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DuPont Fabros Technology (NYSE:DFT)

Q1 2012 Earnings Call

April 26, 2012 10:00 am ET

Executives

Christopher Warnke - Manager of Investor Relations

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

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

Analysts

Michael Bilerman - Citigroup Inc, Research Division

Robert Stevenson - Macquarie Research

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Romeo A. Reyes - Jefferies & Company, Inc., Research Division

David Rodgers - RBC Capital Markets, LLC, Research Division

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

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

Lukas Hartwich - Green Street Advisors, Inc., Research Division

Young Ku - Wells Fargo Securities, LLC, Research Division

Emmanuel Korchman

Operator

Good morning, and welcome to DuPont Fabros Technology's First Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Chris Warnke, Investor Relations Manager for the company. Mr. Warnke, you may begin your conference.

Christopher Warnke

Thank you. Good morning, everyone, and thank you for joining us today for DuPont Fabros Technology's First Quarter 2012 Results Conference Call. Our speakers today are Hossein Fateh, the company's President and Chief Executive Officer; and Mark Wetzel, the company's Chief Financial Officer and Treasurer. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities laws. These forward-looking statements are subject to certain risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Additionally, this call contains non-GAAP financial information, of which, explanations and reconciliations to net income are contained in the company's earnings release, 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 first quarter 2012 earnings call. As noted in our press release, we again delivered solid financial results. We increased the midpoint of our full year FFO guidance by $0.08 per share to $1.49 per share, and increased our common dividends by 25%. Mark will discuss this and our other financial results later in the call.

Since our leasing is our primary focus for 2012, I would like to begin with an update. The beginning of the year has started off well for us. To date, we have signed 6 leases, totaling 23.25 megawatts of critical load, which includes a pre-lease in Phase II of ACC6 in Ashburn. This exceeded our expectations as we expected our leasing to be mostly in the second half of 2012. In the first quarter, we signed 3 leases, representing approximately 5 megawatts of critical load. Two leases were in Santa Clara, one of which was previously disclosed on our last earnings call. The remaining lease is with a new enterprise tenant in New Jersey. Subsequent to the first quarter, we signed 2 leases in Phase I of ACC6. Both are with existing Internet tenants on our Ashburn campus. These leases totaled 9.75 megawatts or 75% of Phase I. As of today, Phase I of ACC6 is 83% leased. Additionally, we signed a pre-lease in Phase II of ACC6 for 8.67 megawatts with an existing Internet tenant. This lease is expected to commence in equal parts in the first and third quarters of 2013. The deal terms of this lease have been provided on Page 2 of our earnings release.

We continue to believe outsourcing data center requirements makes sense. Outsourcing saves tenants capital and allows them to focus on their core businesses rather than data center operations, which is our sole focus. Our just-in-time inventory allows us to meet the tenant's immediate needs. With these competitive advantages, we look to have continued success into the future.

Virginia has been and remains a strong market for us. We have benefited from the success of our tenants and continually strengthen our relationship with them. As previously mentioned, ACC6 Phase I is 83% leased and well ahead of our expectations. Phase II of ACC6 is 67% pre-leased. With this pre-lease, we will commence development of Phase II immediately and expect to deliver the facility at the end of 2012. Our free cash flow and line of credit will fund these developments without the need to raise additional capital. The entire ACC6 building is currently 75% leased and has an average remaining lease term of 13.6 years. A large part of the space at ACC6 has been leased with super wholesale deals. Both tenants have built their own data centers and continue to evaluate the build versus buy analysis. We expect our returns on this property to be approximately 12% once the building is stabilized. For all other properties, we expect to achieve our previously stated returns.

We continue to have confidence in our New Jersey product and believe in the long run this will be a great asset for us. As compared to our other markets, decision-making in New Jersey takes longer. Our sales team continues to track more demand than supply. We signed one small lease of 284 kilowatts in New Jersey in the first quarter. We're confident in our ability to lease up the remaining space. New Jersey is 36% leased as of today.

Santa Clara leasing is in line with our expectations. This market continues to be strong for outsourced data center solutions. During the quarter, we signed 2 leases in Santa Clara. One was previously disclosed on our last earnings call and was for 2.275 megawatts. The other lease was also for 2.275 megawatts. Our sales team is tracking good demand. Santa Clara is 38% leased as of today. Next week, we will have 5.7 megawatts of available space in our VA3 facility. The only thing needed to re-lease the computer rooms is some minor painting and replacing a few floor tiles. We are actively working on re-leasing the space.

