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DuPont Fabros Technology, Inc. (NYSE:DFT)

Q2 2008 Earnings Call Transcript

August 8, 2008 10:00 am ET

Executives

Vicky Baker - Financial Relations Board

Hossein Fateh - President and CEO

Mark Wetzel - EVP and CFO

Analysts

Jordan Sadler - KeyBanc Capital Markets

Erwin Goffman - Citi

Lewis Comody - Stark Investments

Omotayo Okusanya - UBS

Sri Anantha - Oppenheimer

Chris Lucas - Robert W. Baird

Chris Haley – Wachovia

Operator

Good day, everyone, and welcome to the DuPont Fabros Technology Second Quarter 2008 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference to Vicky Baker of the Financial Relations Board. Please go ahead.

Vicky Baker

Thank you. Good morning everyone, and thank you for joining us to discuss DuPont Fabros Technology’s second quarter 2008 results. Our speakers today are, Hossein Fateh, the company’s President and Chief Executive Officer, and Mark Wetzel, the company’s Chief Financial Officer. Press release is available in PDF format in the Investor Relations sections of the company’s corporate website at www.dft.com.

Certain matters discussed during this conference call may constitute forward-looking statements within the meanings of federal securities laws. These forward-looking statements are subject to certain risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events.

Additionally, this call contains non-GAAP financial information of which explanations and reconciliations to net income are contained in the company’s earnings release issued earlier today. We managed the call in a timely manners. Questions will be limited to two per callers. If you have additional questions please feel free to return to the queue.

Now, I’ll turn it over to Mr. Fateh.

Hossein Fateh

Thank you, Vicky, and good morning everyone. Thank you for joining us on our second quarter conference call. We continue to navigate to a very interesting economic environment. The economy has float, which have impacted our near leasing efforts. As I stated in May, we continue to believe that demand for our wholesale data centers remains healthy.

However, the decision to sign new leases is now taking longer, but particularly, in the enterprise or the non-internet markets. We continue to have overall strong interest in our facility and have given numerous sites toward our Chicago location and Ashburn, Virginia campus, as well as initial visits to our New Jersey construction site.

Our sales team continue to be very busy. Given the current environment, many prospective tenants are naturally taking longer to make a final decision. While we will get into more detail about tenant demand and update you on our leasing activity and our development efforts later, but first I want to talk about some important management changes that has occurred in the company over the past months.

I am pleased to introduce our CFO, Mark Wetzel. Mark started with us 30 days ago as doing a terrific job, showing us everyday why we thought he was the right guy for a job. I want to thanks Steve Osgood for his efforts over the past year. He helped take us public last fall, and we are grateful to his role in that.

Within the past months Jeff Monroe, Executive Vice President, and Tate Cantrell, our Vice President of Data Center Technology, each decided to leave the company. Jeff and Tate has been with us from the very beginning of our wholesale data center efforts and contributed greatly to where we are today.

In general, after couple of events as an IPO it is not unusual to some employees to want to do something else. The departure was on good term, and we wish them well, both personally and professionally.

It is important to note that over the last few years many areas of their responsibilities had been let out to other mangers, for example, operations, construction and sales. Scott Davis, our Senior Vice President, Operations; Bob Berlinsky, our Senior Vice President of Construction; and Lee Kestler, our Senior Vice President of Sales and Leasing, as well as each of the respective team continue to be responsible and effective in running the various departments.

The period of natural evolution recording us the opportunity to fine tune our organizational structure to better serve our existing and prospective centers. Particularly now that our development efforts are focused on replicating ACC4 of state-of-the-art data center.

This transition provide a great opportunities for those employees who are taking on new responsibilities while showcasing their talents and skills. Within the process of making key new hires, including sales engineering meet our expanding needs.

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

Mark Wetzel

Thank you for the kind introduction Hossein. Good morning, everyone, and thank you for joining us on today’s conference call. I am delighted to serve as DuPont Fabros Technology’s CFO and to lead a very strong financial team. I look forward to working with and meeting everyone over the coming year.

