American Tower Corp (AMT) — Q2 2018 Earnings Call Transcript

Thank you. Good morning, and welcome to CoreSite's second 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 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. We continue to execute well, achieving another quarter of strong growth with revenue, adjusted EBITDA, and FFO per share, each increasing 16% year-over-year. Regarding our strong internal growth, we had solid performance on substantially all measurements, including solid cash rent growth on renewals, low churn, and 8% year-over-year growth in same-store monthly recurring revenue per cabinet equivalent. Our sales activity generated $10.4 million net of annualized GAAP rent signed in new and expansion leases. Our core retail co-location business was solid, and we had a good quarter in scale co-location leasing. Healthy organic growth is represented by 90% of GAAP rent side coming from the expansion of existing customers. New customers looking to optimize their IT architecture who are embarked on a digital transformation drove the 28 new logos we signed in Q2. More importantly, we believe we continue to see an increase in the quality of new logos. The annualized GAAP rents signed by them in Q2 increased 13% compared to the trailing 12-month average, while the number of kilowatts licensed increased 10%. Hybrid cloud architectures appeared to be gaining traction because they permit scaling, expansion, cost efficiencies, and adoption of new technology products, including the constantly-growing menu of cloud-based applications. We believe most companies today can deploy valuable innovative applications even globally from a single well-connected datacenter with the right customer ecosystem and direct connect facilities. Our network in cloud-connected datacenters together with our customer communities can help businesses with this kind of rapid scaling and innovation while also generally lowering their cost per data center capacity. Our facilities continue to benefit from businesses requiring low latency and robust performance to serve many consumers and enterprises in our very large edge markets. We remain optimistic about the demand trends we are seeing in these markets, and supply is generally in balance with demand. Our Q2 pricing realized reflects the relatively stable pricing in the markets and segments we compete in. We also continue to make solid progress on the building blocks for future growth. In Los Angeles, we commenced construction on 28,000 square feet datacenter capacity at LA2, which is 100% pre-leased. Following the expansion signed by one of our strategic customers of LA2, we have approximately 65,000 square feet of remaining capacity at this building. Overall, we believe demand remains steady in LA and continues to outpace supply in the downtown market. With these dynamics in mind, we recently renewed our existing space in LA1 and expanded it to an additional 17,000 square feet. Importantly, this renewal and expansion extended the term of our lease by seven years to 2029, and extended our control over our space at One Wilshire to 2044. As it relates to LA3, we continue to progress through the permitting process and expect to break ground in the last quarter of 2018. Please bear in mind that the timing is almost entirely determined here in Santa Clara and Chicago by the municipal permitting process. In Reston, we remain on track with our current phase of development at VA3 Phase 1B scheduled for Q1 2019 delivery. In Santa Clara, we commenced demolition of the existing building on the SC8 site earlier this month. We expect to deliver Phase 1 consisting of 58,000 square feet of datacenter capacity during the third quarter of 2019. In Denver, we delivered 15,600 square feet of capacity in DE1 or capacity in the downtown area remains constrained. We have seen good demand in Denver. Finally, we completed 18,000 square feet of additional capacity in NY2 in Chicago. In summary, we are pleased with the quarter and we are grateful for the colleagues who drive our success. I remain optimistic about our future opportunity, reflecting our solid position in great markets with large numbers of dynamic enterprises, large populations of consumers of content, numerous sophisticated customers of cloud, analytics, and similar data products, and a good pipeline of capacity growth for the intermediate term. With that, I will turn the call over to Steve.

