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Edited Transcript of COR earnings conference call or presentation 27-Apr-17 4:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 CoreSite Realty Corp Earnings Call

DENVER Apr 30, 2017 (Thomson StreetEvents) -- Edited Transcript of CoreSite Realty Corp earnings conference call or presentation Thursday, April 27, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Greer Aviv

CoreSite Realty Corporation - VP of IR and Media & Public Relations

* Jeffrey S. Finnin

CoreSite Realty Corporation - CFO

* Paul E. Szurek

CoreSite Realty Corporation - CEO, President and Director

* Steven J. Smith

CoreSite Realty Corporation - SVP of Sales and Marketing

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Conference Call Participants

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* Colby Alexander Synesael

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

* David Bryan Rodgers

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

* John J. Stewart

Green Street Advisors, LLC, Research Division - Senior Analyst

* Jonathan Atkin

RBC Capital Markets, LLC, Research Division - 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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Greetings, and welcome to the CoreSite Realty Corporation's First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Greer Aviv. Thank you. You may begin.

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Greer Aviv, CoreSite Realty Corporation - VP of IR and Media & Public Relations [2]

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Thank you. Good morning, and welcome to CoreSite's First Quarter 2017 Earnings Conference Call. I'm joined here today by Paul Szurek, President and CEO; Steve Smith, Senior Vice President, Sales and Marketing; and Jeff Finnin, Chief Financial Officer.

Before we begin, I would like to remind everyone that our remarks on today's call may include forward-looking statements as defined by federal securities laws, including statements addressing projections, plans or future expectations. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. We assume no obligation to update these forward-looking statements, and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our 2016 Form 10-K and other filings with the SEC.

Also, on this conference call, we refer to certain non-GAAP financial measures, such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com.

And now I'll turn the call over to Paul.

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [3]

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Good morning, and thank you for taking the time to join us today. I'm glad to share our first quarter financial and operating results with you as well as to update you on our markets and our outlook on supply and demand.

Our momentum from the fourth quarter continued, and we started the year strongly. Financial results for the quarter reflect continued steady growth with year-over-year increases in revenue of 24%, while adjusted EBITDA and FFO per share grew 33% and 31% year-over-year, respectively. Importantly, in Q1, we continued to execute on our business objectives, and we were able to further increase efficiency and effectiveness across our organization.

Leasing activity was very solid in the first quarter, with new and expansion sales of nearly $10 million, which was well-distributed across each of our network, cloud service and enterprise verticals. Steve will provide greater detail around the composition of our new and expansion leasing. We are pleased with the pace, pricing and terms of our sales in Q1.

As we have said in previous communications, our business model is predicated on the strength and attractiveness of our markets and the quality of our assets in those markets. The 8 large cities in which we operate represent approximately 20% of U.S. population, 27% of GDP and the lion's share of data intense business and consumer needs, generating exceptional demand for performance and proximity-sensitive colocation requirements. Our assets in these large edge markets are tailored for these high-value data needs. They're well-positioned at key intersections of the Internet, are network and Interconnection dense and have large customer ecosystems, including native access to strategic public cloud on-ramps.

We continue to benefit from our considerable scale in each of our markets, affording us the ability to deploy exceptional local go-to-market teams that provide a hands-on service-intense customer experience. Our scale in each market also supports strong local facilities management leadership and infrastructure capabilities. Our campuses provide scalable and flexible solutions that allow us to accommodate a great diversity of increasingly sophisticated and dynamic customer needs as IT network architecture continues to evolve and require compute storage caching and Interconnection at the edge.

Our existing customer ecosystems are thriving and generating new demand. We see this most clearly when looking at new logo growth, as we work to identify and attract new customers that can add value to the ecosystem. In the first quarter, we added 32 new logos, 84% of which were enterprises, which are attracted to the established network and cloud density available across our portfolio.

As a result of these market and scale dynamics, we continue to see considerable growth opportunities within our existing markets and campuses. We have in flight $84.6 million of new computer room construction. We have also commenced construction on the first phase of our Reston campus expansion. In order to keep up with the strong sales funnel in that market, we are building a 25,000-square-foot, 3-megawatt computer room in one of the existing buildings on our new property at a budgeted cost of $22 million, which we expect to complete early in the fourth quarter. We will also commence construction in the middle of the year on a central infrastructure building and a new 6-megawatt data center building which, collectively, are budgeted to cost $85 million and be completed in the second quarter of 2018. Please remember that all these buildings are in very close proximity and connected by diverse fiber pads to our existing Reston data centers and Interconnection node and our public cloud on-ramps.

We have expansion capacity in almost all of our other markets, including Virginia, we have entitled capacity to expand our portfolio square footage by 65%, and we also have additional land, which we believe can be entitled for expansion. We will continue our ongoing program to identify and acquire more expansion assets in our markets to keep abreast of demand. As part of that initiative, we recently signed a contract to acquire a 2-acre land parcel, with a 30,000-square-foot industrial building we will raise, immediately adjacent to our existing Santa Clara campus. The purchase is subject to customary due diligence, much of which we have been able to complete prior to signing. We estimate that we could build approximately 160,000 square feet of new data center capacity on this parcel, comprising 18 megawatts at full buildout. We currently anticipate closing on the land in the third quarter of 2017. We estimate the cost of land, building and first phase of computer rooms, including costs associated with design, entitlement and permitting, to be approximately $118 million. We are pleased to have this path towards expanding our very successful Santa Clara campus and the customer ecosystem thereon, where approximately 81,000 square feet remains in our current inventory.

