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Edited Transcript of CONE earnings conference call or presentation 2-May-19 3:00pm GMT

Q1 2019 CyrusOne Inc Earnings Call

Carrollton May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of CyrusOne Inc earnings conference call or presentation Thursday, May 2, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Diane M. Morefield

CyrusOne Inc. - Executive VP & CFO

* Gary J. Wojtaszek

CyrusOne Inc. - President, CEO & Director

* Michael Schafer

CyrusOne Inc. - VP, Capital Markets & IR

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Conference Call Participants

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* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Aryeh Klein

BMO Capital Markets Equity Research - Analyst

* Colby Alexander Synesael

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

* Eric Thomas Luebchow

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Jonathan Atkin

RBC Capital Markets, LLC, Research Division - MD and Senior Analyst

* Jonathan Michael Petersen

Jefferies LLC, Research Division - Equity Analyst

* Jordan Sadler

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

* Kurt Simon

JPMorgan Chase & Co. - Former Global Chairman of Mergers & Acquisitions

* Matthew Niknam

Deutsche Bank AG, Research Division - Director

* Michael J. Funk

BofA Merrill Lynch, Research Division - VP

* Nathan Daniel Crossett

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Nicholas Ralph Del Deo

MoffettNathanson LLC - Analyst

* Robert Ari Gutman

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Simon William Flannery

Morgan Stanley, Research Division - MD

* Yong Choe

JP Morgan Chase & Co, Research Division - VP in Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to the CyrusOne first quarter earnings call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Michael Schafer.

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Michael Schafer, CyrusOne Inc. - VP, Capital Markets & IR [2]

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Thank you, Nancy. Good morning, everyone, and welcome to CyrusOne's First Quarter 2019 Earnings Call. Today, I am joined by Gary Wojtaszek, President and CEO; and Diane Morefield, CFO.

Before we begin, I would like to remind you that our first quarter earnings release, along with the first quarter financial tables are available on the Investor Relations section of our website at cyrusone.com.

I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward-looking statements related to CyrusOne and are subject to risks and uncertainties.

Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on cyrusone.com. We undertake no obligation to revise these statements following the date of this conference call except as required by law.

In addition, some of the company's remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the Investors Section of the company's website.

I would now like to turn the call over to our President and CEO, Gary Wojtaszek.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [3]

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Thanks, Schafer, and welcome to CyrusOne's first quarter earnings call. We put up another great quarter with strong operational and financial performance and have undertaken a number of initiatives over the past 18 months to position the company for long-term per-share growth in 2020 and beyond as the company ramps into the capital investments we've made.

Slide 4 summarizes the highlights for the quarter. We signed leases totaling $27 million of annualized GAAP revenue, including $8 million across our European locations. And as of the end of the quarter, we had revenue backlog of almost $40 million. We delivered close to 50 megawatts of capacity in the quarter and more than 80 megawatts under construction across the U.S. and Europe to support the leases we have signed and deals in the late-stage sales funnels.

We continue to maintain a very strong balance sheet, and as a result of recent actions we have taken, are increasing our normalized FFO per share guidance by $0.20, which is a 6% increase from the previous guidance we shared. Additionally, based on our current outlook, we have eliminated the need for any additional equity financing.

Moving to Slide 5. The $27 million in annualized revenue signed during the first quarter was at an average price of $146 per kW, up 18% compared to the prior 4-quarter average. The scale of our leasing relative to the size of our business remains significant, and we continue to take outsized market share as we generate higher bookings relative to the size of our company, which is a phenomenon that we have seen for the past several years. On a trailing 4-quarter basis, we signed new leases representing nearly 20% of our revenue over that same period. The higher average pricing within the quarter is largely driven by mix, with the bigger contribution from smaller higher-priced deals. Nearly 40% of MRRs signed in the first quarter was for small colocation deployments, which highlights the strength of our diversified customer focus.

We continue to experience strong demand from enterprises and signed $10 million in annualized revenue with this segment during the quarter, bringing in 12 new logos, including 1 new Fortune 1000 customer.

Our leasing also remains broad-based, with deals signed across 9 verticals in 12 markets. The IT cloud vertical continues to represent our biggest source of demand accounting for 63% of our bookings during the quarter. This is identical to the average over the last 3 years, and this vertical now represents 43% of our portfolio.

We recently announced the hiring of John McCloskey to lead our cloud sales effort, and I am excited to have him join the team. John will be based in Seattle and brings over 30 years of technology sales experience to CyrusOne, having led sales and marketing teams for the largest cloud platforms, including Microsoft, AWS, Oracle and IBM. In the few months since he joined, he has added a tremendous amount of depth and knowledge with regard to the technical and financial challenges that the cloud customers are working through and made meaningful impacts to the team.

Slide 6 provides an update on the various sources of rent growth that don't require any additional capital investment. Our high-margin interconnection business continues to grow at a very nice pace. We had a record bookings quarter, signing $2.8 million in annualized revenue. This is now a $45 million annualized run rate business, and the first quarter revenue was up 16% compared to the same period last year, which I believe is the highest interconnection growth rate in the industry.

The second source of rent growth is escalators. The vast majority of our new bookings as well as renewals include fixed rate escalation, generally in the 2% to 3% range. Almost 80% of first quarter revenue signed includes escalation, with the weighted average near the upper end of that range at 2.8% per year.

The third source of growth that does not require incremental capital investment is the lease-up of existing inventory. We estimate that the space and power we currently have available across our markets will generate up to $150 million or about 15% of incremental avenue -- annual revenue once leased with no incremental capital required to deliver this revenue.

Slide 7 shows the yield progression at our Phoenix campus, which is similar to the progression across many of our markets, including Dallas, which we showed in last quarter's earnings presentation. Phoenix has been one of our top markets for years, with strong demand from West Coast customers, particularly hyperscale companies. The first data hall at our Chandler I location was brought online at the end of 2012, with the initial investment in land and shell resulting in a negative yield. By the end of 2014, we had fully built out Chandler I and delivered the first data hall at our Chandler II location, with the overall yield increasing to 10% on a $150 million in cumulative investment.

