American Tower Corp (AMT) — Q4 2017 Earnings Call Transcript

Thank you. Good morning, and welcome to CoreSite's fourth 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 statements for a variety of reasons. We assume no obligation to update these forward-looking statements and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our filings with the SEC. Also, on 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 joining us today to discuss our fourth quarter results. I will highlight our 2017 accomplishments, update you on our new developments and briefly comment on our markets. We finished out the year with solid fourth quarter financial results, highlighted by year-over-year revenue, adjusted EBITDA and FFO growth, of 14%, 13%, and 11% respectively, excluding the one-time preferred stock redemption charge. Organic growth was driven primarily by the continued expansion of existing customers and also by new logo growth. We continue to operate our facilities as carrier, cloud and managed services neutral facilities, which attract valuable deployments that drive commerce and interactions among our customers. We executed well on our strategic priorities in 2017 with full year organic revenue growth of 20% and FFO growth of 22%. We took important steps to grow our differentiated, scalable and flexible multi-tenant campus in key markets, including Santa Clara, Northern Virginia, Los Angeles, and most recently, Chicago. 2018 will be a relaunch year for CoreSite with the newest version of our enterprise class multi-tenant building coming online or commencing construction in several of our strongest and most dynamic markets. These buildings, together with computer room build-outs in our other markets, support the foundation for another extended phase of attractive organic growth over the next few years. Turning to sales performance; we signed $7.2 million in annualized GAAP rent in the fourth quarter. Retail signings were very strong, reflecting the value of our ecosystem for applications, needed capacity, and larger edge facilities that support latency-sensitive, data-intensive and hybrid cloud deployments. The amount and quality of new logos was also excellent, which Steve will comment on in more detail. We expect the rebound in retail leasing combined with a continuing strong funnel for larger deployments to support healthy pricing and the construction of additional leasable capacity. Supply and demand seems to be in an acceptable balance in substantially all of our markets. We are keeping an eye on the amount of development and potential development in Northern Virginia, particularly in Ashburn, but demand is also very strong in this market. As I mentioned earlier, campus expansion in four excellent markets is a great opportunity for us in 2018 and beyond. Despite record levels of absorption in 2016, 440,000 square feet followed by another strong year of commencements in 2017, we forecast demand for new product to continue at attractive levels for the foreseeable future. During 2017, we worked effectively to replenish our campus pipeline with new land in Santa Clara, Virginia and Chicago and the creation of an expansion opportunity on our LA2 site. We expect these projects to restore us to our historical model of having the ability to quickly bring new capacity to market in line with demand. As important, the leasing of this new capacity should deepen our campus ecosystems and increase their network effects and corresponding value. We are pleased to have acquired in downtown Chicago a two-acre land parcel in late January. CH2 is one mile from our existing CH1 facility and network node, and we plan to connect the two sites via diverse, high-count dark fiber to create the type of campus interconnectivity most valued by our scale customers. We expect to be able to build approximately 175,000 square feet, or 18 megawatts of turnkey capacity on this land. Along with restoring our development opportunities to more typical levels across the portfolio, we have taken steps to strengthen our development and construction team over the past year. We added some valuable new colleagues with extensive data center construction experience, made some productive internal transfers and have improved our design and contracting processes. We entered 2018 with 220,000 square feet of turnkey capacity under construction and we expect to break ground on SV8 and LA3—an additional 355,000 square feet of multi-tenant shell with a combined 12 megawatts of initial computer rooms at various stages in the year. And if the permitting process goes well, we may even be able to begin CH2 late in 2018. Our team is focused on ensuring our offerings are providing desirable new technology and energy efficiency options for our customers as well as accommodating higher density deployments. As an example, in Q4, we took steps to improve energy efficiency by consolidating our cooling systems at LA2 into one massively efficient chiller plant for which we have been nominated for an energy efficiency award by the local power company. We also entered into a long-term power purchase agreement leveraging fuel cell technology in two of our markets, which significantly reduces related carbon emissions for that amount of power. Our expansion in Reston is progressing, and we anticipate delivering 25,000 square feet of turnkey capacity at VA3 Phase IA around the end of the first quarter. We are making good progress on the overall site development for that campus designed to preserve our ability to increase buildable capacity in the future and on the ground-up construction at VA3 Phase 1B and expect to deliver that building in the fourth quarter of 2018. In Los Angeles, we are on track to deliver 87,000 square feet of multi-tenant data center capacity this quarter with the pre-leased space commencing in Q1 as well. Entitlement, permitting and design work for LA3 is ongoing and we expect to commence construction in the later half of 2018. As it relates to the Bay Area, we are targeting a mid-2018 construction start on SV8. In summary, I'm pleased with the progress we are making with our development program. In addition to adding another good campus expansion site in downtown Chicago, we've added expertise and experience to our staff and laid the groundwork for developing high redundancy at lower costs, providing the flexibility to accommodate high density deployments, significantly increasing power efficiency and lowering ongoing maintenance and operating costs. I look forward to seeing this work bear fruit as we bring these developments online over the next couple of years. With that I will turn the call over to Steve.