Across our markets, demand remains healthy for high-performance, low latency colocation solutions, while supply remains generally consistent with demand. We are seeing consistent demand and a healthy balance with supply in Los Angeles as minimal new supply has been brought online over the last 2 years and churn and other data center operators has only modestly increased supply. The steady pace of absorption in this market supports the growth of our LA2 facility with an additional 41,000 square feet of turnkey data center capacity now under construction. This incremental inventory will ensure we are well-positioned to keep pace with demand in the market in what we view as a solid funnel and favorable pricing dynamics.

In the Bay Area, similar to last quarter, inventory across the market remains constrained and pricing remains positive. New capacity is coming online, though a substantial amount of it appears to be pre-leased and targeted to large wholesale. Despite the new supply, we expect the market to continue to be supply constrained in 2017, particularly as it relates to requirements for scalable network and Interconnection dense deployments.

Regarding Northern Virginia and DC, demand continues to be strong, following a record year of absorption in 2016. Occupancy rates remain high in this market and new and potential supply seems concentrated on the large wholesale market, and it appears that a good amount of the new supply is pre-leased. We are excited about our opportunities in this market and in the downtown Washington, D.C. market due to the strong demand and more limited supply for small, medium-sized and scalable performance and Interconnection-sensitive requirements, especially those seeking diversity from Ashburn.

Finally, in the New York-New Jersey market, we are encouraged by another sequential uptick in the pace of leasing, with 20 new and expansion leases signed in Q1, more than 60% above the trailing 12-month average. Leasing at NY2 was quite robust, accounting for 2/3 of leases executed and the majority of new logos signed in this market. As we continue to support a growing community of enterprises, domestic and international carriers and leading cloud providers, we see a steady stream of leasing activity amongst smaller customer deployments, which is weighted toward the enterprise vertical, including financial services and health care organizations. We continue to feel good about the funnel in the New York-New Jersey market.

To wrap up, the first quarter again demonstrated our consistent execution, both financially and operationally. We will continue to differentiate CoreSite with our large edge market focus and our hybrid approach, providing both scalability and flexibility to our customers based on their changing needs. We will remain focused on bringing additional capacity online in our markets to meet customer demand and accommodate ecosystem growth. As we look ahead, we believe that we have a compelling opportunity to continue to drive strong internal growth from our existing assets and to effectively develop new assets to meet growing demand while generating attractive returns for our shareholders.

With that, I will turn the call over to Steve.

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [4]

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Thanks, Paul. I will begin by reviewing our overall new and expansion sales activity during the first quarter, and then discuss in more detail our vertical and geographic results.

Our Q1, new and expansion sales totaled $9.7 million in annualized GAAP rent, comprised of 46,500 net rentable square feet at an average GAAP rate of $209 per square foot. This rate is 5.5% above the trailing 12-month average, primarily due to higher density deployments signed during the quarter. We have seen a modest uptick in average density over the past 3 quarters and when normalized per density the Q1 rate was in line with the trailing 12-month average.

Regarding the composition of our new and expansion leasing by size of deployment, leases signed a 5,000 square feet or less totaled $6.3 million in annualized GAAP rent signed in Q1. During the first quarter, we signed 2 leases greater than 5,000 square feet each, which included an expansion of an existing strategic customer. We continue to be encouraged by strong network and cloud service provider demand, which we believe creates stability and long-term attractiveness for our ecosystem and is synergistic with enterprises looking to either outsource their IT infrastructure or support a hybrid, multi-cloud deployment. It is our view that these diverse and highly interconnected customer communities across our platform continue to attract new logos to our data centers.

When looking at geographic distribution, 88% of the new logos sold in Q1 were deployed across our 4 largest markets. As it relates to our vertical distribution, 84% of those new logos were in the enterprise vertical. This group of new enterprise customers includes a multisite gaming platform, a multinational mass media corporation, a multinational law firm and a British visual effects company. Net of customer churn, we added 16 new logos in Q1.

In addition to our solid new and expansion leasing, renewals in Q1 resulted in approximately 95,000 total square feet, renewing at an annualized GAAP rate of $146 per square foot, 6% below the trailing 12-month average, primarily due to a specific low-density customer renewing in the Los Angeles market. Our renewal pricing reflects mark-to-market growth of 1.9% on a cash basis and 5.5% on a GAAP basis. As a reminder, we expect cash rent growth of approximately 3% for 2017 to be modestly weighted towards the second half of the year.

Churn in the first quarter was 1.1%, in line with the lower end of our historical quarterly average of 1% to 2%. Supported by our success with the small to medium-sized transactions I discussed earlier, Interconnection revenue grew 14% year-over-year in Q1, reflecting total volume growth of 10%. Volume was comprised of a 50% increase in fiber cross-connects. We remain encouraged by the demand outlook for Interconnection services and the value they bring to our customers. These services enable customers to provide the low latency performance needed to support multi-cloud IT architectures required to better serve their end customers, suppliers and employees in this increasingly performance sensitive digital economy. As such, we continue to enhance our go-to-market strategy to drive awareness of the unique value that our customer ecosystem delivers within our data centers. Enabled by the CoreSite community, which provides dynamic web enabled interface, customers can learn of other service providers, how they can benefit from one another and engage easily to support their IT strategy. These services include: network providers; cloud on-ramps; managed service providers; and software providers, just to name a few.

With respect to vertical mix within our ecosystem. During Q1, network and cloud customers accounted for 9% and 36% of annualized GAAP rents signed, respectively. Specific to the cloud vertical, we continued to see strong momentum with 3 new logos, including a cloud-based on-demand platform serving the financial services industry as well as a cyber security managed services organization. In addition, during the quarter, we signed an expansion with a strategic customer in Northern Virginia and a software-driven cloud networking solutions provider expanded its footprint with us, deploying a private cage of SV7.