I will summarize the key points regarding our FFO and AFFO results, and then review our balance sheet and liquidity. I’ll also talk about our guidance for the remainder of the year. In anticipation of potential questions and to enhance our disclosures, we have expanded our second quarter press release package and we will continue to enhance that over time.

First our FFO results. In the second quarter of ‘08 the company’s funds from operations were $0.35 per share, compared to $0.34 per share in the first quarter of ‘08, a 2.9% increase. AFFO for the second quarter was $0.21 per share compared to $0.20 per share reported in the first quarter. Both FFO and AFFO for the second quarter of ‘08 were in line with our expectations.

Specific to our Q2 results, our tenant services revenue included in other revenue remained consistent with Q2, but G&A increased widely and interest expense was sequentially lower due to the overall amount of interest capitalized on our development projects as we started our New Jersey data center during the quarter. On a net basis, we hit our expected Q2 numbers.

As a reminder and as explained in the last earnings call, we will not review the comparative results from the prior year due to the October ‘07 IPO.

I’d now like to review our balance sheet. As of June 30th, 2008 we had approximately $10 million in cash, $62 million outstanding on our line, $213 million available on our line of credit, our debt-to-market capital the low 24%. As of today, we have approximately $12 million in cash, the amount of outstanding on our line $96 million with a $179 million available to draw.

Our capital structure continue to position us well to deliver on our development initiatives. We have no debt maturities until 2010 and continue that flexibility under our debt covenants and extension options to execute our development plans.

Our current liquidity is sufficient to continue to fund our development efforts at ACC5 in Virginia, NJ1 in New Jersey, which is under construction, and to start demolition and construction in California for SC1.

To further enhance our liquidity and in spite of challenging credit market, we anticipate closing on a secured loan in next 90 days specific to our unencumbered ACC4 facility. We expect to obtain between $300 million and $400 million at an owing rate between 6% and 7% on this loan. The amount of proceed for this loan will be sufficient to cover our development needs into the first half of ‘09.

Turning on amount of rate, we will be active in earlier mid ‘09 to raise additional debt through a construction loan owner three development deals, possibly unsecured debt or preferred equity to enhance our liquidity. I am pleased to announce that we covered our second quarterly dividend as a public company. We paid $0.1875 per share or $0.75 annualized. Our FFO and payout ratios for the quarter were approximately 54% and 89% respectively.

I would like to wrap up my remarks by addressing guidance for the remainder of the year. In press release issued this morning we announced that we are revising our 2008 FFO guidance range with $1.24 to $1.30 per share from our previously provided range of $1.20 to $1.30 per share.

With a solid $0.69 of FFO per share already achieved first six months out of our new range of the $1.24 to a $1.30 per share, we are expecting $0.58 per share in the second of the year. This $0.11 reduction in FFO is compared to the first half, primarily includes three items. The $0.03 per share for Chicago operating income results, $0.07 per share for interest expense, and $0.01 per share at the miscellaneous items. Tenant services revenue included in other revenue should remain consistent and end the year north of $10 million. And G&A is just coming between $11 and $12 million.

Specific to the discussion on the Q1 call regarding the company’s capitalization policy, which includes interest costs, I have revised the guidance knowing we have received both the Chicago facility commissioning report and CO permits for the entire Phase I in late July. I personally toured all the operating data centers including our new Chicago facility.

Improvements to provide tenants power and cooling the available tenant space at the Phase I in Chicago is complete and raised occupancy. Based on these facts, I concur with a prior capitalization accounting policy decision that’s specific to this Phase only of the Chicago facility we should not capitalize costs beyond its completion date. We will not be providing AFFO guidance going forward and we will hold off discussing our 2009 FFO guidance per share on this call.

I will now turn the call back over to Hossein.

Hossein Fateh

Thank you Mark. I’d like to address what we are seeing related to tenant demand, explain our leasing expectations going forward, and provide a development update. Our overall portfolio complete by 600 kilowatt of critical load, the 93.9% during the second quarter with the execution of one new release. This compared to 93.2% as of the end of first quarter.

