American Tower Corp (AMT) — Q3 2017 Earnings Call Transcript

Thank you. Good morning, and welcome to CoreSite's Third Quarter 2017 Earnings Conference Call. I'm joined here today by Paul Szurek, President and CEO; Steve Smith, Senior Vice President, Sales and Marketing; and Jeff Finnin, Chief Financial Officer. Before we begin, I would like to remind everyone that our remarks on today's call may include forward-looking statements as defined by Federal Securities Laws, including statements addressing projections, plans or future expectations. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. We assume no obligation to update these forward-looking statements and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our 2016 Form 10-K and other filings with the SEC. Also, on this conference call, we refer to certain non-GAAP financial measures, such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com. And now, I'll turn the call over to Paul.

Good morning, and thank you for taking the time to join us today. I'm glad to share our third quarter results and to update you on our near-term plans and the current state of our market. CoreSite delivered strong third quarter results. Revenue, adjusted EBITDA and FFO grew 22%, 25% and 22% year-over-year, respectively, driven by continued customer expansion across the portfolio and a focus on good execution throughout the organization. Last month marked the seventh anniversary of our IPO on the New York Stock Exchange, and I couldn't be more pleased with the CoreSite team and its accomplishments since then. We have remained committed to a focused strategy and have distinguished our hybrid model, expanding our network and cloud-anchored campus model to a substantial majority of our market. We are generally best positioned to provide our customers with access to low latency interconnection-rich network nodes complemented by flexible and scalable purpose-built data centers that can accommodate both higher density workloads and the customer ecosystem emerging in major metro markets. Since IPO, we have more than tripled revenues almost entirely through organic growth while prudently deploying capital at a pace and at a return that have allowed us to remain one of the lowest levered REITs. We continue to believe our business model will support future growth and create a compelling value proposition for our current and future customers. Moving on to third quarter sales performance. We signed new and expansion leases of $10.1 million in annualized GAAP rent. Q3 leasing volume included an incremental expansion of a strategic customer at LA2. This customer is utilizing its colocation space with us to support multiple applications that require low latency and interconnection density combined with a reasonable total cost of ownership. This deployment illustrates how the value of our campus model continues to drive strong expansion demand from existing customers both in their current CoreSite facilities and in our other markets. These organic customer expansions accounted for approximately 94% of annualized GAAP rent signed in Q3 and 85% of GAAP rent signed since December 31, 2014. In addition to this organic growth, in the third quarter, we added 24 new logos to our customer base. We have been redirecting our new logo efforts consistent with the market turn towards hybrid cloud and multi-cloud architecture focusing on the enterprises and enablers most attracted to that model and most likely to contribute to the customer ecosystem. We are pleased with these efforts so far. These types of customers generally increase their requirements over time becoming additional contributors to our organic growth. I expect our new logo generation to increase as our modified sales and marketing efforts gain additional traction. We believe our markets are generally in balance or close to it in terms of supply and demand. We are therefore focused on ensuring we have adequate capacity in key markets to continue to meet customer needs for differentiated turnkey data center capacity. We currently have a solid pipeline of projects in planning, entitlement and construction with nearly 220,000 square feet of capacity in various stages of development across the portfolio. We look forward to 2018 during which we expect to set up our company for its next phase of growth, including expected construction commencement on SV8 and LA3 and our ongoing expansion in Reston. These three projects, cumulatively representing nearly 415,000 square feet of incremental TKD capacity, provide significant runway as we look to 2019 and beyond in three of our largest markets. In addition, we are opportunistically looking for additional land and/or capacity in Denver and Chicago. Looking more specifically at our individual markets. In Los Angeles, we are on track with our development projects at LA2 and expect to deliver 87,000 square feet of turnkey data center capacity in the first quarter of 2018. Due to existing customer growth and new customers, the total expansion capacity under construction at LA2 is now 43% preleased. We continue to work through entitlement, permitting and design work for LA3. Pending any unforeseen delays, we expect to commence construction in the first half of 2018. In terms of the market overall, pricing has softened slightly due to additional capacity created by churn at sites owned by others, but we view that as temporary. In the Bay Area, occupancy levels remain elevated across the market, while pricing is moderately down due to incremental supply from other developers but still ahead of historical norms. Across our Santa Clara campus, we have approximately 56,000 square feet available at the end of Q3. We are in the design process for SV8 and anticipate filing for permits in the coming weeks, which should enable us to start construction in the first half of 2018. Northern Virginia and DC still see strong demand though the market remains competitive with new supply primarily in Loudoun County and Manassas. Occupancy rates are high, but the amount of new supply has resulted in modestly more competitive pricing in this market. We anticipate delivering 3,000 square feet of turnkey data center capacity at VA1 in the fourth quarter as well as a 25,000 square foot first phase of turnkey capacity at VA3. We have begun site work at VA3 for an 80,000 square foot data center building, which, at full build-out, will have a capacity of 12 megawatts plus a 77,000 square foot centralized infrastructure building to serve the entire VA3 property. We will build out the first 50% of this new data center building as Phase 1B. Other site work ongoing will enable an ultimate VA3 capacity of 611,000 to 897,000 square feet of new data center space, depending on final zoning rules. We continue to have good discussions with current and prospective customers in this market regarding their growth needs and remain encouraged by the pipeline for pre-leasing opportunities at VA3. In Denver, we completed the first phase of expansion at DE1 and placed into service 8,200 square feet of turnkey capacity, which was 42% leased and 35% occupied. We continue to enhance the value of the ecosystem as our Denver campus is now the site of the first native on-ramp for a leading public cloud provider serving the U.S. Mountain region. With supply across the market still constrained, in Q3, we began construction of the final phase of expansion at DE1 with 15,600 square feet of turnkey capacity, which we estimate completing in the third quarter of 2018. In closing, we are pleased with our third quarter results, our development activities supporting future growth and our efforts to increase market share in the hybrid and multi-cloud space. We believe that our differentiated business model and ownership strategy focusing on scalable, flexible, network and cloud dense data centers in infill locations of large-edge markets where the data community has a high level of interaction and interdependence will enable us to continue to prosper on behalf of our shareholders. With that, I will turn the call over to Steve.