There is no change in Chicago from our last call. We successfully opened Phase II in February 1 and remain 79% pre-leased. As provided in our earnings release, one tenant has an option to give back 2.6 megawatts or 14% of Phase II. Tenants in Phase II are actively building out their space. We are in discussions with new tenants on the remaining space.

Leasing remains our primary focus for 2012. As I have said in the past, leasing can be lumpy. We happened to do a lot of leasing since the beginning of the year. Although this has been a great start, we have plenty of work to do.

Now I will turn over the call to Mark, who will take you through our financial results.

Mark L. Wetzel

Thank you, Hossein. Good morning, everyone. Thank you for joining us. I want to cover 4 main topics today: The first quarter results, a capital markets update, a 2012 guidance update and a dividend update.

For the first quarter of 2012, the company's FFO was $0.34 per share, compared to $0.38 per share in the first quarter of 2011. The $0.04 per share decrease was primarily due to lower capitalized interest expense, additional preferred dividends and unreimbursed property operating expenses. Quarterly revenues were $78.4 million, an increase of $9.9 million or 14% over the first quarter of 2011. AFFO was $0.30 per share in the first quarter compared to $0.25 per share quarter-over-quarter, an increase of $0.05 per share or 20%. Increased cash rents drove this. Sequentially as compared to Q4, revenues increased 5% from $74 million to $78 million. During the first quarter, 7 leases commenced totaling 15.23 megawatts. Year-to-date, we've commenced 23.9 megawatts as compared to 13.5 for the entire year of 2011.

To a quick capital markets update, all of which has been previously disclosed, we issued 2.6 million shares of perpetual preferred stock, raising approximately $63 million in January. In March, we increased our line of credit from $100 million to $225 million, while lowering the interest rate and extending the maturity to March 2016, with an additional one-year extension option. This increased line and free cash flow will allow us to complete Phase II of ACC6 without additional sources of capital.

Cash on hand stands at approximately $42 million today and all of our unsecured $225 million line remains available. As a result of the leases executed and commenced to date, we raised the lower end of our 2012 FFO guidance by $0.13 per share, and increased the top end of guidance by $0.03 per share. Full year FFO guidance was increased from $1.31 to $1.51 per share to $1.44 to $1.54 per share. The bottom end of the new guidance represents no additional leases signed and commenced for the year. To hit the midpoint of our new guidance, we need to sign and commence about $4 million of NOI or $0.05 per share. We need about $8 million or $0.10 per share to hit the high end of our new guidance. We will capitalize about $2.5 million or $0.03 per share of interest, and about $1.5 million or $0.02 per share of G&A in the development of ACC6 in 2012. Our FFO guidance range for the second quarter of 2012 is $0.35 to $0.37 per share.

As of today, our non-stabilized properties are 57% leased, with a stated goal of 70% by year end. This remains our goal to drive annualized rents in 2013. With the leases commenced to date and the increase in the FFO for the year, our Board of Directors approved a second quarter cash common stock dividend increase of 25%. This increases our quarterly dividend from $0.12 per share to $0.15 per share. We believe our solid financial condition and balance sheet flexibility places us in a great position to continue to grow the company.

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

Hossein Fateh

Thanks, Mark. Our top priority is to lease our available inventory. This is everyone's focus. We are confident that there is sufficient demand in all our markets to absorb our inventory. I would like to thank everyone at DFT for their continued hard work and contribution.

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

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from Michael Bilerman with Citi.

Michael Bilerman - Citigroup Inc, Research Division

And Manny Korchman is on with me as well. Hossein, in your opening comments, you talked about tenants. You believe that outsourcing is a trend, but clearly tenants have -- and certainly the larger tenants have a decision to lease versus build their own centers. What sort of analysis do they go through in sort of evaluating that decision and sort of how do you get them over the hump of leasing rather than just building their own?

Hossein Fateh

Michael, a very good question. It is not just a pure cost issue, although that's very important. One of the other points that people don't always appreciate is the operating cost of the data center. These large, 26 to 36-megawatt facilities operate at $28, approximately, in Virginia, per kilowatt per month. If you assume that the rents of these facilities are, say, $100 a kilowatt, and the operating expenses are $28, if a tenant goes and builds a small facility, 5 megawatts, 4 megawatts, 3 megawatts, that number could go from the $28 very easily to $60 per kilowatt. The economies of scale are so large that, when you look at the rent of $100 and the operating expense being $28, that operating expense could go to $60 for a 3, 4 megawatt facility. So when you look at that scale, that's a $32 difference, which is 32% of their rents number. So when they look at that number, they look at obviously their own cost of funds, they look at -- some look at capitalizing leases versus operating leases. And more sophisticated tenants will also look at the useful life of an asset that they may own. Some of those container-type assets, they only have a useful life of 8 years or 2 computer cycles. And so when you depreciate that, in their models, owning an asset, owning a container could be significantly more expensive. So you would look at each one of these issues. And many of our tenants also have spikes in their demand, that suddenly they may need to lease something even though they've built their own. But I would say one of the biggest issues is the overall cost of leasing versus ownership.