As you may recall we originally hope to be a 100% leased at our ACC4 facility by this time, and we are 86%. We also hope to be further ahead in our leasing at our Chicago facility and 100% lease within a new year of being placement service.

As of today, we have several letters of intent executed and remained bullish on the existing traffic and prospective customer interest in all our facilities. We remain comfortable we will achieve an overall 12% un-leveraged return on our cost. We expect to obtain nine leases on the remaining 14% at ACC4 prior to the opening of the ACC5 in the first quarter of ‘09.

As to the leasing execution in Chicago, we remained very busy with the tools on this facility. Chicago is waste tools [enterprise] customer which has the longer sales cycle in signing a lease due to obtaining multiple levels of approval. Now in this current environment any non-maintenance expect this center with a strong financial commitment delaying their decisions if they can afford to do so.

For planning purposes we are assuming based on today’s economic environments that it will now take us 18 to 24 months from the time we placed a facility in service to lease-up and occupy each of our four development properties. Our two largest tenants remained Microsoft and Yahoo! and account for 69% of our annualized rent, which is down from 86% of our October ‘07 IPO. We’ll continue to receive positive feedback from all our tenants on our operations team efforts in the field.

Turning on development properties, and Chicago add 18.2 megawatts of critical load, which is an increase of 22% to our current portfolio. Construction of Phase I of ACC5 in Ashburn, Virginia continue, and we are on schedule for completion at the end of first quarter 2009.

We are pleased to have broken ground of Phase I of NJ1 in Piscataway, New Jersey during that first quarter. This project is scheduled for completion in the third quarter of 2009. We started demolition of existing sites in Santa Clara, California this week. We resolved all issues with the prior tenants, leases and plan to begin construction of Phase I later this quarter with a completion date of the end of fourth quarter 2009.

In summary, I would like reiterate the few key points. We continue to be bullish on the demand of our data centers. The supply and demand parameters are still in our favor that remains significant barriers to entry in the wholesale data center business.

We are working very hard to execute leases and remain confident in our ability to do so. We have a talented and experienced management team in place. Our state-of-the-art date centers modeled after ACC4 is being deployed in our development pipeline. We have a conservative capital structure with low leverage. We are in the process of obtaining financing to fund our additional development projects. We remain on track to meet our 2008 guidance range and overall strategic plan [installers].

One final note before opening up call to questions, we are planning a data center property call for analysts and investors in Northern Virginia on Thursday, September 25th. We will be sending out invitations next week and hope to see you there. Please email the key detail with your contact information to ensure you are included.

Operator, with that, we will be happy to open up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question will come from Tayo Okusanya.

Omotayo Okusanya - UBS

Hi. Yes, good morning Hossein, how are you?

Hossein Fateh

Fine, Tayo.

Omotayo Okusanya - UBS

Good. Congratulation on a good quarter. Again just going right into this, with CH1 have you – couple of questions about CH1. One, given that it seems like it’s a slower sales cycle for enterprise clients at this point, are you considering trying to get non-enterprise or internet clients in there? That’s my first question. And the second question about the letters of intent you have for CH1, is there what you could actually give us some type of sense obviously to find all those LOIs, how much space will be leased up?

Hossein Fateh

Well, I think, I am going to answer your questions backwards. On the letters of intent, we don’t really comment on that, because all letters have been sent as everyone knows are non-binding.

Omotayo Okusanya - UBS

Right.

Hossein Fateh

And on the non-bindings letters that have been sent it’s dangerous to start predicting where we are going to be and what the sense is, and so on. But, we are working very hard and we have terrific interest on the facility, but we don’t want to start commenting on numbers and percentages as it relates to letters of intent.

Omotayo Okusanya - UBS

Okay.