Thanks, Paul. Our new and expansion sales activity was solid reflecting a resurgence that we’ve seen among the smaller deployments, which can be seen in the increased transaction count, helping new logo growth and the pricing we achieved on signed leases. We signed 128 new and expansion leases, totaling $7.2 million in annualized GAAP rent comprised of 42,000 net rentable square feet and an average GAAP rate of $174 per square foot. Leasing results also reflected solid new logo activity across our platform with 30 new logos signed across substantially all of our markets and 117 signed during 2017. Enterprise customers continue to account for the majority of new logos as they look to optimize their IT architecture and leverage the key network and cloud providers across our platform. By deploying in our network connection points and cloud connected facilities, they can reap the benefits of a strongly connected and synergistic ecosystem as well as extended geographic reach and that of their end customers globally. To that point, Alibaba Cloud joined our ecosystem, enabling international customers to expand their cloud-based applications worldwide in an efficient and cost-effective manner. Additional examples of new logos that were attracted to our ecosystem include one of the largest global post-production companies and a large television production organization expanding its content distribution capabilities. A key part of our organic growth strategies is a continued expansion of existing customers, which accounted for approximately 88% of annualized GAAP rent signed in Q4. We have seen that our differentiated campus strategy and strong market position leave us well aligned to meet our customers’ increasing demand for compute and storage needs and close proximity to their other deployments as well as to enable them to scale and grow into additional CoreSite markets. A great example is a key enterprise customer that has continued to expand its footprint on our Santa Clara campus and just deployed at our Reston campus with a new application supporting research and development for self-driving technologies and mapping. The strength of leasing to smaller deployments, combined with the organic expansion opportunities of our embedded base, resulted in interconnection revenue growth of 16% year-over-year driven by total volume growth of 11% and fiber volume growth of 15%. For the full year, the interconnection revenue grew 17%, slightly ahead of the high-end of our expected range. Turning now to vertical mix; network and cloud customers accounted for 41% and 19% respectively of annualized GAAP rent signed. It was a great quarter for the network vertical with the highest level of new and expansion leases signed this year, driven by strong growth from existing customers and by six new logos. A large Chinese telecom is expanding with us in the Bay Area, and a leading global telecommunications provider deployed its latest SDN solution in four markets, providing additional connectivity options for enterprise customers. We also saw solid expansion activity among network providers at our Denver campus further solidifying our leading interconnection position in this market. Turning to the cloud vertical, it was an exciting quarter with strong growth from existing customers and the addition of three new logos, including a private cloud service provider. A large network solution and the cloud hosting provider expanded its footprint across several markets while one of our existing large public cloud partners expanded its reach and deployed natively in Silicon Valley and Northern Virginia. This expansion brings the total number of native on-ramps for this provider to four across our portfolio. Additionally, another leading public cloud company deployed a new on-ramp in Los Angeles. The cloud vertical continues to experience outpaced growth in terms of other customers interconnecting, reinforcing the value of our highly interconnected platform. As it relates to our enterprise vertical, this vertical accounted for 40% of annualized GAAP rents signed. New logos also accounted for approximately 40% of the leases signed as enterprise customers continue to focus on robust connectivity solutions, diversity of providers, and the performance and scalability needed to optimize their deployments. Additionally, a large global technology company expanded its gaming platform deploying in two new markets, and a provider of digital services and content distribution expanded its footprint to support its rendering capabilities with both applications requiring a highly dense colocation solution. From a geographic perspective, our strongest markets in terms of annualized GAAP rent signed in new and expansion leases were Silicon Valley, Los Angeles, Northern Virginia, and New York/New Jersey; collectively representing 87% of annualized GAAP rent signed. Strength in Bay Area leasing was again led by growth from existing customers with the cloud vertical demonstrating the strongest performance followed by enterprise customers and network providers. Demand in Los Angeles remains steady with strength in the network vertical followed by enterprise and cloud deployment. Notably, network and cloud traction continues to gain momentum at LA2 as we signed the same number of network deals at LA2 this quarter as we did at LA1. Turning to Northern Virginia, leasing activity was led by the enterprise vertical. Hybrid use cases leveraging multiple clouds are becoming more common among customer requirements, and we remain well positioned in the market with strong relationships with leading public and private cloud providers, which should continue to drive incremental interconnection opportunities at the Reston campus. Finally, in New York/New Jersey, demand is steady, slowly increasing specifically among financial and healthcare sectors, which is reflected in our solid enterprise leasing results. We continue to see cloud and network providers expand in LA2 while large local enterprises continue to move towards leveraging hybrid cloud use cases. In summary, the fourth quarter results marked the end of another solid year for CoreSite with consistent execution, growth across our markets and ecosystems and continued investment as we set the stage for future growth. I will now turn the call over to Jeff.

