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Edited Transcript of COR earnings conference call or presentation 7-Feb-19 5:00pm GMT

Q4 2018 CoreSite Realty Corp Earnings Call

DENVER Feb 11, 2019 (Thomson StreetEvents) -- Edited Transcript of CoreSite Realty Corp earnings conference call or presentation Thursday, February 7, 2019 at 5:00:00pm 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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* Aryeh Klein

BMO Capital Markets Equity Research - Associate

* 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

* Jordan Sadler

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

* Lukas Michael Hartwich

Green Street Advisors, LLC, Research Division - Senior Analyst

* Michael J. Funk

BofA Merrill Lynch, Research Division - VP

* Nathan Daniel Crossett

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

* Nicholas Ralph Del Deo

MoffettNathanson LLC - Analyst

* Robert Ari Gutman

Guggenheim Securities, LLC, Research Division - Senior Analyst

* 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 Fourth Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference 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. Thank you. You may begin.

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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 Fourth Quarter 2018 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 give no assurance that the expectations will be obtained. Detailed information about these risks is included in our 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 on 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 key accomplishments for 2018, provide an annual overview of our business and service models and share our 2019 priorities. Steve will then cover our sales results and initiatives to strengthen our market position, and Jeff will take you through our financial results and our 2019 financial guidance. Our 2018 annual financial accomplishments showed another solid year of growth, including revenue growth of 13%, FFO per share of $5.06, reflecting an increase of 14.2% or 11.9% growth after adjusting for a 2017 one-time noncash charge; and declared dividends of $4.14 per share, reflecting 15.6% growth. We achieved one of our primary sales goals of substantially growing new logo acquisitions. Annualized GAAP rents sold to new logos in 2018 increased 81% over 2017, and we added many important new companies to our customer communities. We also made significant progress on restoring our development pipeline in 2018. We placed into service nearly 172,000 net rentable square feet, including data centers completed in Reston and Washington, D.C. We expect 2 new buildings under construction to come online in mid-2019 in Santa Clara and in Northern Virginia, 2 of our biggest markets, and we proactively pursued further development in Santa Clara. In January, we entered into a contract for an approximately 4-acre property adjacent to our existing campus to prepare for continued growth in that market. On the operational front, we delivered an approximate 7% improvement in power utilization efficiency on a same-store basis compared to 2017 due to wise investments in new infrastructure and an ongoing program of operational improvements. We also achieved our highest uptime as a company, what we call seven 9s of reliability. Thereby, improving customer experience and reducing our operating costs. We also rolled out significant product improvements this year. We upgraded our Open Cloud Exchange to an SDN architecture, which makes it significantly easier for customers to provision cloud interconnection and enables us to add additional features in a more agile manner. We also piloted and put customers on our first intermarket connectivity product and expanded our blended IP product. We also experienced some challenges in 2018. Our overall sales fell short of our goals. We underestimated the challenges of selling when our occupancies were high and, therefore, capacity constrained, leading us to miss out on a number of good opportunities due to lack of contiguous space. We expect this challenge will be mostly remedied as our SDA and our VA3 Phase 1B buildings come online this year. We also expect to complete our LA1 expansion midyear, which will provide further opportunities. Construction commencement at our LA3 data center project in Los Angeles is still on hold due to delays at the Los Angeles Department of Water and Power and designing the power fleet for the new facility. But we expect that design to be completed soon. On balance, 2018 was a solid year, with much heavy lifting across our company to position us well for future years.

Looking forward to 2019 and beyond, I would like to remind investors of the key components of CoreSite's business model. Simply stated, we concentrate our activities in 8 large metropolitan edge markets, which are rich in consumers and enterprises and where our extensive customer communities provide an outstanding platform for digital activities and transformation. Our campuses are characterized by major interconnection nodes and numerous cloud on-ramps, which anchor large, energy-efficient, highly flexible data centers with the widest possible range of customer deployment sizes and the densities can be accommodated; and where customers can interconnect with each other via short run, dark fiber or virtual connections providing the maximum performance, bandwidth, reliability, flexibility and security. Our primary target customers include: first, enterprises in these markets who are moving to colocation to reduce their data center costs while increasing uptime and performance and interconnecting to a powerful hybrid cloud and to network ecosystem. Second, companies with edge needs in these markets. Third, companies exchanging data traffic at these key Internet peering points. And finally, companies who value deployments in these markets as part of a larger performance and cost strategy built around wide area network realignment. The flexibility of our model is shown by the range of leases we can accommodate. Our smallest new and expansion sale in 2018 was 1 critical kilowatt, and our largest was 3 megawatts. And we've had significantly larger leases in the past years when we had more capacity to sell. We believe this speaks to the diversity of how we can drive revenue as we add new capacity.

We leveraged our service model to focus our leasing efforts on higher value deployments where there is a greater need for the components we offer compared to less differentiated offerings in the marketplace.

Our 2019 priorities include: first, to translate new construction into more abundant sales, including to larger scale deployments in our edge markets. Second, to continue to focus on acquiring additional new logos. Third, to continue to bring new connectivity and customer service products online to increase sales from new and existing customers. And fourth, to continue to deliver great customer experience and ongoing operational efficiencies. We believe these priorities and our other operating objectives will continue to drive value for our customers, employees and shareholders. 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. I'd like to start with a summary of our quarterly sales and leasing results and then spend some time on product enhancements. Turning to our sales results. For the quarter, we had sales of $4.2 million of annualized GAAP rent, which included 16,000 net rentable square feet at an average GAAP rate of $259 per square foot, comprised entirely of our core retail colocation sales. While our sales and scale and hyperscale leasing were below our goals for the quarter, our performance included excellent growth to new logo additions, solid pricing and strong renewables. So let me walk you through a few of these in more detail. We have discussed on prior calls the goal of substantially growing new logo acquisitions in order to achieve greater diversity of our base, enhance our ecosystem and provide a platform for future organic growth. And we've seen some solid traction in that regard. Here are a few highlights.

