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DuPont Fabros Technology Inc. (NYSE:DFT)

Q1 2008 Earnings Call

May 15, 2008 10:00 am ET

Executives

Hossein Fateh - President and CEO

Steven Osgood - EVP and CFO

Victoria Baker - Financial Relations Board

Analysts

David Harris - Lehman Brothers

Omotayo Okusanya - UBS

Steven Rodriguez - Lehman Brothers

Owen Guzman - Citi

Jordan Sadler - KeyBanc Capital Markets

Paul Puryear - Raymond James

Jonathan Atkin - RBC Capital Markets

Phil Wilhelm - Stock Investments

Christopher Haley - Wachovia

Michael Bilerman - Citi

Operator

Good day everyone and welcome to the DuPont Fabros Technology First Quarter 2008 Earnings Call. Today's call is being recorded. At this time I would like to turn the conference over to Ms. Vicky Baker of the Financial Relations Board. Please go ahead, ma'am.

Victoria Baker

Thank you and good morning, everyone. Welcome to DuPont Fabros Technology's first quarter 2008 Earnings Call. By now you should all have accessed your copy of the associated press release. If you haven't, you can access this on the DuPont Fabros website at www.dft.com within the Investor Relations section. You can also call my office at 703-796-1798 and we will send one to you.

Before we begin, I would like to remind everyone that the management of DuPont Fabros will make forward-looking statements on this call that are subject to risks and uncertainties, including those discussed in it's Annual Report on Form 10-K for the period ended December 31, 2007. These factors could cause actual results to differ materially from those expected. The company cautions you to consider those risks and uncertainties in evaluating these forward-looking statements.

Additionally, this call contains non-GAAP financial information, including funds from operations, or FFO, and adjusted funds from operations, or AFFO. DuPont Fabros is providing that information as a supplement to information prepared in accordance with generally accepted accounting principles. Explanations of such non-GAAP items and reconciliations to net income are contained in the company's earnings release issued earlier today.

Now I would like to introduce the management. With us today from DuPont Fabros are Hossein Fateh, President and Chief Executive Officer, and Steve Osgood, Chief Financial Officer. Following management's formal remarks, the team will be happy to answer your questions.

Now I would like to turn the call over to Hossein Fateh. Please go ahead, sir.

Hossein Fateh

Good morning. Again, thank you for joining our earnings call today. I will begin with a brief introduction of DuPont Fabros Technology, then provide an update on the general demand for our data center facility, and talk about our leasing and development activities during the first quarter.

Before handing over the call to Steve Osgood, I also want to spend a few minutes on our new General Counsel, Rick Montfort, as well as our search for a new CFO.

We are a leading owner, developer, operator and manager of wholesale data centers in a select number of primary markets. Our data centers are highly advanced, secure facilities used to house, power and cool the computer servers that support many of the most critical business processes. We lease the raised floor square footage and available power of each of our facility to our tenants, primary, national and international technology companies, including Microsoft and Yahoo!. It is under long-term triple-net leases.

As of today, our portfolio occupancy is 93.8% with leases comprising of 9.1 megawatts of critical load that commenced in the third quarter of 2008. We also have development processes at various stages of completion in Illinois, Virginia, New Jersey and California. In addition, we continue to look for new opportunities overseas.

Demand for new data center space remains healthy and our in-house sales teams has seen increased demand from a variety of enterprise users, especially in the financial services, Internet enterprises and in the software, healthcare and telecommunication sector. Demand continues due to the growth of the Internet and the need for enterprise tenants to digify the data. Several Wall Street research analysts have recently stated that while the economy is slowing and the credit markets remain high, leasing indicators point to continued healthy demands for data centers. Wall Street research expects current demand to outpace supply by two to three times. Oppenheimer recently reported that it expects demand to outpace new supply from 2007 to 2010 rising 47% over the same period.

We understand that other research anticipates web hosting revenues to grow at a compounded annual rate of around 15% over the next five years. With our facilities at the forefront of innovation, we are well-positioned to capitalize on this demand. Critical to our success, is our ability to identify, acquire and develop strategically located site in the right market. And turn the development is to fully occupy data centers with strong credit centers. We currently have four operating properties that are 100% leased and our recently placed in service data center, ACC4, which is in a lease up period, and is today approximately 86% occupied as of April 1. Our portfolio was leased to 11 data center tenants, many of which are investment grade tenants and nationally recognized firms in the technology industry.

Our two largest tenants, Microsoft and Yahoo!, account for 70% of our annualized rent, down from 85.8% at our October 2007 IPO. With respect to ACC4, our prototype for ground up development, we completed the second phase of this facility in October 2007. And 171,300 raised floor square footage of 36.4 megawatt of critical loads, we believe this collectable design and enhanced power and cooling capacity makes it one of the leading data center facilities in the world. Currently ACC4 is 86% leased to seven tenants. The first phase of the property was placed in service in July 2007.

As of today, we have leased 31.3 megawatts of critical loads, of which 9.1 megawatts commenced in the first quarter 2008. This includes a lease with Yellowpages.com that we executed in May and we are in discussions with several new cost excess tenants in a variety of industries for additional space. In addition, Yahoo! and IAC, two of our existing tenants, have accelerated their rent commencement ahead of anticipated dates set in the original leases. With these leasing activities at ACC4, we only have approximately 5.1 megawatt of critical load available for lease.

Turning to our development property. Phase I of our new data center in Elk Grove Village, Illinois, known as CH1, is scheduled to open in early July 2008. Phase I of this data center will add 18.2 megawatts of critical load to our portfolio, which is an increase of 22% over our current portfolio. In our 10-K, we projected a total cost range of $210 million to $230 million, and we now project the total cost range of between $200 million to $210 million. At CH1, we are actively in discussion with a number of new prospective tenants, many of which are in the enterprise industry. We are pleased with the number of potential tenants who are touring the facility. Construction of Phase I of ACC5 in Ashburn, Virginia continues and we are on schedule for completion in March 2009.