Thanks, Paul. I'll begin by reviewing our overall new and expansion sales activity during the third quarter and then discuss in more detail our vertical and geographic results. During the quarter, we signed 103 new and expansion leases, totaling $10.1 million in annualized GAAP rent comprised of 41,000 net rentable square feet and an average GAAP rate of $247 per square foot. There are a few dynamics impacting the Q3 rate, including higher average density, which was almost 40% above the trailing 12-month average. Related, we had somewhat of a unique situation with a full room enterprise customer in Santa Clara that contracted for additional power without adding incremental square footage, resulting in the above average density. We saw good traction this quarter as it relates to new logos signed with enterprise customers accounting for 75% of annualized GAAP rent signed for new logos. These customers included a regional credit union, which deployed with us in two markets; a network pop with the largest social media provider in China; a Fortune Global 500 Japanese information technology equipment and services company; and a provider of hardware and cloud-based CDN and caching solutions. As Paul mentioned, Q3 leasing was again heavily weighted towards expansions of existing customers, which continues to be a strong source of organic growth for us in existing deployments and in new markets or facilities. During the third quarter, a large public cloud provider expanded with us in New York supporting its dipole node and access to its cloud onramp. Second, a large cloud application and platform services company expanded with us in Chicago with a new backbone pop deployed to support its cloud computing services. Lastly, a leading enterprise cloud provider expanded with us in Northern Virginia to support multi-cloud service offerings to its customers. Both the organic growth from our embedded base and the incremental growth from our new logos that are attracted to the high level of interaction with our ecosystem continue to drive better-than-expected performance for our interconnection products and services. In Q3, interconnection revenue grew 21% year-over-year, reflecting total volume growth of 13%, including 70% from fiber cross connects. Year-to-date, interconnection revenue increased 18%. With respect to the vertical mix within our ecosystem, during Q3, network and cloud customers accounted for 12% and 14%, respectively, of annualized GAAP rent signed. The network vertical continued to perform well in Q3 with solid growth from existing customers driving activity in the quarter. We signed 4 new network logos in Q3, including a global satellite connectivity solutions provider and an international fiber to the home network developer. Network demand from existing customers remains healthy with a number of expansions across nearly all of our markets, including the sizable expansion of a subsidiary of an international telecom provider in the Bay Area to support its end customers' growth in the U.S. Turning to the cloud vertical. As I mentioned previously, we saw good growth from existing cloud customers that are expanding with us in Q3 to support growth in their respective products and services. We signed 5 new logos, including a global cloud hosting provider, a leader in software-defined infrastructure and a network visibility and traffic monitoring technology provider. As it relates to our enterprise vertical, this vertical accounted for 74% of annualized GAAP rent signed in the third quarter. Looking more specifically at Q3. In addition to the expansion with our strategic digital content enterprise customer in Los Angeles, we signed expansions with a leading e-commerce retailer of home goods, a leading e-health care provider, a multinational mass media and entertainment conglomerate and a sports broadcasting organization. We continue to believe our highly interconnected network-dense data center campuses provide the optimal mix of connectivity, low latency, and scalability to attract this key customer demographic. From a geographic perspective, our strongest markets in terms of annualized GAAP rent signed in new and expansion leases during Q3 were Silicon Valley, Los Angeles, and New York/New Jersey, collectively representing 85% of annualized GAAP rent signed in the quarter. Strength in Bay Area leasing was led by the power expansion in Santa Clara, which I discussed earlier. Above and beyond that specific lease, performance was driven by the cloud and enterprise verticals followed by network service providers. We have also seen increasing interest from the autonomous vehicle sector in the Bay Area market and continue to see the enterprise vertical representing the demand for larger requirements. Demand in Los Angeles was again impacted by the expansion of a strategic content customer, which Paul highlighted earlier. Apart from that specific lease, digital media entertainment continues to be a reliable source of demand for us, where we continue to see steady network growth with 3 new networks added to the Los Angeles ecosystem. The positive trajectory continued in the New York/New Jersey market in Q3 with performance led by cloud growth. In addition, we see increasing activity among the financial services vertical while the health care vertical is also increasingly common in the funnel. Sales of square footage sold both increased again this quarter with leasing at NY1 the main driver. In October, we received notification from the Virginia Economic Development Partnership authority that CoreSite successfully achieved the targets set forth for capital investment and new jobs creation in order to qualify for the sales and use tax exemption for the purchase or lease of qualifying computer equipment and enabling software by data centers and their customers. CoreSite is the first and only data center provider to qualify in Fairfax County, and we believe this is an important differentiator and benefit to our customers. We can continue to include additional current and future CoreSite data center customers as participants in the programs, sales and use tax savings program through June 30, 2035. Over the last six quarters, a significant amount of our leasing activity has been focused on the necessary building blocks to support our customer ecosystem and future growth by attracting key networks, cloud service providers, and enterprises with similar anchor tenant characteristics which promote the robust exchange of traffic within our facilities and interdependence among our customers. As we build a critical mass of such customers, we will focus more sales resources towards attracting new logos that complement and exchange data with these core customers. In summary, the third quarter sales results demonstrate the effectiveness of our strategy and business model, and we will continue to work to attract valuable new customers and applications to our data centers. I will now turn the call over to Jeff.

