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Edited Transcript of DFT earnings conference call or presentation 27-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 DuPont Fabros Technology Inc Earnings Call

WASHINGTON Apr 28, 2017 (Thomson StreetEvents) -- Edited Transcript of DuPont Fabros Technology Inc earnings conference call or presentation Thursday, April 27, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher P. Eldredge

DuPont Fabros Technology, Inc. - CEO, President and Director

* Jeffrey H. Foster

DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer

* Steven Rubis

DuPont Fabros Technology, Inc. - VP of IR

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Conference Call Participants

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* Andrew Lodovico DeGasperi

Macquarie Research - Analyst

* Colby Alexander Synesael

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Daniel Joseph Occhionero

Barclays PLC, Research Division - Research Analyst

* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - Research Analyst

* Jonathan Atkin

RBC Capital Markets, LLC, Research Division - Analyst

* Jonathan Michael Petersen

Jefferies LLC, Research Division - Equity Analyst

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Matthew Scott Heinz

Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Research Analyst

* Michael Rollins

Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst

* Robert Ari Gutman

Guggenheim Securities, LLC, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the DuPont Fabros Technology, Inc. First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Steve Rubis, VP of Investor Relations. Please go ahead.

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Steven Rubis, DuPont Fabros Technology, Inc. - VP of IR [2]

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Thank you. Good morning, everyone, and thank you for joining us today for DuPont Fabros Technology's First Quarter 2017 Earnings Conference Call. Our speakers today are Chris Eldredge, the company's President and Chief Executive Officer; and Jeff Foster, the company's Chief Financial Officer.

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

I will now turn the call over to Chris.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [3]

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Good morning, and thank you for joining our call. Today, I'll provide comments on our leasing performance, our occupancy and inventory levels, pricing and yields, our Toronto market launch, cloud demand and the core differentiators of DFT.

There's a phrase you've heard associated with DFT in recent quarters: record-breaking leasing. You'll hear it again today but on a largest scale yet. Our team leased nearly 35 megawatts during and after the first quarter. This year-to-date volume represents another leasing record for DFT, building momentum for 2017. We signed 3 pre-leases with our third largest customer at ACC9 and CH3, totaling 28.8 megawatts. These leases represent the largest transaction in DFT's history, surpassing the 16 megawatt pre-lease of SC1 Phase III in the first quarter of 2016.

Our customers continue to turn to us for their data center requirements. They recognize the high-quality, well-designed and efficiently operated data centers built by DFT. We are excited to help our cloud, and social media customers continue to grow. We value the increasing portion of revenues generated by investment-grade customers.

So let's get into some details. Year-to-date, we added 2 new leases and 3 pre-leases totaling 34.42 megawatts of available critical load. The weighted average term of these leases is 8.1 years. The average GAAP base rent of these leases is $89 per kW per month. When operating expense recoveries are included, the average rate is $112 per kW per month. The pricing reflects the unique features of the transaction and the strategic benefits to DFT. We dramatically expanded the relationship with one of our best customers, a customer with a long-term track record of growth within DFT's portfolio.

We significantly decreased our development risks, reducing our leasing and capital costs. We further increased the amount of income derived from investment-grade customers, further improving the quality of DFT's revenues. We achieved these benefits at risk-adjusted yields, well within our target range of 11% to 13%. To achieve our targets, we consider multiple factors on pricing any deal: What's the credit profile of the customer? How does this expand or deepen our customer relationship? How many megawatts are involved? What is the level of redundancy, N, N+1, N+2 or 2N? How many locations are included? Is it an existing facility or custom built? How much leasing risk is removed? Is there customer participation in the design?

Our current sales funnel is full of deals of various megawatt requirements from multiple customer segments. You should expect rental rates to vary based on customer needs, competitive factors and the strategic considerations I just outlined. You should also expect that we will price to achieve attractive risk-adjusted returns on our shareholders' capital. Those returns are targeted in the range of 11% to 13%.

So now let's look at each lease individually. 1 lease represents 4.2 megawatts at ACC7 Phase IV disclosed in our fourth quarter earnings release. We also signed a lease amendment for the remaining space at ACC7. ACC7 is now 100% leased and commenced. The unlevered GAAP return on investment is roughly 14.5% for Phase IV and 14% for the entire ACC7 data center.