Hossein Fateh

As to internet, that is a question that is more market driven. It’s not where what we target in that Chicago, normally Virginia, and Santa Clara are more internet base. Chicago was more enterprise base. New York will be more financial base. So, based on that, real estate developers and real estate developers will find on tenants based on credits and based on how we perceive that tenant to be. But we are not going to – we don’t discriminate that’s what we are saying?

Omotayo Okusanya - UBS

Okay. One quick follow-up question in regard to replacements for Jeff and Tate. Could you give us an update on how that process is going?

Hossein Fateh

Yes, sure. I mean, Jeff and Tate, we’re very happy with them in the past and what is followed. But like I mentioned in my prepared remarks, part of their duties has already been passed on to other employees. Meaning Bob is handling design and that’s really worked well for us, because there is now less conflict within design and construction. Operations has been handling -- Scott Davis in operations has been handling much of the sales engineering at this point.

And also from a tenant perspective, it’s clean and once a tenant signs a lease, they already know who they are dealing with, where in the past, while our tenant signs a lease, they would automatically be transferred from Jeff’s department to Scott Davis’s department. So, that actually is working up and very well for us. We will hire like our sales engineering team, but other than that we are not going to replace them as they were in the past, and we really don’t have that need for that.

Omotayo Okusanya - UBS

How long, do you think you will take to have a sales engineering team today?

Hossein Fateh

Okay. At the moment sales engineering has been handled by operations, and that actually working out well for us. But it would be a guess tell you, but matter of months, we will have someone else in place. But we don’t -- we are not desperate, we just want to find a right person.

Omotayo Okusanya - UBS

Okay, great, I’ll jump off the call for someone to ask the next question? Thanks.

Operator

Thank you. We will go next to Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Thank you and good morning.

Hossein Fateh

Hi, Jordan.

Jordan Sadler - KeyBanc Capital Markets.

I wanted to just follow-up on sort of the tenant demand question. I appreciate the inability to really discuss LOIs. One of your public peers actually talked about it in a different manner. They talked about having 4 million square feet of tenant prospects or tenant demand that they were tracking or entertaining, if you will. And so maybe could you give us a feel for the demand in terms of powers, in terms of customers you’re talking to or you’re entertaining.

Hossein Fateh

I think that what we feel it’s a very healthy market. I don’t want to comment on any of our peer, but we feel that demand outpaces supply. We are confident and we sense that the market is very healthy. I think throwing up numbers in terms of power in press. So, that would be wrong enough to so. We feel that in each of the markets we are in is healthy. The non-internet markets are certainly doing – I mean the internet markets are certainly doing better than the non-internet markets, seems to be very blunt. But now we think that the market is healthy. I don’t want to get into specifics on numbers as far as what is fact.

Jordan Sadler - KeyBanc Capital Markets

And I totally appreciate that. The one sort of issue I guess that I am trying to, and I think we all are trying to get our arms around is, your peers generally, let’ say just in the Chicago market, had activity on their facilities during the quarter or in other markets even. And your activity – I know, you have less available space to lease outside of Chicago, but your activity level was quite limited. So, it’s hard for us to understand what you’re seeing and feeling, and if it’s a function of your mesh trap versus their mesh trap or otherwise. So, how do we get comfort that, it’s just a function of longer lease times rather than your product or your leasing infrastructure?

Hossein Fateh

I mean, we actually feel our [mesh trap] is superior. And we think our [mesh trap] are working very well, designed under the redundancy and then are excellent. But as far as and we feel that our activity very far and at the some level this is a number of things. You have certain amount of prospects that turn into certain amount of tours. The tours turn into certain amount of request for proposals and they turn into certain amount of letters of intent and then those turn into leases. At the top two three levels, what I described. We have great opportunities. And we are pleased with them. But to get into specific numbers, I think it will be unsafe and we will be getting into disclosures that we really don’t want to get into.

Jordan Sadler - KeyBanc Capital Markets

Well, could you just clarify, I think, you said you’re increasing your expected times to stabilization on future development to 18 to 24 months following completion? Does that include Chicago phase one?