Thanks, Steve, and hello, everyone. My remarks today will begin with a review of our Q3 financial results followed by an update of our development CapEx and our leverage and liquidity capacity. Q3 financial performance resulted in total operating revenues of $123.1 million, a 4.4% increase on a sequential quarter basis and a 21.5% increase year-over-year. Operating revenue consisted of $101.8 million in rental and power revenue from data center operations, up 4.6% on a sequential quarter basis and 22.5% year-over-year. Interconnection services revenue contributed $16.2 million to operating revenues, an increase of 5.7% on a sequential quarter basis and 21.1% year-over-year. Tenant reimbursement and other revenues were $2.2 million. Office and light industrial revenue was $2.9 million. Q3 FFO was $1.10 per diluted share and unit, flat on a sequential quarter basis and an increase of 22.2% year-over-year. The quarter included a couple of items worth highlighting and the first is a benefit of approximately $0.03 per share related to real estate tax true-ups at some of our facilities in the Bay Area. In addition, during the third quarter, we saw elevated repairs and maintenance expenses across the portfolio primarily for chiller repairs and upgrades which amounted to approximately $0.02 per share. We also experienced increased expenses in Miami related to Hurricane Irma, which amounted to approximately $0.01 per share. Related to Hurricane Irma, we want to personally thank our team for their efforts in serving our customers and keeping our Miami data center up and running throughout the storm and its aftermath. Looking forward into Q4. I want to emphasize that we expect to invest approximately $8 million to $10 million of recurring capital associated with the chiller plant replacement and upgrade at LA2 and, therefore, we expect AFFO to decrease sequentially. Please remember that we expect a strong return subsequent to this investment with increased energy efficiency. Returning to Q3. Adjusted EBITDA of $65.3 million increased 0.7% on a sequential quarter basis and 25.2% over the same quarter last year. We continued to expand our margins with our adjusted EBITDA margin expanding to 54.7% as measured over the trailing four quarters ending with and including Q3 2017. This represents an increase of 230 basis points over the comparable year-ago period. Related, trailing 12-month revenue flow-through to adjusted EBITDA and FFO was 65% and 54%, respectively. Sales and marketing expenses in Q3 totaled $4.6 million or 3.8% of total operating revenues, down 60 basis points year-over-year. General and administrative expenses were $9.8 million or 7.9% of total operating revenues, a decrease of 140 basis points year-over-year. For the full year, we expect G&A expense to be approximately 7.5% of total operating revenues, in line with the year-to-date level. Now turning to our same-store metrics. Q3 same-store turnkey data center occupancy decreased 20 basis points to 90.3% compared to Q3 2016. Additionally, same-store monthly recurring revenue per cabinet equivalent increased 6.1% year-over-year and 2.2% sequentially to $1,503. Turning to renewals. In Q3, we renewed approximately 81,000 total square feet at an annualized GAAP rate of $178 per square foot. Our renewal pricing reflects mark-to-market growth of 5.5% on a cash basis and 10.9% on a GAAP basis. Churn in the third quarter was 1.4%. We commenced 22,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $410 per square foot, which represents $8.9 million of annualized GAAP rent. As previously mentioned, the density increase in the Bay Area elevated the commencement rate in Q3. We ended the quarter with our stabilized data center occupancy at 93.4%, a decrease of 40 basis points compared to the prior quarter. We completed 8,300 