We are pleased to have broken ground on Phase I of NJ1 in Piscataway, New Jersey this week. This project is scheduled for completion in summer 2009. We plan to start construction of Phase I at Santa Clara, California this summer. This property is scheduled to be completed in the second half of 2009. Phase I of each of our development property, ACC5, New Jersey 1, Santa Clara 1 and CH1, will each add 18.2 megawatts of critical load to our portfolio for a total of 72.8 megawatts. With these developments, our total portfolio will increase to 155.2 megawatts of critical load, which is an increase of 88% over our current portfolio.

In April, we announced the appointment of Rick Montfort, our General Counsel. He joins the company to oversee all legal and corporate matters and provide counsel to the executive management team and the Board of Directors. Rick brings a 16-year legal carrier to the company, where he - where his practice has focused primarily on corporate and securities laws and financing-related transactions.

He was most recently a Vice President at Sprint Nextel Corporation in Reston, Virginia, where his responsibilities included securities law, financing, and executive compensation and employee benefit matters. Before that Rick was Senior Counsel of Securities at XO Communications in Northern Virginia. There his responsibilities included securities law, corporate law, financing, and mergers and acquisition. His experience and counsel are of great value to us and will be instrumental to the company's long-term growth and success. We are very pleased to welcome Rick to our company as General Counsel.

Regarding the search and employment of our new CFO, we're continuing to interview candidates and have identified some very good prospects who are highly impressive.

Before I turn it over to Steve Osgood, I would like to reiterate that we continue to make progress on the execution of our strategic plan and we are on track to meet our 2008 guidance. The development of our pipeline is progressing on schedule and on budget. Data center demand remains very healthy for the space that we're bringing on-line. Steve?

Steven Osgood

Thanks, Hossein. DuPont Fabros reported revenue of $41.1 million for the first quarter of 2008. Our net income was $5.6 million. Net income available to common shareholders for the first quarter was $0.16 per diluted common share. Funds from operations, or FFO, for the first quarter were $22.5 million, or $0.34 per diluted share and unit. Adjusted funds from operations, or AFFO, was $13.2 million for the first quarter of 2008, or $0.20 per diluted share and unit. A reconciliation of net income to FFO and AFFO is included in our earnings release.

I'd like to note that during this call we will not be providing comparative financial results. This is due to the historical financial statements being somewhat convoluted, as I described on our last call, and as a result, a true comparison cannot be made. Sequential quarter comparative financial results for this quarter would not make sense for the same reason, but will be provided in future quarters. In addition, we have included additional supplemental disclosure in our earnings release. This disclosure will continue to evolve over future quarters.

Now I'd like to review our balance sheet. Our capital structure continues to position us well to deliver on our long-term growth initiatives. Total debt was $322.6 million at March 31, 2008. Approximately 62% of that was fixed. As of March 31, the weighted average cost of our debt was approximately 5.9%. We also had $11.3 million in cash and cash equivalents at the end of the quarter. As a reminder, in August of 2007 DFT's predecessor entered into a $200 million secured term loan, as well as a two-step - $275 million senior secured revolving credit facility. The term loan of $200 million and $14 million on the revolving credit facility were outstanding as of March 31, 2008.

With the consent of the lenders, the revolving facility may be increased by an amount up to $200 million to bring the total borrowing capacity to $475 million depending on certain factors. The revolving facility matures on August 7, 2010, but does include a 12-month extension feature. The term loan is an interest-only loan with the full principal amount due at maturity on August 7, 2011, with no option to extend.

As of March 31, 2008, the interest rate on our term loan was LIBOR plus 150, which we have effectively fixed through maturity at 6.497% through the use of an interest rate swap. The interest rate associated with the revolving facility is LIBOR plus 125. We continue to have sufficient flexibility under our credit facilities and term loan financial covenants to execute our development plan.

On December 20, 2007, we entered into a $148.9 million construction loan to which CH1 is currently pledged as collateral. As of March 31, 2008 amounts outstanding under this loan totaled $180.6 million. This loan bears interest at LIBOR plus 225 and requires interest only payment. The loan matures on December 20, 2009 with a one-time option to extend maturity for a period of 12 months, subject of customary conditions. Prepayment is permitted, subject to payment of certain breakage cost incurred by the lenders. As of May 14, 2008 our current debt to market capitalization is 29.2%.

I'm pleased to announce that DuPont Fabros Technology covered its first full quarterly dividend as a public company. We paid an $0.1875 dividend as a first quarter dividend, or $0.75 annualized, and our FFO payout ratio for the quarter was 55% and our AFFO payout ratio for the quarter was 94%.

Before I turn the call over to questions, I would like to reaffirm our 2008 guidance. We believe 2008 FFO will be in the range of $80.3 million to $87 million, or $1.20 to $1.30 per share and unit on a fully diluted basis. And that 2008 AFFO to be in the range of $53.6 million to $60.3 million, or $0.80 to $0.90 per share and unit on a fully diluted basis.

This concludes our formal remarks. We appreciate your time and attention. We'll be happy to take any questions that you might have.

Question-and-Answer Session

Operator

Thank you, Mr. Osgood. (Operator Instructions). Our first question in the morning goes out to David Harris of Lehman Brothers. Please go ahead sir.

David Harris - Lehman Brothers

Yeah, good morning. Steve, it's for you on the guidance question, is that you beat expectations by about $0.07 for the quarter. If I use 34 as a run rate, I'm getting to 136. Can you just give an explanation to why you think subsequent quarters are going to be less than your first quarter?