Michael Bilerman - Citigroup Inc, Research Division

And then just, what caused the delay on earnings? I think you were supposed to have reported after the close yesterday. Was it literally a lease that you were waiting to be signed? Or what sort of drove the delay to report this morning?

Hossein Fateh

I think, I mean, there was one deal that we had coming in, and we were just waiting for one signature.

Michael Bilerman - Citigroup Inc, Research Division

So that lease, was it now included in the results? That's what you're...

Hossein Fateh

Yes, that's correct.

Operator

The next question comes from Rob Stevenson of Macquarie.

Robert Stevenson - Macquarie Research

Just a couple of quick ones. What's your return expectation on ACC6 Phase II? And has there been any changes on the other developments these days?

Hossein Fateh

I think I stated in my prepared remarks that the overall return on ACC6, we expect it to be 12% once it's fully stabilized.

Robert Stevenson - Macquarie Research

That's Phase I and II?

Hossein Fateh

That is correct.

Robert Stevenson - Macquarie Research

Okay. And then in terms of, Mark, what's the expectation for financing of ACC6 Phase II? Are you going to do that with debt? Are you guys going to look to issue equity or ATM program?

Mark L. Wetzel

Rob, what we tried to get across is, free cash flow this year we had projected to be around $60 million. The spend cycle for that build is probably in the $85 million to $90 million to finish that phase out. We will spend that starting this month through the first quarter of '13. So we will be able to fund the bulk of that this year with free cash flow and probably be $30 million, $40 million on the line when we finish in the first quarter. So no new capital raise.

Operator

And the next question comes from Jordan Sadler from Banc (sic) [KeyBanc] Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

I just wanted to circle back on the leasing. Obviously, very robust results. I'm just curious about what else maybe in the till. Clearly, you guys were burning the midnight oil to put the finishing touches on some of this stuff. But I think, last quarter, you talked about some of these super wholesale tenants and maybe even having additional super wholesale tenants in other markets beyond Northern Virginia. Is that still the case or were you just sort of throwing us off the scent a little bit?

Hossein Fateh

I think we're always pursuing -- our business is fishing for these very large fish. And so we're always pursuing it. But I don't want to set everyone's expectation that every quarter's going to be like this. This was an unusually great quarter for us. And it's a huge lump, but as I said, it's a lumpy business. This one was a big lump. But we are searching. We are in the market for very big deals, and we're always looking. So I don't want to set the expectation that there'll be enormous deals very soon. I don't want to set that.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

No, that makes sense. My curiosity was just, are you seeing large tenant requirements, like you saw on Northern Virginia, outside of Northern Virginia?

Hossein Fateh

We have, yes. The answer is yes, we have seen that. Again, say for example, an enterprise tenant in New Jersey may consider that versus building their own. And one of the other considerations, if it's a bank, again, the question that Michael asked, that bank may be so security conscious that no matter -- they may review deals from all of us, but in the end they'll always want to build their own. So we are actively working them, those deals as well, but in other -- in New Jersey, the possibility of it is less because they do have the security issues that, no matter what it costs, they want to own their own.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. Then lastly for Mark. You went over this. I think you said $4 million to hit the midpoint, $8 million to hit the high end. I'm just curious. Just if you could walk through, what's speculative in the revenue guidance for the rest of the year? Is that the -- you need to commence -- find and commence incremental leases that will amount to $4 million and $8 million of NOI?

Mark L. Wetzel

In essence, yes. I mean, the midpoint of guidance -- we tightened that lower end, as you know, on the revenues and base rents. So the midpoint is about where we're headed. And so the focus is, it all depends -- signing leases is great, but what's important is when they commence. And that is what we need to commence to hit those numbers. So NOI is a combination of base rent and obviously unreimbursed OpEx.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So you need to commence another $4 million. And that's total, right? Not annualized, but you have to realize $4 million of incremental commenced rent to hit the midpoint of guidance that's sort of not already baked in based on leases you've signed.

Mark L. Wetzel

Exactly. That is correct. That is correct.

Operator

And the next question comes from Romeo Reyes of Jefferies.