As of the end of this most recent quarter, we had built out 6 facilities on the campus, investing an additional $370 million for a total of $520 million, creating the largest data center campus in Arizona.

Annualized NOI increased $63 million over this period, resulting in an increase in the development yield to 15%. Obviously, on a levered basis, the equity returns are substantially higher. These type of development yields are essentially the same across our entire portfolio.

Moving to Slide 8. Our European expansion is going very well, and demand across the continent continues to accelerate. Consistent with our expectations, we made the decision to enter the market. As I mentioned earlier, we signed $8 million in annualized revenue across our European markets in the first quarter. Most of this was with our existing hyperscale customers, and we added one new enterprise logo in the quarter.

Revenue for the quarter was up 49%, while EBITDA was up 460% compared to European results for the first quarter of '18. As we announced earlier this quarter, we have started building out a larger sales team in Europe, and European sales funnel is growing quickly and in line with our expectations. Our overall sales funnel is up 85% year-over-year, and 20% of that increase is attributable to our European opportunities.

Our current footprint consists of nearly 70 megawatts in Frankfurt and London, which is essentially sold out. We have another 36 megawatts under construction in those markets as well as 6 in Amsterdam, which will increase the size of our European portfolio to more than 110 megawatts by the end of the year. Based on the power capacity in our existing portfolio plus the current development pipeline, our international footprint will represent over 13% of our business by the end of 2019, and we expect it will be over 200 -- 20% by the close of 2020.

Slide 9 provides an update on our partnership with GDS. As you can see, they continue to put up incredible results, with adjusted EBITDA more than doubling year-over-year and a backlog that represents 70% of their current business. We continue to have a lot of success leasing the Chinese hyperscalers as a result of the relationship, and we signed another 5 megawatts in the first quarter, bringing our total to nearly 25 megawatts since we began our partnership just over 18 months ago.

GDS has created a significant value for our shareholders over this time. And as a result, we were able to raise $200 million from the sale of shares while maintaining a position that approximates our original investment. We effectively monetized our gain as their share price roughly tripled over this period. And our remaining investment translates into nearly $1 per share of CyrusOne stock. I believe GDS represents -- provides one of the most compelling investment opportunities in the entire data center industry as it has the most dominant market share position in a country with unbridled growth.

GDS has consistently delivered the fastest growth rates in the world, and their business is only accelerating. It's against that belief that I somewhat regret the decision to sell a portion of our GDS investment as I am a big believer in their business, and I think they are going to continue to make their shareholders very happy. I have and continue to be a big personal investor in GDS and expect that investment to continue to do well.

However, from a CyrusOne perspective, this was a creative way for us to recycle capital and replace a significant portion of our equity requirements by executing a transaction that is very accretive and ensures we remain at investment-grade leverage level.

The commercial agreement between CyrusOne and GDS remains in place, and I will continue to be a member of their Board. In addition to the value of our GDS equity stakes, I would also point out that the value of our investment in ODATA has increased significantly in the last 6 months along with the success of their business. ODATA's campus in Campinas, Brazil is a 40-megawatt campus, which is the largest in Brazil. And 16 megawatts of this facility has been sold or is under reservation to one of the largest U.S. cloud customers. They have also developed a facility in São Paolo, which is designed to deliver 14 megawatts capacity. And most recently, they recently expanded in Bogota, Colombia, in a facility that will deliver 9 megawatts of capacity. Colombia is one of the fastest-growing countries in Latin America, and we are receiving a significant amount of interest from our cloud customers who are looking to expand there.

Lastly, we are working with some of our Chinese cloud customers, which are looking to expand in Latin America. In short, Ricardo and the team have been pretty busy.

In closing, I'm a little -- I am very pleased with our results and market position. We are the fastest-growing data center company in the U.S., with revenue and EBITDA growth rates close to 20% per year and continue to take outsized market share every quarter. In 18 months, we have successfully positioned the company to be a global data center provider with a presence in Asia, Latin America and Europe. We are also in the midst of a significant footprint expansion, adding capacity in 4 new European markets as well as in Santa Clara, California, and continuing to build out capacity in our existing markets.

I recognize that our strategic decision to organically expand internationally has contributed to a significant level of capital investment over the past 2 years, which has resulted in muted FFO per share growth. However, the secular trends driving our industry continue to remain very strong. This quarter, Microsoft's Azure business grew 73%. AWS grew 41%. Google's overall business grew 17%, and Salesforce is on track to growing 20%. It's against that demand backdrop that we feel comfortable with the level of investment that we have made. A significant amount of the capital we invested over the past 18 months is for capital start-up investment required to build the international platform so it's heavily front-end loaded.

At the current run rate, CyrusOne will be able to generate approximately $1 billion of revenue and generate a significant amount of operating cash flow go-forward. Given the upfront investments we have made and the scale of the company, we can lower our capital investment by 20% next year as we focus on building out incremental capacity in our existing markets in line with customer demand.

At the company's current scale, we anticipate being able to self-fund approximately $700 million to $750 million of capital investment without issuing any additional equity. As our utilization rates for these start-up developments increase, we expect our yields will also increase similar to the yield trajectory of the Phoenix campus, which I discussed earlier. This should translate into very healthy and sustained FFO per share growth rates go-forward.

I will now turn the call over to Diane, who will provide more color on our financial performance for the quarter and an update on our guidance for 2019.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [4]

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Thanks, Gary. Good morning, everyone. As Gary mentioned, we had another great quarter, and the steps we have taken in the early part of this year set us up well for the rest of 2019.

Turning to Slide 11. We continue to post strong financial results, with revenue and adjusted EBITDA growing 14% and 13%, respectively. Note that last year's first quarter results have been adjusted to reflect our metrics as if we had adopted the new lease accounting standard as of January 1, 2018, in order to present a more relevant year-over-year comparison. Also, we received $5 million in lease termination fees in the first quarter of last year. Further adjusting to exclude the onetime impact of those lease term fees implies first quarter year-over-year revenue growth of 17% and adjusted EBITDA growth of 19%.