Thanks, Steve, and hello everyone. My remarks today will begin with a review of our Q4 financial results followed by an update of our development CapEx and our leverage and liquidity capacity. Finally, I will discuss our outlook and guidance for 2018. Q4 financial performance resulted in total operating revenues of $125.9 million, a 2.3% increase on a sequential quarter basis and a 14% increase year-over-year. Operating revenue consisted of $104.9 million in data center revenue comprised of rent and power, an increase of 3.1% on a sequential quarter basis and 14.2% year-over-year. Interconnection services contributed $16.3 million to operating revenues, an increase of 0.3% on a sequential quarter basis and 16.2% year-over-year. FFO was $1.09 per diluted share in unit, down 0.9% on a sequential quarter basis and an increase of 2.8% year-over-year. FFO includes approximately $4.3 million of non-cash expense related to the original issuance cost of our redeemed preferred stock, which was previously not reflected in our guidance. Excluding this one-time amount, FFO as adjusted was $1.18 per share, or an increase of 7.3% and 11.3% sequentially and year-over-year respectively. For the full year excluding this expense, FFO was $4.52 per share, representing year-over-year growth of 21.8%. As it relates to the recurring capital, we spent $8.6 million in Q4 to substantially complete the chiller plant replacement at LA2, which resulted in a sequential decline in AFFO of 10%, consistent with our expectations. Adjusting for this investment, AFFO would have been $52 million, or an increase of 8% and 29% sequentially and year-over-year respectively. For the full year, we invested $11.9 million on the chiller project. 2017 AFFO adjusted for this investment grew 25% year-over-year. Turning back to Q4 results, adjusted EBITDA of $68.8 million increased 5.4% sequentially and 13.4% over the same quarter of last year. We continue to drive margin expansion with our adjusted EBITDA margin increasing 160 basis points to 54.6% for the full year, slightly ahead of our expectations. Sales and marketing expenses totaled $4.6 million, or 3.7% of total operating revenues. For the full year, sales and marketing expenses were 3.8%, down 60 basis points from the prior year. General and administrative expenses were $10.2 million, or 8.1% of total operating revenues. For the full year, G&A expense was 7.8% of total operating revenues, down 100 basis points year-over-year though slightly above our guidance. Q4 same-store turnkey data center occupancy increased 100 basis points to 91.8% compared to Q4 2016. Additionally, same-store monthly recurring revenue per cabinet equivalent increased 5.3% year-over-year and was flat sequentially at $1,508. As you look at your models, keep in mind that we will redefine the same-store pool in Q1 as we do on an annual basis. We renewed approximately 79,000 total square feet at an annualized GAAP rate of $142 per square foot. Our renewal pricing reflects mark-to-market growth of 3.5% on a cash basis and 6.2% on a GAAP basis. Churn in the fourth quarter was low coming in at 0.5%. We commenced 52,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $157 per square foot, which represents $8.2 million of annualized GAAP rent. We ended the quarter with our stabilized data center occupancy at 94.4%, an increase of 100 basis points compared to the prior quarter. In Boston, a 14,000 square foot computer room was moved into the stabilized pool at 90% occupancy and 25,000 square feet at VA2 moved into the stabilized pool at 87% occupancy. We completed an additional 13,700 square feet of data center capacity at Boston and 3,000 at VA1, both of which were placed into the pre-stabilized pool. Turning to backlog, projected annualized GAAP rent from signed but not yet commenced leases was $13.2 million as of December 31, 2017. On a cash basis, our backlog was $21.7 million. We expect substantially all of the GAAP backlogs to commence during the first half of 2018. As Paul mentioned, we have a total of 220,000 square feet of data center capacity in various stages of development across the portfolio. As of the end of the fourth quarter, we had invested $98.5 million of the estimated $213.6 million required to complete these projects. Keep in mind that the capacity currently under construction and the associated investment does not include forecasted investment for projects currently in permitting entitlement or design, including SV8, LA3, and CH2. The percentage of interest capitalized in Q4 was 13.7%, and the full year amount is 12%. For 2018, we expect the percentage of interest capitalized to be in the range of 12% to 18%, slightly elevated compared to the 2017 level based on our development pipeline. Turning to our balance sheet, our ratio of net