Steven Osgood

Yes, it's good question, David. But if you think about it, you would expect that the first half of the year for us would be better that as Chicago comes online and we no longer have the ability to capitalize specifically interest and have to start including interest expense as well as those operating expenses that are not recovered from our tenants. In this second half of the year, we will not be performing at the same level.

David Harris - Lehman Brothers

Okay. But saying - sort of related question to that is that you talked of reasonable prospects or advanced discussions I think, and I'm not phrasing you correctly on CH1. Could you give a little bit more color? Because I think many of us have probably assumed that there was going to be some leasing from the get-go and we would be ramping up through the year. Is that still a reasonable prospect?

Hossein Fateh

Well, I think we've always said it's going to take about a year to lease up from the commencement, which is scheduled in July, sometime in July. So with that said, I mean, when you look at the data centers like Chicago, has 18.2 megawatts. The 18.2 megawatts in about a year are probably going to have four or five tenants that are going to occupy the entire building.

Now it's not an exact time as we are getting one tenant each quarter for four, five tenants. Some tenants -- some quarters will have probably several, and some quarters may be none. So we still feel very optimistic about the leasing prospect of Chicago. When you look at that market, it has -- we are almost only person out there that has suburban data center space available. The only other space available is downtown and its price is very much higher. So pretty much if anyone wants to be in the central of U.S. area, this is one of the only available data center that is fully fitted out, ready to go for a wholesale basis.

David Harris - Lehman Brothers

Are you likely to be achieving your pro forma rent? I mean, I know I am sort of jumping ahead of your discussions, and I am not asking for commercial disclosures that would prejudice your position, but--.

Hossein Fateh

No, we're very comfortable in achieving the target of 12% return that we've stated.

David Harris - Lehman Brothers

Okay. And how did you manage to achieve the cost reduction there?

Hossein Fateh

We have a very efficient structure of construction and our construction costs came in lower than expected.

Steven Osgood

And David, if you don't mind maybe if we could pass - let some other people get some questions.

David Harris - Lehman Brothers

Sure. Okay.

Operator

We'll go next to Tayo Okusanya at UBS.

Steven Osgood

Hi, Tayo.

Omotayo Okusanya - UBS

Hi, good morning. Good quarter. Congratulations.

Steven Osgood

Thank you.

Omotayo Okusanya - UBS

Couple of follow-up questions. Again the construction costs on CH1 have come down quite a bit, is there any reason not to expect that the developer yields would be higher than 12%?

Hossein Fateh

They probably could be. I mean, if you think about it, we also talked about maybe the first phase of the project being slightly lower and the second phase of the project being slightly higher than 12%. Now maybe even the first phase will be at 12% to start with.

Omotayo Okusanya - UBS

Great. Second thing. Any update in regards to funding to ensure that you can complete the '09 developments? I know at one point you were talking about getting secured debt on ACC4.

Steven Osgood

Yes, Tayo, this is Steve. We, as you saw, we have quite a bit of room under the revolver and we - we haven't even really begun to tap that, as well as the accordion feature that's with that. So our thoughts on ACC4, which is fully unencumbered, is that we don't really have a need for proceeds until very late this year or the beginning of '09.

Omotayo Okusanya - UBS

Okay.

Steven Osgood

With that said, we understand that the conditions in the debt market being what they are, we have put together a package and that we have begun the process of entering the market to see what's out there. I think the good news is, we have a feeling in the last two to three weeks -- and we have just really entered the market -- there is a sense that some transactions are getting done and some of the securitization has actually flowed through the markets. Obviously there is still a lot of concern out there. But because of the timing and where we are, I would think that we will have a much better update when we have this call in the next quarter.

Omotayo Okusanya - UBS

Okay. And then last question. In regards to Steve, your replacement, how is that process going, so that is a smooth transition when you decide to exit in July?

Hossein Fateh

Yes, we have got a number of very good prospects. A few of them are highly interested, and we're in the process of negotiating with all those guys. I think, as you can imagine, this is an exciting company and I'm proud to say that many of these people really want to work for us.

Omotayo Okusanya - UBS

Great. Congratulations again on another great quarter.

Hossein Fateh

Thank you.

`

And we will go next to Steven Rodriguez of Lehman Brothers.

Steven Rodriguez - Lehman Brothers

Hi, good morning, guys. Just a quick question on the occupancy. Your occupancy remains flat from year end, but it seems like you've commenced leases on a little over 9 megawatts. So from that I expected actually to see an increase. Am I missing something here? Could you talk about that?

Hossein Fateh

Well, Steven, those leases commenced, all three of them that represented the 9 megawatts began on January 1st, they commenced on January 1st of '08.

Steven Osgood

Yes, that's correct.

Steven Rodriguez - Lehman Brothers

Okay. So that was really included in the year-end occupancy number.

Hossein Fateh

Correct.

Steven Rodriguez - Lehman Brothers

Okay. Okay. Thanks.

Operator

We'll go next to Michael Bilerman at Citi.

Owen Guzman - Citi

Good morning. It's Owen Guzman...

Hossein Fateh

Hi Owen, how are you?

Owen Guzman - Citi

Good. Steve, can we talk about the interest capitalization policy a little bit? I'm wondering why you wouldn't continue capitalizing interest on CH1 during the first year of lease-up?

Steven Osgood

This is something that we have had a extremely - had lengthy conversations with our auditors about, actually before we went public. And because the property in totality is being placed in service, and because of the fact that our data center doesn't in fact have TIs, like an office building or a shopping center, if the full property is placed in service at a given date, you can no longer capitalize interest and you can begin to expense it.