Romeo A. Reyes - Jefferies & Company, Inc., Research Division

A couple of quick ones. Can you give us a sense of how much your existing tenants are growing? And how much of your growth, your new lease activity is from new tenants? That's kind of the first question. And then the second one is with respect to the capital expenditures. What are you going to anticipate the ramp to be? Is it going to be front-end loaded over the next 2 quarters or do you expect that to be kind of towards the back end of the year?

Hossein Fateh

Let me answer the first one. I'll let Mark do the second one. I think, typically, we have enormous amount of organic growth. So I would say, depending on market, it could be different market by market, but typically I would say in a Virginia or the Internet-type markets, as much as 70% of our growth may be from organic internal tenants. In the enterprise type markets, it's almost the reverse. It's where 70% are with newer tenants and 30% is organic.

Mark L. Wetzel

But specific to the leases executed to-date, Romeo, one tenant is new and everybody else was existing.

Hossein Fateh

Yes, and that was because most of the leases were in Virginia.

Mark L. Wetzel

Yes.

Romeo A. Reyes - Jefferies & Company, Inc., Research Division

Does that explain though why it's taking a little bit longer to lease up Jersey?

Hossein Fateh

Yes, absolutely. And typically, if you remember, Phase Is of assets take significantly longer. The easy money is on the Phase IIs. Because on the Phase IIs, it's mostly the Phase I tenants growing within the Phase IIs.

Mark L. Wetzel

And then specific to your second question, to help everybody get capitalized interest correct, we have about $26 million in the ground for Phase II. So we will start to capitalize interest off of that number starting 2 months in the second quarter. Obviously, we're ordering equipment to build out the Phase II. There will be a true bell curve in terms of the spend. It's obviously a tighter timeframe of when we start to finish this asset, but when you think of round numbers, $26 million at a weighted average interest rate of 7.6%, and then roughly $15 million to $20 million in Q3, and the bulk of the money going out in Q4. And that sort of maths into the $2.5 million of capitalized interest for this year.

Romeo A. Reyes - Jefferies & Company, Inc., Research Division

Okay. So $15 million to $20 million of CapEx in Q3 you said? And then what was in Q2? Did you say $26 million?

Mark L. Wetzel

Yes, we expect to spend about $60 million this year. So there'll be -- it will be more weighted toward Q4 than Q3, with a little bit in Q2. $65 million was the number I put in the press release that we hope to -- we expect to spend this year in cash.

Operator

And the next question comes from Dave Rodgers with RBC Capital Markets.

David Rodgers - RBC Capital Markets, LLC, Research Division

Hossein, I guess maybe to follow up on Jordan's question a little bit more and not to take away from the volume of leasing, which was impressive year-to-date, it looked like maybe anything over 1 megawatt was really driven by 2 tenants, if I read the press release correctly, at Virginia and Santa Clara. So maybe, can you give us a sense of kind of what other activity you are seeing in the market? Is activity as robust as it has been? Has it been a little bit slower of late? And the vertical that you're seeing more action from, let's say year-to-date?

Hossein Fateh

I think that typically we're seeing it from some of the larger tenants, and mostly in Virginia and Santa Clara. From the Internet-type tenants, we're seeing good activity. The enterprise, financials type tenants, we're seeing slower decision making. And typically, deals are smaller in size.

David Rodgers - RBC Capital Markets, LLC, Research Division

Smaller in size from the enterprise or smaller in size from Internet?

Hossein Fateh

Smaller in size than the Internet. Like the current small deal we did in New Jersey would be about from 280 kilowatts to 1 megawatt, with a maximum size of maybe a 2-megawatt deal, where the deals in Virginia, we're looking at 8 or 9 megawatts on the higher-end side and maybe 1 megawatt on the lower end.

David Rodgers - RBC Capital Markets, LLC, Research Division

And I guess, just given that you're filling up some of the vacancies in the markets where you've been more active, and the demand, you're saying, profile on the Internet side maybe continues to be at the very large scale, does that suggest that you'd even think about doing additional builds, let's say in Virginia, beyond ACC6 Phase II? Are you going to continue to hold out on the smaller blocks until those are leased up?

Hossein Fateh

Well, we do see Virginia leasing up very well. So we don't -- I don't anticipate any problem leasing up the 1 megawatt part in Virginia, if that's your question. We only have -- in a building, we'll have like -- in a 26-megawatt building, we'll have 70% of the space being the larger, 2-megawatt rooms. And then we'll have the 1-megawatt rooms being 30% of the space and those 1-megawatt rooms could be cut up into 284 kilowatts. So if your question is, do I anticipate any problems leasing out the smaller rooms? No, absolutely not. I mean, this has been an unbelievable leasing quarter in Virginia. We just literally opened the building the end of last year and now we're 83% fully leased on Phase I and Phase II is 67% leased.

