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Edited Transcript of COR earnings conference call or presentation 25-Apr-19 4:00pm GMT

Q1 2019 CoreSite Realty Corp Earnings Call

DENVER Apr 29, 2019 (Thomson StreetEvents) -- Edited Transcript of CoreSite Realty Corp earnings conference call or presentation Thursday, April 25, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carole Jorgensen

CoreSite Realty Corporation - VP of IR and Corporate Communications

* Jeffrey S. Finnin

CoreSite Realty Corporation - CFO

* Paul E. Szurek

CoreSite Realty Corporation - President, CEO & Director

* Steven J. Smith

CoreSite Realty Corporation - Chief Revenue Officer

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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

* David Bryan Rodgers

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

* Erik Peter Rasmussen

Stifel, Nicolaus & Company, Incorporated, Research Division - 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

* Michael Rollins

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

* 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

* 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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Greetings, and welcome to CoreSite Realty's First Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Carole Jorgensen, Vice President of Investor Relations and Corporate Communications. Please go ahead.

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Carole Jorgensen, CoreSite Realty Corporation - VP of IR and Corporate Communications [2]

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Thank you. Good morning, and welcome to CoreSite's First Quarter 2019 Earnings Conference Call. I'm joined here today by Paul Szurek, President and CEO; Steve Smith, Chief Revenue Officer; 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 filings with the SEC.

Also, on the conference call, we refer to certain non-GAAP financial measures such as funds from operations. Reconciliation 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 - President, CEO & Director [3]

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Good morning, and thank you for joining us.

Today, I will share our first quarter highlights, discuss our development pipeline and cover a couple of significant recent events. Steve will cover our sales results and discuss how we continue to evolve our customer offerings, and Jeff will take you through our financial results, including our recent financing activities.

Let me start with summarizing our accomplishments in the first 4 months of the year. We're executing well on our 2019 imperatives to create the momentum necessary to accelerate growth in 2020. These include substantial progress on our development pipeline, additional financing to fund new capacity, strong sales execution with the highest core retail colocation sales in 10 quarters, preleasing of 2 phases of our new SV8 purpose-built data center and financial results consistent with where we are in the development cycle and in line with our expectations, all of which we believe position us well for achieving higher growth in 2020.

Turning to our financial highlights for the quarter. We grew operating revenues 7.2% year-over-year, delivered $1.25 of FFO per share and grew adjusted EBITDA 2.2% year-over-year. Consistent with our forecast for the first quarter, our results reflect higher-than-normal churn and interest and operating expenses associated with recently completed developments now in lease-up.

Moving to sales. We did a good job of achieving momentum this quarter. Our sales were driven by our core retail colocation and included $6.6 million of annualized GAAP rent compared to $4.2 million last quarter.

Turning to our customer offerings. We launched our new CoreSite Interconnect Gateway, a fully managed service designed to help enterprises achieve their digital strategies, which Steve will talk more about. We also made substantial progress on our development pipeline.

During this quarter, we launched a 20,000 square foot data center expansion in Boston and a 35,000 square foot data center expansion at NY2. We began construction on the first phase of CH2 in downtown Chicago. We advanced our ground-up developments at VA3 Phase 1B in Virginia and SV8 Phase 1 in Santa Clara, and we expect to achieve our targeted completion dates for both data centers. At LA3, we continue to work with the local power company and government and expect to know more on the permitting progress later this quarter.

Turning to a few of our notable subsequent events in April. On April 12, we closed on the purchase of the Santa Clara property that we refer to as SV9 where we anticipate constructing an estimated 200,000 net rentable square foot data center in the future. On April 15, we preleased both Phases 1 and 2 at SV8 for 108,000 square feet. As a result, we're accelerating construction on Phases 2 and 3 and to targeting completion in late Q4 2019 for Phase 2 and the first half of 2020 for Phase 3.

On April 17, we closed on $400 million of senior notes, $325 million of which were issued immediately, and we expect to issue the remaining $75 million by mid-July. As I discussed previously, 2019 is a transition year for us. We entered the year with leasable capacity at lower levels compared to our historical norms, and we plan to end 2019 with leasable capacity plus quickly developable incremental capacity at the higher levels we experienced in previous years.

To ensure a successful transition, our 2019 priorities include translating new construction into more abundant sales, acquiring additional new customer logos, bringing new connectivity and customer service products online to drive sales and to delivering great customer experience and operational efficiencies. I'm pleased that we are executing effectively on these priorities, as evidenced by our year-to-date accomplishments.

That said, we still have much work ahead of us, including scale leasing at VA3, keeping construction on a good pace at CH2 and SV8, finalizing power and permits for LA3 and obtaining entitlements, power and permits for SV9. I have confidence in our teams, which are working diligently and effectively on all of these activities.

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

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [4]

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Thanks, Paul. Today, I'll start off with a summary of our quarterly sales and leasing results and then talk more about our new customer solutions and growing connectivity offerings.

Moving to our sales. For the quarter, we had sales of $6.6 million of annualized GAAP rent, which included 32,000 net rentable square feet at an average rate of $207 per square foot and was comprised entirely of core retail colocation sales.

A few highlights on our sales. Our $6.6 million of annualized GAAP rent represented the highest quarter of annualized GAAP rent for core retail colocation sales in 10 quarters. And our sales included 30 new logos compared to 32 last quarter, and while revenues from new logos were down from prior quarter, enterprise sales with quality brands that we expect to drive future growth remain strong. We also see a strong pipeline for future new logo wins as we continue in our strategic effort to bring new growth engines to the platform.