square feet at DE1 and this capacity was placed into the pre-stabilized pool at 35.2% occupancy. Turning now to backlog. Projected annualized GAAP rent from signed but not yet commenced leases was $13.7 million as of September 30, 2017. On a cash basis, our backlog was $20.1 million. We expect approximately 35% of the GAAP backlog to commence during the remainder of 2017 with the balance expected to commence during the first half of 2018. As Paul mentioned, we have a total of nearly 220,000 square feet of turnkey data center capacity in various stages of development. This includes new construction and expansion projects in Northern Virginia; Washington, D.C.; Los Angeles; Denver; and Boston. As of the end of the third quarter, we had invested $62.3 million of the estimated $217.1 million required to complete these projects. We have now included the expansion opportunities associated with the future development of both SV8 and LA3 to our held for development summary, which is reflected on Page 19 of the earnings supplemental. The percentage of interest capitalized in Q3 was 11.5% and the year-to-date amount is 11.3%. For 2017, we continue to expect the percentage of interest capitalized to be in the range of 10% to 15%. Turning to our balance sheet. As of September 30, 2017, our ratio of net principle debt to Q3 annualized adjusted EBITDA was 3.0x. Including preferred stock, the ratio was 3.5x. As of the end of the third quarter, we had $332 million of total liquidity consisting of available cash and capacity on our revolving credit facility. As we announced on October 16, we intend to redeem all 4.6 million outstanding shares of our 7.25% Series A cumulative redeemable preferred stock with a redemption date on December 12, 2017, for a total of $116.3 million, including accrued dividends. We believe this transaction will result in significant savings and earnings accretion for shareholders of approximately $0.06 to $0.08 per share in 2018. We expect to utilize the credit facility to redeem the preferred shares and we anticipate the need for additional debt financing during the first half of 2018 to further increase our liquidity. Timing, pricing, and the type of debt instrument are dependent on market conditions, and we've targeted a total issuance amount of $225 million to $300 million while maintaining a healthy balance between our fixed and variable price debt. This additional liquidity can be utilized to fund continued development across the portfolio. And looking into 2018, we currently expect our total capital investment to be between $250 million and $300 million. Finally, as you begin thinking about your models and 2018 estimates, keep in mind that we are planning to adopt two new accounting standards, revenue recognition and lease accounting, effective January 1, 2018. The adoption of these new standards predominantly impacts us in three ways, all of which have been disclosed in our previously filed financial statements in 2017. First, related to the balance sheet, it will require us to gross up our balance sheet by $100 million to $300 million to reflect the estimated lease liability for the properties we lease from third parties. Second, depending upon the quantification of the balance sheet impact, it may increase our rental expense to reflect increased levels of lease expense included in current lease terms. This will likely range from $0.00 to $0.07 per share. Third, we will no longer capitalize indirect sales and marketing payroll cost associated with successful leasing. This has a negative impact of $0.03 per share. All in all, we anticipate this will have an impact of $0.03 to $0.10 per share and is more fully explained on our public filings with our Q3 Form 10-Q expected to be filed tomorrow. Now we'd like to open the call to questions. Operator?