Operator

And the next question comes from Jonathan Schildkraut of Evercore Partners.

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

So listen, I was wondering a couple of things. First, I just wanted to make sure that I understood correctly from your prepared remarks that all of the new deals in Virginia were all super wholesale deals. And then if you could kind of walk us through, again, some of the elements of how you're defining super wholesale, what you're getting, what you're giving up in order to get those transactions. And then finally, if you could update us on a comment that you guys made last quarter about considering different facility style structures or building out in different increments. In the past, we've talked about how building out in 18 megawatts chunks delivers great economies of scale. But at times, in certain markets, if the leasing environment is difficult, it puts a lot of capital into the ground. So I'd just like to get an update there.

Hossein Fateh

Thanks, Jon. I don't want to put categories that every deal is super wholesale because that's not correct. I mean, everything is -- there are what I call super wholesale. I don't want to say -- put exact parameters around it. What we did say last time is we see super wholesale deals that give an overall return of approximately 10%, the deal terms are typically longer. So for the guys that would consider -- considering building their own, that makes a lot of sense because they own the building long term anyway, and they can get, most of the time, an operating lease treatment and sign a longer-term lease. And for us, when we mix that with the smaller size deals, in this case we are still getting a 12% overall return on the building, which is fabulous, because we mix it in with the smaller deal. Our other deals are getting north of 15% on the smaller deals. So that brings the overall average of the building up to approximately 12%. On your second question, Jonathan, what was your second question?

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

The second question was that, last quarter, you talked about examining potentially different architectures for data center construction and building out?

Hossein Fateh

Yes, I think we have -- our infrastructure, I believe, is far superior than anything else that exists in the market because of the iso-parallel design. That gives flexibility of the unused power on the building for redundancy for other tenants within the building. To me, that is a far superior design. And cost-wise, the cost per megawatt to build becomes very efficient. Now, having said that, that design, we have had challenges building it in increments. We have now worked out how to do it in 4.55-megawatt increments. So where that will become effective is building out, say for example, Phase II of New Jersey. When we're fully leased on Phase I, we could build out Phase II with a 4.55 increment. Now, the construction costs are not completely linear because we have to do some work upfront, but that will enable us to have small outlays of cash and essentially build it as we lease it up, for some of the markets that we think don't need 18 megawatts within 18 months.

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

Great. And if I can ask just one more question of Mark. One of the things that you guys did during the quarter, and I see that there's a little bit of a highlight in the release, was to expand your line of credit. Based on the math that I'm doing, it looks like this line of credit could be used -- it feels like there's certainly enough capacity for you guys to even consider going after other development opportunities if they arose. Is that the correct read on that line of credit? And then, under what circumstances is the additional $175 million available?

Mark L. Wetzel

Okay, Jonathan. That's exactly why we put that line in place. It's a 4-year line with a 1-year extension. We can -- with pre-leasing in hand, we can build 2 phases at once. So with free cash flow this year to finish out this phase, $30 million to $40 million on the line, we have plenty of capacity to build a -- for example, a Phase II in Santa Clara, or potentially only half of Santa Clara and half of New Jersey, if the rest of it leased. So we put that in place for the exact purpose of prudently trying to be prepared to build a Phase II out there or to do something else.

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

And under what circumstances is that additional $175 million available?

Mark L. Wetzel

It's really a function of getting a bunch of banks lined up that want to contribute and participate. So it's really -- it's a two-way street. We want to have to do it and then we have to find some banks that want to participate.

Hossein Fateh

But currently, our $225 million is all 100% available.

Operator

And the next question comes from Tayo Okusanya from Jefferies.

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

A question. Just in regards to pricing, I know you guys discussed ACC6 and the 12% yield, but could you talk a little bit about just market pricing in Santa Clara, as well as Northern Virginia and New Jersey, what you're seeing?

Hossein Fateh

We've seen good demand in Northern Virginia, Chicago and Santa Clara. They're all performing either better than expected or faster -- or at our expectations. The super wholesale deals are, like I said, at a lower return of approximately 10%, but they're longer lease terms typically and with great credit type tenants, and we're more than happy to have them combined with the small accounts. The New Jersey market, we believe it's not necessarily a price-driven market. There is depth of the market and the decision-making is just slower. If we suddenly dropped prices in Jersey, that would not lease up the data center. So it's not a pricing issue.

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

Got it. That's very helpful. And then just the VA3 and the 5.7 megawatts, can you talk a little bit about just the demand you're seeing for that space? And if anything has changed meaningfully from last quarter when you discussed that space?