Thanks, Paul. Our new and expansion leasing activity was again driven by our core retail co-location group, which accounted for approximately 95% of leases signed in the quarter. We also had a good quarter in the scale co-location category, including a sizable expansion of existing enterprise customer. In total, we executed 143 new and expansion leases, totaling $10.4 million in net annualized GAAP rent, comprised of 65,000 net rentable square feet at an average GAAP rate of $178 per square foot, offset by near-term reduction in reservation fees. As it relates to portfolio wide pricing, on a per kilowatt basis, Q2 new and expansion pricing was approximately 3% above the trailing 12-month average, with variation by market similar to what we saw in Q1. We continue to focus on attracting high-quality new logos to our portfolio, signing 28 this quarter, which accounted for 10% of net annualized GAAP rent signed. Our well-established campuses are cloud-enabled networked datacenters continue to be a magnet for enterprises, with this vertical representing 65% of annualized GAAP rents signed from new logos. Among our new enterprise logos, our next generation networking technologies company is providing solutions. We also signed two large West Coast-based health and social services agencies. In the education vertical, we signed St. Johns University and Udemy, a leading online college-level learning platform. Further, we had five IT solutions and services companies joining our ecosystem, including Lighthouse Solutions, a Fortune 500 information technology, engineering, and science solutions provider. Our strong organic growth reflects the continued expansion of existing customers across our portfolio, which accounted for 90% of annualized GAAP rents in Q2, including an enterprise customer that expanded its corporate setup with us in Los Angeles, discussed earlier. In Denver, we also signed an expansion with a large social media company that will be deploying its peering exchange serving in the Rocky Mountain region with us. Turning now to our vertical mix, networking cloud customers accounted for 17% and 19% of annualized GAAP rents signed respectively. The network vertical had a very strong quarter with a high overall transaction count and six new logos signed, including Pilot Fiber, an Internet service provider that will deploy with us in four markets to support its growing footprint. We signed six new deployments from international networks, reflecting the continued strength and value of our ecosystem, with two of those international providers deploying at our Reston campus. Additionally, one of the world's largest telecom companies selected our service in Virginia and Denver for significant deployment over its corporate infrastructure directly linking it to our cloud on-ramps, improving its performance as it moves to a hybrid cloud architecture for its internal IT needs. The cloud vertical continued to perform well, adding four new logos, including a cybersecurity and intelligence provider. Additionally, a large data-based cloud and content provider expanded its footprint in Santa Clara to support the growth of one of its existing customers. Our enterprise vertical accounted for 64% of annualized GAAP rents signed, driven by a Fortune 500 customer that exercised its expansion option in anticipation of demand for its cloud platform in Los Angeles. In addition, several other existing customers expanded, including a new deployment with one of the fastest-growing demand-side platforms in digital advertising, which demonstrates CoreSite's first production environment and data analytics platform due to its ability to achieve scalability, high density, and performance. From a geographic perspective, our strongest markets in terms of annualized GAAP rents signed in new and expansion leases were Los Angeles, Silicon Valley, Northern Virginia, and New York, New Jersey, collectively representing 89% of annualized GAAP rents signed. Leasing in the Bay Area was weighted towards expansion of existing customers in terms of verticals, with cloud customers leasing activity including a new logo in Prismo Systems, which is a local provider of software for enterprise digital security operations. New enterprise deployments included the signing by Stamps.com. Demand in Los Angeles was solid, with strength in the enterprise vertical, followed by network and cloud deployments. New logo activity was well-distributed among the verticals, and includes a network from LiveCom Limited, a Chinese provider of satellite-based voice services. In Northern Virginia, leasing was driven by the network vertical with deployments across all of our buildings in the market, with two networks deposited at VA3 Phase 1A. Lastly, in New York, New Jersey, demand was led by enterprise customers, including four new logos; healthcare and media/gaming remain the primary demand drivers in this market along with financial services. In summary, we are pleased with Q2 sales. Going forward, we will continue to focus on generating profitable organic growth, attracting high-quality new logos to our portfolio, and delivering incremental value to our customers as we grow our ecosystem and footprint. I will now turn the call over to Jeff.