principal debt to Q4 annualized adjusted EBITDA was 3.4 times. As of the end of the fourth quarter, we had $180.9 million of total equity consisting of available cash and capacity on our revolving credit facility. On December 12, 2017, we completed the redemption of all 4.6 million shares of our 7.25% Series A cumulative redeemable preferred stock, which was financed through the use of our credit facility. We expect to add incremental debt financing, the majority of which is expected to be completed during the first half of 2018 to fund our development pipeline. The related timing, pricing, and type of debt instrument are dependent on market conditions, and we expect a total issuance amount of $225 million to $300 million while maintaining a healthy balance between our fixed and variable rate debt. During the fourth quarter, we announced an increase in our dividend to $0.98 per share on a quarterly basis, or $3.92 per share on an annual basis. This correlates to an 8.9% increase over the prior quarterly dividend of $0.90 per share that was established in May 2017 and a quarterly per share increase of $0.18 or 22.5% over the dividend rate set in December 2016. You should continue to expect the timing and amount of our future dividend increases to be closely aligned to financial performance and cash flow generation. Now, I would like to address guidance for 2018. Please remember that our guidance reflects our view of supply and demand dynamics in 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. As detailed on Page 23 of our Q4 earnings supplement, our guidance for 2018 is as follows. Total operating revenue is estimated to be $535 million to $545 million. Based on the midpoint of guidance, this implies 12.1% year-over-year revenue growth; the estimated growth reflects the timing of our development pipeline as well as a reduced level of available sellable capacity as we enter 2018. For context, we enter 2018 with approximately 19% of our operating portfolio available that is either currently available or under construction compared to a historical average of 29% following a period of elevated absorption. We currently expect commencements of approximately $40 million in annualized GAAP rent in 2018 compared to $33 million in 2017, or an increase of 22%. We expect that 2018 interconnection revenue growth to be between 11% and 14%, correlating to interconnection revenue in the range of $69 million to $71 million. General and administrative expenses are estimated to be $38 million to $40 million, or approximately 7% of total operating revenue. This correlates to a 4% increase in G&A expenses over 2017. Adjusted EBITDA is estimated to be $291 million to $296 million. This correlates to 11.5% year-over-year growth based on the midpoint of the range and an adjusted EBITDA margin of approximately 54.4% and revenue flow through to adjusted EBITDA of approximately 52%. Our expectation for adjusted EBITDA margin is consistent with the 2017 level and reflects recent investments in our facilities and construction teams given the strong growth in absorption over the last two years. FFO per share and OP unit is estimated to be $4.92 to $5.04. This implies 10% year-over-year FFO growth based on the midpoint of the range and the $4.52 per share we reported in 2017, excluding the impact of the one-time non-cash expense related to the preferred redemption. As a reminder, the FFO per share guidance includes the debt financing that was mentioned earlier. As we discussed last quarter, our guidance for FFO per share reflects the adoption of two new accounting standards: revenue recognition and lease accounting, which are cumulatively expected to reduce FFO per share by approximately $0.06 inclusive of the impact from accelerated straight-line rent expense. Absent these changes, our 2018 guidance midpoint would reflect 11.5% year-over-year growth. The significant drivers of this guidance are as follows; estimated annual churn rate of 6% to 8% for 2018. Cash rent growth on our data center renewals is estimated to be 3% to 5% for the full year. As we communicated last quarter, total capital expenditures are expected to be $250 million to $300 million. The components are comprised of data center expansion costs estimated to be $228 million to $263 million, non-recurring investments are estimated to be $7.5 million to $12.5 million and include amounts related to investments in our IT architecture, facilities upgrades, and our capital expenditures. Recurring capital expenditures are estimated to be $12.5 million to $17.5 million down significantly from 2017 reflecting the completion of the chiller replacement and upgrade project at LA2, and tenant improvements are estimated to be $2 million to $7 million. Now, we'd like to open the call to questions. Operator?