Hossein Fateh

No, I think it's good. We're just getting ready right now. We weren't even allowed in the park to go in and -- we're starting to go in and clean it up, paint it and put a couple of new floor tiles. That's a terrific space for resellers and also for tenants that may want an enormous amount of bandwidth. Sitting on Sunset Hills Drive, it's kind of the biggest corridor of fiber carriers in Northern Virginia. Every fiber carrier is on that road. So long term, I don't see any problems leasing that space. It's very good type of space. And we're very happy to have the space because, with the leasing that we've done right now, we only have 2 megawatts of inventory essentially left in Northern Virginia until the end of the year.

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

That's great. If you just indulge me one more quick question. Just at Santa Clara 1, just curious, the additional lease that was signed in this space, is that an entirely new tenant?

Mark L. Wetzel

We don't disclose any tenants. We're under NDA to disclose any tenant information.

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

I'm not asking for the name. Under that agreement, is it a new tenant and you guys are diversifying your tenant base, was all I was curious about, so that's a tenant...

Hossein Fateh

No. Like I said, we cannot disclose that because of our NDA.

Operator

And the next question comes from Lukas Hartwich of Green Street Advisors.

Lukas Hartwich - Green Street Advisors, Inc., Research Division

Hossein, just a quick one. How big do you think the pool of users is that would lease a DuPont size data center?

Hossein Fateh

Well, I think -- you mean lease 1 megawatt or lease any megawatt data center?

Lukas Hartwich - Green Street Advisors, Inc., Research Division

I think just the -- you've got 30-something tenants today. I'm just curious.

Hossein Fateh

I think it's actually very, very large. I think our biggest competition in the space, whether it's us, CoreSite or Digital, it is not -- opportunity is not the trying to get tenants that are in the market. The biggest opportunity, 90% of the market is converting guys that are still doing their own little data centers. We see that opportunity as very, very large. A pharmaceutical company that has a little data center that is outdated, that is 2 megawatts. Financially, it makes absolutely no sense, a grain processor. A lot of enterprise companies have historically done their own data centers. And that's where the biggest opportunity is, converting those guys to a 1-megawatt, 2-megawatt lease, 4,000 servers. So it's those guys that -- 1 megawatt is approximately 4,000 servers. So to look at how many companies in the country have need for 4,000 servers, and that number, my guess is more than 90% of them are still doing their own. That conversion, I think, is a very big opportunity.

Lukas Hartwich - Green Street Advisors, Inc., Research Division

That's helpful. Where do you think most of those enterprise tenants are? Are they in Northern Virginia?

Hossein Fateh

I'll give you an example of a tenant to that we lost because those -- in New Jersey we were talking to BlackRock, and we gave them a very good deal. It was absolutely using their operating expense versus us, it would have economically made much more sense. But there were some tax incentives that they finally got, and they are building out their own 1.5, 2-megawatt data center in Delaware. It's like a perfect example of something that could've exactly happened. And they would've had multiple growth opportunities with us because they can look to Phase II where, with themselves, once they have a piece of land that's less difficult to grow. I think the Internet guys are normally in Northern Virginia and Santa Clara and the Pacific Northwest. The enterprise tenants are normally in New Jersey type, whether they are the pharmaceuticals and the financials. Chicago is a mix. We got some insurance, some hospitals and some Internet tenants.

Operator

And the next question comes from Young Ku from Wells Fargo.

Young Ku - Wells Fargo Securities, LLC, Research Division

Hossein, given all the success that you guys had in Virginia, I'm just trying to see if you can handicap starting another project there instead of other locations?

Hossein Fateh

Well, I think at the moment, we have started ACC6 Phase II, so we don't anticipate starting anything else without huge pre-leasing. As I said, I believe the Phase IIs of these assets -- and Virginia almost acts like a Phase II because we have so much embedded tenant demand with our campus. The other projects, once the Phase Is are leased, I'm very optimistic on the Phase IIs. And just look at Chicago. As soon as we finished Phase I, Phase II was delivered 70-something percent leased -- pre-leased. So I'm very optimistic about the Phase IIs of New Jersey and Santa Clara once the Phase Is are done.

Young Ku - Wells Fargo Securities, LLC, Research Division

So you'll likely start those Phase II projects before you start ACC7?

Hossein Fateh

I mean, it depends on pre-leasing everywhere as well. So pre-leasing will trump any of that. Virginia, don't forget, even with our 67% leased, we have 5.7 megawatts available in VA3, 2 megawatts in ACC6 Phase I, and Phase II, we're leased 8 megawatts, but we're delivering 13 by January. So we have decent amount of inventory. I don't anticipate starting ACC7 anytime soon. Certainly not this year.