Turning to pricing. For the quarter, pricing on new and expansion leases was consistent with the trailing 12-month average on a per kilowatt basis for core retail colocation sales. Renewals were also another key aspect of our leasing. During the first quarter, our customer renewals included annualized GAAP rent of $11.9 million with rent growth of 3.2% on a cash basis and 5.9% on a GAAP basis. And as previously forecasted, rental churn of 2.7% was higher than normal for the quarter, reflecting churn of 2 larger deployments.

Moving to the mix of retail and scale colocation leasing. The first quarter leasing represented all retail colocation sales. However, as Paul mentioned, in April, we preleased a majority of our SV8 data center through hyperscale leasing, a valuable ecosystem component at our Santa Clara campus. As our development pipeline turns up new capacity, we look forward to the opportunity to having greater contiguous space available for additional scale leasing.

Next, I would like to turn our focus on evolving our offerings in order to deepen our customer value while providing additional forms of revenue to the company. Building on our new service and connectivity offerings delivered in 2018, here are a few of our ongoing efforts to enrich our ecosystem and help attract new customers to our data centers. In March, we launched the CoreSite Interconnect Gateway or CIG. CIG is a true gateway product to initiate and smooth a new enterprise's transition into our data centers by providing a more secure, reliable and higher performance connection between the enterprise and our data centers, which can serve as a pivot point for building hybrid cloud architecture at our campuses and migrate data there too and be scalable to add connections to other CoreSite data centers as a basis to dramatically lower customer [land] costs.

In April, we announced hybrid network connections to Google Cloud available in our Denver and Los Angeles markets. This service from Google Cloud enables enterprises and network service providers that are co-located with CoreSite to directly connect to the Google Cloud Platform through a high-speed fiber interconnect.

In summary, we've had a solid start to sales for the year, and we are looking to build on those results by executing well on leasing our available space, driving new data center capabilities and providing exceptional customer service for our differentiated services.

With that, I will 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. Today, I will review our financial results for the quarter, provide an overview of our April financing and discuss our financial guidance.

Turning to our detailed results for the quarter. As expected, based on where we are in development and due to higher-than-normal churn, this was a relatively flat quarter. Our total operating revenues were $138.9 million for the quarter, which increased 7.2% year-over-year and were in line sequentially. Operating revenues consisted of $117.9 million of rental, power and related revenue, $18.4 million of interconnection revenue and $2.6 million of office, light industrial and other revenue.

Interconnection revenue increased 11.2% year-over-year and 2.2% sequentially. FFO was $1.25 per diluted share, which decreased $0.02 per share year-over-year and $0.01 per share sequentially, largely due to property tax and interest rate increases and dilution from prestabilized developments. Adjusted EBITDA of $74.5 million grew 2.2% year-over-year and was in line sequentially. Adjusted EBITDA margin was 53.6% for the quarter, and we expect full year 2019 margins to be within our guidance range.

Sales and marketing expense totaled $5.7 million for the quarter or 4.1% of total operating revenues and in line with our expectations for the full year. General and administrative expenses totaled $10.2 million for the quarter or 7.3% of total operating revenues, in line with our expectations for the full year. For the quarter, we commenced 24,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $242 per square foot, which represented $5.8 million of annualized GAAP rent.

Moving to backlog. As of March 31, the projected annualized GAAP rent from signed but not yet commenced leases was $8.9 million or $13.6 million on a cash basis. We expect most of the GAAP backlog to commence in the next 2 quarters. Keep in mind that this backlog excludes all sales activities that occurred in April.

Turning to our property operations and development. First quarter same-store monthly recurring revenue per cabinet equivalent was $1,556, reflecting an increase of 6.7% year-over-year and 0.6% sequentially. Q1 same-store turnkey data center occupancy was 89.2%, an increase of 80 basis points year-over-year and a decrease of 110 basis points sequentially.

We have a total of 428,000 square feet of data center capacity in various stages of development across the portfolio with $262 million of cost incurred to date of an estimated total cost of $671 million or $409 million of cost to complete these projects. This includes all 3 phases of SV8 and 2 new data center expansions, including one in Boston and the other at NY2 in the New York area. For more details on our development projects, please see Page 19 of our supplemental information. Capitalized interest for the quarter of $2.6 million represented 21.7% of total interest, in line with our full year estimate of 20% to 24%.

Turning to our balance sheet. As we've shared previously, we expected to access the capital markets this year for $350 million to $400 million in the form of additional debt and to term out the outstanding balance on our revolving credit facility, which we just completed. On April 17, we entered into a note purchase agreement and agreed to issue and sell an aggregate principal amount of $200 million of Series A Notes due April 2026 with a coupon of 4.11% and $200 million of Series B Notes due April 2029 yielding 4.31%. On April 17, we issued $200 million of the Series A Notes and $125 million of the Series B Notes and expect to issue the remaining $75 million of the Series B notes prior to July 17, 2019.

The initial proceeds for the notes were used to pay down outstanding amounts on the revolving portion of our senior unsecured credit facilities. This provides us the ability to borrow $445 million under the revolving credit facility and, along with the expected additional note proceeds of $75 million and $2 million in cash, results in total liquidity of $522 million, which we plan to use primarily to fund the $409 million of remaining costs on our current development pipeline.