Now, that is the policy and it will be particular to each individual property, because as an example, if we were to build - and we always refer to Chicago as being Phase I of Chicago and we talk about Phase I of New Jersey, Santa Clara, or ACC5 - if we were within that Phase I, we're going to literally build the property in phases where it would be only certain pods as an example to be placed in service at a given time. That will change the ability of how we would capitalize the enterprise.

We thought about - we actually explored that opportunity with Chicago, with the construction cost to actually build the building itself, and again, this was an existing structure that we retrofitted to be a data center versus everything else being ground-up development. It was just prohibitive from a cost basis to approach it that way. So, that's a long answer to a short question. In Chicago, the entire site will be placed in service in early July, and because of that we will need to begin expensing interest in operating expenses.

Owen Guzman - Citi

But how much is that total in terms of what you expect to - both on the OpEx side and the total cost side?

Steven Osgood

We have not given out that information and prefer to look at it the guidance we give. We think that is enough information for you out there to look at how we want our other data centers and what the debt is on the properties, to come up with your own calculation. The guidance that we have given is really been annualized FFO and AFFO.

Owen Guzman - Citi

How much capitalized interest right now is on - are you capitalizing for that asset and how much more do you spend between now and when the asset comes online in July?

Steven Osgood

I don't have the answer for the current quarter, but I can tell you in the first quarter it was 3.5 million for Chicago.

Owen Guzman - Citi

And that's all for Chicago?

Steven Osgood

Yes.

Owen Guzman - Citi

How much more do you have to spend after - you have a 200 to $210 million budget. How much of that will you need to spend - once the asset delivers in July with no leases, how much more do you have to spend to get it leased up?

Hossein Fateh

I mean, only any necessary leasing commissions and some operating costs.

Owen Guzman - Citi

I mean, percentage of that, I mean, how much are we talking about 15, $20 million?

Steven Osgood

No, no. No, much less than that.

Hossein Fateh

I can also tell you that it's in our Q that as of the end of the first quarter we had spent about $199 million on the development of Chicago.

Owen Guzman - Citi

So you only have $10 million more to go which covers all these TIs and other funding of the OpEx?

Steven Osgood

Well, again we don't have TIs.

Owen Guzman - Citi

And your - how much of this - how much - you have operating expenses now that you are capitalizing on Chicago?

Steven Osgood

Sure, I mean we have real estate taxes.

Owen Guzman - Citi

How much is that?

Steven Osgood

I don't have a break out of that amount. But I mean you have those types of costs that are included in the development cost while you are developing our property.

Steven Osgood

But for here the development costs are not that much. Much of the equipment is under warranty. So it's the labor and the real estate tax is an insurance to carrying above.

Owen Guzman - Citi

And there is - you talked about ACC4. I know there is a period of time where - and even if you get your leases done, the tenants will have some time to get their operations and you look at Yahoo! and ACC4 was staged over a period of two years in three stages. So even though you had at least in your straight lining the rent the actual cash flow wasn't coming in until, I guess, 2009 till all of it actually comes in?

Steven Osgood

Let me address that in two parts. Because firstly, don't forget anytime that a tenant comes in, even though they may be taking down their triple-net rent over a certain period of time, they always under our lease structure pay a 100% of the operating expense.

Owen Guzman - Citi

Okay.

Steven Osgood

So I would decide everyone was just the same. Now, if you are addressing ACC4, in ACC4 we have only got 5 megawatts left. So, yeah, that would be for 13 megawatts. So it is not going to take that long for the rent to burn in.

Owen Guzman - Citi

I am thinking more about your timing on Chicago. Right now you have - it's 0% leased. It sounds like it is not going to - you are not going to have much leasing when the thing opens up in July. I'm just trying to think about the timing of both leased and then economic occupancy ramp for that asset.

Steven Osgood

I mean, we're cautiously optimistic and we still believe that the whole thing will be leased up in about a year.

Owen Guzman - Citi

Leased and occupied in terms of fully cash paid?

Steven Osgood

Lease and certainly signed up maybe, and if it is signed up the tenants will pay 100% of the operating expenses. Now obviously the lease structure will be similar to ACC4, will take a couple of years for it to burn in, for the leases to start commencing - all the leases to start paying rent, just like ACC4.

Owen Guzman - Citi

So you would expect then - I mean, if we're talking July 2009, it would be 100% leased, maybe 50% occupied from an economic rent paying - granted you are covering the OpEx, and then maybe it's July 2010, another year, for us to be fully cash flow positive?

Steven Osgood

We're not going to go into that detailed guidance. What I can tell you, in about a year a 100% of the space will be paying this operating expense.

Hossein Fateh

And a large degree of that will actually depend who the tenants are. It makes a big difference whether you have four tenants within the property or whether you have seven tenants within the property. With the less power being provided, the space being taken, however you want to look at it, less negotiation as far as the amount of time they have to take the space.

Owen Guzman - Citi

What's the current volume of cash rents that are signed and are not yet ramping related to leases like the Yahoo! lease in ACC4? In other words, if we take your - the $65 million annualized cash rent number that's disclosed in your Q, how much more cash rent is actually signed but has just not yet been collected?

Hossein Fateh

We show t an annualized rent of 97 million, that's not again the question. But in the tables on the properties, we are showing the annualized rent of 97 million to the entire portfolio.

Owen Guzman - Citi

Right, but that's on a GAAP basis, right? So in other words, if you subtract the annualized straight-line rents, how much - if we just look at cash rents, how much is signed but not yet rent paying?