The annual GAAP rent for new logo additions in 2018 increased 81% over 2017. In addition, the average weighted monthly lease term for 2018 new logo wins increased by about 6 months for new logos in 2017. And the majority of these new 2018 logos were driven by enterprises, with ongoing logo growth for cloud and network providers. Pricing was also an important focus for us. For the quarter, pricing on our new and expansion leases was consistent with our trailing 12-month average on a per kilowatt basis, driven by continued execution in the core retail colocation space, which typically supports both better pricing and profitability.

Moving to scale leasing. As Paul mentioned, our capacity constraints impacted our sales opportunities, primarily sales of scale colocation, which we believe will be addressed by our ongoing property development and our presell activity for projects nearing completion. We also have several markets with available inventory where we look to execute better in driving scale leasing. Renewals are another key aspect of the health of our business. During the fourth quarter, our customer renewals were strong, with annualized GAAP rent of $22.5 million. Rent growth of 3% on a cash basis and 7% on a GAAP basis. And rental churn of 1.9% for the quarter, which was better than expected. So the fundamentals of our business remains strong, with increasing growth from new customer and logos signing with CoreSite; existing customers, including key strategic accounts choosing to extend their term and expand their space with us; and core retail colocation pricing levels remaining firm. Additional focus going forward will be on executing well in the scale segment as those opportunities align with our value proposition and available capacity.

In my role as chief revenue officer, we are evaluating opportunities to evolve our offerings in order to deepen our customer value while providing additional forms of revenue to the company. We have been working directly and through partners with a goal of making it easier for customers to continue their digital transformation journey. As such, there are several steps we have delivered this year, and look to expand as we go forward.

In 2018, we upgraded Open Cloud Exchange with SDN architecture, enabling easier onboarding to cloud and SaaS providers as well as paving the way for future development; added Microsoft Azure Express Route private connectivity in our Silicon Valley and Northern Virginia markets; enabled enterprises with direct private connectivity between VMware and AWS in 4 markets, including Boston, Denver, New York and Northern Virginia; introduced AWS's logical redundancy offering as second data point of connectivity to AWS direct connect at our Silicon Valley campus; provided dedicated access to the Oracle cloud infrastructure in Northern Virginia and Washington, D.C. campuses; enabled intermarket connectivity; expanded the flexibility of our blended IP products; and formalized the launch of our solution partner program to extend our reach and value through our ecosystem to help customers along their journey from IT assessment to transition services, to ongoing support and management. I hope this gives you a sense of our ever evolving customer-centric initiatives in our data centers. We're focused on the collective value of our solutions to customers as we enable them to execute against their business plans and grow their relationships among each other. Technology is driving higher expectations on all companies to make it easier and faster to do business with them. We believe we are a key resource for enterprises upgrading their technology to better support their business in the future. Enterprises that can drive a better digital experience for their employees, customers and suppliers should win in their respective industries. We expect to be the cornerstone of how they successfully deliver digital transformation. With that, I will hand the call off 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 would like to share some highlights of our 2018 financial performance, review our detailed fourth quarter financial results, update you on our property operations and development and provide you our financial guidance for 2019.

Looking at our financial results. Our full year 2018 results included 13% revenue growth, 14.2% of FFO growth per share or 11.9% after excluding a 2017 noncash charge related to our preferred stock redemption and adjusted EBITDA growth of 12.5%, while maintaining an adjusted EBITDA margin of 54.4%; and declared dividends of $4.14 per share or 15.6% growth. In 2018, we successfully accessed the capital markets and amended and expanded our credit facility, which provided us $250 million of additional liquidity while extending our debt maturities at attractive rates. We were also an early adopter of the new lease and revenue accounting standards, so we've had that in our rearview mirror since the beginning of 2018.

Moving to our fourth quarter financial results. Our total operating revenues were $139.1 million for the fourth quarter, which was in line with the third quarter and reflected a 10.5% increase year-over-year. Operating revenues consisted of $118.3 million of rental, power and related revenue, $18 million of interconnection revenue and $2.8 million of office, light industrial and other revenue. Interconnection revenue increased 1.8% sequentially and 10.9% year-over-year. FFO was $1.26 per diluted share and unit, in line sequentially and an increase of 15.6% year-over-year or 6.8% growth after excluding a 2017 noncash charge related to our preferred stock redemption. Adjusted EBITDA of $74.6 million increased 1.1% sequentially and 8.5% year-over-year. Adjusted EBITDA margin was 53.6%, up 57 basis points from the prior quarter, and down 100 basis points year-over-year, primarily due to the new lease accounting requirements that we implemented in 2018, higher-power rates and increased property taxes. Sales and marketing expense totaled $5.4 million for the quarter or 3.9% of total operating revenues. For the year, sales and marketing expense was $21 million or 3.9% of operating revenues, in line with 2017. General and administrative expenses totaled $10.5 million for the quarter or 7.6% of total operating revenues. For the year, general and administrative expenses were $40.1 million, essentially in line with our guidance. These expenses represented 7.4% of total operating revenues for 2018 compared to 7.8% in 2017.

In the fourth quarter, we commenced 23,000 of net rentable square feet of new and expansion leases at an annualized GAAP rent of $192 per square foot, which represented $4.4 million of annualized GAAP rent.

Moving to backlog. As of year-end, projected annualized GAAP rent from signed, but not yet commenced leases, was $9.9 million and $14.3 million on a cash basis. We expect substantially all of the GAAP backlog to commence during the first half of 2019.