The second lease represents 1.2 megawatts at CH2 Phase II. CH2 is now fully leased and commenced with great returns. The unlevered GAAP return on investment is roughly 13.25% for CH2 Phase II and roughly 13.5% for the entire CH2 data center.

So how do we do on the 3 pre-leases signed with our third largest customer? The first pre-lease is for the full 14.4 megawatts critical load in CH3 Phase I. We expect the lease to commence in the first quarter of 2018 when the phase is projected to open. Based on this lease and our current estimated CH3 development cost, CH3 Phase I should achieve an unlevered GAAP ROI between 11% and 12%.

We signed another pre-lease for 7.2 megawatts of critical load at ACC9 Phase I. The pre-lease will commence on May 1 because, as of today, the phase is in service.

The third pre-lease represents 7.2 megawatts of critical load at ACC9 Phase II. The pre-lease is expected to commence in the third quarter of 2017 when the phase is scheduled to open.

Based on the 3 pre-leases to date at ACC9 and the current estimated development costs, we forecast ACC9 will achieve an unlevered GAAP ROI between 11% and 12%. These 3 pre-leases are particularly interesting. While cloud customers of this size can service their own data center requirements, they continue to see the value in outsourcing.

With portfolio occupancy at 99% as of today and strong leasing activity year-to-date, let's talk about inventory. We announced the commencement of our ACC10 Phase I and CH3 Phase II developments in our earnings release this morning. ACC10 Phase I will consist of 15 megawatts and has been designed for N+1 redundancy. Expected delivery is in the second quarter of 2018. CH3 Phase II will consist of 12.8 megawatts and has been designed for N+1 redundancy. Expected delivery is also in the second quarter of 2018. Including commencement of ACC10 Phase I and CH3 Phase II, our development pipeline is now 51% pre-leased.

So our development capacity totals 93 megawatts of critical load, of which 45.3 megawatts are available for pre-lease, 17.5 megawatts slated for delivery in 2017 and 27.8 megawatts scheduled for 2018 delivery. For 2017 deliveries, ACC9 Phase I is 70% pre-leased. ACC9 Phase II is 50% pre-leased and SC1 Phase III is 100% pre-leased.

We are very excited about our prospects in Canada. The initial build-out will consist of 4 computer rooms, totaling 6 megawatts of critical load. The initial build is forecasted to be placed in service in the fourth quarter of this year.

We recently announced the hiring of a regional sales director to oversee our Canadian sales efforts and appointed JLL as the exclusive real estate broker on TOR1. We view Toronto as a favorable wholesale market due to the limited existing capacity and Canada's data sovereignty laws.

Let's turn now to demand trends. These themes should have a familiar ring. The cloud continues to develop new services and move to data-rich applications. Innovation will continue to support tremendous growth among our cloud clients.

Here's an example: In 2008, AWS users had to wait 15 days for a new service offering. Today, these same users received 2 new service offerings a day. Such a pace of innovation continues to drive the healthy growth of the cloud. Additionally, growth in new service offerings, such as Facebook Live, are driving strong and sustained demand for data center space.

Let me close by outlining the 5 differentiators that will help DFT continue to unlock shareholder value over time. First, we are the only pure-play wholesale provider. 82% of our annualized base rent comes from the cloud or cloud-like customers. Second, DFT remains the only data center REIT that is 100% owned and operated. We own all our data centers and the land beneath them. Third, our operating portfolio consists of high-quality state-of-the-art data centers. Our 99% occupancy is the direct result of the attractiveness of our portfolio and operating services. We have very low churn, in part because our facilities attract sticky infrastructure from clients, including network nodes, test and development environments and production environments. Fourth, roughly 70% of DFT's annualized base rent is investment grade or equivalent, which we believe is higher than any publicly traded REIT. And finally, fifth, DFT delivers industry-leading EBITDA margins, in part because G&A remains below 5% of revenue given our efficient sales force and back office. These 5 characteristics uniquely position us as a leading enabler of the cloud.

I will now turn the call over to Jeff.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [4]

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Thanks, Chris, and good morning, everyone. Thanks for joining us today. I will cover 4 topics today: first quarter 2017 results, development update, capital markets and our revised 2017 guidance.