The network vertical had a strong first quarter, driven primarily by expansions of existing customers. Networks are continuing to grow and expand within existing buildings and deploying into new buildings with us as they see an increase in end customer requirements from our growing ecosystem. Demand was broad-based as we saw network providers expand with us in nearly every market in which we operate.

As it relates to our enterprise vertical. This vertical accounted for 54% of annualized GAAP rents signed in the first quarter. Performance was driven by expansions with managed service providers and digital media companies, with several new logos in the media and entertainment space. We signed a sizable expansion with a global content delivery network for large streaming and other web-based content and expansion with a leading online video gaming platform and an expansion with a global systems integrator supporting the critical public sector service. We're pleased to see continued momentum and diversity within the enterprise vertical as these companies look to re-architect their IT requirements around hybrid cloud deployments.

From a geographic perspective, our strongest markets in terms of annualized GAAP rents signed in new and expansion leases during Q1, were Northern Virginia, DC, Los Angeles and Silicon Valley, collectively representing 87% of annualized GAAP rents signed in the quarter. In Northern Virginia DC, the pace of leasing remains robust, with continued strong demand from smaller requirements and one large lease signed in Q1. As we have seen in recent quarters, enterprise demand remains strong, with these customers accounting for nearly 60% of leases executed and substantially all of the new logos signed in Northern Virginia DC market. Stabilized occupancy in this market now stands at 96.4%, an increase of 30 basis points on a sequential basis, given the number of commencement occurring across the campus during Q1.

Demand in our Los Angeles market continues to be steady, driven by demand from smaller customer requirements as well as expansions of existing customers. Demand in L.A. was skewed towards our LA2 facility, with leases signed at this building accounting for 77% of annualized GAAP rents signed in the market. The strength of our sales pacing at LA2 reflects the success of our overarching baseline strategy, which is to leverage the value of our legacy, low latency and network-dense facilities, such as LA1, that are then redundantly connected by high count dark fiber, providing not only high-performance, but also increase flexibility and scalability to support a higher density requirements of today's workloads.

In terms of verticals, enterprise was our strongest in this market, followed by network and cloud. Stabilized occupancy in the Los Angeles campus was 92.5% at the end of Q1, down 10 basis points from Q4. Activity in the Bay Area was strong, with leases executed at all of our available multitenant data centers in the market. Demand for our new turnkey data center capacity of SV7 was particularly strong, with leasing at this building accounting for approximately 90% of annualized GAAP rents signed in the Bay Area in Q1, as customers take advantage of the low latency, high performance access to the network and cloud and enterprise community we have developed on the Santa Clara campus and across the Silicon Valley market.

In terms of verticals, Q1 lease executions in this market were again weighted towards cloud, followed by enterprise deployments. Stabilized occupancy across our Silicon Valley campuses decreased 40 basis points to 96.3% due to some modest churn of SV1 and SV2.

In summary, 2017 is off to a solid start in terms of leasing activity and the continued maturation of our customer ecosystems. We believe we are well-positioned to continue to gain market share on the performance-sensitive side of the market, given our scalable and flexible mix of available capacity, significant network and cloud density and the differentiated customer experience.

I will now turn the call over to Jeff.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [5]

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Thanks, Steve, and hello, everyone. My remarks today will begin with a review of our Q1 financial results, followed by an update on our development CapEx and our leverage and liquidity capacity. I will then conclude my remarks with an update on our 2017 guidance.

Q1 financial performance resulted in total operating revenues of $114.9 million, a 4% increase on a sequential quarter basis and a 24.3% increase year-over-year. Q1 operating revenue consisted of $95.1 million in rental and power revenue from data center space, up 3.6% on a sequential quarter basis and 25.2% year-over-year. Interconnection services revenue contributed $14.5 million to operating revenues in Q1, an increase of 3.8% on a sequential quarter basis and 13.9% year-over-year, and tenant reimbursement and other revenues were $2.3 million. Office and light industrial revenue was $3 million, which includes revenue associated with the Reston campus expansion.

Q1 FFO was $1.13 per diluted share in unit, an increase of 6.6% on a sequential quarter basis and a 31.4% increase year-over-year. The strength in FFO was due to in part to better-than-expected rental revenue following a year of retro commencements in 2016 and better-than-expected flow-through to adjusted EBITDA, resulting in better margins.

Adjusted EBITDA of $64.4 million increased 6.2% on a sequential quarter basis and 32.8% over the same quarter last year. We continue to expand our margins, with our adjusted EBITDA margin expanding to 54%, measured over the trailing 4 quarters ending with and including Q1 2017. This represents an increase of 260 basis points over the comparable year-ago period. Related, trailing 12 months revenue flow-through to adjusted EBITDA and FFO was 67% and 60%, respectively.

Sales and marketing expenses in the first quarter totaled $4.5 million or 3.9% of total operating revenues, down 70 basis points year-over-year. General and administrative expenses were $8.1 million in Q1, correlating to 7.1% of total operating revenues, a decrease of 230 basis points year-over-year, reflecting a benefit of approximately $0.01 per share related to annual compensation true-ups.

Now turning to our same-store metrics. Q1 same-store turnkey data center occupancy increased 430 basis points to 90.9% from 86.6% in the first quarter of 2016. Additionally, same-store monthly recurring revenue per Cabinet Equivalent increased 7.3% year-over-year and 0.5% sequentially to $1,439. On a per-unit basis, the largest contributor to the year-over-year growth in MRR per Cab E is growth in power revenue, followed by Interconnection and rent growth. Keep in mind that our same-store pool is redefined annually in the first quarter and the 2017 pool only includes turnkey data center space that was leased or available to be leased to our colocation customers as of December 31, 2015, at each of our properties and excludes powered-shell data center space.