Churn was slightly elevated in the first quarter compared to our prior 4-quarter average, consistent with what we had anticipated and had noted on our last quarter's call. In particular, there were footprint reductions associated with an energy customer and a telecom customer that no longer needed the space given their current business requirements, resulting in a significant contribution to the churn for the quarter. These events were anticipated in our original guidance, and we continue to expect full year churn to be in the range of 5% to 7%. The churn will be weighted more to the first half of the year. And as you recall, this range is below our historical annual guidance range of 6% to 8%.

Moving to Slide 12. NOI grew 13% on an adjusted basis, in line with revenue growth and again, excluding the lease term fees I mentioned earlier, would have grown 18% year-over-year. The adjusted EBITDA margin was down slightly compared to the first quarter of 2018 driven by higher pass-through meter power reimbursement as a percentage of revenue, which results in 0 margin contribution and also the lease term fees, as I discussed. Normalized FFO growth was in line with adjusted EBITDA growth, while normalized FFO per share was down slightly as a result of the equity issued to fund our growth and manage our leverage.

As the chart at the bottom of the slide shows, the net impact of the adjustments to normalized FFO was slightly negative in the quarter when calculating AFFO. As a reminder, the positive net impact of the adjustments in the prior 2 quarters was primarily driven by cash received from large installations associated with the few customer deployments in those quarters.

Turning to Slide 13. We continue to have a very balanced revenue distribution across our markets, which include all the top U.S. markets as well as the 2 very important European locations of London and Frankfurt. Our European expansion will further enhance the geographic diversification of the portfolio. The CSF leased percentage was flat year-over-year even with a 21% increase in capacity.

During the quarter, we closed down a small facility in South Bend, and this closure will generate cost savings of approximately $300,000 on an annual basis. The impact of this change to our portfolio is reflected in our first quarter churn.

Moving to Slide 14. Our own data centers constitute vast majority of our portfolio. The percentages shown on the slide have increased significantly over the last few years driven by significant level of organic development that represents our core business model. We anticipate that these percentages will continue to remain very high over time as we build more wholly-owned data centers.

Turning to Slide 15. Our development pipeline reflects activity across domestic markets, many of which are power densification projects with no associated space under construction as well as our continued international expansion. In total, we have 190,000 colocation square feet and 82 megawatts under construction. The pipeline is 24% pre-leased on a CSF basis, but we anticipate that by the time this capacity is actually brought online, that percentage will be significantly higher as we are building rates floor to support deals in our late-stage sales funnel.

As you can see on Slide 16, we continue to maintain a very strong balance sheet and credit profile. Gross asset value now exceeds $7 billion. Our weighted average remaining debt term is more than 5 years with no debt maturities until 2023. And we remain fully unsecured with available liquidity of nearly $1.6 billion. Pro forma net debt to adjusted EBITDA is 5x at the end of the quarter, including the proceeds from the ATM and GDS sale and after adjusting to exclude the impact of the adoption of the new lease accounting standard, which is consistent with our presentation of this metric in prior periods. And equity represents nearly 70% of our capital structure.

Our weighted average interest rate on our debt is just over 4%, and we have strategically hedged our euro exposure by synthetically converting $270 million outstanding on the revolving credit facility into more attractively priced euro-denominated debt, resulting in a nearly 300 basis point decrease in the interest rate.

We will likely term out our euro-denominated revolver borrowings in the fixed rate bond market later this year to manage our liquidity in accordance with our policy of maintaining significant capacity on our line and increasing our fixed-to-floating interest rate ratio.

We raised approximately $250 million through the ATM program in the quarter to manage our leverage at quarter end as net debt-to-capital adjusted EBITDA would have been over 6x had we not issued equity. As Gary discussed, we were also able to opportunistically monetize a portion of our GDS investment in April. And as a result of these actions, we have eliminated the need for additional equity for the rest of the year based on our current outlook. Subsequent to the end of the quarter, we've paid down $200 million of the $1 billion term loan maturing in March 2023. In addition to reducing interest expense, this creates a more balanced fixed floating rate mix and reduces our concentration of debt maturing in 2023.

Turning to Slide 17. We had a revenue backlog of nearly $40 million as of the end of the quarter, with approximately 60% expected to commence by the end of the second quarter. Combined with the full year impact of leases that commenced in the latter part of 2018, this significantly derisks our growth this year.

Moving to Slide 18. We are reaffirming revenue and adjusted EBITDA guidance for the year. The guidance midpoint reflects year-over-year increases of 19% and 18%, respectively, with the adjusted EBITDA growth rate based on the pro forma 2018 results adjusted for the new lease accounting standard. These growth rates are among the highest across all REITs.

As Gary mentioned, we are increasing the guidance range for normalized FFO per share by $0.20 at the midpoint, adjusting it to $3.30 to $3.40 per share, up from $3.10 to $3.20 previously. The new midpoint represents a 4% increase over pro forma 2018 normalized FFO per share adjusted for the lease accounting standard.

The increase in guidance is driven by several factors. We had not contemplated the GDS share sale or the execution of the euro swap in our initial guidance. And the combination of these items accounted for nearly $0.15 of the increase. The balance of the increase is driven by lower interest expense as a result of a lower interest rate outlook compared to our original assumptions as well as the timing and level of capital spend.

We have decreased and tightened the guidance range for capital expenditures as we anticipate that a portion of the spend we had originally assumed would occur this year will now likely occur in 2020.

In closing, our business continues to perform well. Our European expansion efforts are producing very good early results. The underlying fundamentals for data center demand remained strong, and we are well positioned with capacity across all our key markets. In addition, we have fully covered our equity requirement for the year and have ample liquidity to fund our development pipeline.

Following up on Gary's comments, as we begin to think about 2020, we can fund approximately $750 million in capital next year with no additional equity issuance. This will result in strong growth next year funded through our free cash flow and debt while maintaining our target leverage range.