Turning to our financial guidance. In terms of guidance changes, we've increased our annual churn expectations by 100 basis points due to a pending customer bankruptcy filing. As a result, we have arranged for the customer to vacate its deployment in the third quarter and expect to receive payments to utilize their current capacity and terminate their current license in August 2019. Our annual guidance for 2019 churn is now 7% to 9%.

As communicated previously, we continue to expect our second quarter churn to be in the range of 2% to 2.5%. We are also increasing the range of data center expansion capital expected for 2019 to $405 million to $465 million and total capital expenditures now expected to be $425 million to $500 million. This increase is primarily as a result of our preleasing at SV8 and the accelerated development of Phases 2 and 3.

That concludes our prepared remarks. Operator, we would now like to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jordan Sadler with KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [2]

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So first, I wanted to just touch base on the scale leasing you guys accomplished post quarter end, if I could. Can you talk a little bit about the type of tenant if it was one tenant and maybe any terms in the lease that you could share?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [3]

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Jordan, this is Steve. I think we've kind of shared as much as we possibly can around the lease. Obviously, most of our customers in general but especially those larger hyperscale leases are -- have a lot of confidentiality surrounding the lease itself. So I think we've shared about what we can there.

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

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Okay. And will you guys -- I mean, is it safe to assume that you guys will be able to achieve the typical 12% return hurdle?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [5]

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Yes, I think it's safe to assume that we will maintain that expectation for SV8.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [6]

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Okay. And is it possible that Phase 3 could see a similar type of lease, in other words, maybe same -- is this one tenant?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [7]

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It's one lease, yes.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [8]

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Okay. And is it possible that Phase 3 could go to the same tenant as well if they have an option on it or no?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [9]

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I'm not sure that we can disclose any of those details. We're -- as we mentioned in the prior remarks, we are in construction, planning to kick that off here soon so that will be available.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [10]

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Okay. And then maybe just moving to the bankruptcy that's pending. Anything, Jeff, that you could share as it relates to that tenant exposure or that churn event? So is that a -- will churn just be an average or a lower number in 3Q versus 1Q and 2Q still or is that going to be elevated? And is there anything else you can kind of share about this tenant, maybe a location or...

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [11]

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Yes, you bet. I think in general, as you think about churn for the third quarter based on what we expect today inclusive of the customer, I would expect churn in the third quarter to be up in that same range as we've given for the first half, which would be somewhere 2% to 2.5%. So keep that in mind as you think through it. Again, that would be inclusive of this particular customer. I think just some other color and commentary. We've obviously had received some questions prior to the call regarding the customer name and can we give visibility to that. I just think in general, we're really not in a position to comment on who the customer is. We just don't think that, that's our position to do so. I would say, however, that the particular customer will be vacating an entire computer room in our data center. And as we think about it, there's very little, if any, capital that's needed to get that room ready to re-lease it to the market. It is in a market where we have some good results over the past 18 months, and Steve and his team have a strong funnel currently in that particular market. And obviously, we hate to see any customers going into bankruptcy but we wish them well. They've been a good customer for us and that we wish them well as they continue their future business plan. The only last thing I'd add is just due to the customer vacating the space, it obviously adds some turmoil in terms of their operations, and we have been working with them to the extent any of those customers didn't want to leave that particular location, we have accommodated them and have taken them -- some of those customers on directly and made them just direct customers of CoreSite. So we're currently working closely with the customer, helping them out where we can and we're helping them out vice versa wherever we can make ends meet.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [12]

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Is it a service provider or a third-party reseller of sorts then?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [13]

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Yes, I think that's a fair description, absolutely.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [14]

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I think I'll just add a little more color from Jeff's comments there. We continue to have further conversations with some of their client base there to make sure that there's a smooth transition and if there's an opportunity to help them remain in the building, those are active conversations.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [15]

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Okay. Last one to Jeff on financing sources of capital. I know you took your CapEx guidance up a little bit here. What would you estimate leverage would be at year-end on a net debt-to-EBITDA basis?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [16]

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Yes, great question, Jordan. Obviously, we executed on the financing in April. And I think as we had said, we assumed we would accomplish a majority of that financing for the year here in the first half. I think we probably [won] a little bit more than expected just due to pricing and the economics in the private placement. Having said that, I think from a leverage perspective, today, our stated policy is to be somewhere around 4.5x debt to EBITDA. We ended the quarter at 4.1x debt to EBITDA. And I think as you look at the capital expectations for the rest of the year, it's likely we will exceed 4.5x. Obviously, it's also dependent on adjusted EBITDA growth. We are comfortable taking that leverage in excess of 4.5x, probably up to 5x. However, just keep in mind, as we've said previously, that's ultimately a Board decision and we'll continue to have those conversations with our Board. And to the extent that, that formal policy changes, we'll get that communicated. But I would expect it to increase over 4.5x throughout the end of the year and that we'll continue to have a conversation with our Board in terms of the formal policy itself.