Hey, guys. I wanted to start with some of the leasing details from the quarter. It looked like both leasing spreads as well as kind of the overall absolute level of pricing in the quarter both commencements and leasing trended lower. How much of that was the function of pressure in the market versus geographic mix versus density? Can you kind of break those thoughts out for us?

Yeah, sure. This is Steve. Thanks for the question. I would say overall it's primarily a function of timing as to overall volume. So as far as the overall leasing activity is concerned, as I mentioned in my predetermined comments there, the overall volume is very strong and we were very encouraged with the total number of leases as well as the content of those leases. The network vertical obviously was very strong, a little bit lighter on the wholesale end of the things and that’s primarily driven from timing and just availability of overall capacity, but the underlying current demand in the market is very strong.

Hey, Dave. This is Jeff. And let me just give you some additional commentary as it relates to – I think he also commented on commencements and renewals. If you look at it on a per square foot perspective, from a pricing perspective, that that is going to vary depending upon our density and the type of deployments that are being renewed and ultimately commencing. So, for example, when you look at the renewals, the composition of those renewals this quarter were – had a very low density. And as a result, you're seeing a price perspective being lower. When you take away and neutralize the density impact, you actually get to the point where that pricing for renewals, this quarter was flat to slightly ahead of where we were on the trailing twelve months. So hopefully that gives you some additional commentary around that.