Diluted earnings per share in the first quarter of 2017 totaled $0.45 versus $0.36 a year ago. The first quarter of 2017 included a severance and equity acceleration of $0.01 per share. Excluding this charge, earnings increased $0.10 per share in the first quarter of 2017 attributable to 2 drivers: first, new leases commencing in 2016 and the first quarter of 2017; second, lower preferred stock dividends as we reduced our preferred shares outstanding in mid-2016 by $150 million through the redemption of Series A and B and issuing Series C, which carries a lower dividend rate. This was partially offset by the issuance of common shares late in the first quarter of 2016.

Normalized FFO totaled $0.77 per share for the quarter versus $0.67 per share a year ago, an increase of 15% or $0.10 per share. Normalized FFO benefited from increased operating income excluding depreciation as well as lower preferred stock dividends. This benefit helped overcome a headwind of $0.05 per share, which resulted from the issuance of common equity late in the first quarter of 2016.

Revenues in the fourth quarter totaled $139.5 million, representing a 12% increase from the year ago quarter. New lease commencements were the primary driver of the strong revenue growth. Same-store cash net operating income totaled $93.4 million in the first quarter of 2017 versus $76.6 million a year ago, an increase of 22%. Same store, same capital cash net operating income in the first quarter of 2017 totaled $75.4 million versus $71.1 million a year ago, an increase of 6%. Chris previously discussed the expanded 2017 development plan that is a result of our year-to-date leasing success. We currently have 7 projects under development totaling 93 megawatts, which are 51% pre-leased, leaving 45 megawatts available for pre-lease. The 51% pre-lease compares favorably to 29% as of our last earnings call, as does our backlog of $66.7 million versus $28.1 million as of our last earnings call. The backlog has increased 137% so far this year. Of the 93 megawatts under development, 50.8 megawatts are scheduled to be delivered in 2017 and 42.2 megawatts in 2018.

Our newest development projects are ACC10 Phase I and CH3 Phase II. The first phase of ACC10 is scheduled for delivery in the second quarter of 2018 and will bring a much-needed 15 megawatts of capacity to market. ACC9 is now 60% pre-leased, leaving only 11.5 megawatts available for future pre-leasing and leasing. The majority of which is being held for current customers.

DFT is currently out of inventory in Chicago with Phase II being 100% leased and CH3 Phase I being 100% pre-leased. We are -- we project bringing our next project capacity of Phase III, Phase II online in the second quarter of 2018, totaling 12.8 megawatts.

For 2017, total CapEx spend is forecasted to be between $725 million and $775 million, which will be a record for DFT. Through Q1, we've spent a little less than $150 million, which we have funded through cash generated from operation and borrowings under our line of credit. We are forecasting that the remaining $575 million to $625 million of spend will be funded through a combination of cash from operations, borrowings and equity.

We are borrowing in Canadian dollars to fund TOR1 and anticipate putting a mortgage on this property upon completion of Phase IA. We anticipate a bond issuance to firm out the financing for the U.S. dollar borrowings in late 2017.

On April 17, we paid our quarterly dividend of $0.50 per share. DFT's anticipated 2017 annualized dividend is $2 per share, representing an estimated AFFO payout ratio of 63%.

Last, let me discuss the updated guidance. The full year 2017 normalized FFO guidance range is $3.01 per share to $3.13 per share, representing a decrease from the prior guidance of $0.03 per share or 1% at the midpoint. The driver for the decrease is a projected equity rate related to financing ACC10 Phase I and CH3 Phase II. This is partially offset with increased operating income before depreciation from our new leases, of which 20 of the 34 megawatts executed year-to-date will commence in 2017. The low end of the range assumes no revenue from speculative leases that commence in 2017 and the high end assumes $0.10 per share of revenue from speculative leases. Second quarter normalized FFO guidance range is $0.76 per share to $0.78 per share, with the midpoint being the same as Q1 2017 normalized FFO per share.

Operator, we will now take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will be coming from the line of Matthew Heinz from Stifel.