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Operator [17]

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Our next question comes from Sami Badri with Crédit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [18]

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My question actually pertains to the interconnection revenue growth that we saw in the quarter. And could you help us understand the dynamics here regarding why interconnection revenue has grown so much faster than rental revenue in the quarter? And it's almost a multiplier of 2x as far as growth rates specifically in this quarter. And this dynamic hasn't really occurred in your model for about 8 quarters, and I just wanted to understand why it's happening specifically now. And then I have a follow-up.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [19]

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Sami, let me try and address that as best I can for you and just something to think about for modeling. But in general, the interconnection revenue growth is, from a pure quantity perspective, is dependent upon the types of deployments we sell in quarters probably -- I'd say anywhere between 1 to 2 years preceding that particular quarter. And the reason for that is you typically get a trail of increase in interconnections as that customer is deploying, and so it always follows the ultimate deployment of the customer's particular deal. So it's important to just understand the composition of the type of deployments and ultimately what that means in terms of interconnection revenue growth. When we have higher retail colocation leasing, it will lead to a higher density of cross-connects for every kilowatt we sell as compared to the scale leasing. So just keep that in mind as you think about it. And in terms of revenue growth, keep in mind when you look at the numbers, as we've said publicly, about 2/3 of that revenue growth comes from growth in pure quantity of our cross-connects. The other 1/3 of revenue comes from customers who are shifting due to volume needs on our Open Cloud Exchange or possibly the Any2 Exchange, where they just need higher bandwidth and those pricing -- it steps up pricing without increasing quantities just to the higher volumes needed in those particular, so you get about 2/3 coming from pure quantities, about 1/3 of our revenue growth comes from composition or a higher-priced product mix.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [20]

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Yes, Sami, and I guess the final piece of that is in Q4, as you think about 2018 in general, there was quite a bit of disconnects relative to M&A activity and consolidation there, of which you saw a fair amount of that in Q4, of which we did see some leveling off and actually less of that as we came out of Q1. So that obviously had a positive impact.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [21]

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And then the follow-up related kind of to this is I'm assuming that a lot of your tenants are transitioning their switches from 10-gig speeds to 100-gig speeds. Could you give us an idea on where we are in this entire transition or this process? And then are you seeing any form of gig deployments, given your customer compositions?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [22]

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Yes, Sami. So as far as the interconnection product itself is concerned, the 100-gig migration has been going on for quite some time. And we haven't seen a material impact of that as far as the overall number of cross-connects. As you know, the growth in overall IP traffic and data traffic in general has continued to ramp up and will for the foreseeable future. So that continues to offset any kind of efficiency that you start getting out of 10- to 100-gig or even greater that. As far as the traffic that we see on those interconnections, we really don't see the traffic. Those are fiber connections that we pass between our customers. And the traffic that they move on that, whether it's 1, 10, 100 or more, is really dependent upon the gear that they put on either end of that light. So we do see some higher speeds in that and some gear that's coming out to support that but nothing material at this point.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [23]

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Got it. And then I have just a model clarification question for you regarding real estate taxes and insurance. The percentage of revenues of that expense went up to 4.5% of revenue versus prior quarters. It just kind of stood out. Is that because of the new facility? Is there anything else? And this is pertaining mainly to real estate insurance. Maybe if you could just help me understand what is going on regarding the step-up?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [24]

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Yes, Sami, just really 2 things. We've talked a couple of times over the last probably a year or so, just some commentary related to taxes. And I think in general, we've seen a general increase in real estate taxes through our portfolio. That's largely driven by each of those municipalities as they're looking at and estimating overall assessed values. And so I think that's going to continue. The other item is as we complete development of certain computer rooms, and in the fourth quarter, we completed DC2, the -- any taxes associated with properties that come out of development obviously, we start absorbing that into our income -- our operating results as it was being capitalized during the development, should it be in those results. So just keep that in mind, insurance is up a little bit but the majority of that increase is really being driven by the property tax increases.

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Operator [25]

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Our next question comes from Colby Synesael with Cowen and Company.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [26]

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3 quick ones. One is I'm wondering if you can disclose the GAAP rental revenue that you got from your customers since that's something you do typically obviously give us each quarter. Just -- if you're giving us megawatt, I was hoping you can give us the GAAP rental revenue? And then secondly, as it relates to that customer churn, just wondering what the termination fees are that you're anticipating getting from that customer. And I assume you'll recognize those as rental revenue, but just confirming that. And then lastly on SV9, can you just tell us what's on that land right now and how long, in broad brush strokes, you think you could take before you could actually get a facility up and running there?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [27]

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Colby, I guess I'll take those. When we report our second quarter sales results, we'll include all the GAAP revenue from the April lease, prelease in those results. But as Steve mentioned, we can't disclose that on an individual basis. The same kind of confidentiality provision applies to the termination fees we've negotiated with the tenant that's going into bankruptcy. So I apologize but we can't disclose those items of information. SV9, similar to SV8, currently has a building on it. It's a single-story multi-tenant office building -- service office type of building. All the leases will expire before or be terminated pursuant to their terms before we have to develop. Our critical path really starts with the entitlements process and then the -- and the power process and then the specific permitting process. In SV8, that took about 12 months to get through. I would estimate it's going to be about 10 to 14 months in the case of SV9 because as you probably are aware, there are new power provisioning practices in California that add a little bit more time to your design before you could get into environmental reviews. And then once we start demolition and site work, it typically takes about 12 months from that point to deliver the data center. Obviously, there's a lot we can't predict or control in these processes, but our team has been very proactive in doing a good job trying to line up everything for as seamless a process as we can have. But I think that's kind of the right range to put soft expectations around.