Hossein Fateh

Absolutely, that includes every single one of our assets. We see that the current market environment is more challenging and that every single one of our assets that we are developing were increasing the size for lease-up. And so, we feel that it will take us longer to lease-up and frankly as a private company, we always had soft that it will take, more like three years to lease-up the facility, 18 to 24 months and that’s what we have in our constructional loan. And right now, we are more trapping that to be conservative.

Jordan Sadler - KeyBanc Capital Markets

And that is not affecting your cash return on cost expectations for longer lease-up times?

Mark Wetzel

Well, it’s a really an un-levered, this is Mark Wetzel. It's really un-levered 12% return.

Hossein Fateh

And we feel very-very comfortable with that return and in fact, ACC4 is crossing closer to 13% un-levered return.

Jordan Sadler - KeyBanc Capital Markets

Okay,

Hossein Fateh

Longer to do so, but we are very comfortable with the return.

Jordan Sadler - KeyBanc Capital Markets

But your carrying cost increased, day if you increase the time to stabilization which would increase your denominator, what your numerator did?

Hossein Fateh

You are absolutely right Jordan, but the 12% was so conservative in the past that we felt very confident of that return. We have so much cushion in there, that’s why we are very confident with that return.

Jordan Sadler - KeyBanc Capital Markets

Do you think it is being offset by better rents in the market?

Hossein Fateh

No, it’s being offset in that we were conservative in our original 12% and we will certainly get there and it was perhaps 13% to 14% on the flat 12% to be conservative and we will certainly solace.

Jordan Sadler - KeyBanc Capital Markets

And my last question on [Hapa], the ATC 300 million to 400 million of financing, where are you in that process? It sounds like you’re going to close in 90 days, but does that mean you have the lenders wind up in your term sheet.?

Mark Wetzel

Yes, we are in that process, it could be higher than 90 days. But we are out there.

Jordan Sadler - KeyBanc Capital Markets

It would be tighter than the 90 days you said?

Mark Wetzel

Yeah, we could secure the financing within 90 days, but laid out 90 days?

Jordan Sadler - KeyBanc Capital Markets

And types of lenders?

Mark Wetzel

At this point I am not going get into that but we are very comfortable that we have ability to get this loan done.

Jordan Sadler - KeyBanc Capital Markets

Okay, thank you.

Operator

We will go next to Michael Bilerman of Citi.

Erwin Goffman - Citi

Hi. Good morning, its Erwin Goffman.

Hossein Fateh

Hi, Erwin, how are you?

Erwin Goffman - Citi

Good, I am wondering just considering your comments Harry on those of longer lease-up time. You’re delivering about a billion dollars of worth of inventory over the next 18 months. Are you entertaining idea of potentially delaying some of those starts or some of those deliveries and we get better sense of what the economic picture.

Hossein Fateh

I mean, at this point, we are certainly not because we feel very-very confident that the financing on ACC4 is there. So, we are not at a point of being even close to making that decision. Because part of it is not just not there on that table because that’s how confident we are with our financing preceding?

Erwin Goffman - Citi

And can you sort of just elaborate on the marketing effort on a development pipeline? Obviously you’re very much involved in tenant discussions? But can you give us a sense of the scope of [inaudible] backing you up and the resources that are dedicated marketing today?

Hossein Fateh

Marketing, you mean leasing efforts?

Erwin Goffman - Citi

Yeah.

Hossein Fateh

We have a very good sales team that has come from background with so location and communication. The preceding to give a numerous fours, as numbers gain is concerned we have numerous towards as much as once a week on each of our facilities. We very much liked the product that we have out there. We think that redundancies are fabulous and we – the operating the expenses are very-very low on our properties and we feel highly confident that the properties we are putting out for our tenants will lease-up. Also, we are engaged with that brokerage community, and the brokerage community also consults with the product we have out there.

Erwin Goffman - Citi

Is there any NOI from Chicago in your current guidance?

Mark Wetzel

Just the roughly $0.03 that I referenced on the call.