Turning to our property operations and development. Fourth quarter same-store monthly recurring revenue per cabinet equivalent was $1,537, reflecting a 1.6% sequential increase and a 6.3% increase year-over-year. Q4 same-store turnkey data center occupancy was 90.7%, an increase of 60 basis points sequentially. We ended the quarter with our stabilized data center occupancy at 92.8%, an increase of 40 basis points sequentially. During the fourth quarter, we completed construction and placed into the pre-stabilized pool 25,000 net rentable square feet for our DC2 data center. We have a total of 271,000 square feet of data center capacity in various stages of development across the portfolio. This includes ground-up construction at VA3 Phase 1B and SV8 Phase 1, which together, total 108,000 square feet, with $118 million incurred to date of an estimated $246 million. Data center expansions at LA1 and LA2, which together, total 45,000 square feet with $9 million incurred to date of an estimated $34 million. And preconstruction of LA3 and CH2, which together, represent 118,000 square feet with $39 million incurred to date of an estimated $250 million to complete the first phases of these projects. Collectively, these projects totaled $166.4 million invested as of the end of the fourth quarter of the estimated $530.2 million required to complete the projects. For more details on our development projects, please see Page 19 of our supplemental information.

Turning to capitalized interest. The percent capitalized in the fourth quarter was 17.9% and the full year percentage was 13.6%. For 2019, we expect the percentage of interest capitalized to be in the range of 20% to 24%, which is elevated compared to 2018 based on our development pipeline.

Turning to our balance sheet. Our ratio of net principal debt to Q4 annualized adjusted EBITDA was 3.8x. As of the end of the fourth quarter, we had $236.2 million of total liquidity, consisting of $233.6 million of available capacity on our revolving credit facility and $2.6 million of cash. As a reminder, we announced last quarter that we expect to access the capital markets for $350 million to $400 million in the form of additional debt to term out the outstanding balances on our credit facility. We expect the majority of this financing to be completed in the first half of 2019.

As I stated last quarter, we are comfortable with modestly increasing our targeted debt to adjusted EBITDA ratio to 4.5x.

I would now like to address our 2019 guidance. For context, it's important to note that our guidance reflects our view of supply and demand dynamics on our markets as well as the health of the 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. And bear in mind that our guidance reflects coming into the year with constrained capacity due to high occupancies and significant new capacity expected to be available midyear and beyond.

As detailed on Page 23 of our fourth quarter supplemental information. Our guidance for 2019 is as follows: total operating revenue is estimated to be $580 million to $590 million. Based on the midpoint of guidance, this represents 7.5% year-over-year revenue growth, which reflects the timing of our development pipeline and the current level of capacity entering the year. Interconnection revenue is estimated to be $74 million to $77 million. This reflects 8.3% growth at the midpoint. General and administrative expense is estimated to be $42 million to $44 million, representing 7.4% of total operating revenue at the midpoint. Net income is estimated to be $104 million to $109 million, representing $2.15 to $2.25 per share of net income to common shares or $2.20 at the midpoint. Adjusted EBITDA is estimated to be $316 million to $321 million. And at the midpoint, reflects a 54.4% adjusted EBITDA margin and 7.6% year-over-year growth. FFO is estimated to be $5.21 to $5.31 per share and operating unit. At the midpoint, this reflects 4% growth. As a reminder, this guidance reflects the plan to debt financing that I mentioned earlier. Other guidance includes: rental churn, which is estimated to be 6% to 8% for the full year; cash rent growth on data center renewals estimated at 2% to 4%; and capital expenditures were -- which are estimated at $400 million to $450 million, including data center expansion of $380 million to $415 million, nonrecurring investments of $5 million to $10 million, tenants improvements of $5 million to $10 million and recurring capital expenditures of $10 million to $15 million. 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 Jonathan Atkin with RBC Capital Markets.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [2]

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So I was interested in Steve's comments about better execution on scale leases going forward, and if you could maybe elaborate a little bit about what that looks like. Apart from having inventory to sell, what is it on the execution side that you think can drive better success? And then on the products side, you mentioned the OCX -- the Open Cloud Exchange SDN offer. Is that something you're offering because you can in anticipation of potential customer demand? Or are you seeing meaningful takeaways already as you kind of ramp that products and active customer interest? Or is that more on the [comp]?

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

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Jonathan, thanks for the question. Yes, as it relates to better execution, I think, you'll hear me say that consistently regardless of our results, but I do think we can and should do better, especially in the scale leasing and really across the board. As it relates to scale leasing with the inventory that we have today, there are a few pockets where we have availability to sell scale deals today, albeit a few. And I just think there's always areas where we can execute better as far as how we are aligning to the market, making sure that the markets are aware of our availability out there. How we're ensuring that our value is driven throughout the organizations making those decisions and that reposition us in the most favorable light to win. So it's really just how do we ensure that those aspects come together, and we continue to just try to get better in that regard. As it relates to your question around OCX and SDN, it really just sets the platform up for us to be able to provide those capabilities, and automating the provisioning of logical circuits across our OCX. We have seen some initial interest, and we are encouraged by the future of what that can provide us, not only for intramarket, but also intermarket, and some additional enhanced services as we go forward. So it's really just kind of setting the stage for the future.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [4]

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So if I could follow up on that, are there any sort of use cases that you could maybe illustrate in a generic fashion that would be driving that demand? And then a last one, perhaps for Jeff, you mentioned the PUE improvements. How would you translate that into kind of margin lift? So on a same capital basis, without the benefit of the cross-connect growth, what kind of margin lift would you have seen from the PUE improvement that you referenced in the script?

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

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Sure. So just to give you a couple of use cases. A great use case that we've already seen some demand for is where customers may be deployed in one market but need access to a native on-ramp -- cloud on-ramp in another market where they can access our Open Cloud Exchange, logically provision that circuit to gain access within our Open Cloud Exchange on the other end and in a different market and get that native connectivity. So that's a pretty common request, I would say. Another would be a pretty typical use case would be where customers are deployed in more than one market, where they may have an active-active type of environment or perhaps want to just load share their requirements between different markets and they can share those from connectivity standpoint and be able to turn those up and down based off of the amount of demand and the amount of traffic that they need. So those were just a couple of examples for you. And I'll let Jeff answer your other question there.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [6]

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Jonathan, I would say that in general, that PUE uplift contributed about 60 to 70 basis points to our adjusted EBITDA margin during the year. And so those are some of the things that Paul has kind of messaged as we think about operational improvements during 2018 and that our team is continuing to focus on as we head into 2019.