Thanks, Steve, and hello everyone. Our Q2 financial performance resulted in total operating revenues of $136.4 million, a 5.3% increase on a sequential quarter basis, and a 15.7% increase year-over-year. Datacenter revenue consisting of rental revenue, power revenue, and tenant reimbursements contributed $116.1 million to operating revenues, an increase of 5.6% on the sequential quarter basis and 16.6% year-over-year. Interconnection services contributed $17.4 million to operating revenues, an increase of 5.2% on a sequential quarter basis, and 13.7% year-over-year. Excluding U.S. Colo interconnection revenue, Q2 interconnection revenue grew 3.5% sequentially and 11.8% year-over-year. Turning to FFO; we reported $1.28 per diluted share in unit, up 0.8% on a sequential quarter basis and 16.4% year-over-year. As you think about sequential FFO growth in Q3, there are a few moving pieces to keep in mind as it relates to your models. First, in Q3 we usually have seasonally higher power costs, amounting to approximately $0.01 to $0.02 per share. Second, as a result of the renewal and expansion of our lease at LA1, we expect an increase of approximately a penny per share in our rent expense. And third, we anticipate increases in our property taxes of about a penny per share. AFFO declined 0.5% sequentially, primarily due to higher interest expense and capitalized leasing commissions, reflecting an increased mix of scale, co-location leasing in Q2. On a year-over-year basis, AFFO increased 30.5% reflecting the growth in the operating portfolio and lower levels of recurring capital expenditures. Adjusted EBITDA of $74.9 million increased 2.7% sequentially and 15.5% year-over-year. Our adjusted EBITDA margin for the trailing 12 months ended Q2 2018 was 54.7%, and remains in line with our expectations and our guidance for the full year. Sales and marketing expenses totaled $5.4 million or 3.9% of total operating revenues, up 20 basis points year-over-year. General and administration expenses were $10.3 million or 7.5% of total operating revenues, down 60 basis points year-over-year. Both amounts are in line as a percentage of revenue to our expectations for the full year. Q2 same-store turnkey datacenter occupancy increased 430 basis points to 89.9% from 85.6% in the second quarter of 2017. Sequentially same-store turnkey datacenter occupancy increased 80 basis points. Additionally, same-store monthly recurring revenue per cabinet equivalent increased 1.7% sequentially, and 8.3% year-over-year to $1,483. We renewed approximately 140,000 total square feet at an annualized GAAP rate of $137 per square foot. Our renewed pricing reflects mark-to-market growth of 2.8% on a cash basis and 5.7% on a GAAP basis. Year-to-date, our cash mark-to-market growth of 4.2% is in line with our guidance for the full year. Churn was 1.3% and we continue to expect churn for the year to be in the 6% to 8% range. As you may recall, within our annual churn guidance, we expected a 200 basis points impact related to a specific customer move-out in Q4. With increased visibility related to this specific customer, we now expect approximately 70 basis points of churn in Q3 with the remainder in Q4. We commenced 34,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $192 per square foot, which represents $6.5 million of annualized GAAP rent. Turning to backlog, projected annualized GAAP rent from signed but not yet commenced leases was $9.9 million at June 30, 2018. On a cash basis, our backlog was $20.9 million. We expect approximately 42% of the GAAP backlog to commence during the second half of 2018, with the remainder expected to commence during the first half of 2019. We ended the quarter with our stabilized datacenter occupancy at 93%, a decrease of 40 basis points compared to the prior quarter, primarily due to two computer rooms moving from the pre-stabilized pool to the stabilized pool. We have a total of 161,000 square feet of datacenter capacity in various stages of development across the portfolio. At the end of the second quarter, we had invested $56.3 million of the estimated $274.4 million required for these projects. Those buildings also include space for quick future construction of an additional 167,000 square feet of datacenter capacity. Turning to our balance sheet, our ratio of net principal debt to Q2 annualized adjusted EBITDA was 3.5 times, in line with the prior quarter. As of the end of the second quarter, we had $336 million of total liquidity consisting of available cash and capacity on our revolving credit facility. In closing, I would like to address our updated guidance for 2018. I would remind you that our guidance reflects our current view of supply and demand dynamics in our markets as well as the health of 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. Our guidance updated for 2018 is as follows: total operating revenue is now estimated to be $537 million to $547 million compared to the previous range of $535 million to $545 million. Based on our year-to-date commencements of $22.7 million and our expectation for timing of commencements in our backlog, we now expect commencements for the full year to be closer to $36 million to $38 million in annualized GAAP rent, compared to our original guidance of $40 million. As Paul mentioned, keep in mind that the timing of future construction deliveries and related leasing is driven in large part by each locality's permitting process. While the lower level of commencements should not have a material impact on 2018 earnings, realization of incremental revenue in 2019 will depend on the timing of permitting and subsequent completion dates for SV8, LA3, and CH2. So far the municipal approval processes are tracking at the slower end of our estimates. Adjusted EBITDA is now estimated to be $293 million to $298 million, an increase of $2 million based on the midpoint of current and previous guidance. FFO is estimated to be $5 to $5.08 per share in OP unit. This midpoint of $5.04 per share represents an increase of $0.06 per share or 1.2% from the previous guidance. The increase in our FFO guidance also reflects lower than expected interest expense as a result of better-than-anticipated execution on the debt financing transactions completed in April. As it relates to our guidance for capital expenditures, we are increasing the total expected investment to a range of $280 million to $310 million, from the previous range of $250 million to $300 million.