And Dave let me just follow up addressing both sales and maybe interconnection volumes as well. Historically, these have always varied quarter by quarter and we don't expect that to change. This is probably, as Steve mentioned, due to the timing of bringing on new capacity, but it's also attributable to the increase in scale leasing we began to experience in 2015 as edge needs in our markets rose to new levels. These deployments are lumpier and the sales cycles are longer. So while the pipeline for this type of demand is very robust, as Steve mentioned, the timing of concluding any particular sale is difficult to predict. And we do our pricing in this way by trying to jam these types of sales into any particular quarter. We see the same type of lumpiness in interconnection growth, which frequently follows to some extent scale deployments and enterprise additions, but not on a linear path. These are the reasons combined with the lumpiness of delivering new capacity that we've incurred to observers to focus more on annual trends as opposed to quarterly results.

And Dave just to kind of round that out with a bit more color there, if you look at the overall lease count, 127 of the 128 leases that were signed in the quarter were less than 5,000 square feet. And if you look at the revenue from leases that are less than 5,000 square feet, we're actually up 5% over the trailing 12-month average, so overall health in the pipeline as well as the results, we feel very positive.

Great, appreciate all the color from everybody, Paul maybe turning to you in terms of the volume. It sounded like based on your comments, you’re pretty happy with the pipeline and the projects that you have in it, but it did sound like that you are maybe frustrated with the fact that you didn't have product to deliver to meet the outside demand that you continue to see in the industry. Are there one or two big things that you've kind of been addressing over the last, whether six months a year or you plan to address that really kind of cause this maybe mistiming between development delivery and demand in the market?

Well, I wouldn't say frustrated. It's almost all related to VA3 and as we've – in fact as far as I can tell it's all related to VA3. As we stated previously, we have a reasonable but ambitious plan to maximize the amount that we can build on that site that requires converting the low density office and light industrial development into a denser development with more interconnected buildings. Accomplishing this goal requires a significant amount of moving underground utility infrastructure and creating new infrastructure. These are the tasks that have taken longer than expected partly due to unforeseen conditions like utilities that were not located on the survey, more underground rock than the geotech studies indicated, although to some extent rock is very seamy and that's not completely unexpected and frankly to some extent contractor performance. The good news is that these elements are almost entirely behind us. We have one more power line to move, so we can finish our new main entrance. And the better news is that the new colleagues we've added working with the team that has continued have really performed well to limit the delays caused by these elements. So I'd honestly say rather than frustrated, I'm just really excited about where we are right now and where we can take this forward.

Okay, thank you.

Hi. Good morning for you guys. I just wanted to follow up on a couple of things. First, you made a comment about the timing of dividends referring to it as following, I think, you mentioned the cash flow. Is that a change in the timing that we had last year where you had two dividend increases? So is this something that's just going to be on an ad hoc basis each quarter? Or should we expect the same kind of cadence for the company to revisit the dividend? You know I have an operational question if I could afterwards.

Yeah, good morning, Mike. Yeah, I think, I wouldn't read too much into that in terms of a change. I think what we're trying to communicate is we do look at our level of growth in cash flow on a quarterly basis and obviously look at the dividend on a quarterly basis. But what we're trying to communicate is— which is probably similar to what you saw last year—which is to the extent you do see us or that we do see cash flow growing incrementally that we want to make sure we're more timely in paying that out to our shareholders. Last year, we did it on an every six month basis. And from our perspective, I think that fits well into the way we anticipate to do things going forward, but it is something we look at on a quarterly basis.

And the second things on the operational side, you mentioned the difference now versus in previous periods in terms of the percentage of footprint of total that was available to sell whether it was in development or kind of ready to serve up. When you look at the development pipeline that you have for this year, does it get you back towards that historical percentage I think you mentioned it was 29%? Or is there more development that you would need to bring forward to get to that kind of available capacity level?