We commenced 37,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $244 per square foot, which represents $9.1 million of annualized GAAP rent. We ended the first quarter with our stabilized data center occupancy at 94.7%, an increase of 20 basis points compared to the fourth quarter and an increase of 410 basis points compared to the first quarter of 2016, reflecting the record level of leases that commenced during 2016.

Turning now to backlog. Projected annualized GAAP rent from signed but not yet commenced leases was $5.6 million as of March 31, 2017, fairly consistent with where we ended the year, and $15.7 million on a cash basis. We expect substantially all of the GAAP backlog to commence during the remainder of 2017.

Turning to our development activity. We had a total of 116,000 square feet of turnkey data center capacity under construction as of March 31, 2017, with development and expansion projects in Northern Virginia, Washington, D.C., Los Angeles, Denver and Boston. As of the end of the first quarter, we had spent $16.9 million of the estimated $106.9 million required to complete the projects.

As shown on Page 21 of the supplemental, the percentage of interest capitalized in Q1 was 9.9%. For 2017, we continue to expect the percentage of interest capitalized to be in the range of 10% to 15%.

Turning to our balance sheet. As of March 31, 2017, our ratio of net principal debt to Q1 annualized adjusted EBITDA was 2.8x. Including preferred stock, the ratio was 3.2x, slightly below where we ended the year. Including preferred stock, the Q1 leverage and adjusted EBITDA levels provide capacity for an additional $195 million of debt assuming a 4x debt-to-adjusted EBITDA ratio.

With that in mind, last week, we closed 2 separate financing transactions, resulting in additional liquidity of $275 million, modestly above the amount we targeted, given the lender demand and economics. The first transaction results in an incremental $100 million of liquidity by expanding an existing senior unsecured term loan, originally scheduled to mature in 2019 to a total of $200 million. The expanded term loan has a new 5-year term maturing in April of 2022. In addition, we successfully raised $175 million through a private placement bond offering, priced with a 3.91% coupon. The execution of the expanded term loan and private placement offering allows us to improve our overall liquidity position, manage our debt maturity profile and maintain both financial flexibility and a balance between fixed and variable price instruments in our capital structure. The proceeds of both transactions were used to pay down all outstanding amounts on the revolving portion of our existing credit facility, providing approximately $362 million of available liquidity to fund our growth and development plans.

Now in closing, I'd like to address our updated guidance for 2017. I would remind you that our guidance reflects our current view of supply and demand dynamics in our markets as well as the health of a broader economy. We do not factor in changes in our portfolio resulting from acquisitions, dispositions or capital markets activity other than what we have discussed today.

As detailed on Page 23 of our Q1 earnings supplemental, our guidance for 2017 is as follows: Total operating revenue is now estimated to be $472 million to $482 million compared to the previous range of $470 million to $480 million. Based on the midpoint of guidance, this implies 19.1% year-over-year of revenue growth. Keep in mind that our revenue guidance is dependent upon the power product composition of deployments within our portfolio and how quickly the larger, metered power deployments install their infrastructure and ramp into their associated power requirements. As it relates to Interconnection revenue growth, we continue to expect the 2017 revenue growth rate to be between 13% and 16%.

General and administrative expenses are now expected to be $35 million to $37 million or approximately 7.5% of total operating revenue. This correlates to an approximate 2% increase in G&A expenses over 2016.

Adjusted EBITDA is now estimated to be $256.5 million to $261.5 million, up from the prior range of $253 million to $258 million. This correlates to 22% year-over-year growth based on the midpoint of the range and adjusted EBITDA margin of approximately 54.3% and revenue flow-through to adjusted EBITDA of approximately 61%.

FFO is estimated to be $4.35 to $4.45 per share in OP unit compared to the previous guidance of $4.25 to $4.35 per share, an increase of 2.3% at the midpoint. This implies 18.6% year-over-year FFO growth based on the midpoint of the range and the $3.71 per share we have reported in 2016. In addition, due to the completed financings, we expect FFO per share results to be fairly balanced in the first and second halves of the year and therefore, FFO growth to be weighted towards the first half of the year. We also anticipate this result in a decreased revenue flow-through to FFO, which we estimate at approximately 45% based on the midpoint of our updated 2017 FFO guidance.

As it relates to our guidance for capital expenditures in 2017, we are increasing the total expected investment to a range of $280 million to $310 million from the previous range of $243 million to $271 million. The biggest drivers of this increase are increased data center expansion investment, which we now anticipate to be $241 million to $259 million compared to the prior range of $212 million to $228 million. As Paul mentioned, this updated range includes the first 2 phases of expansion in Reston, additional turnkey data center capacity at LA2 to support demand in that market and the acquisition cost associated with land under contract in Santa Clara for our buildout of SV8. In addition, we are increasing our expected investment in recurring capital expenditures to a range of $21 million to $25 million from the prior range of $13 million to $17 million. This represents a significant increase from the 2016 level and a substantially higher level than we expect to spend in subsequent years on average. The increase in 2017 is largely driven by the opportunity we had to replace our chiller plant that existed when we originally purchased LA2 upon deciding to commence the buildout of the incremental capacity on our fourth floor. The new equipment is more energy-efficient and with the economies of scale from the new construction, it made sense to combine the replacement of the older equipment in this project. The older equipment was originally scheduled to be replaced in 2019, and was accelerated due to the cost savings in our continuing pursuit of improved PUE. This incremental capital investment will also provide a return on investment that is substantially higher than our overall stated return objectives and criteria.