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Matthew Scott Heinz, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Research Analyst [2]

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Jeff, I just want to make sure I heard correctly what you said regarding ACC9, basically the remaining 11, 12 megawatts or so available there were essentially spoken for via ropers? And I guess, first off, is that correct? And if so, would that be the same customer that recently signed the deals in April? Or was that a prior customer facility?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [3]

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Matt, I'll start, and if I miss something, I'll let Chris add some color in. Most of that capacity is being held for customers. I don't want to talk about our contractual vehicles that were holding it through, but most of that is being held. There's some still available for lease. And we're not going to say which customer it relates to at this time.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [4]

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What I can tell you is, Matt, is they're very strategic customers, and it's not just 1.

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Matthew Scott Heinz, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Research Analyst [5]

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Okay, great. And just as a follow-up, what's the kind of funnel look like on ACC10 at the moment? I know it's very early, but if you could just speak to the funnel there and, I guess, just generally in the Ashburn market. And also, I know that you were holding some space at ACC8, which was a smaller building and not really necessarily suitable for turnkey. Just wondering if you've had discussions with customers regarding a build-to-suit opportunity with that space.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [6]

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Yes. But Matt, we were holding some space at ACC7, which we talked about a little bit on the last call, and that 4.2 megawatts was leased. ACC8 would be a build-to-suit. And we also have ACC11, which would be some additional capacity. So we've had talks to customers about it, and that's really all I could share with you. The second thing is, you talked about the funnel for ACC10, when you lease 28.8 megawatts of capacity, obviously, there's a replenishing phase with any type of funnel. But we're very, very pleased with our funnel and our current pipeline.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [7]

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Yes. I think starting ACC10 shows the strength of our funnel.

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Operator [8]

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Our next question comes from the line of Michael Rollins from Citi.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [9]

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Two, if I could. First, I was wondering if you could talk a little bit more about what you're looking to accomplish in Oregon and how we should think about timing and future investment for those facilities. And then secondly, maybe just taking a step back just in terms of the types of activity that you're seeing, and do you feel a lot of competition for the deals that you're winning? Or are these deals that you're able to book because there's something that you have that your competition can't offer like for like?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [10]

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Mike, it's Jeff Foster. I'll talk about Oregon here for a second. So we're still in the design phase of OR1, though I cannot say at this time how many megawatts it would be. I would suspect it's going to be closer to like Toronto amount of megawatt than an Ashburn amount of megawatt just because it's not yet a fully developed market like an Ashburn or Chicago. We're still projecting late 2018 for Oregon to come online. And with that, I'll turn it to Chris for the other question.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [11]

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Yes. Mike, there's definitely increased competition in Chicago and Virginia. But when you look at this opportunity, the 28.8 megawatts, I mean, I think it was ours to lose from the beginning. We have a tremendous relationship with this customer. They value our operations team. They value the things that we do for them. So as I mentioned on the last earnings call, people do buy from people, and I think it's a tribute to the team here at DFT why we won this opportunity.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [12]

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And one last, if I could. Can you talk about your future plans in Santa Clara?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [13]

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Sure. I mean, Santa Clara is a unique market, land is scarce. And I can tell you, we're actively in the market looking for land, but the price of land in that market has went up significantly. If we could find something at the right price where we can get the right returns, we'll be active in the market.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [14]

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Yes. And Mike, in the immediate future, SC1 Phase III is projected to come online in Q3 100% pre-leased.

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Operator [15]

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Our next question comes from the line of Jonathan Atkin from RBC Capital Markets.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [16]

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So I was interested in any commentary about the rent escalators on the new leases signed. Is it 3%? Or does it deviate from that? And then if you can also talk about the $89 per kW per month is year-to-date, is there a 1Q average of new leasing rate that we can think about for just calendar 1Q?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [17]

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Yes, Jon, I'll address those questions. So the escalator is in line with our normal 2% to 3%. And we always disclose year-to-date. We don't disclose quarter-by-quarter on the price. So the $89 is what we're disclosing at this time.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [18]

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Okay. And then maybe circling back on just the nature of the leases so far. Full service versus triple-net, I might have missed that, but can you provide a little more color on that?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [19]

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Sure. They've been all triple-net so far this year.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Okay. And then circling back on the Facebook situation and renewals prospects, any additional perspectives to had beyond what Chris said in the scripts?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [21]

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Yes. Well, the phase -- the first renewal with Facebook is in the summer of 2018, and we're going to continue discussions with them about new opportunities and about the renewals. When you look at the infrastructures that's in our facility, it's pretty sticky in nature. So we're very comfortable with the discussions with Facebook.