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

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It sounds like brush -- broad brush strokes, maybe mid-2021 we can get something there. And then just [answering] the first 2 questions so quickly. VA3, I think there's been expectations for several quarters now, to be honest, that, that would've gotten preleased by now and we still just haven't seen that. And you mentioned in your own prepared remarks that, that being a focus. Why do you think that, that has taken so long? And just kind of give us a little bit more color on what the pipeline for that potential opportunity is right now.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [29]

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Yes, thanks, Colby. I'll take that one. As far as VA3 is concerned, we've actually had some good retail leasing in VA3 already in our initial phase there, so that continues to show good traction and great quality brands that we brought into that building. So the VA3 campus itself is up and running into a good start. Phase 1B, which I think you're referring to, we're nearing completion, but I think as you look at that overall market, as you know, there's more inventory in that market. And I think as you look at preleasing, any market that has more available inventory is going to have a shorter window of time to prelease. We continue to see a robust pipeline there and are in active conversations with customers. But we -- as we've mentioned on other calls, we are disciplined on how we approach these larger leases to ensure that they either contribute to or value our ecosystem and are also a good return for our investors. So it's a balance of all those things to ensure it's a good fit.

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

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So you still are pursuing a hyperscale lease for Phase 1B, and I guess based on what you're seeing, you think there's a good shot we can get that done once that facility opens?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [31]

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We -- again, we balance those things between the scale of a hyperscale lease with the return that we expect to drive for the overall campus. So it's both of those things. And scale leasing and hyperscale leasing comes in all forms and fashions and as well as size. And we continue to evaluate those and work with our pipeline of customers to try to drive a good fit there. So it is important to us. We know we need to drive greater traction there and that's a focus from me and the team.

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Operator [32]

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Our next question comes from Aryeh Klein with BMO Capital Markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [33]

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Maybe just following up on that last question within VA3. Do you still expect to deliver those 12% returns? Or do you think it might go lower from here?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [34]

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Steve mentioned that and as we've mentioned on the quarterly calls for some time, that from a pricing standpoint is our most competitive market. And while we still think it's achievable to hit our targeted returns on VA3 as a whole, it is going to be a bigger push in -- at VA3 than it is in our other markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [35]

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Okay. Maybe turning to Chicago. It looks like occupancy dropped a little bit in the quarter. Can you talk about what's happening there? And then you have shipped -- sorry?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [36]

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It was just one of those churn events.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [37]

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Okay. But with CH2 coming online in the first half of next year, do you feel any differently about the opportunity in Chicago than maybe you did a few quarters ago?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [38]

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No, I think we feel the same and maybe probably a little bit better, wouldn't you say, Steve?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [39]

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Yes, I think so too. I mean we did have a couple of customers that we expected to churn that have but the overall pipeline still remains strong even before CH1 for that matter. So I think Chicago is one of those markets where it will be, especially our position there, which is downtown and providing a modernized scalable facility that's connected to a heavily interconnected site of CH1, we think we've got a very unique value proposition in a great market.

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Operator [40]

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Next question comes from Jonathan Atkin with RBC Capital Markets.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [41]

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So interested, just real quick as a point of clarification on the CoreSite Interconnect Gateway. To what extent does that leverage third-party partners versus being an entirely homegrown product?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [42]

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Sure. Thanks for the question. It's difficult to try to give the full color of that in our prepared remarks, but it really is a service that we've worked with our partners on to provide essentially a rack of equipment that the customer would have fully managed from one of our partners that would reside in our data center so that starts their colocation experience with CoreSite. And that can then support the customer in multiple ways. The first is providing a secure high-performance connection between our data center and their enterprise location. That then provides an efficient and secure and high-performance way for them to connect to all the native on-ramps that we've worked very hard to establish within our data centers. So it gets them onto this cloud on-ramps very quickly and securely, which they otherwise wouldn't have from their enterprise location. And then from there, they can either access other data centers that we may have in order to diversify their cloud ramp experience and give them access to other availability zones, or act as we expect it to as to be really kind of a stepping stone for them to expand their colocation footprint within our data center into more of the hybrid enterprise deployment that we have seen more of.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [43]

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But you wouldn't leverage other parties' SDN offerings? It's really your own homegrown product from a connectivity standpoint, it sounds like?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [44]

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As far as the data center itself, it's obviously our data center but as far as the equipment and the management of that equipment, we are working with our partners to provide that service. So we're not providing the managed service directly to our customer. That's through one of our partners.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [45]

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Okay. And then on SV8, any kind of color you can share around the commencement schedule around that commitment and kind of over multiple years or multiple quarters?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [46]

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I think I can give you a little bit of color there without any issue with the confidentiality components that we mentioned earlier. So as you think about the 2 phases that this customer signed up for, we expect the first phase of that to commence late Q3 and the second phase of that to commence late Q4 this year.

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

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Very consistent with our construction completions, Jon.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [48]

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But presumably, there'd be a ramp -- a move-in ramp, and so would there be further kind of additive commencements to take place in subsequent quarters associated with that or is it pretty much once it's completed, you're getting full rent contribution?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [49]

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I don't know that I can give you any more color than what I just gave you.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [50]

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Okay. And then lastly, I was just interested in the kind of a more broad question because we kind of touched on Virginia and Chicago and a little bit L.A. But just as you see the pipeline and overall demand profile across the company, what are some of the markets going forward where you see a potential for scale lease?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [51]

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Well, I think, as you look at where we are investing in capital and building new facilities as well as expanding in-place capacity, we have a lot of opportunity ahead of us. The top 4 markets, as we've historically provided and displayed growth in, I think will remain strong. So we think about L.A, the Bay Area, Virginia as well as New York and we've even seen some growth in Boston as well. Chicago really has been hampered by not having a modernized facility that can support it, and we look to have some of that growth come out of Chicago as well. So we look to see more diversity across the platform as more of that capacity comes online. But in each of those cases, we do expect some scale type of leasing.

