these hyperscale cloud providers. I've spend a lot of time with most of these folks and they tell us we're their preferred vendor and we want to make sure that we continue to be their preferred vendor because the relationship is something that's not only important to them, but it's very important to us.

Lukas Hartwich - Green Street Advisors, LLC

Great. That's really helpful. Thanks, guys.

Operator

Thank you. And our next question comes from Ross Smotrich from Barclays. Your line is now open.

Unknown Speaker

Good morning. This is actually Dan. So, my question is pretty similar to the last one. But given a strong and improving demand, why not be a little bit more aggressive in pricing? I guess the risk of that is you're signing these long leases in a very good environment that potentially you could be signing at higher rates in a year or two. Have you thought about being more aggressive in terms of pricing?

Christopher P. Eldredge - President, Chief Executive Officer & Director

Dan, we definitely talk about that a lot, and we have thought about it. And it's something that we may or may not implement, but right now, if you look at the returns that we're getting, we're above our threshold on all the returns. So I talked about, ACC9 14%, CH2 is above 12% and I mentioned it before that it really is a partnership between us and a lot of these providers. We secured our first lease with the hyperscale cloud provider that hadn't done anything with us since our IPO at 2007. They came to us for the quality of our data centers and the flexibility that we've provided. So, it's something that we're evaluating and we could implement that in the future.

Operator

Thank you. And our next question comes from Jon Petersen from Jeffries. Your line is now open.

Jonathan M. Petersen - Jefferies LLC

Great, thank you. I think you have probably talked about this at the Investor Day, but I'm just curious if you can remind us, now that you have land and you're moving forward in Toronto and Oregon, what your return hurdles are in those markets. I guess maybe compare and contrast how you think about what the return requirements are in these new markets versus like at Ashburn, Virginia where you're very well established.

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

All right, hey, John. This is Jeff Foster. I'll take that. So, we have modeled our normal 12% return in those markets, but we didn't make a comment at Investor Day based on the prices we saw when we did our diligence that we thought they could be a little bit higher. But since we haven't entered the market before, we are going to model our normal 12%. And we also model that it would take a little bit longer to lease up in a new market than in existing market because that's been our prior experience.

Jonathan M. Petersen - Jefferies LLC

Okay. Right. Is that a 12% sort of a GAAP yield or a first year cash?

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

GAAP yield.

Jonathan M. Petersen - Jefferies LLC

Okay. And then just I guess obviously there's a time demand out there you guys are accelerating your building schedule to meet that demand. What are your thoughts or what are you guys kind of seeing in terms of new competition in the market? Do you think the barriers to entry are high enough that the existing players are going to get the majority of this incremental demand or is there a lot of whatever it is, private equity or venture capital money on the side lines do you think is going to start playing in this...?

Christopher P. Eldredge - President, Chief Executive Officer & Director

Hey, John, it's Chris. We haven't seen that. I mean the private equity money is still on the side lines. But with every market and whenever you're successful, there's always going to be competition. One other thing that excites me about my job is the ability to compete every day. And I think we've done a pretty good job of winning over the last couple of quarters and that's going to continue.

Jonathan M. Petersen - Jefferies LLC

Yes. All right. Great quarter. Thanks, guys.

Jeffrey H. Foster - Chief Financial Officer & Executive Vice President

Thanks.

Christopher P. Eldredge - President, Chief Executive Officer & Director

Thank you.

Operator

Thank you. And that does conclude our question-and-answer session. I would now like to hand the call back over to Chris Eldredge for any further remarks.

Christopher P. Eldredge - President, Chief Executive Officer & Director

I just want to thank everybody for joining the call. And we look forward to seeing you all in the next call. Thank you. Enjoy the rest of your summer.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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