Maybe, Steve, just wanted to start with the leasing activity in the quarter. It seems like it was maybe just a little bit slower than the pace you've been moving at, and I wanted to know if that ties in all your comments that you had made about setting the groundwork for the right tenants to come in. So I guess the two questions, to shorten it up, would be, did you see any kind of pull back in leasing in the quarter that worried you at all? And the second would be, do we expect leasing to accelerate now that the building blocks are in place or just kind of stay where it's at?

Yes. Thanks, Dave. I guess the short answer is it doesn't provide any concern as to where we are with any slowdown. I think we are being, and continue to be, disciplined about how we're first to marketplace in pricing. So that's a key aspect of this. But as we mentioned in the prerecorded remarks, it's really around how do we target the right tenants, those that are going to value low latency and interconnection. And as we establish those building blocks, to your point, we continue to look to those right logos that will complement that as well as value that, and that continues to be our strategy. So as far as overall volume is concerned, we continue to drive more focus there, and we expect to see those results to increase.

Okay, great. And then, Jeff, you did mention on the balance sheet up to maybe $300 million of issuance in the first half of next year. Have you thought more about the public fund market in terms of that being a new option for you given the sizing of the transaction you talked about?

Obviously, the public bond market is always an option, and we watch that market and that pricing closely. Having said that, you saw the recent execution actually that was just priced yesterday by one of our peers in the public bond market. And I think that data point, together with some of the other data we see in terms of trading pricing of some of the other public bond issuers, is something we'll take into consideration. But I think we're able to get better pricing in the private market today. At least we were last April when we went out, last test of the market, we hope that's the same as we again look at trying to do something again in the first half of '18 but is something we'll have to watch closely.

Lastly for me, you talked about added power revenues or added power density at existing leases in the quarter. One, do we see more of that coming in the future; but two, also, how much of an impact did that have in the third quarter, and is there any additional carryover into the fourth quarter as well?

Yes, as far as power densities are concerned, we do see some applications that are requiring higher density overall. We feel that that's fairly consistent quarter-over-quarter, though. So I think as equipment and customers get better utilizing their power as well as gear gets more efficient in using that power, you'll see that climb up a bit over time. But nothing dramatic that we've seen, just a continued march towards that better utilization.

And Dave, the only other data point I'd give you if you just take a longer look at what's happened to density, just call it, over maybe the last two years, you have seen an increase in overall power densities across at least our portfolio. But this quarter was even higher than what we've seen there. That's obviously why Steve wanted to point it out in the prepared remarks.

I wanted to follow up on the development and sort of the positioning again for '18 and the sort of next phase of growth. So you've added LA3 and SV8 to the new development schedule and, obviously, Reston is underway. Can you just talk a little bit about the return expectations there vis-à-vis sort of maybe commodity space versus what you've historically been able to generate on sort of more network dense facilities?

Jordan, this is Paul. We view these investments as having the same potential returns that we have always historically targeted. And as you know, that is based upon the fact that our space is not commodity space but leverages off our network nodes and our model of providing scalable higher density capacity, more efficient capacity close to, i.e., interconnected to our network nodes. So I view these as continuations of our historical development strategy and return targets.

That's helpful. However, I've noticed the scale of some of these new investments is clearly related to you leasing a significant portion of the existing portfolio. We've discussed avoiding the J curve and possibly signing substantial leases upfront. It seems there is real competition to attract those larger, anchor customers you have traditionally targeted. Will you be able to maintain pricing for those larger requirements?