Erwin Goffman - Citi

Chicago and just one last for monitoring accounting question? Mark, the 70.7 million of current cash rent that is referenced in the supplemental. Does that exclude any leases that are signed, but not yet commenced, maybe the incremental leasing on Q4?

Mark Wetzel

No, that does not.

Erwin Goffman - Citi

Those are all leases that are signed regardless of whether they are rent paying or not?

Mark Wetzel

Yes.

Erwin Goffman - Citi

Thank you.

Operator

Our next question will come from [Lewis Comody] of Stark Investments.

Lewis Comody - Stark Investments

Hey, Hossein, cheer up, you actually had a good quarter. A quick question, how much the FFO does it stabilized CH1 add?

Hossein Fateh

I am going to turn this question to Mark. Thank you Lewis.

Mark Wetzel

Lewis, I don’t have that at my finger tips for CH-1

Lewis Comody - Stark Investments

Okay, and better clarity pursuant to kind of stabilization because I think that your investor base, certainly that’s included understands the products, understands the new answer the differentiation between you and your brother in your competition, which is better clarity on stabilization or your development story right now. That will be real helpful, alright guys.

Hossein Fateh

I think its time to move on.

Lewis Comody - Stark Investments

Okay, bye-bye.

Operator

Our next question will come from Omotayo Okusanya.

Omotayo Okusanya - UBS

Hi, just a quick follow-on question in regards to the financing, up coming financing, could you talk a little bit about what causes you to be up on low end of the range that is to be 100 versus the high end for 100 and what could cause it to be at the low end 6% financing all in cost versus 7%, is it all negotiations or is there something else in that?

Hossein Fateh

There is no question, let's face the reality in which office today, good strap terrible state. Everyone knows where we are at. I think we would be doing 400 million plus and much lower rates of the markets being where they beyond. We are giving a conservative guidance of where we think roughly and I think with every conservative guidance the range was given obviously the midpoint sounds normal.

Omotayo Okusanya - UBS

Okay. One other quick follow-up question, the dropping of the AFFO guidance, could you just walk me through again why you are deciding to do that? And if you could potentially reverse that decision because I think a lot of analyst do find that guidance useful?

Mark Wetzel

I guess that was my discussion what I would coming here this month FFO guidance seems to be the common trend in terms of what we put out there and you should track in two range with guidance -- there is a straight line reduction to get there basically and we disclose what that straight line is. So, we have done a path of [Harmen’s] indicator out there with FFO. So instead of tracking two ranges the guidance just put one out there.

Omotayo Okusanya - UBS

Alright, but I think it definitely would be helpful if you guys reconsider that decision?

Hossein Fateh

Okay. We’ll take that into advice. Thank you.

Operator

Sri Anantha with Oppenheimer has our next question.

Sri Anantha - Oppenheimer

Good morning. Hey Hossein, I just had a quick question, as you look at the demand outlook for there for data center space. Could you just give us like some sense today, if you look at your sales pipeline what percentage of that pipeline comprises about and comprises as suppose to internet-centric businesses? And also if you could just give us a little bit of color on how your customer mix has evolved over the years, I know the initial demand for data center space was driven by the internet-centric businesses, but I would imagine that your customer mix is lot more diversified today then it what it was like three or four years ago?

Hossein Fateh

I think you are absolutely right on that, but however, it is more market centric and each market is different. Virginia is a round number its perhaps 60% to 80% internet based. Santa Clara, I would put at the same percentages perhaps even higher. Chicago is lower because Chicago being in the middle of country that’s tenants required data centric space and they want one data center. Chicago is the perfect location for that, and they want it in the middle of the country due to license fee issues. And it's a perfect market for that. Chicago will be non-internet based.

New York will be mostly around the banking sector and we actually feel very good about the banking outsource data center business and that perhaps a year ago or 18 months ago significant bank may not outsource data centers due to perhaps one thing to build their own data centers now many of the banks they are under stress and we feel outsourcing will be a fabulous option for them. So, we feel very good about our demand in New Jersey. I think to answer your question it depends on each market -- each market will be different.