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Operator [52]

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Next question comes from Erik Rasmussen with Stifel.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [53]

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First, the outlook for next year based on your comments may be trending somewhat higher revenue growth. Can you just help us reconcile what that means and how it compares to your previous expectations for low double-digit growth?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [54]

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Obviously, consistent with what we've outlined for 2019, we got a lot of things ahead of us in terms of trying to work through and obviously through the first 4 months of the year, we've made a lot of good progress. I think Paul touched on that and probably will try and summarize a little bit more. So I don't want to get too far out ahead of our skis in terms of declaring victory on 2020 guidance at this point in time. I would just say that obviously in our forecast and ultimately embedded into that guidance we gave is for us to execute on some portion of scale leasing, which Steve and his team are focused on. And I'm not sure today, as we sit here today, I would just confirm where we are marching towards in 2020, and that is to hit low double-digit revenue adjusted EBITDA and FFO per share growth. I wouldn't modify anything from what we've said to date.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [55]

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Okay. Great. And then maybe you do talk a lot about your new logos and new logo wins. But I think last quarter, you talked about existing customers and what you could be doing. Can you give us an update there and the initiatives you're planning to kind of reaccelerate growth from the segment and some of the things you can comment on the quarter and maybe upcoming for Q2?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [56]

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Yes, as it relates to our existing base, is that the question?

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [57]

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Right, yes.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [58]

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Yes. So one of the things that I think you saw even coming into this quarter was a bit of a resurgence in our base expanding with us, which is good to see. That was a little bit lighter in Q4. But we continue to make that a focus not only in having them grow their space with us but serve them in new ways either through interconnection to the Open Cloud Exchange, for example, and enhancing that. We announced our upgrade of our Open Cloud Exchange and some of the capabilities there on the last call but also intersite connectivity between our various campuses. And we've seen more adoption there. And then the other things that I mentioned earlier in the call relative to our CoreSite Interconnect Gateway and those types of things. So part of it is having them go expand their footprint, going to new markets but also deepen those services and, therefore, the revenue that goes along with them. So a little early in the innings as far as those enhanced services, but we're trying to be diligent about what we roll out and ensure that it actually does provide value and is represented by demand in the market and we'll execute accordingly.

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Operator [59]

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Next question comes from Nate Crossett with Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [60]

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I just wanted to get your comments on a potential investment-grade rating down the road. And I know you just priced debt at some attractive rates, but my question is have the conversations with the agencies changed recently now that Equinix has an investment-grade rating? And is this something you are even pursuing?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [61]

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Yes, let me just give you some color and maybe some observations related to that. But just in general, we've always operated our company and managed our capital in a manner for us to try and achieve investment-grade rating at an appropriate time. And so that's something we're -- we've been focused on and continue to be focused on. However -- in addition, I should say, we meet with the rating agencies on a very regular basis, at least once a year with each of the agencies just to continue to have those conversations and discussions. I will say that it's been good to see some of the movements from the rating agencies specifically to our peers. I think that, that's been a good sign. I know they and we have all been working hard to educate and to help keep them informed on the industry. And I think they've been making some movements and I think that's all headed in the right direction. We will -- it's clearly an objective of ours and something we keep focused on. But to date, it hasn't been needed at least in the public realms, but at some point, as we continue to scale the company, that's clearly something that we're focused on.

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

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I would only add, Nate, that we do have an investment-grade rating for our private bonds.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [63]

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Okay. So if you did get investment grade, would it even change the rate much that you could issue at or...

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [64]

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That's really driven more by our capital allocation decisions and where we have opportunities. And I don't think it's essential for us to be able to fund a good rate of opportunities that we've been pursuing historically.

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Operator [65]

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Next question comes from Richard Choe with JPMorgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [66]

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Just wanted to kind of go into the higher churn rate but the overall revenue kind of holding the same. Can you give us some puts and takes on what's going better despite the kind of 100 basis point increase in churn that makes you feel comfortable with keeping the revenue guidance for the year. And I have a quick follow-up.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [67]

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I would just say in general, as we look at our forecast through the rest of the year and obviously updated for Q1 results, you always have a lot of puts and takes throughout the operations of the company. And obviously, those have been updated. We've updated the guidance, as you just touched on, some of it related to churn and some of it related to our CapEx spend. Obviously, it's early in the year but as we sit here today, we -- the visibility we have, we still are affirming the guidance from a revenue perspective and expect to be somewhere in that range. But it's early in the year. We'll continue to keep you updated and apprised as we move forward. But nothing specific I can point to as we sit here today other than we're still comfortable with the guidance we have out there today.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [68]

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And I don't know if you can answer this, but given the market that the SV8 prelease is done, is it fair to say that is kind of your normal rate of return for a wholesale deal or could it be higher, given that it's a relatively tighter market?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [69]

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Again, we will talk about expected returns on a property as a whole but not as it relates to individual transactions.

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Operator [70]

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Next question comes from Frank Louthan with Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [71]

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You commented a little bit about pricing across your various markets. Where are you seeing some strength in the market and what markets are you seeing a little weaker? And then if you could give us a general comment about how you view M&A. Obviously, a lot of assets out there in the market currently. How do you view assets that may be where the owner owns all the underlying land and buildings and so forth versus those that they don't? And how does that factor into your process as you look at that?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [72]

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So I'll jump in where Steve would normally cover just to make it quick. But as you can see from our results, pricing is tending to be pretty stable to all of our markets with the same thing we've been saying about Northern Virginia for the last few quarters, where there has been a decline in scale and undifferentiated pricing over the last 18 months. It seems to be kind of stabilizing down there but that's -- that dynamic is still there in Northern Virginia. As we've also said on previous calls, we do evaluate M&A opportunities. We have pretty tight criteria on what makes sense and haven't seen it obviously yet other than the 2 very small ones we've done in our history. I think everybody would value owned properties differently than leased properties, that would certainly be our view of them, and we will continue to look at what's out there.