We thank you for participating on the call, and we are now happy to open the call to questions. Operator, please open the lines.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Frank Louthan from Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [2]

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Talk to us a little bit about the level of network investment that your customers are making into your facilities. What's that trend been over the last 6 months or so? Have you seen that growing? How should we think about that?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [3]

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Frank, there's been no noticeable change in terms of the level of network deployments. I mean typically, you don't really think of us as kind of an interconnection-focused company, but we continue to put up really strong results in that area. I think that's really more as a result of the size and scale of our facilities than thinking of us more as of like an interconnection play. But we grew this quarter that line of business at 16%, and it's a $45 million business now. It's growing really well, but I wouldn't say that there's any noticeable change in terms of the amount of networking deployment in there. That said, I mean, Megaport continues to do really well and continues to outperform selling lots of customers' additional capacity. And they basically open up opportunities for us that we may not otherwise have without them.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [4]

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So on that, what's sort of driving that uptick this quarter? What are some of the solutions customers are trying to drive with the cross-connects they are buying from you?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [5]

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Yes. I mean it's just related to the size of the business overall. I mean what you see is continued growth in customer acquisition. And as you get more customers, they just naturally draw more interconnection. Our average number of cross-connects per customer is at about 20 now, which is up 6 or 7x fold from like when we first started reporting this in '13 or '14. They're connecting to other networking providers in there and starting to connect more and more to customers, in particular through Megaport.

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Operator [6]

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The next question comes from Robert Gutman from Guggenheim Securities.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [7]

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Can you break out the split of the $27 million in leasing between hyperscale and colocation in the quarter? And secondly, can you talk a little bit about the CapEx reduction and reconcile it back to the development table?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [8]

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Sure. I'll hit the -- so the mix was 60% hyperscale, 40% enterprise. And that 60% is consistent with the average bookings over the last 3 years. So it has not really changed too much. With regard to the overall reduction in capital, we cut that back around 7% at the midpoint. That's basically just projects that we think are going to get pushed out later in the year into 2020.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [9]

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Yes. If you look at Page 23 of the supplemental, in the first -- first of all, we always talk about CapEx in terms of cash spend because we're focused on what we actually have to fund in the calendar year. And on the spent to-date on the development pipeline, it's about $117 million. And in total, to finish it out is about $600 million to $700 million. What we've actually spent in total in the first quarter was about $300 million. So when you add all that together, that's where you get to the high end of about

$1 billion.

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Operator [10]

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And the next question comes from Simon Flannery from Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [11]

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Gary, I think you said that the funnel was up 85% year-over-year. If you could just give us a little bit more clarity on what you're seeing in the marketplace, how the competitive environment is? And what's the time line for bringing that to actual leasing? Is it kind of near term or more of a 6- or 12-month-type funnel?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [12]

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Yes. Sure. So we've seen a continued progression in the size of our funnel over the last several quarters. So we're up 85% this quarter versus last year at the same quarter, but 20% of that increase is purely attributable to the additional funnel that we're building in Europe. What -- we give out these -- the funnel commentary just for general directional purposes. I mean that's a really strong funnel increase, and we've seen continued increase in that funnel over the last couple of years. The only time we actually saw a decline in the funnel was after the second quarter blowout leasing last year into the third. It came down, and then we started rebuilding it again.

So the funnel is as strong as it's ever been. It's up about 10% sequentially as well and filled with a bunch of new customers in Europe. I think that's really a good indication of the broad secular underlying demands in the industry. I talked a little bit in my comments already about Amazon's business being up 40%, Microsoft's Azure platform over 70%, Google up 17% across their company overall. It just really gives strong indication that these -- those businesses, which are about 40% of our business right now, continue to put out really big numbers. And we expect that the secular trends that we've been seeing for a decade are going to continue go forward. And so we're involved in a number of different deals. But as I mentioned on last quarter's call, we were seeing a reluctance for companies to close. So if you look at the bookings that we had this quarter, we feel really good about that. That's down from where we were over the last 4-quarter average. But we had guided to that this year.

We saw a noticeable pullback last year, and so we revised our outlook this year to be, I think, fairly conservative from a bookings perspective. That said, any of these deals that we're tracking could churn, and you can get these windfall profits. We try to position ourselves from a capital perspective to basically have adequate inventory in all the key markets that we're in, in particular Europe as we're building out that platform. So we're positioning ourselves to win. We think that the broad secular demand backdrop is there. And that when customers do start buying again aggressively, we're going to continue to take our outsized share of the market.

That said, what I also provided color on the call is that we've spent basically 18 months now building out an international platform essentially organically. That is a really difficult thing to do. It's difficult just operationally to execute that. But also I think, as a lot of folks have recognized, from a financial perspective, the burden that you put on your FFO per share is also challenging. But we did that because we feel really confident about the drivers. We also recognize now that we have all these upfront investments that we made that we expect are going to continue to drive really nice yield progression increases, similar to the chart I just shared on our Phoenix development.

So we think at the current rate, we could spend about $700 million to $750 million of capital, building out all of the existing platform, and that's going to provide really nice per share growth as we increase our utilization in those facilities.

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Simon William Flannery, Morgan Stanley, Research Division - MD [13]

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Great. And anything on the competitive environment pricing on new deals on re-leasing?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [14]

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Yes. It's more of the same. Our churn this period was up 2%. That was within our guidance range. We took down our guidance churn estimate this year from 5% to 7%, and that was included -- that's also related to partially the revenue shortfall versus consensus estimates just because that churn was more front-end loaded. But it's more of the same. I mean some of the deals are pricing up, some are pricing out. For anything that's associated with any pricing reduction or any customers leaving, in aggregate, that is all reflected in our churn metric that we report. I think we're probably reporting the most conservative churn metric in the industry because it relates to anything that reduces revenue in place existing revenue, whether its price compression, volume reduction or absolute customer leaving entirely. Those are still, I think, on par with what everyone else is experiencing in the industry.