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Operator [7]

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Our next question is from Jordan Sadler with KeyBanc.

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

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So Paul, in your opening remarks, you mentioned that the slower sales will likely be mostly remedied, I think, as it relates to additional capacity. And I'm just curious, is there something else beyond the additional capacity that you're focusing on to increase the sales effort?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [9]

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Really just 2 things. One is the continuous improvement that we strive for, that Steve mentioned, and they do a great job, he and Maile and the rest of the team and diving into every opportunity from the previous quarter of lessons learned, how do we change our approach for future opportunities. And we've seen a lot of success from that continuous improvement. The other thing is what you guys have seen happen in the space since it was created, is that you have different waves and cycles of user demand. And 1 year, we see a lot of scale sales in our markets, and then those getting filled up, and then in subsequent years, there's less of that. But then as those fill up, the cycle comes back. So I think having the capacity is a prima facie requirement for winning those deals, and I feel good about what we see out there in the industry in general and pipelines in general.

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

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Is there anything you could add vis-à-vis the cycle where you think we are in terms of what types of customers have been slower to lease which may be coming around in 2019?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [11]

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So every side, the edge cycles are different than undifferentiated or hyperscale cycles. We had a big edge cycle in 2015 and 2016. It started tapering off in 2017 and 2018, but we're seeing good signs going forward for that. That's not a promise of anything, but I do feel good about where we are in the edge cycle.

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

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And then along those lines, I was curious regarding the interconnection revenue growth assumption or guidance of 8.3%. Is it -- obviously -- [moderation] from what you did in '17, but also from the pace in 4Q of 10.9% growth, down to 8.3% for the year, is there anything else embedded in there in terms of consolidation or churn that you could point to?

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

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Yes, Jordan. I would say that all of those items you mentioned, whether it's some of the consolidation, just some of it associated with some churn are all embedded into those estimates. But I think if you look at the past 2 to 3 years, you can see that, that has decelerated by 200 to 300 basis points per year, largely driven off of the volume growth. To the positive side, what we continue to see is customers that migrate from a certain volume to a higher volume product, which obviously increases price. And so while you may not see volumes -- our overall volume increase from a per unit basis, overall pricings continue to go up just as they migrate to a higher priced product. We continue to see that, but all of that has been embedded into that -- those estimates. As you point out, the midpoint is about 8.3%. The range is somewhere around 6% to 11%, and we'll just see how we perform as we work through the year.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [14]

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Okay. Jeff, just while I have you there. The commencements, I noticed that didn't provide any specific commentary for the year. Is there any number that's embedded at the midpoint here that you could point to beyond the backlog you talked about?

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

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Yes. I mean, obviously, the backlog, as I mentioned, you get about $9.9 million, call it $10 million that we've got visibility into for next year. And the remaining of those commencements are going to be largely dependent upon our leasing results, and some of that is dependent upon our construction deliveries. And so we'll continue to update as we work through the year. In terms of trying to estimate that, I would just point to whatever our high-level revenue guidance is and our churn estimates and make some estimates on estimated timing of leasing and commencements that will get you there based on the high-level revenue guidance we provided. And we'll continue to update you guys as we progress during the year.

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Operator [16]

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Our next question comes from Nick Del Deo with MoffettNathanson.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [17]

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First one for Steve. You noted that revenue book for new logos in 2018 was up 81% versus the prior year, which is a pretty substantial change. Can you talk about some of the specific initiatives you undertook to help drive that results? And were there particular selling points you found to be particularly effective in getting new enterprises onboard?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [18]

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Sure. Well, thanks, Nick. Thanks for the question. Yes, that was one area that we did see some good traction on and I think it's an important aspect. We've mentioned it on prior calls where that was a key focus area for us, even I would say, more than a year ago where we wanted to really provide more diversity across our base, be less reliant upon our existing customer base for our future growth and just enhance the ecosystem. And that's been the real impetus for this whole initiative. But there's been really a concerted effort both from our sales, marketing, product teams, our channel team, really across the board to ensure that we drive the right messaging, the right outreach that we align our incentive plans, all of those kinds of things to ensure that we really motivate all the oars in the water towards -- rowing towards those new logos. So I'd say it's really kind of a combined effort there as well as just looking at the industries that we've -- they have been adopting CoreSite, those that value our value proposition. And really trying to get better at identifying through internal, as we call it, customer knowledge of those customers that tend to buy from us and how do we target more of them to just get smart about where we spend our money and where we spend our time to better attract those logos. So it's really just a combination of all those things.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [19]

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Okay, that's helpful. Then maybe one on Santa Clara specifically. Now that's historically been a very good market for you guys, in part because it's hard to bring new capacity online. It seems like there's recently been a spike in projects under development there with a lot of capacity in various stages of development. How do you see that influencing that market over the next couple of years? And are you confident you can get your desired returns on SV8 and the facility you plan on building on the parcel you just acquired?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [20]

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We -- this is Paul, Nick. We feel good about the Santa Clara market. There is always room for more participants in that market, but we like our campus ecosystem, the value that it drives, the performance that it drives. That's why we're, despite those new participants in the market, we're continuing to look to expand that campus, as I mentioned in my prepared remarks.