Good question, Michael. I think with what we have in process we will actually be better and more consistent than historical norms, but we are going through a little bit of a valley. In fiscal year – in 2015, we added 15.3% to our leasable capacity through construction and development. That ballooned to 32.2% in 2016. In 2017, it was only 3.7%. Based on what we have in process today in LA and VA3 and other places, we'll add 10.5% this year, and that's included in our 19% number. But that will be able to accelerate in future years up into the high teens to low 20% range as we build out the four projects that we've talked about. And quite honestly if demand continues as strong as it has been and we see as many or more demand drivers going forward as we've seen historically, we have the capacity to accelerate some of that development if we need to.

Thanks very much.

Thanks Mike.

Hi, good morning. So I wanted to just come back to one of your answers in the Q&A here. I think you described leasing now a little bit more as lumpier and longer. And I guess it's a little bit new to me as it relates to CoreSite. I kind of think of you guys just being a little bit steadier, and I recognize that you bring a bunch of product on. But can you maybe just give us a little bit of context for what you meant by that? Is that germane to Reston and that project? Or would you expect potentially to see larger, lumpier or longer sales cycle leases in some of these other more traditional markets as well like Chicago or Silicon Valley or LA?

Jordan, it's a good question. And I think if you went back to these sessions over the last four or five quarters, you probably heard us mention on at least every quarterly call the lumpiness that has been introduced by these scale leases. And in fact I think if memory serves me correctly, Jeff, our sales this quarter in terms of GAAP rent are pretty comparable to our sales in the fourth quarter of last year. And then we’ve obviously had some accelerated quarters in between. So I'm sorry if we weren’t more clear about that in the past, but that is something that we've tried to make sure everybody was aware of. But you are correct the introduction of new capacity and the timing of bringing new capacity on adds an additional element of lumpiness, which we are expecting and hoping to reduce going forward with a more robust and proactive development platform as you see in the announcements that we've made over the last couple of quarters. Jeff?

And Jordan, the only other thing I'd complement with that is in order to give you some visibility into that lumpiness. As you’ve probably seen and heard us in the past, we break up our sales in those two buckets: one that's less than 5,000, and one is greater than 5,000 inside that supplemental if you haven’t had a chance to look. It does give you some better insight. But as Steve was alluding to, that less than 5,000 has been fairly steady and is actually up slightly as compared to the trailing 12 months. The lumpiness as Paul alluded to really does come from those larger than 5,000 square foot leases. And that's where you're seeing some of the of what we’re alluding to.

Okay. But so you would expect to see – it would be safe to assume that you’d expect to see scale type leasing in markets outside of Northern Virginia for example over the next year.

Yeah, Jordan, this is Steve. I tell you that the pipeline overall looks very robust and the activity there looks very strong. It's a matter of timing when the customer requirements line up with available capacity, and we work very hard to stay on top of that so far the overall pipeline looks healthy.

And Steve, while I have you, just sequentially this is about as flat as I've seen the interconnection revenue. I know that this business just as a function of the growing base and some of the other factors as you guys talked about regularly. The growth is moderating a bit, but was there anything going on in the fourth quarter at all that we should be looking at?

No, I think if you look at the underlying current there, the trend is still very healthy. We could have one customer that churned out of LA1 in Q4 that had pretty significant amount of interconnection and we have another customer that consolidated some of their deployments. So that drove part of the pressure there, but overall the trend for interconnection is still very healthy. There are some technology trends that are also out there relative to customers able to get 100 gig out of a single interconnection versus 10 gig, but you still need a connection to a provider to get there. So you may see some efficiency come out of that as well as some of the capabilities from some of the big network providers as far as SDN capabilities, but overall we still see a very strong trajectory as far as health in interconnection.

I just would add to what Steve said. The ability to increase the amount you can move over those interconnections is one of the attractions to being able to interconnect within the data center. And you know while it may reduce the total cross-connects, it also increases the value of the space and the deployments in those data centers.