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Operator [15]

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Our next question comes from Richard Choe from JPMorgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [16]

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Wanted to ask, the European signings were strong, and you've talked in the past about the $20 million kind of being the bogey. With your -- is there a new bogey? And then knowing that it could be somewhat volatile but also wanting to get a sense of how you feel Europe is ramping. Are we at a good run rate? Or is there more to kind of be developed?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [17]

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Yes. No. I mean Europe is coming together really nice. I think what you saw this quarter is recognition of the efforts that we have been making there. So in spite of really strong bookings there, $8 million, our aggregate funnel increased 85% year-over-year, and 20% of that was related to Europe. So even in spite of having the biggest bookings quarter in Europe in this quarter, we still managed to increase the size of that funnel quite substantially. So we have a lot of interest from a number of companies, mostly hyperscalers but also enterprises. Tesh has done a really nice job hiring a bunch of key individuals building out the sales team in Europe. And we expect that's going to continue to do well.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [18]

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And as a quick follow-up, a lot of the backlog has started to commence. And excluding the churn, I think we can see some nice growth going forward. But in terms of the funding and debt levels and equity raises, it seems like you're at a good organic run rate. Does it make sense to think that the funding is kind of going be there now versus kind of calling it a little short before?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [19]

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Yes. Well, absolutely. We are -- our equity needs are done. And what we're also trying to communicate is that we have strategically made the decision to build out an international platform over the last 18 months. We are there now, right? So we have expanded into initially in Asia with GDS. We did our acquisition of Zenium last year. We have a number of big investments undergoing in organic developments in Europe in the fourth quarter last year. We partnered up with ODATA in helping to launch the Latin American franchise. When we've made all these investments, you're investing a significant amount of upfront capital to build out that platform. And that requires a lot of capital that you're not being paid for as you lease these out. And the point in showing that Phoenix development table is to show that all of these investments that we're doing, we currently have 5 underway, are all dilutive in the short term. But as we continue to grow up those campuses and facilities, the yield progression increases really nicely.

We are showing -- in Phoenix, we're making 15% development yields on a $500 million investment. The reason for that is to basically share what we're seeing in our business. And so if you use that as a proxy for all the investments that we've been making in building out the platform internationally, you should see really nice yield progression on all those facilities, which would translate into really nice FFO per share progression.

And also I was trying to allude in this is that since we made so much significant capital investment building out all of these new locations, you should expect that our capital investment needs go-forward are not going to be nearly as high as they have been over the last 2 years. And given the sale -- scale of the company, we'll be about $1 billion run rate company. That generates substantial amount of internal cash flow generation, which would basically enable us to self-fund all of our capital needs over the foreseeable future and not require any additional equity. So at that $750 million of capital investment, annually, we would not need any additional equity financing at all. That will translate into nice increases in our FFO per share as we grow into all of the investments that we've made over the last 18 months.

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Operator [20]

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The next question comes from Colby Synesael from Cowen and Company.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [21]

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Just want to stick with the financing requirements. So are you implying that you expect CapEx to be around $750 million next year?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [22]

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Yes.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [23]

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Yes?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [24]

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Yes. And I think on that, Colby, I mean to be more pointed, is that is a really nice level of organic capital investment. From a REIT perspective, that's probably one of the highest organic capital investments. And what I'm saying is that at the scale of the company now, that's all self-funded.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [25]

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Okay. So $750 million next year. And then just, I guess, the -- just as precise with the ATM, are you saying that you are not intending to use the ATM for the remainder of 2019?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [26]

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We're done.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [27]

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Based on our plan, no more equity.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [28]

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I just want to hear it in print. And then lastly, as it relates to ODATA...

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [29]

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Are we that (inaudible) really?

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [30]

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And then as it relates to ODATA, you mentioned your ownership stake, I think, had increased. I think my understanding was as you give referrals to ODATA and those ultimately end up translating into leases, you're paid effectively through an increase in your ownership stake. Am I correct that that's how it works? And I guess can you give us an update on where that stands today based on the success that they've had?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [31]

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Yes. We're still at the same level. They're continuing to do really well. We're helping them build their funnel up. And we expect that from our ownership to go up a little, but that's not going to be material to our investment requirements at all.

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Operator [32]

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Our next question comes from Jonathan Atkin from RBC.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [33]

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A couple of questions. The Phoenix slide kind of prompted me to ask about good year and just other markets in that general vicinity. Lot of interest on both the self-build side as well as among third-party developers and how do you see that impacting your current operations. Does it validate the market? Do you see it as maybe representing potential competitive threat? And then turning to Europe. Just interested, Frankfurt and London, which do you see as the more competitive markets for scaled deals? And in which markets from a supply perspective, which is the more competitive market? And then in which market are you seeing or expecting to see more demand for data center capacity?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [34]

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Sure. Yes. So look, I mean, we basically kind of created an oasis in the desert there. So we went in 2012 and launched our operation in Phoenix. And everyone at the time were saying, what are you doing? That's so crazy. blah, blah, blah. Same thing and the feedback we've heard when we went to Virginia and everywhere else, frankly. And what you see now is we got $0.5 billion and they're generating 15% return and that is one of the largest data center markets in the country. I think the reflection that you see a bunch of our competitors and also customers looking at buying capacity and land there is just a reflection of all the great work that we've done to highlight just how great Arizona is from a data center perspective.

You got really great tax rates. It's a low-risk environment from an environmental perspective. Power rates are really low. That said, I would say, look, it's easy to buy land, right? I mean land out there isn't particularly expensive. And it's one thing when you buy land to make that type of level of investment versus the capital required to go build out and put the real dollars in the ground building out you're fitted out facility. So I think, in general, I think if that market develops, the more customers move there, hopefully, that becomes the Northern Virginia of the West Coast. And more and more companies will be there. And hopefully, all of us would do well together. With regard to the European markets, both Frankfurt and London are both really, really hot markets. And actually, to be honest, Amsterdam and Dublin. But of the 2, Frankfurt right now is the biggest and most -- hottest market with the least amount of capacity available for folks.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [35]

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And then just lastly, just on potential future M&A, the flavor for the types of opportunities that you would consider, whether it's tuck-in, new markets, domestic, international, any kind of broad thoughts as to kind of how you think about that?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [36]

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Yes. You know I think what you're seeing over the last 18 months was really kind of a recognition from us that M&A was not easily to do, right? There were many platforms out there. We thought that going organic, like the way we have, made the most sense for us. Clearly, a challenge because it takes a while before you can get a presence in these markets. And clearly, there's a lot of headwinds financially trying to bring your investors along in this. But we're there, right? And so we have a really nice platform right now in Europe, and we've made a lot of start-up investments. And we expect our per-share results are going to reflect that over time as we go on to them. So from an M&A perspective, we're not really focused on doing any other M&A. We're just focused on selling out the capacity that we currently put in the ground.