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Operator [22]

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Our next question comes from the line of Andrew DeGasperi from Macquarie.

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Andrew Lodovico DeGasperi, Macquarie Research - Analyst [23]

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I guess, just broadly speaking, given the strong demand you're seeing from the cloud, I mean, are you potentially looking at new markets? I know you're still in development with several and some in design phase in Oregon. But are there any additional cities you're looking at that have attractive cost power? And then secondly, also sort of bigger conversation. Tax reforms sort of came through, just wondering what your thoughts around that.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [24]

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Well, I'll take the first part and I'll let Jeff take the tax reform stuff. I mean, I saw the one pager yesterday, but he's a better person to answer that than me. But let's talk about new markets. Our focus right now is to execute in Toronto and Oregon. Of course, we'll always evaluate what's going on in some of these new markets. We talked a little bit about on the last earnings call that we had land under contract in Phoenix. So we're exploring new markets, but right now our plan is just to execute on those 2 new markets.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [25]

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Yes. Andrew, on the tax reform, I didn't read the entire document myself. And for me, I'm focusing right now on the rate differential between individuals and corporation. There's a 20 percentage points spread there, and that would change the nature of how we want our dividend to be taxed. I think it's way too early to tell just off a couple bullet points that are out there, but that's what I'm focusing on today.

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Operator [26]

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Our next question comes from the line of Dave Rodgers from Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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Chris, maybe one question for you. The average lease term, I think, on the deals you signed, 8.5 years, maybe talk a little bit about kind of what the trend has been there and how you came with the customer to get to that kind of 8.5 number, how that fits in with your maturity schedule going forward as well.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [28]

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I'll let Jeff talk about the maturity schedule. But last year, I think the average lease terms was over 12 years. With this one, it was 8.1 years. And it's typically, this customer, their leases are a little bit shorter than what we did last year. So we're very comfortable with the lease terms on this deal. We think this customer has tremendous potential to expand with us in some of these new developments.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [29]

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Yes. And on the lease maturity schedule, it's going to go out like the '25 -- 2025, '25 time frame, which are pretty light maturities right now, so that's a really good fit.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [30]

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Is there any staggering of the deals that you're doing now so they don't all come due kind of as a bullet maturity at some point?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [31]

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I think it varies by deals. I mean, some of those come due basically as a bullet, as you described, and others are staggered. It depends on what the customer wants and what we have available for leases, when we'll be opening facilities.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [32]

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Okay. That's helpful. And then, Chris, maybe a little bit on the dedicated sales force in Toronto. I know you've added a lot of salespeople since you joined the company. Having a dedicated sales force in-market at a specific asset, is that something that you had always planned to do there? Was there something that kind of triggered you do want to do that in Toronto?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [33]

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Yes. We think it's important. Obviously, Toronto is a new market for us. Our sales force is still much smaller than all of my peers. It's 1 person, so it's not a large sales force like you think. It's somebody that has a lot of experience in the market. And the partnership with JLL, we think, is going to bring a lot of benefits to the relationship. They're already bringing customers in for tours. So we're really excited about our prospects in Toronto. We think we're going to be pretty successful.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [34]

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Just for clarification, the 1 person is just our Toronto sales force. We do have some in the U.S.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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Okay, got that. And then because you talked about a variety of different verticals in the backlog of tenants you were touring and talking with, can you kind of talk about maybe outside of cloud where you're seeing the most activity?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [36]

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Yes. We're seeing -- I mean, obviously, cloud is the #1 vertical right now in social media. So we're seeing a lot of activity in the Toronto market from financial services, pharmaceuticals, enterprise-type customers. It's great. We think it gives us a great opportunity to add some high-quality new customers in a new market.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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Great. Last question for me, Jeff, and maybe just talk about a little bit of the rationale about preannouncing the equity offering at some point for the year, any additional thoughts you have around that.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [38]

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Yes. I wouldn't call it a preannouncement. Just that I modeled it in my guidance because I think you guys will be able to do the math, but we couldn't do the 2 new developments without going above our 5x net debt-to-EBITDA. I did not want to create a thought process that we were just going to disregard that key metric. So in order to stay under that, we need -- I had to model some equity and went ahead and decided, I think, as you described, a prudent nature to disclose that.