Consistent with historical practice, I believe so. The preleasing activity really heats up right around the time that you break ground for your vertical buildings. We expect the same here. And historically, a lot of our pre-leasing has just come from customers who need to expand in place in our existing campuses, and we see a lot of those same trends continuing with these projects which is why we're excited about moving forward with them.

I would like to note that as we develop these projects, we are not only considering the scale of each project but also the underwriting aspects. We have taken into account the necessary pricing to launch them effectively and achieve the expected returns. Therefore, we believe we are in a strong position to compete and generate the returns we aim for.

Last one. As we ramp these developments a little bit more, especially the initial phases, I think you talked about first half of '18 for SV8 and LA3, should we anticipate that the CapEx spend for next year would ramp up a bit above the levels we're seeing this year?

Yes, Jordan. I think today we have guidance for this year in the range of $250 million to $290 million, with a midpoint of $270 million. In the prepared remarks, I highlighted our expectation for CapEx in 2018 to be about $250 million to $300 million. So at the midpoint, it aligns closely with what we expect to spend in 2017.

I wanted to ask about the renewal spreads and the positive trends you're observing. Are these trends widespread or do they vary? Are they associated with shorter-term contracts? Are you also noticing an increase in longer-term full sale deals as they come up for renewal? Additionally, regarding interconnection, what factors do you see driving growth in that area? Is it primarily businesses connecting within the same campus or data hall, or is it related to cloud services or more carriers utilizing your sites?

Jonathan, it's Jeff. I would like to provide some additional commentary before handing it over to Steve for more details. I want to remind everyone that at the beginning of the year, we indicated our expectation that our cash mark-to-market would remain fairly flat or at the lower end of our range during the first half, with an increase anticipated in the second half. Based on our third quarter results, everything is in line with what we expected, so we weren't caught off guard. I just wanted to emphasize this to ensure everyone understands our expectations for the year. Steve will share more insights related to your other questions.

Yes, Jonathan. As far as renewal spreads are concerned, it is a cause and focus for us to ensure that we are maximizing the opportunity there but also being fair to our customers, and we feel like we strike that balance. We do have a fair amount of customers that came due this year that we were successful in marking to market, so we continue to look at those individually. And as we also have constrained space to make sure that we're getting the most return out of the space available. So that continues to be a focus for us. But overall, we seem to be in balance with where market conditions are. And also, as you look at the churn, we seem to be striking that balance fairly well. As far as interconnection growth is concerned, the primary factor that we've seen is really in the connection to cloud so we've highlighted that on prior calls and that continues to be the trajectory that we're seeing right now and we look to see that continue in the foreseeable future.

Okay. And then Chicago, you mentioned that, I think, alongside Denver, is a place amongst you're looking for additional location. So in Chicago, is that kind of a campus situation or an additional site downtown? What are you thinking there?

Like most of our peers, when it comes to that type of activity, it's better to talk less until you actually execute something. But I think we've been fairly clear that our business model is based on the campus model, and whatever we do in any city like Chicago or Denver will be consistent with that model.

Okay. And then finally, I'm just interested that you called out the chiller plant investments at LA2. And just at a broader level, can you talk about how frequently one would see the sort of lumpier and more expensive maintenance activities going forward?

I think these situations are quite uncommon. This particular instance arose because we were already expanding LA2 and needed to increase chiller capacity, which allowed us to upgrade all the chillers simultaneously, resulting in significantly improved energy efficiency and substantial savings. It presents a great return on investment. Typically, such opportunities for accelerated replacements in conjunction with new constructions don't arise very often, but in this case, it is very appealing.

Given year-to-date commencements and what is scheduled to begin in the fourth quarter from the backlog, I believe we are getting close to the $30 million you projected for the year. If we assume another steady quarter with additional deals signed and started, and without any significant changes in power revenue and churn, can we reasonably assume that we are aiming for the higher end of the revenue range?

Yes, let me discuss what you're likely seeing, which is our guidance for 2017. As we approach the fourth quarter, we have decided not to alter our guidance for the remainder of the year, considering where we stand. With that in mind, I believe it’s important to note that for operating revenues, adjusted EBITDA, and FFO per share, we will likely be at the higher end of our current guidance ranges. I wanted to provide that additional insight as you consider the fourth quarter.

And just a quick follow-up. So I guess the same thought process applies to the interconnection guidance because it's 13% to 16% and you're already about 18% year-to-date.