Sri Anantha - Oppenheimer

Okay, but just if you look at your sales pipeline today where do you think the incremental demand is coming from, do you think it's still skewed towards internet businesses or it's now more a logic portion is coming from big traditional enterprise companies?

Hossein Fateh

Well I think Virginia and Santa Clara will be more skewed towards internet businesses in fact the large portion which we feel that Chicago when you look at our sales pipeline is probably 60%, 65% non-internet and 30%, 35% internet business. New Jersey will probably we guess is going to be probably in the same as Chicago 60%, 65% non-internet but we feel good about New Jersey in that many of the banks -- we want to expand there and have data center presence that’s outsourced and also the size of the tenants in New Jersey will be significantly larger than in Chicago.

Sri Anantha - Oppenheimer

Well the last question I have is, could you talk about demand from your existing customers they have existing customer base, do you think that the demand from them is still increasing at a pace --?

Hossein Fateh

In a [hysteretic] way, in a very good way we trench power loads of our tenants and we would not want to disclose them publicly but we see the loads increasing and that’s the very big way and we are tracking many of our existing customers and we believe not only they will expand in Virginia but they will expand with us in other markets.

Sri Anantha - Oppenheimer

Great. Thanks a lot.

Operator

Chris Lucas with Robert W. Baird have our next question.

Chris Lucas - Robert W. Baird

Hi, good morning, everyone. Hossein can you just kind of give us a sense as to how we should think about typical pre-leasing and post-opening leasing process that the facility should have? In another words how much really pre-leasing should we expect and how much is driven by one of the facilities?

Hossein Fateh

One of the analysts I was covering up was tracking two years, we think perhaps that’s on the very conservative side. The leasing will not be straight line and we have seen that in another location. We are, however, say for example in Virginia, tracking a number of deals that we think will lease up prior to the opening but it's to give you better guidance on exactly or find model that going to be bumpy or to get lumpy. We don’t think it's going to be a straight number. We think that if you track 18 to 24 month its conservative and within the range of where we think it will take to lease up any one of the facility. Some of the Virginia and Santa Clara properties will probably be on the shorter side it’s not on the very low end of that and then the Chicago property will probably be in the middle of that.

Chris Lucas - Robert W. Baird

And today what is your expectation would be for New Jersey?

Hossein Fateh

I am sorry I didn’t the catch the last part of that.

Chris Lucas - Robert W. Baird

What is your expectation would be for New Jersey?

Hossein Fateh

New Jersey we feel actually very good about it, although the site is on the construction we toured numerous tenants to the facility and I think probably right in the middle of the 18 to 24 month is conservative and very realistic.

Chris Lucas - Robert W. Baird

And just a point of clarification for Mark, you talked about your an agreement with west the current account would be for ACC4, is that want to be assuming, is there an expectation that will be consistent going forward or you going to be reevaluating each project going forward and from an accounting perspective is how you dealing with capitalization issues?

Mark Wetzel

Yes, I will be coming in looking at it, walk into building understanding how the power and cooling was build in the each of tenant phases, I am going to look at each phase. Right now it seems for this specific phase the ways Chicago was build is the right answer.

Chris Lucas - Robert W. Baird

Okay, thanks. That’s all I have.

Operator

Our next question will come from Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets

Hi, guys.

Hossein Fateh

Hi.

Jordan Sadler - KeyBanc Capital Markets

Could you, Mark, should be ranking your markets in terms of the relative strength?

Mark Wetzel

Little bit tough question but we feel that Santa Clara maybe a little bit even harder than Virginia, but Santa Clara and Virginia would be up there together than it would be New Jersey and Chicago would probably be at that level for (inaudible) four markets. So if you rank them I would say Santa Clara and Virginia together or maybe Santa Clara a little bit higher so then middle would be New Jersey and than it would Chicago.

Jordan Sadler - KeyBanc Capital Markets

Okay. And [ACC] Virginia so strong this ACC4 phase II, do you we expect of that lease up to take 18 to 24 months?