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Operator [39]

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Our next question comes from the line of Frank Louthan from Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - Research Analyst [40]

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(inaudible) industry that you're seeing (inaudible) pre-leasing that you have in the pipeline here. And when look at that chart you have with your top customers, how should we expect that to change over the next 12 months or so? Is it diversifying (inaudible)? Do you see (inaudible) customers [under that]? How should we think about that?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [41]

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Frank, will you be able to call back in on a different line?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [42]

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Yes, we can't hear anything you're saying.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [43]

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We'll put you right back in the queue.

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Operator [44]

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We'll move on to the next question, which is coming from the line of Colby Synesael from Cowen.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [45]

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The contemplated equity offering is anticipated to have a $0.10 impact for 2017, and assuming, obviously, that in the next month or so, it's going to have a 6-month impact, so call it $0.20 on an annualized basis. Do you think that the incremental growth that you'll be able to achieve from the new facilities, which you're building out, could allow you to make up for the anticipated dilution that would be coming from that equity offering? And then also just going back to ACC9, how long do those customers get to hold that space before you would be allowed to start marketing that to others? And what's the likelihood in your view that they actually do take that remaining space in that facility?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [46]

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Colby, it's Jeff. I'll take the first one, the math question. Absolutely, we think that the NOI that we generate from these 2 developments would both have the impact (inaudible).

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [47]

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And Colby, I can't give you the dates on ACC9, but I can say that there's a strong possibility that they will lease the space. We had a similar 4.2 megawatts in ACC7. And I told you guys on the last call that customer didn't take it, but we had somebody else right behind them that wanted the 4.2 megawatts. So when you look at our pipeline, as I mentioned, we're very pleased with it. I don't think it will be an issue leasing the space.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [48]

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Okay. And I guess, just one other question because you moved through those so quickly. In Toronto, the 6 megawatts in Phase I, do you anticipate that, that's going to potentially go to 1 customer? Or do you think just based on the market dynamics that it's more likely that, that'll be split up and sold to a variety of customers?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [49]

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It's hard to predict, Colby. I mean, there's some opportunities in the pipeline for that level of leasing, but there's also some opportunities that are smaller. So if I had a crystal ball, I would think it would be multiple customers.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [50]

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Yes. Overall, the opportunities on average in Toronto are definitely smaller than Ashburn and Chicago. They're different types of market.

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Operator [51]

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Our next question comes from the line of Frank Louthan from Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - Research Analyst [52]

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Great, sorry about that. If we look forward, looking at your pipeline of deals and so forth, how should we think about it from a logo perspective? What sort of industries and so forth that you're attracting? And looking at your chart with your top customers, we look at all the pre-leasing that you put on the books today -- you're telling us about today, fast-forward a year or so, are we likely to see that mix change? Are you seeing some diversification come in? How should we think about that?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [53]

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Well, we're definitely seeing some diversification. But as the cloud continues to grow, you're still going to see continued leasing from the hyperscale. I mean, their requirements are going through the roof. They're adding new types of applications. I mean, you look at the growth of AWS, you look at the growth of Microsoft, you have companies like Oracle getting deeper and deeper into cloud, you have IBM SoftLayer. So there's a tremendous market opportunity out there. Especially, with deals of the size of the 28.8 megawatts, I think you're going to continue to see that from cloud providers. But the smaller deals are going to come from the financial services, the enterprises, the financial -- actually pharmaceutical vertical. So I think it's going to be a healthy mix, to be quite honest with you.

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Operator [54]

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Our next question comes from the line of Dan Occhionero from Barclays.