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Operator [21]

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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 - Associate [22]

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Paul, I think you mentioned earlier that LA3 construction's been delayed a little bit more. How does that impact your previous outline for 2020 growth as it relates to revenue EBITDA and FFO? Do you still feel comfortable returning to the double digits there?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [23]

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I do, and I don't expect this to be a significant delay, although it's a bit of a disappointment. And let me just be clear, I have a lot of sympathy for these power companies that got to manage these grids, and I'm guessing there's more sensitivity around this today than there was in the past. So I get it, they want to get it right, we want them to get it right. And we're hopefully very close to resolving that and being able to start construction in the first half of this year. So it shouldn't meaningfully move from where we were expecting it in the past, but it could be a quarter or 2, maybe slightly more from what we had previously.

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Aryeh Klein, BMO Capital Markets Equity Research - Associate [24]

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Okay. And then so you mentioned the positives from new logo growth. What are you seeing from existing customers? How are they growing their footprints? And do you still feel confident about that side of the business?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [25]

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It was a little bit lighter in 2018, and I would refer you back to my -- the comments I made earlier about cycles of demand in various areas. I think, we'll see that be better in 2019.

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Operator [26]

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The next question comes from Richard Choe with JPMorgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [27]

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I just want to get a little bit more color. I guess, you have completed projects, pre-stabilized, but completed, in Virginia, New York and D.C. It seems like they've been pre-leased but the commencements haven't kind of come in. Can you give us a little more color on when they will start commencing and when we can see revenue coming from those projects? And I have a follow-up.

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [28]

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Some of them have already commenced and there's revenue in them. Others will commence over this quarter and the next coming quarters. Just want to give you a little bit of detail there, Richard. VA31a is a pure colocation asset, so it doesn't really accommodate scale. And those take a while to lease up, but it's leasing up, frankly, handsomely right now. DC2 was really completed late in December. It had its first tenant signed up earlier this month. And so that's a very new asset. And those colocation assets tend to take -- they're more linear in their lease-up, whereas scale assets tend to be lumpier in their lease-up.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [29]

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And given the development table for 2020 and knowing it's a little early, if you look at the megawatt numbers, they're relatively similar to the amount you're doing in 2019. Should we expect there might be a little bit dropoff in CapEx? But it really seems like the CapEx level going into 2020 should probably be equal to 2019. Would that make sense?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [30]

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Richard, yes, just broadly speaking, if you look at the megawatts for '19, we're looking at delivering about 19 megawatts. And 2020, it's only 12. And so I think keep that in mind, I do believe 2019 would be elevated as compared to where we think 2020 will be, at least as we sit here today. That may change based upon ultimate sales and absorption trends as we kind of work our way through 2019, and obviously we'll provide some detailed color around that as we get closer to the end of this year. But I wouldn't expect it to be higher than what we're expecting for this year. If anything, similar or slightly down based on where we sit today.

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Operator [31]

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Our next question comes from Erik Rasmussen with Stifel.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [32]

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Just kind of back to the scale location. That obviously continues to be challenged. You finished the year with roughly half the amount that you signed last year. So given your guidance for 2019 and the capacity expansion plans you've talked about, would you say 2018 was the trough, and we'll see scale colo higher in 2019? Here, we're just trying to understand comments about new leasing opportunities, given a lot of the construction development plans you guys have. Then I have a follow-up.

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [33]

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So yes. Obviously, our guidance implies very strongly that we expect 2018 to be a trough. And the requirement of increased sales is you have to have capacity to sell, and it has to be the right capacity in the right markets. Our trademark has been, as I mentioned in our comments, that we've been able to accommodate deployments from as small as a cabinet or sometimes even less, all the way up to substantially larger requirements, 8, 9 megawatts and even occasionally a powered shell. We just didn't have anything like that kind of capacity to accommodate those types of opportunities in 2018, but we will in 2019 and continuing further into 2020.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [34]

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Great. And then maybe in terms of your new development in construction projects. At this stage, how conservative do you think your development completion timeline is, the one chart on 19 there. It seems that VA3 did slip to Q2. What were the factors there? And where do you see the major hurdles to hit your overall timeline on that chart?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [35]

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So we try actually, and maybe we've taken the wrong approach to this, but we try to be really straightforward based on the documentation that we have in place. So when we're in the permitting phase, we're going off the adviser's estimates of how long it takes to get permits in a particular jurisdiction. I think, going forward, we're going to categorize that as preconstruction and not be as detailed as -- in terms of when we will get permits, because it is very hard to predict in these markets. And then in terms of construction, we go based on what the delivery date in the construction contract is in terms of when we expect delivery. Now those delivery dates can change based on weather changes, the -- got a certain amount of allowances in contracts, and sometimes, there are unanticipated field conditions that can drive delays. That's primarily what's going on with VA3 in terms of sliding from late in the third quarter to, call it, mid-second quarter is a combination of site conditions and weather conditions in the Virginia market.

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Operator [36]

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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 [37]

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When we met with you guys at NAREIT in, I think, it was early November, it seems like you guys felt pretty good about the pipeline for a scale deal at VA3 and that you're tracking various opportunities. And obviously, you didn't sign anything during the quarter. Curious if those opportunities are still there, if they've gone elsewhere, and if the delayed opening had anything to do with it. Then also, as you look to get that anchor scale deal with VA3, how are you thinking about pricing? I know in the past, you know that pricing has come down. Are you willing to do a deal at what you perceive now as the market clearing price? Or are you going to kind of hold in there until you can get the price that you want?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [38]

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Colby, this is Steve. I'll take a shot at this, and then Paul can chime anything that I might miss here. But I would just tell you as far as the overall pipeline is concerned for preleasing, whether it'd be in Virginia or in the Bay Area, activities still remain strong. We're having multiple conversations and we're still positive with the outlook. As far as any individual deals are concerned, not sure exactly which individual deals were in discussion. But I would tell you that, even customer requirements, especially of that size, move all over the place based off of their dates and when they want them or whether or not they remain a real opportunity. So the overall market in the pipeline still remain strong, and we're optimistic about where we can go with it. As it relates to pricing, we feel like we've underwritten the asset to where we can still absolutely execute against it and meet the returns that we underwrote. The market clearing price, I would say, there's not necessarily a market clearing price. I think, there's a lot of variables that go into what price is in any given market, but maybe especially in Virginia, as to what customers value, whether or not they're willing to pay for it and how much scale they're looking to bring on board. So we feel like, based off of the value, the ecosystem, the scale and size and the level of redundancy that we have built into the asset that we'll be able to meet the market.