Thank you. Good morning. I wanted to first just clarify something, Jeff, if you could, in the guidance. Can you help me understand just the difference between the upward adjustment in the operating revenues in the context of the downward adjustment in the commencements?

You bet. Really, Jordan, the increase in revenues is attributable to two things. And that's really related to the timing of the commencements, and it's also related to the product mix, predominantly power. So as you think about commencements, even though we've taken them down slightly for the full year, the first half we experienced slightly higher than what we anticipated in terms of those commencements, so it led to higher revenue that we're expecting for the rest of the year. And then in terms of the profitability of the dollars, our product mix also helped contribute to most of that increase in revenue basically flowing down through adjusted EBITDA and to FFO. And then the other item that I mentioned in my prepared remarks really relates to just interest expense, which is we're doing better than what we anticipated in our original guidance. So those are really the three pieces that drive the $0.06 increase, but the revenue is really driven by timing of commencements and the product mix.

Okay. And then in terms of product mix, it sounds like you mentioned power revenues. Did you see a greater mix of breakered-amp type requirements?

That's exactly right. A greater proportion of the breakered product model than what we had anticipated.

Can you elaborate on that? I'm curious about what you're observing in terms of customer requirements. Maybe Steve can address the trends. Are customers still open to the breakered-amp product, or are you noticing more resistance with more people seeking metered power solutions today?

Let me just give you what the numbers are telling us historically and then Steve can give you a little commentary in terms of what the customers are seeing and saying. But if you just look at our product mix of power revenue today, that composition equals about 55% is on our breakered model and about 45% on our metered model. And that's been fairly consistent over the past several quarters. And so to date, we haven't seen a significant degradation of that breakered power model, but Steve can give you some commentary related to the conversations with customers.

Yes, sure, thanks, Jeff. Hey, Jordan. Yes. As it relates to the overall mix and the, I guess, adoption of the breakered model, the core retail co-location space is a big focus for us. So it has been and we talked about that in the prepared remarks as well. And the bulk of those customers are typically buying at the size level and in the markets and the buildings where breakered is the predominant product that those customers are buying. It gives them better predictability around their costs and also gives us a better view into how we distribute power across the buildings. So overall, that's - I think, just speaks to the health of our business in that core area of retail co-location and those hybrid type of deployments that we're seeing from those enterprise customers.

Okay. And then Steve, lastly, while I have you, I was curious if the pace of permitting, titling, or planning moving a bit slower on some of the builds is affecting your ability on the pre-leasing side or what you're seeing on the pipeline for people interested in a possible pre-lease for some of those developments.

Well from a overall pipeline perspective, if the pipeline continues to be healthy and you know, as you look at just the overall data growth in the market in general and just technology adoption, the pipeline does remain healthy. I think that the pre-leasing window is probably shorter than it's been historically, because there's more inventory that's available on the market. But at the same time you still see a healthy amount of pipeline that we feel like can time out well with when those commencements happen. So overall, it doesn't seem to be impacting us overall.

Jordan, I would like to add that we are still within the expected timeframe for receiving permits that we previously indicated, although it is occurring at a slower pace. This is entirely due to the fact that we are operating in an infill market with much stricter permitting processes and generally understaffed government agencies. While this situation creates significant long-term value in these markets, it does complicate short-term permitting predictions.

Okay. Thank you.

Thanks, Jordan.

Thank you for taking my question. It appears that the leasing for smaller footprints under 1,000 square feet has accelerated compared to last quarter. I'm curious about the underlying factors for market demand in this category between last quarter and this quarter. Also, regarding the increase from $2.6 million to $4.6 million, was that primarily driven by one customer?