Now we'd like to open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [2]

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While Audrey is pooling for questions, I would like to comment very quickly on the fact that we issued a corrected and replaced earnings release this morning, shortly after our initial release. That was done as we needed to correct some prior period financial information specifically related to Q4 and Q1 2016 income statement. The initial release included and reflected some incorrect information. I just wanted to mention that before we get into Q&A in case there were some remaining questions from that. Audrey?

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Operator [3]

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Our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [4]

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I wanted to follow up on guidance. The increase makes sense given the quarter's results. I'm curious what might be the drag as we look at the run rate you were able to achieve in 1Q, what the offsets are as we look forward to the rest of the year outside of, obviously, the financing you discussed and the churn event you have coming in 2Q?

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [5]

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Thanks, Jordan. I think you touched on 2 critical elements. First, as you discussed, the interest expense associated with the incremental financings, if you just think about, for instance, Q2, we think about Q2 as in subsequent quarters. The interest expense have an about a $0.02 per share drag on earnings per quarter. In addition, as you mentioned, we do have our last churn event from our customer out in the Bay Area, and that churn event also will be contributing a decrease of about $0.02 per share in the quarter -- in the second quarter as you think about that. One other item we didn't mention in the call or on my prepared remarks was the fact that we did get about $0.01 per share benefit in our G&A during the first quarter associated with some true-ups we made in our compensation, year-end compensation true-ups. And so that gives you some idea how we've been looking at it, at least specifically for the second quarter. And then beyond, I would say it's largely going to be attributable to the timing of our commencements. And at the end of the day, it's going to be driven by the timing associated with that and ultimately how the sales continues to generate and reflected for the rest of the year.

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [6]

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But Jordan, to that, we obviously saw a lot of commencements happen in Q4, which drove significant revenue growth that we're seeing earlier in the year. So that's helping us see the growth early. And we plan to see that moderate as we go forward in our traditional year.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [7]

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Okay. And this $30 million commencement guidance, obviously, it looks like a new statistic you'll be providing, which should be helpful. But relative to historical commencements, it feels like it's a little bit light. And is that -- would you say that's a function of just available inventory today?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [8]

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Yes. I think -- in our call last quarter, we gave some commentary around historical commencements. And I -- my recollection, if you just look at the past several years, our commencements have averaged somewhere around $26 million to $27 million per year, just depending upon the year. So it's up slightly from the pace which we've seen historically. And so yes, that's where we're pacing to, and hopefully, they execute it. If you just look at what we did commence in the first quarter, we were at $9.1 million. Our backlog that we're exiting the quarter at is $5.6 million. And we've said that, that will all commence at various times during the rest of this year. So you're at slightly less than $15 million, we're at about 50% of the way there. We feel good where we are, and Steve and his team continue to work to try and hit and/or outperform.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [9]

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Okay. And then there was a news report recently of a competitor taking some space in LA1. And I had a curiosity as to what the impact of that might be on the dynamic in that market, meaning, would you view that as more competition for LA2? Or how should we be thinking about that?

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [10]

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Jordan, this is Paul. Thanks for that question. We view that as kind of business as usual at One Wilshire. Yes, there has always been an ecosystem there that included space that we didn't control. As it relates to that particular space, the anchor tenant for that space, which takes up most of that space, just wasn't a deployment that required the value that we provide in our particular solutions in One Wilshire. In fact, it's not even going to be connected directly to the meet-me room. So it just wasn't in the fairway for the sort of things that we do. The tenant that has the space overall, we have a good working relationship with them. And as we said on prior calls, we have a unique -- for historic carrier hotels, we have a unique set of rights to preserve the value of our meet-me room experience, of our meet-me room proposition. And we have been able to work very successfully with the other people in the building to make that work for everybody. So long story short, we don't view this as a meaningful change in One Wilshire.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [11]

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Okay. Just -- well, that's helpful. One last clarification. I noticed that the MRR per Cab E reported went to $1,439, I think, in the quarter. And I looks like -- I don't know if there's a change in disclosures that I may have missed or something, but my last quarter supplement, I had $1,529. And I don't know if there was change that I missed?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [12]

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Yes. No, that same-store pool gets updated in the first quarter of every year, Jordan, just because we then add an incremental level of real estate. So it's just a defined new pool, and that happens every year on the first quarter.

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Operator [13]

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

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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I guess, you've been doing a large number and a fairly consistent number of smaller deals. The average size has been largely the same the last couple of quarters, and the number of deals as well. I think one of the things that maybe caught us off guard, the power revenue did slow. And if you mentioned it in your primary comments, I didn't hear it. But is the slowdown in sequential growth in power revenue is a function of just maybe those deals just kind of just above the threshold for recognizing power revenue? And is there anything that happened in the first quarter we should be thinking about?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [15]

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Yes, Dave. I provided a little bit of color commentary on that as it relates to guidance. And it really simply relates to -- if you look at our historical leasing over the last, call it, 2 to 4 quarters, we've been leasing and specifically, the SV7, had some larger metered power deployments that ultimately commenced in -- early on in the fourth quarter of 2016. Ultimately, the power revenue associated with those will be dependent upon when those customers ultimately deploy all of their architecture, and then ultimately begin drawing on a metered basis. And those are large deployments. It just takes a little bit of time to get that ultimately installed and before they're ultimately drawing at the power levels that we've expected.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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And is that in 2017?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [17]

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That's correct, yes.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [18]

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And then, I guess, as we think maybe moving forward with regard to some of the new development, whether it's out in Santa Clara or Reston, where you've got quite a bit of capital that is going to go out the door, should we expect to see maybe, anchor some of those developments as they start to come online or as we think about maybe late 2017, early 2018 doing some larger deals and transactions at those parcels?