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Operator [37]

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Our next question comes from Nick Del Deo from MoffettNathanson.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [38]

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First, to drill down a bit more on the CapEx deferral, was that related to data center construction or land acquisitions? And was it in the U.S. or Europe? Did it relate more to Phase 1 build or subsequent fit out? Any other color you can give.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [39]

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It's really just more timing. We have found in Europe that the buildout time line is a little lengthier than U.S. So a lot of it is just that timing of when the dollars will go out.

And we have there -- other than the land that we have announced, that we already purchased, which is San Antonio and Santa Clara, we don't really have any other land targeted at this point. And as you recall, last year, we acquired like $200 million of land. So last year was a huge land year to start building out this inventory across Europe and some of the other U.S. markets, particularly Santa Clara and Northern Virginia. So a significant reduction in land acquisitions is also part of the reduction in CapEx.

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Kurt Simon, JPMorgan Chase & Co. - Former Global Chairman of Mergers & Acquisitions [40]

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Okay. Got it. And then on the interconnection front, what do you view as a reasonable upper bound for the number of cross-connects per customer or the number of cross-connects per customer per location? And what does the split look like between cross-connects going to traditional network service providers versus SDN providers? You talked about SDN providers growing really quickly, but I'm interested in the absolute numbers.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [41]

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Yes. Yes. So I don't know, I mean, I would never expect us to get up to the same level of penetration or cross-connects per customer as your traditional interconnection plays like an Equinix. But I think what we've seen is the number of cross-connects per customer increased significantly, up fivefold from when we were first reporting on this a couple of years ago. So I -- we've not seen any recognition for it to slow down. I think just as more and more of your -- the digital economy goes digital, right, and more and more information gets generated on the Internet, shared on the Internet, it just creates more demand on customers to buy more cross-connects. With regard to the vast majority of our business, it is the traditional networking providers. My points on the SDN providers, we've seen significant growth, up a couple 100% each quarter, year-over-year. But that's still relatively small in terms of our overall market. I don't know specifically on that. I would guess it's probably no more than 10% overall in our cross-connects. But it's growing really nicely, and we don't see any signs of that slowing down.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [42]

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Okay. Maybe a different way to ask. What's the typical number of networks you have per data center today, at least per enterprise range data center?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [43]

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It ranges probably at the low end from about some of the smaller facilities from maybe 4 carriers to the higher end, some of our other more connected facilities probably are pushing up to 50 or 60.

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Operator [44]

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The next question comes from Aryeh Klein from BMO Capital Markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [45]

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So as it relates to the plan for $750 million in CapEx spending in 2020, was that something you were always expecting to do? Or is that -- did something recently change in the market that prompted you to lower the spending plan?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [46]

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No. It's always -- we've never given guidance beyond a year, right? And what we have all -- what we have always been saying over the last 18 months is 2 things. One is -- well, actually even further beyond that. I have always, from inception of when we went public, we have always talked about that this is a global industry. And that ultimately, if you want to be a relevant helpful supplier to your customers, you have to have a global presence. So we've always believed that from a strategic perspective that this is a global industry. 2 years ago, right about now, I had talked about that we are going to make an effort to go build out that international platform. We have spent the time over then looking at different M&A alternatives to hopefully accelerate that. But none of those things were coming to fruition. Some of the prices that folks wanted were much too big. And yet, here we are in a position where we think strategically it's really important. We have customer conversations that validate the need for us to go internationally. And then we just bit the bullet and decided to go build out that platform organically. We recognize that there was a lot of upfront capital to go build out that platform. We also recognize that from a real estate perspective, going organic like we did is not the traditional way and you're penalized for that. And we also recognize that from a real estate perspective, going international is also unheard of. There is only roughly about half a dozen REITs that are -- that generate $1 billion in revenue and are also international. So really rarefied the air there. But we do believe that the secular drivers are really intact, and we are pursuing that. The scale back in terms of our CapEx performance kind of is really just reflective of all the investments we've made and what we think we can deliver and keep customers happy and still maintain really nice rates of growth, particularly on our FFO per share.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [47]

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Okay. And then just in the presentation, you mentioned that a large percentage of deals contain escalators. What about the deals that don't have them? What kind of determines that? What types of deals are those? And can you do anything to add escalators to those?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [48]

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Yes. These are really short-term deals. I mean if you look at the number of deals we did this quarter, like over 80% had escalators in it with an average uptick of 2.8%. The other ones that don't are really short-term deals that were added on to existing contracts so they're really short term in nature. Like so for instance, like some of the cross-connects, they don't have escalators on them at all, but we traditionally price up cross-connects every year.

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Operator [49]

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Our next question comes from Eric Luebchow from Wells Fargo.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [50]

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Gary, you talked about last year that you thought the really high leasing you saw in Northern Virginia probably wasn't sustainable. And it seems like industry-wide volumes are down in that market year-over-year, at least in the first quarter. So curious what type of hyperscale interest you're seeing in other U.S. markets? And what are some of the demand that was in the Northern Virginia last year could shift to other markets? And then on the development of Santa Clara, I didn't see it in your development table. Just curious how that's progressing when you expect to open it and when you could expect to see some pre-leasing in that market?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [51]

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Sure. Look, as I mentioned, our funnel is up 85% year-over-year and 65% if you exclude Europe. So that funnel is broad-based. A lot of it is in Virginia, but it's also in the other key markets around the country as well. So I wouldn't read anything more through in terms of the strength of the Northern Virginia market other than kind of just typical buying patterns of these big cloud companies that they go up and down. I think if you were seeing sustained decreases and slowdown in the aggregate rates of growth for these big cloud companies, that would be probably more telling and more concerning for us. And we don't see that. We see them just kind of natural gyrations. We expect that's going to bop around. We are seeing demand from big customers across pretty much all of our markets, East Coast, Central and West as well as in Europe now as well as we expand that platform. What was your other question?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [52]

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Santa Clara. So Santa Clara is still in the finalizing design and permitting stage, so it's not on the development table yet. That will come on probably later in the year with the first capacity being '20 -- late 2020 delivery.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [53]

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Yes. We're scraping ground there now. So we knocked down the original building and kind of just getting the land ready for construction.