Hossein Fateh

At this point in time, on an annualized basis that number would be around 66 million. In our ACC4 on a non-GAAP basis, '09 is almost fully stabilized and everyone is almost fully paying rents in '09. So if you look at, we started the first phase in July of '07, the second phase in November of '07, it takes 18 months to two years to - for everyone to fully pay rent. And if you're modeling it, I will model it that way.

Owen Guzman - Citi

Right. But what I'm trying to get at is, what is the actual rent right now that has not been collected but that's already been signed? In other words, the spread between the 66 and the 97, how much of that is just driven by the fact that Yahoo! is leased and is just straight-lining their rent but you are just not collecting it yet?

Hossein Fateh

Well, I mean I can tell you in the case of Yahoo! is they are paying two-thirds of their rent and one-third of their rent starts paying in October of this year. Now I don't have it in my head of everyone in ACC4 and we can look at it after the call. But in case of Yahoo!, they are paying two-thirds of their rent and their last - they were going to stop paying rents in January, and as I said they decided to accelerate rent payments and they are going to pay it in October.

Owen Guzman - Citi

And just one last question. When you quote the 12% cash-on-cash yield, does that take into account the interest expense that you'll no longer be capitalizing when the asset delivery is taken?

Steven Osgood

That's 4% return, is an unleveraged return based on the all-in cost of the project.

Owen Guzman - Citi

And does that all-in cost includes interest that won't be capitalized, in other words that won't be included in the phases of the asset?

Hossein Fateh

Well, I mean, the phases of the asset is unleveraged.

Owen Guzman - Citi

Right.

Hossein Fateh

But its unleveraged asset, so the12% is based on the asset being unleveraged. So it's unleveraged. There is no debt, so there is no interest.

Owen Guzman - Citi

No. But you have been capitalizing interest to date as you've been developing it, you are including that in your 200 -- 210 million?

Steven Osgood

Yeah.

Hossein Fateh

Correct, we are.

Owen Guzman - Citi

Right. And so I think what everyone was asking is, once you deliver the asset in July, you are going to stop capitalizing interest to the assets. 12% return is going to be on the 200 to 210?

Hossein Fateh

That's correct.

Owen Guzman - Citi

But clearly your - there is a period as you are leasing it up, is obviously interest or...?

Hossein Fateh

Yes, absolutely.

Owen Guzman - Citi

Which is not in the 12%?

Hossein Fateh

Yes, that's correct. That's correct.

Owen Guzman - Citi

Okay. Thank you.

Operator

We'll go next to Jordan Sadler at KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Good morning.

Steven Osgood

Good morning, Jordan.

Jordan Sadler - KeyBanc Capital Markets

Just wanted to circle up on a couple of items. One was, you talked a little bit about the activity in Chicago. I think previously you had a target of being 25% preleased upon the open. Is that still the target?

Hossein Fateh

I think at this point by July, I don't want to say that we're going to be 25% leased up. But I still like to maintain that we will be fully leased in about a year from July of '08. And basically, like I said, 18.2 megawatt of critical loads will probably going to have four or five tenants. Four or five tenants in about a year is one or two tenants a quarter. Now it's pretty much impossible to say which quarter these tenants come in at. We have - what we are very pleased about is that we have huge amount of tours and prospects, and this is really a numbers game.

And as far as the numbers game, we are having approximately one tour a week. We had over six financial institutions tour, we had got a search engine tour, we had Internet hosting, we had an exchange or consulting firm, media Internet and Internet commerce firm, financial accounting, higher education, healthcare, again Internet hosting, a law firm, global positioning services, a wireless company, a publishing company, media Internet. I was just reading off the list of our prospects that we are talking to.

Jordan Sadler - KeyBanc Capital Markets

Yes, that makes sense. I think the last time we spoke about Chicago, maybe on the last call, you related it to ACC4 Phase I and its opening about a year earlier, and essentially they were parallel just one year over, one year later rather in Chicago. And I think you had said that the activity in Chicago was even more encouraging...?

Hossein Fateh

Yes, absolutely and we still maintain that. We've had much more activity in Chicago than we've had in ACC4 Phase II that I was referring to.

Jordan Sadler - KeyBanc Capital Markets

But ACC4 Phase I opened up fully leased in July of last year?

Hossein Fateh

Yes, it did and part of that was that we had already established campus in Virginia, and part of the already established campus 75% of that fully leased up building was one tenant, Yahoo!, that was expanding from the building next door.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Hossein Fateh

So it helps. But my comments it still - I still maintain and very confident that our leasings and our touring prospects are going very well.

Jordan Sadler - KeyBanc Capital Markets

Is there any difference in sort of the tone of those who are leasing space, or I mean prospective tenants, are they little bit more cautious today than they were a year ago?

Hossein Fateh

We don't see that at all, but we do see that enterprise tenants, and we have said this before, generally take a little bit longer to sign up leases than Internet company. And by enterprise, our definition of it is pretty much everyone, but the Internet guy. They take a little bit longer, the process takes longer. But still we have had enterprise customers before and we are working through it and we still think one year is the correct amount of time to lease it up.

Jordan Sadler - KeyBanc Capital Markets

That's helpful. And then just, Steve, you mentioned the - that you are out to market with the package on the financing side it sounded like. Can you maybe elaborate little?

Steven Osgood

Well, we put a package together. We have talked to - or we have the package out to a couple of people within Wall Street just to see what might be available there and where the securitization markets might be. We've also --

Jordan Sadler - KeyBanc Capital Markets

When you say package, I assume - I mean, what's unencumbered today that you could package up and --

Steven Osgood

ACC4 has no debt on it.

Jordan Sadler - KeyBanc Capital Markets

Okay. So it's ACC4.

Steven Osgood

This is all specific to ACC4.