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [19]

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We do, as you know, follow policy. We started a couple of years ago of seeking strategic tenants to pre-lease space in newly developed data centers, and we'll continue that with these new developments as well.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [20]

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Okay. No real change, I guess, on the policy there is what you're saying. So that's...

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [21]

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No change.

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Operator [22]

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

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Yes. So on that last question, maybe just to push back on the policy a bit. If the site is across the streets and immediately adjacent, why wouldn't you want to just immediately kind of continue the kind of the retail progress that you're seeing in SV7 and not necessarily seek a larger anchor?

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [24]

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Well, we have other places in the Santa Clara campus to accommodate the retail demand. And we just find there tremendous synergies, both with enterprise and retail demand going forward and having the right strategic tenants in place during the pre-leasing process. On top of which, as you guys know, developing in Santa Clara does take some time for entitlements, so there's plenty of time during the entitlement and preconstruction process to seek those kinds of anchor tenants without really slowing down the realistic scheduled construction.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [25]

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The $118 million, how many -- what's kind of your baseline assumption on megawatts and critical load? And is that in [NQ1] or 2N, or what can you kind of share on that in terms of your baseline assumptions?

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [26]

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That's for -- that's to bring the first 1/3 of capacity into the data center. So it's about 6 megawatts. It'll eventually expand to 18 megawatts. Our best guess is that cost per kilowatt is about 10,500 to 11,000 per kilowatt. And that will provide the same mix we provide today, which is 2N and N plus 1 to accommodate customers that have different needs.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [27]

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And then maybe for Steve or you, Paul, but I'm just interested in kind of the Interconnection revenues and the ecosystems that are driving that. Is it just the traditional ones that are continuing to grow? Or there are emerging ones that you're seeing that are starting to kind of gain share within the revenue mix of Interconnects?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [28]

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Yes, we -- this is Steve. We are seeing continued growth just on the broad-based level. But where we're seeing accelerated growth is really around the enterprise connecting to the cloud, where we've seen over 40% growth year-over-year. So that continues to be a healthy market for us and I think just speaks to our overall strategy of trying to drive on-ramps available in those markets in that ecosystem of cloud network and enterprise.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [29]

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Is there anything around advertising or Internet of Things or anything else worth kind of calling out as a driver of Interconnects? Or is it mainly cloud and network?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [30]

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Sure. And I think Internet of Things can apply to a lot of things. So we do see that across the board and whatever business you happen to be in, typically, the Internet is involved. So we do see a lot of different enterprises really requiring those hybrid multi-cloud type of deployments as well as just using their infrastructure to do commerce over the Internet. So we feel that customers are continuing to see value in that within our data centers, and the overall ecosystem that brings all those things together helps them drive more of their business, and that's where we're seeing a lot of growth.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - Analyst [31]

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And then, just real quick, 2 more on Chicago, I think 95% utilization in -- as you think about expansion in that market. Is it downtown? Is it suburbs? What are kind of your thoughts there? And then on new logo capture, I'm just interested in whether the majority of those are taking occupancy at one of your sites or multiple sites?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [32]

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Yes. I guess, to start off as far as Chicago is concerned, we continue to look at markets and the opportunity there to grow. A lot of it comes down to where we have capital already deployed where we see the maximum number of share returns for our shareholders in each given market and what the absorption looks like there as well as the competitive dynamics. And Chicago is definitely one of those that we continue to look at. We do have an opportunity to get better efficiencies out of the facility that we have there today. But we continue to look at new opportunities to expand in the Chicago market, and that continues to remain attractive for us.

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John J. Stewart, Green Street Advisors, LLC, Research Division - Senior Analyst [33]

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And then, new logos, single site or multisite, mostly?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [34]

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We're seeing an increase in multisite. Our customers start to deploy in more markets, but for the majority of our new logos that we signed, they typically come in as a single market.

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Operator [35]

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And our next question comes from the line of Colby Synesael with Cowen and Company.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [36]

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You talked in your prepared remarks about improvement in profitability. In the press release, you talked about increasing efficiency. I was wondering if you could just dive a little bit further into what you might be doing and how that might be different than quarters past. And then also, just as a point of clarification, the phase 1 of the -- for the new facility that you built on the land that you're acquiring, recognizing that, that's going to take some time and you have to take the building down first, how quickly do you think you could actually get that to market?

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [37]

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Thanks, Colby. Good questions. First, on the latter question. My guess is that building would come online probably about 18 to 22 months after we close on the land purchase. It could be faster, depending upon how quickly the entitlements process goes. And as you know, that's always the hardest thing to predict in some jurisdictions, more so than others. Efficiency and effectiveness, we are continuing programs we started a couple of years ago to re-architect our own IT systems to provide our people in the field and our construction and development teams with better tools to manage and take care of the plants and the facilities and to do new development, reduce the amount of time they have to spend on tasks that the systems could do for them. And not only gain more efficiency from each person, but also to be able to be more proactive in how we take care of plant and equipment, just so -- we have a great record for reliability. Sometimes, that involves more unscheduled time than is necessary, and these systems give us greater visibility and the ability to be more proactive. And that's really going on across the organization. And that's just part of the maturation of the company and the benefits of our increasing scale.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [38]

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And was there anything that happened, I guess, in the first quarter in particular that allowed you to see any type of stair step improvement in profitability, the projects that may have been completed?