Young Ku - Wells Fargo Securities, LLC, Research Division

Okay, got it. So I hear that you're pretty comfortable with your land positions in Virginia at this point?

Hossein Fateh

Yes, we are.

Operator

And we have a follow-up question from Michael Bilerman with Citi.

Michael Bilerman - Citigroup Inc, Research Division

Just a follow-up, just on the leasing, Mark. So you talked about this $4 million to $8 million. What would that be from a signed and commenced megawatt perspective? Back of the envelope, I'm getting like 6 to 12 megawatts, depending obviously on how quickly this stuff comes in. But I suspect we're talking about stuff that probably wouldn't start until the beginning of the third quarter.

Mark L. Wetzel

I mean, we always had it back-end loaded, Q3, Q4. So obviously we had some great success year-to-date. But you could sign only a couple of megawatts if it started next week and probably hit that number. So it's just a function of when it starts. Our goal is to think about where '13 is going to look like from a growth perspective. And by getting leases commenced and then getting the annualized run rate in next year, that's what drives that guidance jump that you can appreciate for next year. But we're targeting another 5, 10, 15 megawatts, but the question is, do they all start in Q4, a little bit in Q3? So I think it's just -- the megawatts don't drive it. It's the commencement and the dollars.

Michael Bilerman - Citigroup Inc, Research Division

Right. So let me think about it a different way. So the developments you talked about going from 57% today to 70% by the end of the year, and obviously different commencement dates, when you look at the core portfolio, 79%, which I guess gets boosted up a little bit by some of the ACC6 leasing, where does that commenced or leased rate, the 79% and 81%, where is that at the end of the year?

Mark L. Wetzel

That's about 15 more megawatts to get us there.

Michael Bilerman - Citigroup Inc, Research Division

So effectively, in terms of at the end of the year, that's where you'd want to be heading into 2013? 15 more -- we should have in our mind 15 more megawatts of the core portfolio being leased this year, on top of the megawatts leased in the development pipeline?

Mark L. Wetzel

Yes, it's between 10 and 15, depending on when it starts, that's correct.

Michael Bilerman - Citigroup Inc, Research Division

Okay. In just the pure core portfolio?

Mark L. Wetzel

That is correct.

Michael Bilerman - Citigroup Inc, Research Division

And that excludes the ACC6 that was done in the quarter.

Mark L. Wetzel

Exactly. Excludes ACC6, but it does include VA3.

Michael Bilerman - Citigroup Inc, Research Division

Okay. Includes VA3. Okay, so the renewal, effective re-lease of the space there.

Hossein Fateh

Think about 10 to 15.

Michael Bilerman - Citigroup Inc, Research Division

Okay. The second thing is, just talk a little bit about the movement in Chicago. What sort of impact the delay of that 4 megawatts, effectively that tenant taking up space in Virginia and why that was important to them to do that and how you got comfortable, a, delaying the commencement in Chicago; and b, potentially getting back almost 3 megawatts if they decide to cancel the lease?

Hossein Fateh

I think Chicago, like I've said in the last 2, 3 quarters is one of our best markets in line with Virginia. So for us, we do not have another development in Chicago right now. So we think that's a very strong market. So we're moving it -- it was almost like a move or an option to delay or move a tenant, that we're going to have no problems leasing that space in Chicago up because it's so tight. So for us, it was a win-win situation, both for them and for us.

Michael Bilerman - Citigroup Inc, Research Division

And how did the rent compare on that space?

Hossein Fateh

I don't think we've disclosed that, but how do you want to answer that one?

Mark L. Wetzel

Yes, I mean, just from a commencements, one of them was to commence in Q3 and one in 4Q. So it wasn't a big run rate for this year. And the rents, obviously time will tell whether we release that at what rent up there, but...

Hossein Fateh

I think we're still going to hit...

Mark L. Wetzel

We're still comfortable with our returns.

Hossein Fateh

We're still very comfortable with hitting an overall return of 12% on Chicago.

Michael Bilerman - Citigroup Inc, Research Division

Okay. And I just want to make this clear. The 10 to 15 is inclusive of Virginia and also effectively getting the completed not stabilized developments from 57% to 70%?

Mark L. Wetzel

Let me correct myself a little bit. The 50 -- the 70% goal initially did not include VA3 because that's part of the stabilized portfolio. The non-stabilized portfolio was the 4 assets that got us to the 70%. That's our goal for the year.