Jordan Sadler - KeyBanc Capital Markets

Okay. And so you're entertaining sort of a secured financing on ACC4 hopefully for timing in the second half of this year?

Steven Osgood

Right. But we've actually brought - and I didn't quite finish. We broadened the approach to talk to various other institutions as well, because we all realized that the debt markets were still trying find the right instance of optimistic news and activities have taken place in the last month or so. But we are certainly not taking a rightful approach. We are taking more of a shotgun approach and approaching various different players that have shown an interest both domestically as well as we've actually been approached by some players internationally that have an interest.

Hossein Fateh

I think what we have is this unusual asset in ACC4 and that has got such good credit turn. But I think there is no question that this market is challenging from a debt perspective. Anyone that tells you it's not, well, they don't know what they are talking about. But the issue is, our credit on ACC4 being all - except for maybe one tenant (inaudible) helped us, put us in a very good position.

Steven Osgood

It's also, I think, important to realize that we are not looking to take the last dime out of the property. We are looking at something below 60% loan to value and then all the leases as structured are long-term leases to same set. We have great tenants. The 10-year leases, there is very little risk from lender's perspective.

Jordan Sadler - KeyBanc Capital Markets

Okay. Now the expected sort of cash out refi from - or mortgage that will be attainable on ACC4?

Steven Osgood

Yeah.

Jordan Sadler - KeyBanc Capital Markets

300 million, 400 million?

Steven Osgood

We're looking between 3 and 400 million.

Jordan Sadler - KeyBanc Capital Markets

Okay. And that's really the primary source of financing for the developments that you've launched including - now you'll basically within the next, call it, 60 to 90 days or so, it sounds like you'll have 6, $700 million worth of development under way. By my count you've got about $300 million worth of liquidity or capacity today. Will there be other project financing?

Steven Osgood

There could be, and we've actually been approached just recently on that as well to do another loan similar to CH1, and we might pull one of the projects out and look for a more typical construction financing as we've done previously. But our capacity is actually a little bit greater, as we really haven't pulled on the line to any large extent and it does, with 275, have the accordion feature. So as I mentioned in the prepared remarks that the...

Jordan Sadler - KeyBanc Capital Markets

The accordion feature, Steve, don't you have to roll ACC4 into the facility to get the access to that accordion, going to get commitments from the rest of the banks?

Steven Osgood

We do have to get commitments from rest of the banks to pull the full 40 and we would need to pull in ACC4, but we can access a portion of the accordion without that based on the formulas.

Jordan Sadler - KeyBanc Capital Markets

Okay. About how much is that?

Steven Osgood

I have not done the math recently, so in the range of 75 to 100 million would be my feeling.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Hossein Fateh

But we also have a couple of hundred million dollars left on the revolver.

Steven Osgood

(inaudible) 250.

Hossein Fateh

Yes.

Jordan Sadler - KeyBanc Capital Markets

You've got 15 million or 14 million out on the revolver as of quarter's end...?

Hossein Fateh

Exactly. So if you look at that, there is about 273 on the revolver, less 15, there is like what 260 million there, and there is $300 million on ACC4, so that's $520 million -- $527 million.

Jordan Sadler - KeyBanc Capital Markets

560.

Hossein Fateh

Yeah, exactly 560 million there. Then on top of that, on the other projects we will can construction loans and so on.

Jordan Sadler - KeyBanc Capital Markets

Okay. And the construction loan market, it's just early in the stages in terms of --?

Hossein Fateh

Yeah, it's way too early

Jordan Sadler - KeyBanc Capital Markets

Okay, that's helpful. Thank you.

Operator

We'll go next to Paul Puryear of Raymond James.

Paul Puryear - Raymond James

Thanks. Good morning guys.

Steven Osgood

Hi, Paul.

Hossein Fateh

Hi, Paul.

Paul Puryear - Raymond James

A couple of clean-up items on the income statement. The other revenue, Steve, of 2.9 million, could you give us some color on that?

Steven Osgood

Right. Well often times - this all going through our TRS, the other revenues and other expenses. Our responsibility, as we've explained in the past, is really at the outlet in the wall. But many times our tenants will approach us as a service to basically run the electrical from the outlet to the wall to the actual servers themselves. They don't want us to mess around with the fiber optics, which has to kind of run through the same path. And we will do this business service for our tenants and it's something that we subcontract out and generally mark up by 20%. So that's the other revenue, is reflecting that we had quite a bit of activity in the first quarter of that type of service. And the other expenses are the flip side of it.

Paul Puryear - Raymond James

So what kind of a run rate should we expect there?

Steven Osgood

This is what I describe as somewhat as the most recurring non-recurring work that we do. And it will definitely follow the lease up of the properties, so that the ACC4 for the most part is spoken for. It's very difficult to project. This is not a number that will be recurring on a quarterly basis. I would say that we might do - as a run rate I might look at a like amount of this for the balance of the year. We had unusually heavy activity in the first quarter.

Paul Puryear - Raymond James

Okay. And then also on the income statement, the G&A for the quarter, is that a reasonable run rate? What do you expect for the year?

Steven Osgood

We have not given - again, we have not given any specific guidance on any of the line items, and really stuck with the FFO and AFFO on an annualized basis. If you think about our business and what we do and the number of people that we have within the organization, and that we're only bringing one property on-line, which is just about complete, I would not expect there to be significant changes in that number. I'd like to leave it at that.

Paul Puryear - Raymond James

Okay. One more question, Hossein, for you.

Hossein Fateh

Sure.

Paul Puryear - Raymond James

At CH1, how sensitive is your client base to price? And if you chose to move the price, does that close deals for you?