Yes. I mean, I think we're just under 18% year-to-date, so we would agree we would be probably at the upper end, probably exceeding the upper end of our guidance range given what we've got out there today.

You've historically reviewed your dividend towards the end of the year. I realize you raised it, I guess, out of order in the second quarter. Is it fair to assume that you're going to still look at it again at year-end this time around? Or are you now in a new schedule for that? And then as it relates to the stabilized square feet, it looks like it was down quarter-over-quarter, I think, for the first time if not ever. I'm just trying to understand what would have been behind that.

So thank you for the question. I believe we mentioned after the last dividend raise that we expected to review the dividend biannually, and I expect that our board will continue to follow that approach.

If that's the case, should we still consider the payout ratio to be somewhat similar? Whatever growth assumptions we have, it remains what it is, but the payout should likely be fairly similar.

I mean, I guess that's a good way to look at it. It's ultimately a board decision, so I can't say any more than that.

And Colby, just related to your second question around the stabilized square feet, that decrease of about 9,000 square feet really just relates to some of the churn that we experienced in the quarter. And the churn that we experienced in that decrease was largely a result of some move-outs we had at Chicago.

Okay. As a quick follow-up regarding the guidance, I understand that the recurring CapEx investment will affect AFFO, and you mentioned that you expect AFFO to be lower quarter-over-quarter. Did you also indicate that this would impact FFO? If so, which line item will reflect that, considering it excludes recurring CapEx?

Yes, the recurring CapEx that we expect to invest in the fourth quarter specifically related to the chiller plant is about $8 million to $10 million. This will only affect AFFO and will not impact our FFO.

Great. So AFFO down quarter-over-quarter but not necessarily the case with FFO?

That's correct.

Regarding the updated disclosed number of interconnections, the 25,000-plus in the supplemental disclosures, could you give us some color on the driving force behind the new cross-connects? And how come things like Megaport, PacketFabric and other software-defined network companies are helping drive interconnection revenue for your company?

Yes, sure. As I mentioned earlier, the primary driver that we see, so far anyway and has been on the trail, has been related to those enterprises that are connecting the cloud as well as network to network. So a lot of enterprises are connecting to both networks and to cloud customers. We do have several SDN providers that are built out within our buildings. One of those is PacketFabric, another is Megaport, as you mentioned. And they are driving some of that interconnection as well. But so far, not a material amount.

And Sami, the only other commentary I would add, and we mentioned this on the last call, and it's fairly consistent again this quarter, Steve touched on this earlier in regards to the interconnections being driven by our cloud providers. That growth rate of those companies connected to cloud providers is probably 2 to 3 times higher than what we're seeing in the fiber cross connect volume, just from a volume perspective, just to give you some perspective on what we're seeing inside the vertical mix.

Got it, got it. And then on the 24 new logos added in the quarter, are these customers coming to colocation as a solution for the first time? Or do they already have colocation solutions deployed and we're just looking to expand with CoreSite?

It's really a mix of that. It is difficult, which is one of the great things about our model, to pull somebody out of an existing colocation provider. So winning those new logos especially as they transition to an outsourced model is a great opportunity for us, which seems to be the primary driver for those new logos but there is some that we win from other providers as well. But I would say, without having the exact numbers in front of me, the majority of those new logos are moving from an existing space that they may already operate to outsourcing to a colocation provider for the first time.

Got it. And then I just have one more question regarding the Miami market. Can we just get an update on what's going on in specifically that part of the U.S.? And have Phoenix, Dallas, or Oregon come up with opportunities that you guys are evaluating? Or you're just sticking to the same campus model that was already in place?

The answer to your second question, we continue to look at other markets where we can deploy a campus model, but we're not looking to enter the race for undifferentiated colocation in any other market. But we do continue to look for new market opportunities.

Yes. With respect to Miami, I do think that provides us an opportunity there. As we've mentioned in prior calls, we had some space that came back to us that gives us the opportunity to lease up again. And with some of the changes in the competitive landscape there, I think it actually gives us a greater opportunity to lease up there as well as access to Latin America and so forth. So we continue to drive more focus there. We're also looking to make some slight improvements to the site there that I think will make it more appealing for customers, so it is a focus for us.

You were mentioning when you were discussing the Virginia Ashburn market just that there was some deployment, and pricing may have gotten a little more competitive there. I was curious if you can just unpack your comment a bit more as to what you're seeing specifically in the competitive environment in that market. And are you starting to see any signals of incremental competition in some of the other major markets in which you operate?