Yes, I'll just speak to the overall demand aspects of the less than 1,000 square feet there first, I guess. I wouldn't say that I've seen any major shifts in that space, in that market. As I mentioned earlier, it's a continued focus for the company, our marketing team and our overall sales team to try to bring in those customers, the majority of which are enterprises that are looking to deploy and take advantage of the many networks and cloud on-ramps that we have in our datacenters. So overall, I'd say the trend is positive as more enterprises continue to adopt colocation in hybrid types of environments. But I wouldn't point to anything that suggests that anything dramatic has changed. As it relates to the larger scale leases, Jeff has probably more detail on the numbers there, but…

Yes, Rob, it was driven by a few customers in that second group, and one was noticeably larger, but without sharing specifics about individual customers, that's about what we can tell you.

Great, thank you. The revenue per cabinet up I think it was up 8% pretty strong growth there just wondering if there's anything worth calling out in the sustainability of that going forward. And also just more broadly, Paul, just curious if you can give us your current thinking on the importance of market expansion having a global footprint, how that may or may not have changed in terms of your thinking over the last I guess since the beginning of the year. Thanks.

Colby, let me address your first question really when you look at that MRR per cabinet growth, what we saw this quarter is very consistent with what we've seen in the past several quarters which is the interconnection revenue in the power revenue are really driving the majority of that increase. So for instance, interconnection revenue in our same-store on a per cabinet basis was up 10% and power was up 13%. Overall contributing to the 8.3% increase we saw year-over-year and as we look at the second half of the year I would tell you that we would anticipate that MRR per cabinet growth to be in the mid to higher single digits consistent with what we saw in the first two quarters of 2018 to give you some idea of what we expect.

Expanding into new markets would be a nice addition rather than a necessity, as we have ample opportunities in our current markets. Building out our campuses and customer ecosystems is an effective way to create value for both customers and shareholders. We continue to explore potential market entries that align with our existing business model. Our perspective on international expansion remains unchanged; we are seeing strong interest from non-U.S. customers in our campus communities, and a growing number of our customers, both new and existing, are pursuing international options without necessarily establishing their own data centers in other regions. Services such as cloud and content delivery allow us to better support these customers within our data centers, providing the necessary utilities for their operations.

Great, thank you. I want to dig into what factors inflation may be having in its potential impact on development yields what are you seeing in posts are in raw materials and labor and your outlook, you believe it kind of pass it along you did see that play into the increase CapEx for SV8 LA2? Thanks.

Not really LA2, a little bit in SV8 labor costs in the North California market have increased materials costs have increased a bit, I'm sure you all know what's going on in the background there. But with all that and as Steve mentioned in his prepared comments pricing continues to be pretty strong. We were actually 3% above our trailing 12-month average on a per kilowatt basis and so we still expect to achieve or exceed our targeted returns on investment that we've previously talked about, so yes you got to be you have to pay more attention to your development planning and design in cost Brian Warren and his team are doing a good job with that and we think everything will work out pretty well.

Hi, thanks for taking my questions. First, the guidance clarification for Jeff that you mentioned the timing of commencements and product mix for the revenue guidance change, how much should be U.S. Colo acquisition plan to that if I remember correctly last quarter you didn't include it and it was going to be worth a couple million bucks this year?

Yes, Nick what we're seeing from U.S. Colo is obviously it's contributing some to our revenues and has played in part to some of what we're seeing with the results and ultimately guidance. To date, U.S. Colo contributed about $1 million of revenue in the quarter and that gives you some idea in terms of its contribution.

Okay, then your maybe one bigger picture question, do you guys have any interest in developing your own SDN offering the way I can access or is that not something that makes sense for you?

So there's a lot of different flavors of how companies can service customer desire for more nimbleness and how they provision aspects of their network. We recently pushed through and upgraded our open cloud exchange which provides a lot of that functionality more options for customers a broader range of choices they can make a greater API integration to other platforms and that's a utility that we can continue to evolve to give customers more control and flexibility about how to provision both cloud and network.

Hi, thank you for the question. Jeff, you made a comment earlier about 3Q, 2018 realizing higher power costs and I just want to understand what is driving that across your customer workloads and install bases like what is fundamentally happening around that time in the seasonality?