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Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [39]

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Great. And then maybe just one for Jeff. You've taken your leverage target up from what has historically been sub-4 and this year, it's 4.5. And in response to, I think, Richard's question, you noted that you expect CapEx next year to be down, but maybe similar. One model would assume that your leverage continues to go up as you go into 2020. Do you assume that you're just going to be taking up your leverage target further? Or are there other actions that you're likely to take?

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

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Colby, those are items that's going to be very dependent upon, ultimately, based upon our EBITDA growth in terms of where that leverage ultimately gets to. But more specifically, to your question, our leverage at 4.5, which we've messaged to, we continue to have those conversations with our board when we meet and assess where we want to take that leverage. But that is one option that we would look at. There are other options that we need to consider based upon maybe factors in terms of the economics out in the marketplace. And so it's one lever we can pull, not the only lever. We just got to evaluate those with our board as we work our way through the year and see how the lease-up is coming and ultimately, the EBITDA growth associated with it.

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Operator [41]

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Our next question is from Frank Louthan with Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [42]

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So going forward, do we -- are we looking for more growth in the sales team? Or is it really just more -- just having some more inventory available to kind of get the sales up? And then can you walk us through some of the rent per square foot, kind of seem to tick up a little bit in the quarter. What's sort of the nature of the mix of those leases that was driving that uptick sequentially?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [43]

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Frank, yes, this is Steve. As it relates to the sales headcount, we had a couple of open positions, a few open positions, I would say, coming out of 2018 that we have now filled a couple of markets. For example, Chicago where we have obviously new building coming onboard where we expect to have better traction there and be prepared for that building coming online. And just adjusting a few heads here and there, but overall, very consistent with where we've been in prior quarters and prior years. So I wouldn't expect any significant changes as far as total number of heads or dollars associated with them. As it relates to the rent and per square footage piece of it, I'll just give you my perspective, and then hand it off to Jeff. But the uplift was primarily driven just from increased density that we saw in the fourth quarter, whereas we saw some of those smaller deals that were also more dense that drove the square footage dollar up in that quarter.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [44]

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Yes. And Frank, the only thing I'd add to that is Steve did make a reference in his prepared remarks that our pricing on a per kilowatt basis was consistent with the trailing 12 month coming into the fourth quarter. And so that gives you a better sense for that density to drive some of that increase on a per square foot basis.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [45]

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All right. And how do you see that going forward? Is that just sort of an anomaly in the quarter? Or due to the fact you had a little bit more the smaller deals versus some larger hyperscale deals? Or you think you're able to take that density advantage going forward and drive some higher rents as we look out in our models?

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

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I think, it is pretty variable. I think, we've seen it over time that densities have crept up. So I think that trend will probably continue. I think, Q4 was probably a little bit higher or elevated, primarily because of the fact that we had just such concentration in retail and of smaller deployments. But I think in that segment, and even in the scaled segment, you're seeing density creep up a little bit.

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Operator [47]

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

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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Maybe for Steve and tying in some comments that Paul had made earlier as well. But when you look at your completed pre-stabilized project, the nearly 150,000 square feet, it sounds like a large portion of that is not really colo scale available. So I was kind of curious what the percentage of that portfolio is kind of leasable for scale colo? And then compare and contrast that to kind of what's under construction to the full out development pipeline, is all of that colo scale available? And then the third part of that question, just to be more confusing, is the 5,000 square feet that you use for the bottom of the scale colo portion of your business, is that too small? And is it just the scale colo today for you needing to be substantially larger than kind of that low end of the bar?

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

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Yes. I'll give you a little bit of color on the scale versus retail. We don't necessarily break it out as far as which sites are specifically suited one for the other. But I would say, in general, Paul kind of mapped this out earlier in his comments around our initial phase of VA3, which is primarily geared towards colo, the DC2 facility, which recently came online as more colo-oriented. Obviously, the LA1, 15th floor that we'll be building out this year, will be more colo-oriented. As you look to our newer build it's probably easier to look at them as being able to accommodate either retail or scale or wholesale, just in the modular fashion, and you have a fresh floor plate that you can grow from. So I think as you look at the next phase of VA3, for example, SV8, LA3, CH2, those are all able to accommodate both retail and scale or hyperscale.

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [50]

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Dave, this is Paul. I just -- I would point you to Page 13 of the supplemental. And I think you can kind of get the picture that it's a combination of tight occupancies and the market spread of where we had capacity, like Santa Clara 97.3% occupied. I think, you can easily interpret what that means for the ability to handle scale there. NY2, 77% occupied. More capacity to handle scale, but a less strong market. And that -- I think that sort of illustrates the dynamic that we've been working through in 2018, and we'll be solving in 2019.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [51]

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Great. And then maybe a second question. I don't know if Jeff or Steve, but with regard to the interconnect business, do you have any additional color, clarity, commentary around the switching to larger -- switching gear of the customers? And maybe any impact that you're able to kind of see now as we've gotten deeper into that process?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [52]

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Yes, Dave. I would just add that we saw, obviously, some of that occurring in 2018. I would say it moderated in the fourth quarter. What that looks like going forward is, obviously, we have estimates associated with it, and we'll continue to monitor customer movement and/or changes as we work through the year. But I can't put a number on it for you, but it is -- we did see it moderate in the fourth quarter.