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Daniel Joseph Occhionero, Barclays PLC, Research Division - Research Analyst [55]

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Question on the equity offering. So what's the time line that's being assumed in the guidance? And kind of following on that is, is there any reason you guys used the ATM in the first quarter? And I guess, the third part of the question is on the stock repurchase. Can you talk about the strategy of adding that?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [56]

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All right. Yes. So I'll do the last 2 first. So on the ATM, we have been working on this lease that we announced, the 28.8 megawatts, for some time. And we thought it would have a positive impact on the stock, so I didn't want to issue at a price lower than I thought the stock would be at in the near-term future. On the repurchase program, since we're having an ATM, I wanted to have a repurchase program just to protect us from the downside in the stock. So it's basically having another tool already in my tool bag ready to go. And then on the timing of equity, we've modeled it using the ATM. We've modeled it as a marketed offering, but I don't want to get into any specific timing. We did model about $300 million of equity, but the timing and the exact amount will determine that and the vehicle that we're going to use will determine that based on how the market is and what looks like the best way for us to go.

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Daniel Joseph Occhionero, Barclays PLC, Research Division - Research Analyst [57]

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All right. And just one other question, switching gears a little bit. So there was an article a couple of weeks ago on datacenterknowledge.com talking about Apple and about how they've been growing the modest space that they lease over the last several years. To what extent are you guys speaking with them about increasing their space requirements?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [58]

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Well, I can't comment on Apple. But I disagree with (inaudible). From what we see and what we hear on The Street that, yes, they're continuing to grow and they're very aggressive in the market.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [59]

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Yes. I think we've talked in the past that they are somewhat -- they're actually coming off AWS for their iCloud and going into either leased or company-owned data centers.

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Operator [60]

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Our next question comes from the line of Jordan Sadler from KeyBanc.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [61]

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Just wanted to clarify on the pre-leasing. You mentioned -- I think one of your top few customers, was this a hyperscale cloud provider? Could you clarify? And then maybe just characterize the size of the overall demand funnel today. You've done that on prior calls, and I'm curious if you're still at those peak levels.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [62]

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Well, Jordan, I'll talk about the funnel first. I think I did a little bit at the beginning of the call, it's when you take out 34.42 megawatts out of the funnel, there's a replenishing period. But as I mentioned earlier, we're very pleased at the level the funnel is at right now. And it's continuing to grow each day. We hired a new salesperson in Toronto. He's helping us establish an even stronger, more robust funnel in that market. So we're pleased and very excited about our pipeline. And you asked the question, what vertical? Well, I just find hyperscale a little bit different than others. And I call them the 3 big hyperscale providers. And all I can tell you that it's not one of the 3 large hyperscale providers.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [63]

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Okay, that's helpful. And then in terms of the returns. You did talk about Chicago and Northern Virginia in the 11% to 12% range, obviously large leases and buttoned up early. But did that slip a little bit relative to your previous anticipation?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [64]

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No. Jordan, there's been no change to that. I think, Jeff, has always been clear when he talked about that, that if we can get a large pre-lease, we're okay with an 11% return. So there's been no change. And when you look at Toronto, we said 13% from the beginning because the tax leakage -- and our target is 12%. We've exceeded the expectations in Chicago, and we've also exceeded the expectations in Virginia at ACC7. But the target's always been 12%. And for a large pre-lease, we've always said it's been 11%.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [65]

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Yes. Very similar to SC1 Phase III, where we took 11.5% for that large pre-lease.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [66]

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Okay. Would these types of leases have ramps in them? Or are you not seeing that in the market today?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [67]

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No, we're not really seeing -- for our size deals, we're not seeing the ramp request of multiple months of free rent. We're still seeing the normal 3, 4 months to build out the space for free rent but nothing really beyond that.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [68]

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All right. That's helpful. Last one on the amendment. Can you offer a little bit of insight into what happened there? It looks like they soaked up the additional square footage. Was there incremental rent? What does an amendment entail?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [69]

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I can assure you we charge rent. (inaudible) sizable density model at ACC7, and we had -- we also had it at CH2, and we handled this one a little bit differently. At ACC7, we leased every megawatt in the building. Really had no ability to get any more megawatt in the building and had half a room left. So we went to the first (inaudible) the other half of the room and said, "Would you like to spread out and use the whole room? And if you would, then yes, here's what we would charge you for the rest of the room. No additional powers." So that's what we signed. At Chicago, the second building, Chicago 2, we were able to take 1 whole -- we had 1 entire room left over. And because of that, we were able to position some power equipment inside the room and outside of the building, service that room and able to sell an extra amount of power. And you saw that on prior calls, where we increased the megawatts of the second Chicago building. So you're going to start to see things like this at our buildings because they're a puzzle, where you try to put together the seat and the megawatts. And usually, we run out of megawatt before you run out of seat.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [70]

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Yes. And just a prime example, with the hyperscale cloud providers, they're taking higher and higher density space, which requires less square footage. That's a trend that we're seeing.