All right I think we’ve talked about the same as it relates to SDNs. Are the SDNs cropping up a little bit more in terms of discussions with customers that are using – are they using them to a greater extent a little bit more comfortable these days?

Well, I think they're beginning to embrace it more as you talk to some of the carriers that are also partners of ours and our data centers that they seem to see a greater level of adoption. And I think that's actually helping us more as customers look to be closer to those interconnection points and leverage their hybrid architecture. So I think the starting number is that more.

Okay, thank you.

Thanks, Jordan.

Thanks. A couple of questions. I wondered about CH2, what was the thought process? Did it come from customers or just kind of your own preferences in terms of going downtown versus perhaps suburbs where you could have had maybe more of a campus environment? And then secondly, you mentioned chiller plant and it just kind of made me think about just the technical design above what you're delivering on your maybe current and prospective builds. Power densities, are they going higher 2N versus N plus one if you could just sort of comment on the product that you're aiming for and where you see the sweet spot of the market? Thanks.

I'll try to remember all those elements, Jonathan, but feel free to remind me if I leave something out. First of all both from a customer and product perspective, we were very heavily focused on downtown Chicago. And if you look at you know the precedent for our campus development, LA1 and LA2 are a great example of the tremendous synergies you can achieve by providing this enterprise-class scalable, you know more flexible for higher density product, more power-efficient, new building or new space that has this type of dark fiber connectivity back to your main network node. It really expands the use cases and the edge cases that can take place in the urban core where there is a much more enterprise-rich target environment. And it's essentially our model. We use it at VA2 and 1 and 3. We use it at – in Santa Clara. And so, we were very, very focused on finding this type of opportunity in downtown Chicago and we're glad to do that. I would also add that as we've had ongoing conversations with customers about their needs and what they need and where they need it, this is exactly the type of product in Chicago that has received a lot of encouragement from that – on which we've received a lot of encouragement from our customers. Regarding the product overall—and I've touched on this a little bit earlier in the answer. Brian Warren, our Senior Vice President of Construction and Engineering and his team, which I have a very high regard for, have really evolved our product over the last couple of years. It gets better with each iteration but figuring out how to achieve the appropriate levels of redundancy with more design efficiency and lower cost, how to improve our contracting processes to deliver better results and lower cost and how to design and set up the data center to where we have more flexibility within the same building to accommodate both high-density and low-density deployments and to get the best possible PUE outcome from the equipment we're deploying and to set it up and commission it and turn it over in such a way that we have significantly better operations results although we've always had outstanding operations result, but at a lower cost on an ongoing basis. So I'm really pleased with what he and his team have done in that regard and I think we're still in the fairly early innings of ongoing product evolution.

Thank you. And then just on kind of it just maybe relates to cross-connects and the Alibaba announcements that you had on both coasts and then I think bringing AWS Direct Connect into Denver. Can you talk about pull through of these cloud nodes? And does it drive – does it drive cabinet ads? Does it drive cross-connects? Or is it really depends on the particular situation? What trends have you seen over time?

Yeah, Jonathan, this is Steve. I would say it’s all of the above. They do provide unique value not only in their own drive as far as interconnection and passing traffic to other providers, but also for those enterprises that are looking to gain close and immediate on-ramps to those facilities. So we feel like those are another key differentiator that are attractive to our sites because of our network density as well as our go-to-market model around the enterprise because enterprises are obviously attractive to those same sites because we have the network in those on-ramps. So it’s really a synergistic type of environment that I think helps all three of those.

Thank you.

Thanks, Jon.

I'd like to close by thanking the broader CoreSite team. Greer, Jeff, Steve and I are fortunate to work with outstanding colleagues who enable us to consistently increase value for customers and shareholders while also making this a very good environment in which to work. I look forward to our ongoing achievements, and I thank all of you who took the time to listen to us today. Have a great day.