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [39]

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No single thing in particular, just a number of small things that, together, add up to incremental efficiency, and that's probably going to be our pace for the next few quarters.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [40]

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Colby, the only additional commentary I would add, this isn't specifically related to efficiencies, but first quarter, while we did highlight, we had a benefit of about $0.01 associated with some annual comp true-ups, yes, we also benefited, we think, from having some lower bad debt expense in the first quarter. We hope that continues. But obviously, that's a hard one to predict. And it's, again, something we'll watch closely. But all signs in the first quarter look very good.

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Operator [41]

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

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [42]

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So I was hoping you could provide a little more color on network demand. Is it being driven by the deployment of content delivery infrastructure in support of OTT offerings, is it unified communications? What are some of the underlying drivers there?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [43]

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Robert, this is Steve. We're really seeing across-the-board, I mean, as enterprises Interconnect more between our locations as well as with the customers and suppliers are driving more and more demand just in general. We do see -- it depends on the market, I guess. It's probably just the easiest way to look at it. So as we talked about in the earlier remarks, the L.A. market is obviously very entertainment and content delivery-focused as part of the general market is concerned. So we see greater demand there, and with that comes greater demand for the network that goes along with it. But overall, between cloud, content delivery and just the proliferation of enterprise and how they connect to their suppliers and employee across the globe, frankly, that just requires more and more network to do so.

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Operator [44]

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

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [45]

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It looks like most of your net leasing growth in terms of number of leases came from the deployments under 5,000 square feet. And so I'm wondering as you unpack performance of that segment or category versus the others, what are you seeing in terms of new customer interest versus leases from existing? And are there certain markets that you find are doing better than others on this smaller colocation side of the deployment scheme?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [46]

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Michael, this is Steve. I'll give you a little bit of color on just the overall approach and where we're seeing demand, and maybe Jeff can chime in a little bit more from a just the financial perspective. But from an overall lease perspective, as we talked about in the earlier comments, we do see a vast majority of the transactions being created in that less than 5,000-square-foot space. And that's really a reflection of our go-to-market strategy, which is that three-pronged approach between enterprise, network and cloud. But a lot of effort and focuses around driving enterprise into our data centers that then those cloud and networks want to connect to and those enterprises obviously want to see the value from. So it's a lot of work. It's a lot of effort to bring those type of customers in, but that's the vast majority of the new logos that we saw in the first quarter, and frankly, every quarter as through the enterprise. And as we see that market continue to mature, my expectation is that we would continue to see that proliferate across our ecosystem. I don't know if that answers your broader-based question, but in general, across each of our markets, that is where the focus is, is in driving in enterprise, which is those less than 5,000-square-foot deployments typically. Sometimes, they are networks as well. But for the most part, those are just traditional enterprise and the larger over 5,000-square-foot type of deployments are either large Fortune 1000 type of deployments or cloud content type of delivery.

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [47]

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I would just add to what Steve said. Going back to the introductory comments about our business model and the importance of being scalable and flexible for your customers, adding new logos has long been a part of a consistent strategy, providing, bringing new companies, customers in that will then subsequently expand and also providing expansion business for the customers that we have in place that provide network and cloud and other services. And there's a lot of synergy between those communities, and that's why the ecosystems seem to keep throwing off the value that they throw and why it's important for us to continue to be able to provide that scalability and flexibility because we see an enormous amount of growth from the customers that we bring into the ecosystem and the growth they throw off to the people that are already in the ecosystem.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [48]

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And just one other follow-up on the numbers. Was there any reason why the growth of power in the quarter sequentially, significantly lack that at the base rent in the quarter?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [49]

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Yes. Mike, this is Jeff. I mentioned earlier, it really relates to some of our larger wholesale deployments, specifically at SV7, that deployed, and those deals commenced, I guess, in early Q4 of 2016. Those customers are deploying gear at this time, and it really just ultimately, the power generally might lag the increase in rent associated with those deployments because it takes a little while to get their gear deployed and ultimately start power or throw power that those deployments are going to need and that we sold into those particular customers.

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [50]

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The other qualifier, I would add there, is beyond just the revenue portion is the margin that goes along with that power. So obviously, with those larger deployments, typically, those are metered type of deployments which are traditionally passed through power and not necessarily bring a lot of margin to us as far as the power margin associated with it. So just to provide some clarity there.

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Operator [51]

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Our next question comes from the line of Matthew Heinz with Stifel.

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Matthew Scott Heinz, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Research Analyst [52]

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You highlighted some particular strength in demand from the network vertical, and I think Equinix had some similar comments last night. I was hoping maybe if you could highlight any specific regions where you're seeing that strength? Is it kind of a core upgrade cycle? Any specific type of activity and also whether you're seeing any significant dark fiber runs going into your campuses as the carriers add more gear in the data center?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [53]

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Go ahead, Matthew. This is Steve. I would tell you, it really varies from network provider to network provider, and really, region-to-region. So it's hard to give you some general guidance around where we're seeing more strength from a network perspective. A lot of it just depends on the maturity of the facility and how we see networks been eventually choose to build natively into those buildings. LA2 is probably a great example of that, where our initial strategy, which has still worked very well for us, is in -- leveraging the dark fiber tether between LA1 and LA2 is still a great way for us to provide customers the scalability and performance that they see at LA1, but in a more scalable campus in LA2. At the same time, that building has matured, and we've seen more customers deploy there. Networks have also chosen to deploy there natively as well. It's more efficient for them. They see the same benefits, and so you see that happen as we -- as you see buildings mature over time. And we're seeing the same thing at NY2 as well as that matures over time. So I think you just see that across the market as we start to get better synergies in our ecosystem in each of our facilities. But overall, networks tend to coalesce around one another. And we see that continuing to mature as we execute against our strategy.