As I mentioned earlier, we don't observe any significant decline in pricing. However, it has been somewhat affected by competition and new developments, likely in the range of 5% to 10%. It's difficult to estimate precisely because products and solutions vary widely. That said, it aligns with how we evaluate our new investments and pre-leased economics, and we feel positive about that. Being the only network node in Reston offers diversity to the Ashburn route and network node, so we don't see as much of that pricing impact. Consequently, I can't provide as much insight into what's happening in Ashburn and Manassas compared to some other companies.

Yes. And Michael, this is Steve. I would just kind of reiterate that point that Virginia has always been very competitive. There's always been a lot of competitors in that market as well as inventory that comes online. The absorption still seems to be holding strong there. But as Paul mentioned, I do think we have a good story to tell there, being a strong interconnection story that's not in Ashburn but still within that net market that provides low latency, scalability but an alternative to Ashburn being in Reston. So we do see even some of the bigger cloud providers that have deployed in the Ashburn market that are looking for an alternative to provide redundancy and other on-ramps, and that's been a good story so far for us.

And one other question. If you total up the development that's in your pipeline right now and measure that historically, how would the size of this development pipeline compare? And are there opportunities to get more aggressive and accelerate the pace of build over the next 12 to 18 months?

I believe that we are significantly above average in total dollars in our development pipeline. But as a percentage of our total assets, probably similar or maybe even slightly ahead than where we've been. But in terms of accelerating it, we've always been glad to accelerate when the market allowed that, and there is some possibility for that in all of these developments, but it's hard to predict the certainty at this time.

Following up on that, how should we think about the timing of the SV8 and L.A. developments along with Reston in terms of next year and the year after?

One of the challenges in predicting the exact timing is related to the advantages of developing in these markets. They present difficulties that create natural barriers to entry. The regulatory framework contributes to this, making it hard to predict when permits will be granted. I provided guidance on when we anticipate these projects will start in my comments and our other materials. Typically, once initiated, our current construction model estimates it will take 9 to 12 months to complete before we begin generating revenue. This is the best estimate we can provide regarding timing at this moment.

Great. And I guess to follow up on the pricing question earlier. It seems like there was a little bit more available space because of churn from competitors in L.A., and it seemed like you kind of held the line on price. Can you give us an idea of how the company thinks about what drives wanting to drive a higher deal versus a lower one versus, I guess, the space you have? Just kind of getting an update on that would be great.

Typically, especially in markets where we are space constrained until new developments come up, we adhere to a very good discipline on pricing and also a customer discipline. So we target that space to those customers that we perceive as being healthier, long-run for the ecosystem, stickier, more likely to grow, generate more cross connects and attract other customers to the ecosystem.

And the only other thing I would add is as we look at the overall absorption rate as well as the competitive dynamics in the market, just trying to align those things to obviously maximize return but also look at, as Paul mentioned, the overall value to the ecosystem, both in terms of rent and power margin but also interconnection and the overall attractiveness that they might bring to other entities that we would want to sell to.

I would like to discuss the pricing situation in this market. What are your thoughts on the pricing strategies of competitors? Do you consider it to be irrational behavior, or do you think it stems from advantages like lower construction costs? How do you perceive this in the current market?

I don't see it as irrational behavior. Instead, I believe people see these markets as strong with solid long-term supply and demand characteristics. Demand is still on the rise currently. However, a lot of new projects have started recently, potentially leading to supply growth outpacing demand growth compared to historical trends. This increase in participants in some of these markets typically results in more competitive pricing.

To provide more insight, it really depends on the market regarding whether additional inventory is being built or if some customers are switching from competitors, prompting them to be more aggressive in filling that gap. Overall, as Paul mentioned, the situation seems quite balanced. At this moment, I don't see any irrational behavior in the market. We just want to ensure we adhere to our strategy, remain disciplined, and so far, that approach appears to be effective.

Thank you. Thanks to everybody on the call for their interest in the company and for the opportunity to answer your questions. I just like to close by thanking my colleagues throughout the company for their excellent efforts, another good quarter. And we very much look forward to the future. We love our business model. We love our team. Our customer communities are understanding and growing in the right way. And the future for us looks very promising.