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Operator [53]

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Our next question comes from Nate Crossett with Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [54]

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How do you guys think about landholdings in the long term? Obviously, your product is dependent on having good locations and a lot of the markets you are in are tighter markets in terms of available supply. So how should we think about how you're positioning the land bank for the longer term? And maybe are there any new markets that are potentially on the table?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [55]

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Good question, Nate, about land bank. And I think the new parcel we put on the contract in Santa Clara illustrates our approach, that we -- as we said the last several quarters, we need to be more proactive than we have been in the past about acquiring, entitling and getting shovel-ready land for expansion in key markets. And so we had a rush to get the SV8 land, the CH2 land and the VA3 land in position to develop it, to acquire and put it -- get it in a position to develop. And we don't want to fall short like that again in the future, so we are active in all of our major markets to look for additional opportunities to expand. Land availability, property availability in these markets is -- the supply can be somewhat ephemeral, so you have to be in the market all that time, looking for it, working on it, striving for off-market deals when you can and making them work in terms of connectivity and power and proximity. So again, look at the new land we have under contract in Santa Clara as an example of that. I apologize, I forgot the second half of your question.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [56]

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Are there any new markets that could be on the table? And maybe just your thoughts on U.S., like, are you always going to be only U.S.? Or are you open to expanding kind of internationally?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [57]

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So let me try to answer it this way. When we sit down with our major customers, really all the way down to the top 20 or 30 customers, the primary thing they value about us is that we keep expanding in these infill edge markets where we exist. Because they have tremendous needs, they foresee significant needs there in the future and they realize it is hard to proactively expand in those markets. That doesn't preclude us from going into other markets when we can find the right conditions. And believe it or not, we do consistently look at opportunities, but we just haven't found the right ones. I think, that would be more of a domestic thing, if and when it happens. International may happen in the future. I wouldn't rule it out, but it's not something that we're focused on at this time.

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Operator [58]

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Our next question is from Michael Funk with Bank of America.

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

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Just a few for you, if you could. The first, you mentioned earlier the waves and cycles in the industry. Just curious how your thinking our positioning in CoreSite, so call it, skate to where the puck is going strategically based on where you see the market. A second part of the question, somebody asked earlier how you're feeling about kind of scale of demand in general. I guess, to phrase it slightly differently, versus where you stood beginning of 2018, do you feel better or worse about the scale of demand? And then finally, the last piece of the question would be any kind of commentary on build cost? And what you're seeing there on an absolute basis. And then just trajectory, too.

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [60]

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Okay. Thanks, Michael. I would say, we feel just as good about secular long term and intermediate term, and really even short-term demand, today as we did at the beginning of 2018. Using your hockey analogy, we just want to camp out in front of the goal, because we know that's where all the pucks ultimately end up. And having capacity in major metro infill markets, that is crucial for low-latency, high-performance applications for consumers and businesses and as well as the Internet peering points is a core part of our strategy. And it served us very well so far, and we feel -- we still feel very good about that. In terms of build costs, I think, they have come up, obviously, a little bit more, I would say, than general overall inflation over the last couple of years. It varies significantly market-to-market. Labor costs are probably the most variable dynamic. Our design team does -- puts a lot of work into -- not constantly, but regularly updating our designs to create a more efficient and cost-effective way to build to offset some of those costs. Our construction management team works very hard to keep them in line, and our equipment procurement team consistently works through our supply chain to try to offset some of that. But you're still seeing some construction cost inflation.

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Operator [61]

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Our next question comes from Lukas Hartwich with Green Street Advisors.

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Lukas Michael Hartwich, Green Street Advisors, LLC, Research Division - Senior Analyst [62]

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Given the comments that leasing was held back by a lack of contiguous space, can you provide a little more color on frictional vacancy for the current portfolio?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [63]

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I'm sorry, on what vacancy?

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

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Frictional. Is there -- I think, you're in the low 90s right now. Is there -- is that kind of a natural state? It's hard to get above that, given the lack of contiguous space?

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [65]

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I mean, really again, I'd go back to the -- my response and earlier comment. It really varies by market, but yes, there are markets where we're so tight in the -- or buildings that were so tight that -- and I think when you get above 91%, 92%, you see this a lot more where you just don't have those contiguous spaces where you can handle 1 megawatt deployment, much less 2, 3, 4 megawatts.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [66]

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The only thing I would add to that is that I think our model does lend itself in some cases to tighten that up on occasion because we do sell smaller deployments that in the right floor plate will allow us to fill that in tighter with smaller deployments whether they're networks, smaller enterprises or the otherwise. So I think our model as opposed to being just being focused on hyperscale or either you have it or you don't, that's another reason why we focus on trying to bring in more logos and get more diversity across our installed base so that we can fill in some of those other pockets.

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Operator [67]

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Our next question comes from Robert Gutman with Guggenheim Securities.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [68]

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So coming into 4Q, you'd expected, I think, 100 basis points of churn, extraordinary churn, from the customer of that churn, about 70 basis points in the prior quarter. Net-net, the churn came in a little lower sequentially. And I'm looking at guidance, which is 6% to 8% for 2019. I think, you prior said 2% to 2.5% per quarter through '19, which will be 8% to 10%. So how -- what's the color there on how your perspective on churn has changed? Secondly, if you can provide the number for new logos, which I think we have from prior quarters. And I have one follow-up.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [69]

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Rob, I saw your note this morning, so I appreciate you raising the question. Just to give you some color on the fourth quarter, first of all, as Steve alluded to, our churn in the fourth quarter was better than anticipated. We had a good outcome ultimately with the customer we were renewing in the fourth quarter and while they did churn some level of their space, it wasn't as high as what we anticipated. So I think overall, that was good news. In terms of 2019, the commentary I provided last quarter, which is consistent with where we sit today is that in -- we would expect elevated churn from somewhere between 2% to 2.5% in each of the 2 first quarters, so just the first half of the year. Second half of the year, we would expect that to be returning back to the normal levels. So just factor that in, that should explain your question related to the guidance for the year. Does that make sense?