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Matthew Scott Heinz, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Research Analyst [54]

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And then as a follow-up to that, I think you mentioned fiber volume growth outpaced Interconnection revenues by about 100 basis points this quarter. And I guess that would suggest some flattening of pricing, which you had previously called out with guidance. But I was hoping you could add some color to that in what you're seeing around cross-connect pricing. And then I also missed the growth in the logical Interconnection services, if you could just repeat that, please?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [55]

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Yes, Matt. This is Jeff. Let me give you some color. Steve gave a little bit of his on his script, but overall, cross-connect volume growth for the quarter was 10.3%. The fiber, as you just alluded to, was 15% of that. So blended, you get a -- I'm sorry, I mean, 10.3% paid volume growth overall. And as you just alluded to, overall revenue growth was about 13.9%. So I still think there is some pricing strength there. It has not decreased, but that's -- that 10.3% was overall volume growth.

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [56]

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Yes. And just to give you a bit more color around the overall growth numbers, the fiber cross-connects, the traditional go-to for customers that are looking to do cross-connects within our facilities, the decrease that you see is really related to the mix that we've seen over the past several quarters relative to larger wholesale deployments versus smaller retail deployments. And the larger deployments, obviously, get a little bit more diluted because they're leveraging more square footage for maybe smaller cross-connects than a traditional enterprise might for the same-size footprint. So that's just why you see it a little bit of decline in that regard. I do think that some customers and networks are starting to explore a bit around 100-gig, which they get a bit more efficiencies around. But at the same time, our connection is a connection they need to -- where they need to connect their cloud provider or a network that's still a physical connection or, in some cases, logical one.

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Matthew Scott Heinz, Stifel, Nicolaus & Company, Incorporated, Research Division - VP and Senior Research Analyst [57]

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Okay. And then sorry, just -- are you still disclosing the growth in logical Interconnection services? Or -- I'm not exactly sure what number was measuring with it, kind of cross-connect equivalents or some type of revenue growth number?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [58]

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Yes. No, my apologies, Matt. Overall, volume growth on the logical Interconnection this quarter, year-over-year, was 6.5%. I think that's actually a deceleration from where we were in the previous 2 quarters, and that's largely attributable to a couple of customers where we had some churn in those particular deployments. But overall, this quarter was 6.5% year-over-year.

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Operator [59]

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Our last question comes from the line of Lukas Hartwich with Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [60]

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I know you guys don't play a lot in the wholesale arena, but I'm just curious, what are your thoughts in the supply and demand dynamics there?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [61]

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Yes, this is Steve. I can give you my sense on it, and I'm sure Paul and Jeff would -- can chime in as well. Wholesale can show up a lot of different ways. And as we stated in our overarching strategy, it's really opportunistic as far as CoreSite is concerned. And that opportunity comes with not only newbuilds that we may be doing in the market but also how they fit into our ecosystem and our overall strategy relative to those 3 pillars around enterprise, cloud and network. So -- and the -- typically, the wholesale deals that we have been engaged in, we do have a newbuild that's going on, but they will also contribute to that overarching strategy. We have typically not participated in the hyperscale type of deployments that you see in less Interconnect-sensitive type of markets. We don't see a dramatic change in that strategy.

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [62]

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We do, in that market, see the same things that we've heard commented on -- by some of the analysts that, that hyperscale market does tend to be somewhat lumpy, a lot of procurement, and then growing into the procurement, but then there'll be another stage of procurement expected down the road. And we think that's going to continue for some period of years as far as we can see, consistent with the overall growth in data and that data traffic and all the different things people are doing with data right now.

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [63]

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I would say, one of the areas that we have seen an increase in where you would probably traditionally call wholesale, is, as Paul mentioned earlier in his remarks, around the edge and how those edge type of deployments may be sizable in some cases, but are still very performance-sensitive. And the reason why they need to be close to the edge in order to provide a very performance-sensitive type of response back to their customers or other applications that they may be delivering service to. So those are a bit unique in their deployments and -- but we are seeing a bit of an uptick there.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [64]

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That's helpful. And then my last question is around New York and the improvement there. Is that market-related? Or is that more company -- just better company execution? What's kind of driving the uptick there?

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Steven J. Smith, CoreSite Realty Corporation - SVP of Sales and Marketing [65]

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I think it's kind of a combination of both, frankly. The team there has matured over time, and we're seeing better results out of the team as we built there. I think the ecosystem there has strengthened over time. So we've seen that in various markets as we get customers and ecosystems established there that they, as Paul mentioned earlier, they start to throw off more value to other participants there that continue to grow and that helps drive more revenue. But market starts to find out more and more about the value that we're providing in that space. So I think it's a combination of a lot of that. And I think, overall, the market is maturing there as well. So we're optimistic about the outlook, and we continue to work hard every day to keep it going.

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Operator [66]

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That does conclude our question-and-answer session. And at this time, I'll now turn it back to Mr. Paul Szurek for closing comments.

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Paul E. Szurek, CoreSite Realty Corporation - CEO, President and Director [67]

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Thanks, everybody on the call, for your interest in the company. We are -- as we mentioned, we're very pleased with this quarter and pleased with what we see going forward. I would like to thank all of our colleagues at CoreSite who work really hard every day to take good care of their customers and try to stay ahead of customer demand. And we look forward to the rest of the year. Thanks very much.

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Operator [68]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.