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Operator [73]

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Next question comes from Nick Del Deo with MoffettNathanson.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [74]

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A number of your peers are discussing JVs or selling more mature facilities as a way to recycle capital in development projects. Can you envision circumstances under which that might make sense for CoreSite? Or does the nature of your campuses and business mix make it less tenable?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [75]

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So I think the simple answer to that is that it's not likely. It's probably a higher cost of capital than what we'll be able to achieve just by following our historic strategy. And there is a lot of value in our interconnected campuses. And remember, we also include a lot of flexibility around scale and density in those campuses. And there is value for everyone to have a very comparable customer experience through common ownership. So for those reasons, I would say it's probably unlikely for us. But again, we always evaluate opportunities that are out there just to keep an open mind.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [76]

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Okay. Got it. And then one accounting one for Jeff. What sort of straight-line assumption have you baked into 2019 guidance? And should we think that the SV8 lease will start moving into straight-line [just impact] towards more normal levels?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [77]

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Nick, we would expect, as you saw it coming, I think it's right around $1.2 million actual add back for AFFO purposes this quarter. And that's largely being driven by the leases in which we're the actual lessee where we've got some straight-line expense up in our operations. I would just say that typically on larger scale and hyperscale leases is where you'll typically see some straight-line effect, especially once those leases commence. And so as you see some of those occurring later this year, you could see that straight-line impact start to moderate and possibly reverse back to the other scenario in the income statement. So I would say expect it to moderate this year and then possibly flip as you get into 2020.

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Operator [78]

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Our next question comes from Dave Rodgers with Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [79]

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Yes, maybe for Steve, just wanted to ask a little bit of color on Boston and NY2. Those have been 2 slower markets to lease up and obviously, you already have some of the space available at NY2. So maybe a little color on just kind of what you expect and kind of how you're looking to tackle those 2 markets. And as an aside to that, it looks like this next phase at NY2 will cost about twice as much on a per-foot basis as the last phase. So could you add a little color around that as well?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [80]

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Sure. I'll just give you a little bit of color as far as the sales pipeline and the approach on those 2 markets, and then Jeff can talk a little bit more about the cost and the financing. As far as the overall markets are concerned, we're actually very bullish in both of those markets. In fact, as you look at back through last couple of quarters, Boston has been one of our stronger markets as it relates to sales execution there. And so the growth and the build-out that we're are doing there is based off of some of the traction we've seen there with some of our existing customers as well as the new ones that were coming in. So we've staffed a little bit higher there as well to support that demand, and we're excited about the opportunity in Boston. New York, we have continued to see new logos come through the door. The activity actually is very strong there and the pipeline looks very strong. So again, we're trying to align our capital based off of where we see the demand and we need to execute against that demand, but we're bullish about where that heads.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [81]

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The only thing I'd add to Steve and just specifically related to the cost question is in -- at NY2, in this particular build-out, it was more efficient and much more price effective to build out some more of our back what we referred to, I guess, just our [back-plane] infrastructure related to a future phase. And so we're just adding some infrastructure earlier to support another room build-out that will come later down the line and it was just more effective and efficient for us to do it at this point in time.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [82]

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Got you. That's helpful. And then maybe just a broader question on, you get about 40 megawatts, I think set to complete between now and the middle of 2020. And there's been a lot of questions about different development yields by project or even by lease. But can you kind of talk about where you expect that to shake out in the next 40 megawatts kind of from an earnings power perspective, how should we think about kind of that set of development yield in the aggregate in terms of what that can contribute, given how you're thinking about whether it's hyperscale or colo leasing?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [83]

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Well, it's a great question. I think when you look at the chart we've got on Page 19 of our supplemental that lays that out really by particular expansion, I think the way to think of it is as follows: anytime we're doing a ground-up construction, you're going to see generally lower yields in those first phases and the yields will increase as we build out subsequent phases just due to the investment we're having to make in the first phase where we're basically investing about 50% of our overall cost of that project. So that's -- so as you think about it, to the extent we have preleasing like what we did at SV8, you'll see that come on much quicker than you might otherwise where we're leasing it up over a longer period of time. Where you've got those computer rooms just being built out inside an existing shell obviously those are going to deliver -- those returns on that incremental capital are going to be substantially higher. And so just think about maybe taking those 2 components and putting some blend in there, I don't know what it will come out on a blended basis. I haven't done the math myself, but I have a better idea where it is on particular projects -- but just keep that in mind as you work through your estimates.