Hossein Fateh

I'm not really sure. I mean, I'm not really sure that it does. The issue is, we are extremely competitive with someone trying to build their own data center. Because when you think about it, the data centers, the one like Chicago, just the labor and cost of sick people and cost of the security is about 1.2 million a year in Chicago. And 1.2 million a year, a tenant that takes two out of 18 megawatts will pay one-ninth of that cost, right, one-ninth of 1.2 million. Now, if the tenant is just $133,000 in labor and security.

I just spoke to a tenant that is considering a data center on their own, and they will require five people on security. And they told me themselves straight out that will cost them $900,000. So in regard to wholesale data centers where tenant share the operating expenses, that by itself in that example was about $750,000 savings that can - we could get part of that in a little bit rent if they can share part of that. So I'm not really sure if it's that price sensitive. It's a matter of getting the right person at the right time and charging them a fair return on our money.

Paul Puryear - Raymond James

Is power available in Chicago?

Hossein Fateh

Yes, it is.

Paul Puryear - Raymond James

All right, thank you. Good quarter.

Hossein Fateh

Thank you.

Operator

And we'll go next to Jonathan Atkin at RBC Capital Markets.

Hossein Fateh

Hi, Jonathan.

Jonathan Atkin - RBC Capital Markets

Hello. I wondered if - I have a couple of operational questions. One is, as we look at New Jersey, as we look at Chicago, as we look at the West Coast and DC, what do you see - what are your observations on just the amount of capacity being added by other data center and co-location providers? And then secondly, with respect to power, can you refresh us on, you talk about megawatts of capacity and then sometimes you revert to square footage. But in terms of your customer contracts, particularly those that are being signed now, are those enumerated entirely in power-based terms or is there a square footage element as well?

Hossein Fateh

Okay. Let me address the, one at a time. The first question is how I feel about New Jersey and Santa Clara in terms of customers, and supply and demand, right?

Jonathan Atkin - RBC Capital Markets

Yes.

Hossein Fateh

In terms of New Jersey, we've had there enormous - our New Jersey data center is primarily surrounded by New York City companies and financial institutions. As you know, the financial institutions have had not a good year in terms of their own stock prices and how they are doing. And a lot of them have had enormous data center demands that they haven't been able to fill. So we actually feel very good about the New Jersey market, in that these financial institutions can lease and not put huge amount of capital on their balance sheet. So - and that would - and it's more cost effective. There is no question. I mean, if you want a 2 to 3 megawatt data center, the only reason you do it on your own is because either security or someone trying to build a big empire for themselves within a company.

In terms of Santa Clara, I actually saying that's one of the best markets in the country and I wish we had a product there now, in that many of the companies that are 1, 2 to 3 megawatt or 5 megawatt. It doesn't make sense for them to go to the Pacific Northwest because they have to take the whole team up there. So in that sense, Santa Clara being $0.07 or $0.08 per kilowatt market in terms of power, when you go to San Jose $0.14, $0.12, so each cent can power economically for a 10 megawatt data center the million dollars a year in cost. So there is huge savings in being in the Santa Clara area. And historically that's really been from an Internet standpoint, the best market in the country. Now to address the second part of your question, I forgot. What was it again?

Jonathan Atkin - RBC Capital Markets

Yes, it was about power and the terms of your contracts with tenants?

Hossein Fateh

Terms of our contracts with our tenants are generally around 10 years. And in terms of power, power is a pure pass through. These are triple-net leases. They pay for the power whatever the local power costs are.

Steven Osgood

There is no markup in the power.

Hossein Fateh

There is no markup in the power. And it's just meters and pass-through, both power and cooling.

Jonathan Atkin - RBC Capital Markets

Okay. In terms of how the contracts are denominated, is it--?

Hossein Fateh

Okay, yes. No, because I see what you're talking about. How the contracts are denominated is that we just find the raised floor area and identify it as to how many square feet it is. We also define the amount of critical load, the amount of usable power in that space. Both of those are defined in the letters of intent and in the leases. However, the negotiation all surrounds cost of power per kilowatt per month, because these tenants can be in seven foot racks, they could in eight foot racks, they could be - some of them are in nine foot racks. So the way as long as we promise to provide the power and we promise to cool the tower that we provided, it is really irrelevant in most cases the size of the areas, just because that could go vertically, that could go horizontally.

Jonathan Atkin - RBC Capital Markets

Great. Thank you very much.

Operator

And our next question goes to Phil Wilhelm at Stock Investments.

Steven Osgood

Hi, Phil.

Phil Wilhelm - Stock Investments

Hi, Hossein.

Hossein Fateh

Hi there.

Phil Wilhelm - Stock Investments

First of all, great quarter and we wanted to comment on your conservative capitalization methodology. We think that's prudent and appropriate, and we appreciate the clarity and honestly associate with that.

Hossein Fateh

Thank you.

Phil Wilhelm - Stock Investments

But, one question. Provided that you meet your leasing goals for ACC4 and for CH1 this year, what type of year-over-year FFO growth do you expect?

Steven Osgood

Well, Phil, I mean that - that is very difficult for many, many reasons. One is, as I mentioned in my prepared remarks, the formation transactions of the IPO included step-ups at various points in time. The fact that ACC4, which is a dramatic increase in the number of megawatts from what the portfolio was during 2007 and came in half at July, half in October, there is no real way to put a comparable number together.

Hossein Fateh

But if you look at that from a growth standpoint ...

Phil Wilhelm - Stock Investments

I'm thinking in terms of '08 to '09.