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Operator [54]

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Our next question comes from Michael Funk from Bank of America.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [55]

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A couple of quick ones, if I please could. Back to the Europe commentary, obviously, the moving over there trying to preposition to win some of the hyperscale business. Maybe just your thoughts and commentary on how you are positioned to win some of the Microsoft business, Microsoft commenting that they're putting substantial capacity overseas and how you think you're lined up for that?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [56]

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I think we're lined up really well, not just for Microsoft but for all the customers. I mean we have built a really nice franchise with strong customer relationships across all the various cloud players. But we're not just a cloud company, right? I mean this quarter, 40% of our bookings were in the enterprise space. That's consistent with our 3-year trends. And I think that really just highlights the strength of our franchise that we can drive really strong enterprise sales as well as cloud sales. But I think we're positioned really well with all the companies, they are all putting up big numbers, and I expect continued growth. I think Amy was probably more open about the investment that she was planning to do to kind of reaccelerate the growth in Microsoft's cloud. But I don't think that's any different than what everyone else is looking at as well. The reality is only 15% of enterprise business is outsourced today to the cloud. So the big fat part of the adoption curve is still in front of us. So I'd expect everyone's going to put up -- consistently put up really nice growth rates for the next couple of years.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [57]

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And one clarification, if I could. I didn't hear you mention it earlier. But the $750 million in CapEx -- development spending in 2020, what was the implied cost per megawatt that you had -- that you had baked into that?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [58]

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It's going to be low. It depends on where the demand materializes. But after your first part of your buildout is done, your incremental megawatt cost is roughly $5 million or so.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [59]

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And then are you still seeing any kind of upward pressure on build cost as well? Or is that pretty consistent with the trend during 2018?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [60]

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Yes. That hasn't really changed much at all. Actually, labor -- one of the tightest markets in the U.S. was in Virginia with labor and that's kind of dialed back now.

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Operator [61]

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The next question comes from Matthew Niknam from Deutsche Bank.

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Matthew Niknam, Deutsche Bank AG, Research Division - Director [62]

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Just, 2 if I could. One on the backlog and how that sort of rolls into 2Q. I think there's about $24 million on Slide 17. Could you just help us think about whether it's front-end loaded or back-end loaded to get a better sense of the cadence and how that rolls through? And then secondly, on leverage, as we think about the $750 million in CapEx next year, and we think about the ability to self-fund, any updates you can provide in terms of leverage and comfort zones and where you'd like to be there?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [63]

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Okay. The first one, the $24 million backlog that we say comes online in the second quarter. I mean, we just always guide to midyear.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [64]

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Mid-quarter.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [65]

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Midyear -- sorry, mid-quarter. It's hard to say exactly when it's all coming in, so mid-quarter is just a pretty safe way to model it. Regarding -- I think your question was on leverage. Clearly, with all the activity we did in the first quarter, we brought down leverage really basically to low 5. And if you adjust it for that, our EBITDA went up -- and I'm sorry, EBITDA went down because of the new lease standard, it would really be like straight 5x. So we've already built the cushion to build leverage over the balance of the year. And when we say the $750 million going into, say, 2020, that is -- that's because of EBITDA growth quarter-over-quarter as time goes on and then still solving in that mid-5x leverage range.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [66]

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So basically, what we're saying is at that level of capital investment we're going to be able to sustain a really nice growthy business. Never need any additional equity to fund it and also be within the credit agency guidelines to become investment-grade.

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Operator [67]

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The next question comes from Sami Badri from Crédit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [68]

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Crédit Suisse. My question was more to do with LatAm and specifically, your relationship with ODATA and just maybe does ODATA give you some insight on the type of returns on invested capital yield that you're generating or they're generating, specifically in LatAm? And is that more comparable to the North America market or the European market just so we can begin to understand that region as it begins to develop as you know everyone is now entering? So any color on that would be very great.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [69]

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Sure. Sure. Yes. Yes, we do have insight in that. They generate really nice yields, probably stronger than the U.S. market.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [70]

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Okay. Is there going to be any kind of hiring required by CyrusOne side when it comes to scaling up or developing that business? Or is it just solely relying on ODATA in the partnership and no real additional OpEx coming on?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [71]

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Sure. Yes. It's just ODATA and they're basically -- they're -- the big financial partner in that is Patria, which is a really well-established private equity firm out of Brazil. So our whole focus in terms of how -- if your goal is to ultimately build out an international platform and you have limited amount of capital, how do you do so in the most capital-efficient way? And that was the original foray that we did with William and Dan -- and GDS gave us access to China. That's gone really well. We have a really strong relationship with them. We tried replicating the same thing in Latin America with Ricardo and the team there. And this is a way for us to kind of develop our franchise in those areas, develop real relationships with partners over there where we can help leverage our customer relationships. And then in Europe, where we felt very comfortable putting in direct capital investment, building out that platform on our own felt like the right thing to do. So I think we're pretty much where we wanted to be when we started this at least when I started talking about actually on this call 2 years ago.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [72]

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Got it. And then question for Diane regarding the normalized FFO guidance, how it increased by $0.20. You commented on the $0.15 portion regarding the European financing dynamics and GDS capital recycling. But you also made a comment regarding the $0.05 to do with the investment-grade rating and lower interest rate expense. Now as we think about the business and financing in 2020, 2021, should we also be considering a little bit of a step-down as well in some of your interest rate costs like your marginal rates just because you may potentially be either reissuing or rolling the debt? Just giving us more color on how we should be thinking about this longer term as you guys go through this transition.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [73]

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Yes. So as it pertains to this year, again, we had not contemplated the cross-currency swap. That was probably worth about $0.06 a share. And then the GDS was a direct substitute for issuing equity. So it was over 3 million shares that we would have contemplated issuing that we did not because of the $200 million of GDS sales and then the balance of the interest rate saving was going into the year probably not unlike a lot of other public companies. Originally, we thought LIBOR was going to probably bump a couple of times with the Fed. It wasn't really into -- going into this year, everybody thought rates were going to have at least 2 bumps, and we're pretty much following the LIBOR curve in our own projections. And now we -- it appears that it's flat. So we have taken out those bumps. So it was more just a reforecast of what we think actual rates will be over the course of the year, which are lower than what we had planned as well as some deferred timing and when CapEx is funded.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [74]