Michael Bilerman - Citigroup Inc, Research Division

And I just want to -- I apologize, just one other clarification. Hossein, you said in your opening comments that you were pleased with the leasing that came in the second quarter which you had thought they were going to be second half. How much of that were the prospects that you thought were going to come in the second half that you effectively pulled forward versus the potential for incremental demand and continued leasing in the second half? And I know you've talked about it being lumpy, and we shouldn't expect big quarters, but I'm just trying to really understand how much of this was a shift of stuff that you had in the hopper of tenants that you thought were going to sign that you just got earlier versus incremental.

Hossein Fateh

I think out of the 23 megawatts, and this is a little bit of a guess, maybe 8 of it was something that we pulled forward. I guess that's it, but I still think we need to do 10 or 15 megawatts through the end of the year.

Emmanuel Korchman

And Hossein, going back to the -- this is Manny here with Michael. Going back to that tenant that has moved from Chicago to Virginia, was that something that you guys initiated or was it something that they came to you two and said, look, we're in Chicago now, but we'd either rather be in Virginia or we'd also like to be Virginia?

Hossein Fateh

Yes, I think it was a combination. One thing that I'll add is, we recently got a -- we were very active in getting a legislation passed and we -- the Governor of Virginia has now signed it, whereby if we qualify for certain things, there is no sales tax on servers inside a data center. And of course, we have to still sign a memorandum of understanding with the state, which we have not done so yet. But that makes Virginia a little bit better in terms of economics. And it is a significant shift. If you think about it, the tenants will spend $10 million a megawatt within their space. And they may renew their servers every 4 years. So when you look at that, that's approximately $18 a megawatt a year on 5% sales tax -- sorry, it's $18 a kilowatt a month, let me correct myself, in value to the tenant at the $10 million spend and renewing every 4 years on their servers.

Mark L. Wetzel

And Manny, that particular tenant was already in both Virginia and in Chicago. So they wanted to move and just balancing there...

Hossein Fateh

And our Chicago was so -- we had so much pre-leasing, we felt good about leasing the balance.

Emmanuel Korchman

And then, Mark, just quickly on the G&A, it looks like your guidance to G&A came down $1 million and you said you're capitalizing $1.5 million to $2 million. So does that mean G&A's actually going up $1 million?

Mark L. Wetzel

No, $19 million to $18 million. I didn't give a range last quarter. And the $18 million -- it's $1.5 million is what I said, so it's honestly a little less than $0.02. But it rounds, whether it's $19.5 million to $17.5 million, it's still in that sweet spot.

Operator

And the next question comes from Jordan Sadler with Banc (sic) [KeyBanc] Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Just clarifying. On the super wholesale deals, the 10% returns, are those over the life of the lease? Or is that an initial cash? Or an initial stabilized return?

Hossein Fateh

That's a initial stabilized return based on GAAP income.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So is it initial -- so GAAP income is average, right?

Hossein Fateh

Yes, yes.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

So is it -- are you trying to say that x the free rent? Or are you saying x the escalators?

Hossein Fateh

I think both the escalators and the ramp are built in. So the first year, they may have rent at 50% on a 12, 13-year lease. And so obviously, that gets averaged the first year and then the escalator gets averaged too.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Got it. So -- and they're what? 3% escalators in these things?

Hossein Fateh

Typically.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. So the initial cash return is probably in the 7% range after the free rent burns off. It's 10% in the middle, 13% at the end or what have you?

Hossein Fateh

Probably, I mean, I haven't looked at it that way, but it doesn't sound unreasonable.

Mark L. Wetzel

Yes, that's correct, Jordan.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. Just curious, this question is a little bit, maybe esoteric, but lease rates. Do you think that these wholesale deals lower lease rates for the market because there's sort of precedent? Or do you think that sort of pulling the space out of the market, because you in many cases represent a lot of the availability or supply, like in this case, actually puts upward pressure?

Hossein Fateh

Well, I think you take out a huge amount of space from the market. And also these are deals that guys that at that rent are willing to lease, but otherwise, they want to build their own. So I think, like you said, in many instances, we are the supply in the market. And by these super wholesale deals, we're taking up big chunks of supply out of the market.

Operator

Another question from Tayo Okusanya from Jefferies.

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

Just a quick follow-up question about ACC6 Phase II. Could you just let us know the total cost of that data center, how much it's going to cost you?

Mark L. Wetzel

Approximately $120 million total cost to build. We've spent $26 million to-date. Obviously, there's capitalized interest, but we'll spend about $85 million to $90 million in cash to finish that out.

Operator

Okay. Actually, there are no more questions at the present time, so I'd like to turn the call back over to management for any closing remarks.

Hossein Fateh

Thank you, everyone for joining us on today's call. Thank you.

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