Hossein Fateh

Exactly. So let me just look at this from a growth standpoint. From a growth standpoint, we are about 82 megawatts, and what we are adding by the end of '09 will be at 155 megawatts. That's 88% increase in capacity without going back to the market and asking for more equity. So that's the way I would kind of look at it by the end of '09, and that way you can model it. And that only includes the Phase I of the four developments, New Jersey, ACC5, Chicago and Santa Clara. And this is just the properties that we have, that we control and own, and that's the growth that comes in, the 88% on - but I'm not quoting FFO. I'm quoting megawatts of capacity that we are putting out.

Steven Osgood

Right. You've put out the range of the costs of the construction and you know that we're looking at the 12% unleveraged return at this point to make your own leasing assumptions and put your own - put the model together.

Phil Wilhelm - Stock Investments

Well - and so, provided that we don't raise equity, which it sounds like there we don't have any plans of doing in '08, that those factors should equate to a double-digit growth rate.

Steven Osgood

Yes.

Phil Wilhelm - Stock Investments

Okay. Thank you.

Operator

And the next question goes to Chris Haley at Wachovia.

Hossein Fateh

Hi, Chris. How are you?

Christopher Haley - Wachovia

I am well, thanks. And yourself?

Hossein Fateh

Pretty good.

Christopher Haley - Wachovia

Just want to make sure I understand the next projects that you have besides Chicago. You're going to be treating them pod by pod from a capitalization policy?

Steven Osgood

No, no, no. I did not say that. I said that that would - if we were to do that, we would have the ability to close capitalized interest as we bring the pods on. But there, we have made no plans on how we are treating that at this point in time. Currently we're -- the current capitalization policy is when the property is placed in service, we are expensing the interest.

Christopher Haley - Wachovia

But the way that you are planning on building out the next several projects, are they - are you going to build out, I guess, the term cold-shell piece by - pod by pod, or you're going to build the whole project?

Hossein Fateh

We are building the projects at the same time.

Steven Osgood

Right.

Hossein Fateh

But we are building the full phase - at this point in time, I would tell you from a modeling perspective that we are building the full phase of our projects and it will all come on-line on the same day.

Christopher Haley - Wachovia

And what would make you - or how would you plan on communicating the accounting policy change? What would - what needs to happen for you to make that change or your construction activities to keep the policy the way it is in your next project?

Steven Osgood

Well, it is - first, it's got to stay consistent with what it has been, and if we were to make a change of that magnitude, which obviously would have a dramatic impact, we would communicate that to everybody.

Christopher Haley - Wachovia

Thank you.

Operator

(Operator Instructions). We have a couple of follow-ups in the queue. We will go to David Harris at Lehman Brothers.

David Harris - Lehman Brothers

Yes, hi again. Just coming back on some of the remarks that you made in your opening address, Hossein?

Hossein Fateh

Yes, sure, David.

David Harris - Lehman Brothers

Yes, you talked - but not Sir David, yet. I don't think, the queen is not that close to me.

Hossein Fateh

Yes.

David Harris - Lehman Brothers

The overseas opportunities that you talked that was being potential. Would you characterize those more of acquisitions or development?

Hossein Fateh

Whole development.

David Harris - Lehman Brothers

Whole developments. Any particular locations? Are we talking Europe or --?

Hossein Fateh

Europe is little bit closer than Asia, but the best markets that we believe are London, Paris or some areas in Europe that was very cheap, high growth, that we're looking at. But London and Paris are the first places on our stop. Again, it takes so - it's so critical to find a terrific site of all real estate, location, location, location. And with us, it's location, location, location, and then power and fiber. We have two other things to add to it. And with it, to find the site around London with the right amount of power, with fiber, is challenging.

We've got a couple of good prospects that I don't want to say where they are, that we are going to be making offers on. And then Paris, we are looking very aggressively. We like that market from a power standpoint because most of their power is nuclear and inexpensive. And then Asia, we're looking at Hong Kong, Shanghai and Singapore more - very aggressively trying to find the location. But again, I wouldn't model those in right now, because we have plenty of growth with the sites that we've got going right now that we will announce it when we finally find the site and are able to tie it down.

David Harris - Lehman Brothers

Would any of those involve any strong element of pre-leasing or were they any more speculative development?

Hossein Fateh

There is one or two sites that may have a pre-leasing. We've got one tenant we're in discussion with. But again if all that happens, great. But I wouldn't model that in right now. But we are in discussion with a couple of them. I want everyone to keep their models conservative.

David Harris - Lehman Brothers

Okay. And one final question then. No question has been asked with regard to your sense as to what's happening to cap rates. I know it's an impossible question. But are we stable? Are we going down, going up, any color on that?

Hossein Fateh

For valuation, I mean, one recent sale that's happened is this big portfolio that everyone is talking about and the word on the street is, that it's going for a sub-seven cap rate.

David Harris - Lehman Brothers

How would you characterize the quality of those assets?

Hossein Fateh

I think they were inferior to ours. And maybe it is self-serving, but I absolutely believe that leases are like five-year leases. Most of their assets are not as new as ours and there is certainly nothing I feel parallel and they are not dynamic type of UPS. Many of them are roof-top units (inaudible). I would say that those assets that are in our portfolio that we here trading right now is trading at what we understand what we are told and just another seven cap and they are inferior assets to ours.

David Harris - Lehman Brothers

Great. Thank you.

Operator

And we will go next to Michael Bilerman at Citi. Please go ahead.

Michael Bilerman - Citi

Sir, my question has been answered. Thank you.

Operator

Very good, thank you. And gentlemen, we have no other questions in the queue. So I would like to turn it back to the speakers for any closing comments, please.

Hossein Fateh

Okay. Thank you everyone for joining the call. We are excited about our prospects and we will be happy to take questions offline. If any of you have, please feel free to call.

Operator

Thank you. That does conclude the call. We do appreciate your participation at this time. You may disconnect. Thanks.

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