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [70]

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Yes, yes. That's great. And about the new logos? Number of new logos?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [71]

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What was the question around the number?

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

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I think, we had a number, it was 27, 28 in the prior quarters. What was the number of new logos for the fourth quarter?

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [73]

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Yes. It was 32 this last quarter.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [74]

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Great. And the last thing is that with PC2 coming on at the end of the fourth quarter, I -- rental expense was pretty flat quarter-over-quarter. Should we expect that to be higher in the first quarter, and then the impact -- your view on EBITDA margin through the year.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [75]

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Yes. Great point, Robert. The DC2 did come online very late in the fourth quarter. And so you will see an uptick here in the first quarter associated with that rent for that particular data center. And in terms of the adjusted EBITDA margins, if you look at our guidance, you can see that it's very flat compared to where we ended 2018. I think, the implied EBITDA margin is at 54.4%, right in line with where we did 2018.

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Operator [76]

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Our next question is from Jordan Sadler with KeyBanc.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [77]

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Just a quick follow-up on the revenue growth guidance of 7.5%, Jeff, the total operating revenues. Do you have a breakdown of rental revenue versus power revenue growth?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [78]

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I don't, Jordan. What I would utilize, though, you can see whether those percentages came out for the full year of 2018. I would use that same pro-rata allocation as you look at your estimates for 2019. I don't think those are going to be moving meaningfully.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [79]

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Okay. So a similar split, I think -- I had rental revenues were up 11% versus 17% for power, something like that. So a similar, yes, spread. Okay.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [80]

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Yes, I think that's fair.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [81]

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Okay. And then I was just coming back to the interconnection question. It sounds like maybe that cycle of equipment upgrades may be slowing a little bit. I'm not sure if I read that correctly in your commentary. But what does longer-term growth look like in terms of interconnection revenue in your minds, sort of 3- to 5-year?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [82]

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Just maybe to clarify as it relates to some of the items that were impacting churn for -- the interconnection growth -- I'm sorry, in 2018. We alluded to some of the consolidation taking place inside the portfolio as one aspect of it. The second being some of the migration from 10-gig to 100-gig. And now, on the second -- the migration, there's only a minority of customers that, that really is applicable to. And so it's hard for us to ultimately forecast when it makes sense from their perspective based on the volume of traffic they're moving through those switches. It is something that we watch and try to make estimates on. I don't know if it's going to moderate for next year or not, but it's something we continue to watch. But just keep in mind, I think it really is only applicable to a minority of our customers that we have in base today. And then I've missed the last part of the question, your second part.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [83]

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I guess, I'm just thinking, like, what does organic growth look for -- look like in the interconnection business, 3 years or whatever, as opposed -- because you've seen this 200 bps -- I don't know, are we moderating by 200 basis points a year for the next 3 years? Or are we going to level off here at 8%? Is that -- I guess, sort of -- and I don't know if you can break that down between price and volume. I mean, is price stable in cross-connects? Or are the SDNs eroding price?

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [84]

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Yes. No, that's a great question, and that's an area that we continue to focus and put a lot of energy into in terms of evaluating how best to monetize the value of the ecosystem that's there today and how to balance that with customer expectations. And as Steve alluded to, we're looking at various products that might enhance that. We're going to continue looking at it. I wish I could give you a definitive number on where that hits. Clearly, we would like to see it moderate rather than continuing to decline. And we've got to figure out ways to make sure that happens.

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Steven J. Smith, CoreSite Realty Corporation - Chief Revenue Officer [85]

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The only thing I'd tell you, Jonathan, is if you look at just the broader industry and technology as a whole, interconnection is not reducing. It's accelerating, if anything. So the amount of interconnected things out there just continues to grow. And so I think that provides a good opportunity for the industry and for us as well on how we monetize that. We have physical versus logical interconnection, I think, is playing out as we speak. And that's why we made some of the investments around the OCX and providing additional capabilities there. But I guess, to answer maybe an embedded question that you had there around SDN eroding any pricing around fiscal cross-connects, we have not seen that as of yet.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [86]

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Jordan, one more thing I'd add as you think about longer-term growth and that is I do believe that the interconnection revenue growth is fairly correlated to the volume of kilowatts we're selling and the type of deployments that we are selling. And so keep that in mind as you think about the growth in the outer years. I do think it's a little bit -- it's more correlated with the volume of kilowatts that we're selling.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [87]

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That's fair. And no erosion in prices kind of what I heard on the physical cross-connects.

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Jeffrey S. Finnin, CoreSite Realty Corporation - CFO [88]

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I think that's accurate.

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Operator [89]

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Ladies and gentlemen, we reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Paul Szurek for closing comments.

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Paul E. Szurek, CoreSite Realty Corporation - President, CEO & Director [90]

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First, thank you all for being on the call. Appreciate the interest and the good questions. One of the -- I forget which one of you, and I apologize for that, but one of the analyst reports that came out overnight mentioned that they were glad to have 2018 behind us and for CoreSite. And I certainly appreciate that sentiment because it has been a year of transition from using up the native capacity that we had since IPO and moving into a new development phase of the company. I honestly feel very good about what the team accomplished in 2018, and I'm not referring to myself. I probably have a longer list than any of you guys of things that I could have done better. But the people that I work with here had a really remarkable 2018 in terms of putting together the building blocks for future growth. From the construction progress that we made, the new land that we've entitled and started into the permitting and development process, the operational excellence and the high levels that we achieved in that and frankly, greater efficiencies, the better power efficiency and there are a lot of other smaller building blocks throughout the organization in terms of IT and other areas that are really going to collectively be important as we go forward. So it was -- from the outside, it was a year of a lot of work, a lot of grinding work, but I feel good about what the team accomplished and I'm very excited as we move forward into 2019 and beyond. So thank you very much for your interest, and we'll talk to you next quarter.

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Operator [91]

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This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.