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Operator [84]

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Next question comes from Robert Gutman with Guggenheim Securities.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [85]

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So maybe ask you something that people touched on but from a different angle. With the near-term deliveries that are scheduled in the second quarter, should we expect a return of leasing of the over 5,000 square foot deployments? They've been absent the past 2 quarters. So should we be expecting that to be included in the second quarter leasing basically and obviously excluding SV8?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [86]

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Well, I would just say that since we're in Q2, I'm not going to comment on where we are going to end up in Q2. But I will say that we are actively working with customers and working to execute against a pipeline that presents itself. So I really can't comment on where we -- forward-looking statements on where we're going to finish the Q other than the guidance that we've already provided.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [87]

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Okay. And also, out of the 32,000 square feet that were leased in the quarter, I think it looks like about 5,000 was in the prestabilized properties. Can you talk about where the rest kind of landed and just a little color on verticals and geographies of the rest of leasing that occurred in the quarter?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [88]

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Maybe I can just start off with the overall markets. The markets that we closed in were kind of the typical markets that you'd expect from us as far as L.A. being our top market, Santa Clara, Virginia. So those are really the kind of the top 3 for us. As far as the same-store versus other, I know Jeff's looking for that right now. I don't have that in my fingertips right now.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [89]

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Yes, I think obviously, from a same-store perspective, Robert, there was some leasing associated with that. And as you saw sequentially, our occupancy dropped a little bit. We would expect that to come back a little bit as those deals commence and there were some of that associated with same-store, obviously.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [90]

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As far as vertical -- I'm sorry, just to maybe give you a little color as far as the verticals are concerned. It was really kind of split about half to enterprise and then the other half split between network and cloud, if that gives you a little more color.

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Operator [91]

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Next question comes from Michael Rollins with Citi.

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Michael Rollins, Citigroup Inc, Research Division - MD and U.S. Telecoms Analyst [92]

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Two if I could. So first, the development yield guidance has been consistent around 12% to 16%. But I was curious if you could have unpack that with respect to what the expectation for development yield is for our retail deployment versus a hyperscale deployment based on current market pricing. And then second, as I was looking at the top 10 customer list, I noticed that half -- the bottom half with about 10% of revenue or rent is coming due on an average term of less than 12 months. And how do you look at that in terms of opportunity for upselling or renewal pricing versus maybe some of the risks on architectural changes, et cetera?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [93]

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So Michael, just as it relates to different categories, as you know, we try to not give out that type of specific pricing and return figures. I think it's fairly common knowledge that retail leasing generates a higher return than hyperscale leasing does. And when we look at overall data center yields, we're looking at them on an expected mix. And I'll let Steve address the rest of the question.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [94]

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Yes, I would just say as far as the mix is concerned, we do look at the difference -- obviously takes longer and more of them from a retail perspective to fill up our data centers and get to a stabilized yield for the building. So it's -- we really do try to strike that balance and look at the overall blend of the population of each data center to try to get to the yields that we've stated. So that's probably the best way to think about it. As far as the top 10 customers are concerned, I think you're probably referencing 2 of those customers that are -- have expired in the top 10. And I would just give you some color there that we do look at this as opportunity for us to not only extend those terms but grow them for all of our customers and for those 2, I would just give you some -- that we have actually renewed several other spaces and both of them have quite a few spaces with us, and we've renewed some of them and expect to move forward with completing the renewal of both of them.

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Operator [95]

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Next question comes from Jon Petersen with Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [96]

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I'm wondering if you could update us on kind of your sales force, how well staffed that is right now. I know kind of historically for CoreSite and all of your peers, there's always been a little bit of challenge with turnover in the sales force. I was kind of curious. Any update there?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [97]

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Yes, sure. I'll give you a little color. I mean I'm happy that we are fully staffed, which is always a challenge to get staffed with the quality folks that you would like to see. We haven't really changed the overall expense component of our sales and marketing team. We have changed the mix and kind of some of the roles that we have throughout our sales organization as well as where some of those people are located and they're focused based off of where we have capacity or expect capacity to come online. So it really is more of a mix and positioning component that we try to work with to make sure that we're hitting the market as best as possible. We shifted a couple of resources around from sales to be more technical and trying to help customers through their hybrid deployment journey. And I think that's borne some fruit for us as well as I mentioned, putting some of the resources in markets like Boston and Chicago where we expect more capacity to come online.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [98]

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And then curious with all the development you guys have coming online and the first phase stuff, I would assume that's going to weigh on EBITDA margins over the next couple of years. I guess is that a reasonable expectation? And I guess how do you think about your kind of long-term adjusted EBITDA margin targets for the company?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [99]

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I think it's accurate that as we roll off some of this development and start going through the lease-up, it is not going to give us the opportunity to expand those margins. And I think that's the best way I'd look at it. I think they should be fairly consistent as we roll through some of this development and get it through lease-up. Having said that, I would then just say longer term, and this goes on beyond probably 2020, I think we have an opportunity to expand that margin by maybe 100 to 200 basis points, but that's something we've got to think through on exactly how to execute on it. And I think what's key to that is how can we continue to leverage inside our existing markets, and I do think we can scale off of them. But it's just getting much harder to do that in the future as it's been in the past, just given the size of the company and the way we've been making some investments. But it's something we've got on our mind and something we'll work towards. But as we get through the next 1 year, 1.5 years, we'll continue to provide some color and commentary around that. But I wouldn't expect it to expand as it has in the past but it's something, I think, there is still some room for improvement.

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Operator [100]

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There are no further questions. I would like to turn the call over to Paul for closing comments.

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [101]

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Thank you. Carole, Jeff, Steve and I appreciate everyone's participation in this call. As you can see, we are pleased with what our colleagues have accomplished this year so far and grateful for the opportunities ahead of us. We continue to see good demand for edge data center capacity in our markets and now are bringing online the product to meet that demand. We have and will probably always have much work ahead of us, and we have a great team pursuing all that work. We look forward to the future. Thank you, and have a great day.

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Operator [102]

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This concludes today's conference. Thank you for your participation.