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Operator [71]

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Our next question comes from the line of Robert Gutman from Guggenheim.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [72]

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So you guys mentioned last quarter, I think, that you can get board approval for Portland this year. I was wondering if this could incur additional CapEx and if this is accounted for in the capital raise.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [73]

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Yes and yes. So it's modeled as part of our CapEx guidance for the year. The $725 million to $775 million assumes that we get approval for OR1 Phase I this year, and we've spent some money on it this year. And it's also accounted for in our capital plan.

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Operator [74]

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(Operator Instructions) Our next question comes from the line of Lukas Hartwich from Green Street.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [75]

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The 29 megawatts of pre-leasing, I just wanted to clarify, is that all 1 customer?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [76]

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It is 1 customer.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [77]

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Okay. And then do you guys ever look at powered shell deals? Or do you focus more on the turnkey space?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [78]

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Our focus is more on the turnkey space, but we've looked at a power-based shell, but it's not our core business.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [79]

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Yes. ACC8 is a building that probably fits best for a power-based shell. But if we can find a build-to-suit or something other than the power-based shell, we would tend to focus on that.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [80]

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And then in the current portfolio, is there any powered shell in there?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [81]

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There's not.

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [82]

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No.

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Operator [83]

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Our next question comes from the line of Jon Petersen from Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [84]

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I think I just have one question. So Chris, in your prepared remarks, one thing that you mentioned was demand from Facebook and their new Facebook Live platform. Just kind of curious, with your conversations with the company, what the data center demand is from an application like that. Are we talking about a few megawatts kind of scattered around the country? Or are we talking about dozens of megawatts?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [85]

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Each application is unique in itself, and we haven't really talked about the specifics of that application in general. But from what we see from historical opportunities, typically, an application like that is 4 megawatts across multiple locations because for a video, you have to be close to the edge to get the good effect -- or a high-quality kind of video.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [86]

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Got you. Does that -- I guess, how do you feel about your portfolio in terms of being close to the edge? I mean, do you have to be like in -- like the Equinix-type facilities? Or are you just saying you need to be in the market?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [87]

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No, not at all. I think we feel very good about our portfolio being close to the edge. When you look at Loudoun County, 70% of global IP traffic runs through Loudoun County. So there's more eyeballs in this market than any place else. So we feel very, very, very comfortable.

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Operator [88]

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Our next question comes from the line of Jordan Sadler from KeyBanc.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [89]

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I just want to follow up on the leverage question. Given sort of what you're modeling in terms of the equity and obviously the development spend, what does pro forma leverage look at -- look like, sorry, at year-end on a debt-to-EBITDA basis?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [90]

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Jordan, it's around our normal 4.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [91]

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4x. Okay. And then just thinking about the ramp in FFO because, obviously, you'll have a couple of big moving pieces here as some of these chunky developments come online and leases come online along with them. Can you give us a sense of what the fourth quarter, what year-end quarterly run rate might look like or how FFO will trend through the year?

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Jeffrey H. Foster, DuPont Fabros Technology, Inc. - CFO, EVP and Treasurer [92]

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I'm not really prepared to do fourth quarter guidance right now. I'd rather keep it quarter-by-quarter as we go. I'll leave it at that.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [93]

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Okay. Is there anything you'd -- well, I guess, you've given us 2Q guidance, so we're reasonably well off.

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Operator [94]

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Our next question comes from the line of Jonathan Atkin from RBC Capital Markets.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [95]

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Yes. So the customer that you did a lot of the pre-leasing with, are you in discussions with them about Toronto as well?

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [96]

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No, we're not in discussions with them about Toronto at this time.

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Operator [97]

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At this time, I'm not showing any further questions and would like to turn the call back to Chris Eldredge for any closing remarks.

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Christopher P. Eldredge, DuPont Fabros Technology, Inc. - CEO, President and Director [98]

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I just want to thank everybody for attending the call today, and look forward to seeing everyone at NAREIT in June. Thank you.

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Operator [99]

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