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So with regard to your question for next year, yes, I think what we've just shown here is that we are on that investment-grade path. We have shown a willingness to basically ensure that we're going to keep our balance sheet really strong. And we just showed some creative ways to recycle some of that capital. I think it's appropriate to assume that the interest rates are going to go down as the scale of our business increases and we become investment-grade.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [75]

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Investment grade probably is of interest rate savings of 75 to 100 basis points. So as we would go out to the long-term bond market once we get to investment-grade, you can assume that's the kind of savings we'll have on our marginal new fixed rate debt and our revolver pricing margin goes down automatically when we get to investment-grade as well.

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Operator [76]

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The next question comes from Nate Crossett from Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [77]

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On GDS and the Chinese hyperscale deals you guys have been getting, I was just curious to know how much of the 25 megawatts that you signed since you made that investment are in Europe versus the U.S. And maybe just some color on what sub markets the Chinese seem to be targeting in the near term?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [78]

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Yes. That's all in the U.S. We're talking to them about Europe now and also in Latin America as well. So in the U.S. markets, they are in -- typically deployed in the 3 major hyperscale markets in the U.S. with Northern Virginia being the most popular followed by Santa Clara.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [79]

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Okay. And then are all those deals being sourced through GDS? Because I'm just trying to get a sense of your advantage with the Chinese versus say other providers.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [80]

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Well, initially, I mean, all the relationships and contract -- contacts and introductions and all that have been through GDS. And now we've got great relationships with those customers and are working with them everywhere. And similarly, we introduced GDS to all of our customers and put them in touch and try to do the same things that they've done for us, we do for them. So like when I am -- like so last week, I was meeting with a bunch of our customers on the West Coast, the conversations that I was having with them was talking about all the capacity and locations that we can offer them as well as what we can do for them in China and Latin America with Ricardo and William as partners.

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Operator [81]

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The next question comes from Jon Petersen from Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [82]

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Just one question. So over the last few years, if you look at the tax treatment of your dividends, it looks like your taxable income is very low if not 0 in some of these years. So it doesn't seem like you have any pressure to increase the dividends. So against that backdrop, I was just curious with all the talk of CapEx needs and organic growth, how you think about growing the dividend over the next couple of years. Will it grow in line with AFFO per share? Or will you hold some back so you can reinvest in the business?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [83]

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Well, you're right. The nature of our dividend, ever since I've been here, has been all return of capital. So we don't have any pressure to increase the dividend. I think we were pretty clear on our earnings call in February to say we weren't increasing it at the beginning of the year, given, again, we don't need to increase it from a REIT tax perspective. And given the guidance on CapEx, we'd rather retain it for our own capital funding. Ultimately, the dividend is a Board decision, and the Board reviews it quarterly. Over time, we certainly envision increasing the dividend again. Just didn't want to do it early this year. But yes, as AFFO and cash flow grows, I think you could assume we will increase the dividend in the future.

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Operator [84]

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The next question comes from Jordan Sadler from KeyBanc.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [85]

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Can you -- just digging in on the financing going forward, Diane, can you offer up the retained cash flow expectation for this year after the dividend?

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [86]

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You know I don't have it off the top of my head. You could probably model it. It's a couple hundred million. I don't have an exact number.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [87]

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Couple hundred million. Well, I guess I’m looking...

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [88]

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Again, over time, that will grow.

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

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I guess I'm looking at your FFO of $3.35 as a starting point and that's, call it -- and then you have a dividend of $1.84. I get to $1.50 per share times 1 10. That's pretty much -- is that a decent proxy, hundred...

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [90]

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Our operating cash flow when you net out all that stuff is between 200 and 250 and scaling at roughly 20% a year.

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

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Okay. At least I could maybe walk through that later. So -- and the idea here is to basically just lever the retained cash flow to support the growth going forward?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [92]

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Supplemented by internal cash flow generation. Yes.

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

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Okay. No joint venture or asset sales contemplated going forward?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [94]

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I mean that's always something you have as dry powder in there. But at that level of capital investment, you don't need it. And then you're weighing that relative to the complexity of kind of complicating your capital structure further. But those are always available to you.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [95]

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Okay. And then the floating rate debt, Diane, you were running through the calculus on savings once you hit investment-grade. What's the total floating rate debt pro forma as a percent of total debt pro forma to swap?

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [96]

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It's in the decks.

It's 45-55, roughly.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [97]

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Yes. And we have said we are generally comfortable managing in the 50-50 fixed to floating, particularly before we get to investment-grade. Because we don't want to fix a bunch of debt long term and put it in like 5- and 7- and 10-year maturity buckets. If we're going to be able to get a more attractive fixed rate once we get to investment-grade. So you would see us build the fixed rate bucket once we get to investment-grade because we can just fix it at a much lower fixed interest rate. But just generally, we have been in the 50-50 range and that's -- we're very comfortable there at this point.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [98]

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Yes, I think the other thing to consider as part of that, Jordan, is if you look across the entire REIT universe, we are probably overequitized. So if you look at 70% of our capital structure being equity, and you consider that relative to the 50-50 fixed floating rate leverage or debt composition that Diane alluded to, you think that we have probably a higher proportion of fixed than most of the other folks in the industry. And given just how well the secular trends in the data center space versus some of the other real estate asset classes, we think we're in a really stable and strong position there.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [99]

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That might be fair. Although I think most investors probably would focus on developers within the REIT universe as opposed to the entire REIT universe because you guys have a substantial development pipeline and that's viewed a little bit differently versus guys who do 0 development. Okay.

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Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [100]

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Well, thanks to everyone. We appreciate you dialing into today's call and don't hesitate to reach out and we will see you in a couple of weeks at NAREIT. Have a great week.

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Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [101]

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Bye.

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Operator [102]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a good day.