Mark Wetzel

No, not at all. I think we’ve mentioned in our prepared remarks that was highly confident that we will lease up well before delivery of ACC5 and ACC5 is delivering at the end of the first quarter of '09. So it was highly confident that’s going to be mixed up. We only have about 5.1 megawatts less and it's broken up in 5.5 [room] so its not even 4 together. So we’re very confidant that will be leased up well before delivery of a 65.

Jordan Sadler - KeyBanc Capital Markets

Yes, that’s sounds like this year. Any tweaks that you would want to make to certain prototype facility you’d developed in ACC4 and then be did or try to replicate in Chicago?

Mark Wetzel

Jordan, from ACC4 to ACC5 we've made 250 lessons learned, but if walk through the building you almost don’t see any difference from the naked eyes, but we feel that we made -- we know we can take 250 [chambers], but to the naked eye you wouldn’t know but I think tenants appreciate a little bit of some of those changes. We have the ability, we have the flexibility to go to we split the room in half if we need to but having said that we’re not sure if we paid for that flexibility as cost of money to split the rooms but we’re not sure if we are going to needed in fact we think we probably won't need it.

Jordan Sadler - KeyBanc Capital Markets

Okay. And then this one is for Mark, I think since we’re going to be loosing the AFFO guidance going forward can you just remind us how the cash flow comes online on ACC4, vis-à-vis on page 7 you say, your annualized rent in places 44.6 million but the cash is 21.2 currently, when does the balance of that rent come online?

Mark Wetzel

Obviously over the next year I think insurance, but I don’t have that at my finger tips but the straight line continues to drop sequentially in each quarter on that building.

Jordan Sadler - KeyBanc Capital Markets

Do you recall is there a big chunk or two at a specific date is it January or when the rest of ACC4 is cash rent kick in?

Mark Wetzel

By the end of fourth quarter it dropped a variance portfolio in total down to about $4 million.

Jordan Sadler - KeyBanc Capital Markets

At the end of the fourth quarter of this year?

Mark Wetzel

Of this year, yes.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Mark Wetzel

For the portfolio in total.

Jordan Sadler - KeyBanc Capital Markets

This put between cash and straight line?

Mark Wetzel

Exactly.

Jordan Sadler - KeyBanc Capital Markets

Okay. That’s helpful. And then lastly, the interest expense sequentially Mark went down and that was a function of increasing capitalization on New Jersey or what?

Mark Wetzel

They are just brining New Jersey into line looking at phase II to being build so sequentially it dropped and then on a go forward basis for roughly for every dollar we spend, we’re projecting that it's going to be probably 50% to 55% to 60% would be capitalized. Probably 60% on model basis.

Jordan Sadler - KeyBanc Capital Markets

Only 60% of the cost?

Mark Wetzel

It didn’t for the next two months.

Jordan Sadler - KeyBanc Capital Markets

Okay.

Mark Wetzel

For this calendar year, it's obviously next year it will change, but for the rest this year we will be kind of in that range.

Jordan Sadler - KeyBanc Capital Markets

Okay. That’s helpful. Thank you.

Operator

[Operator Instructions]. We go next to Chris Haley with Wachovia.

Chris Haley - Wachovia

I am sorry, all my questions have been answered. Thank you and welcome aboard.

Hossein Fateh

Thank you.

Mark Wetzel

Thank you, Chris.

Operator

We have no other question at this time. I would like to turn it back to our presenters for any additional or closing remarks.

Mark Wetzel

Just one follow-up answer to a question with regards to stabilizes NOI for Chicago, we believe it's on stabilize basis about 25 million of NOI. And back to Hossein.

Hossein Fateh

Thank you for listening in and I like to iterate we have a tour of the properties coming up. I think one if you be one of the properties and you will be investors, you really understand the asset plan. So we highly encouraging you to think about it. Thank you everyone.

Operator

That does conclude our call. We would like to thank everyone for their participation. Have a great day.

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