It's really not attributable to our customer workload. Sami, it's really attributable to the rates that we receive from our power providers. That's something that happens every year due to the increased volumes of power consumption throughout the markets—not just from data centers, obviously just from U.S. consumption in general—and that's just very common we see it every year and it's about $0.01 to $0.02 per share in the third quarter is what we would consider to see?

Got it and then the next question is more to do with how we should be thinking about modeling and the dividend and dividend growth rate over time and you've increased it now a couple times the last two years probably a little bit faster than what some people are already modeling should we think about modeling an adjustment like that payout ratio against the dividends like maybe like close maybe just give us an idea on how we should be doing is like how should we think about this in the next two years as far as like total dividend?

Yes, I think that the best way to look at that Sami is if you look at our payout ratio and just take the second quarter of 2018 and this is provided on page nine of our supplemental, you can see that our payout is about 82% of our trailing 12-month FFO and it's about 91% of our trailing 12-month AFFO. I don't anticipate those increasing meaningfully; they're already at a fairly high level, if they move it would be very at the margin at best, so what really is going to drive that growth is really growth in our cash flow which as we've talked in the past is really driven by what we define as cash flow that is distributable to our common equity holders, which is AFFO last nonrecurring capital. All of that's disclosed in the way in our supplemental but that's really the way we manage around our dividend increases is to monitor increases and cash flow that is distributable to show how we want to think about increasing dividends moving forward.

Yes, hi, thanks for taking the questions. So circling back with the permitting the patience seem to be slowing down but still kind of within the range but what has fundamentally changed? Is it really just more of the supply and more deals kind of trying to be put through the system and then do you continue to see this as a headwind and do you think that at some point things can free up a little bit and have a follow-up?

So honestly, I don't think there's any new news here within the ranges of what we said before and it's pretty typical for these types of permitting environments in fact, I again want to give credit to our development and construction team for being very proactive and getting us within the ranges that we've originally set, just to give you some historical perspective if you go back to VA2 which we built on land that we already own before we started the special exception, design and construction process we started that in early 2011 we're not able to bring new capacity on until the first quarter of 2015 so about four years. Every project that we've got going on right now is tracking to about 50% of that timeline, so again not an unusual situation in many of these markets it just is what it is and it makes the asset more viable going forward.

Eric, one thing that I will point out to just because I think it's important as you and others think about models for 2019 because obviously we've had three ground-up developments that we're working on as Paul alluded to. Another thing I think I would add is you saw we put one of our projects under construction this quarter and so we have better visibility into the timing and we've disclosed that at this point as being sometime in Q3, 2019 as when we think we will be completed with that first phase. As you think about the other two construction projects that we're working on, LA3 and CH2, we've always said that we always thought LA3 would be expected to be completed by sometime in the back half of 2019. And we still expect it to be in late 2019, but as Paul alluded to it's subject to what happens on the permitting process. As it relates to CH2, we've always been saying it sometime probably late 2019 early 2020 as we sit here today I think it's probably leaning towards more early 2020 before that would get completed again tracking towards the latter part of our original estimate, so just think about that fact of that and as you guys model 2019.

Great, thanks. So the pricing on new leases this quarter was a little below average from recent quarters but obviously you guys had one or two large-scale deals. I'm just kind of curious if you could break maybe out the different product types smaller leases, scale-side leases. I mean how are rents trending and then maybe even a little more specifically on the scale side you see rents trend on down like we're seeing with some of these like really huge hyper-scale deals, how you guys usually plan?

So John, let me take a stab at that and Steve and Jeff can jump in if I omit anything. We tried to give both space and power pricing because both components play into our business and with higher density step the power side of it actually tends to be more meaningful and as you saw from Steve's comments on a per kilowatt basis our pricing was 3% above the trailing twelve months. We don't break out pricing by market and by product because quite honestly that just gives away too much competitive information. But we do look at that internally and we feel good about where the trends are as Steve said it's up in some markets and down in some others but overall it's up and as it relates to scale leasing, we tend to focus on those scale leasing opportunities that need to retail co-location ecosystem or the network ecosystem. There's more value to those types of scale opportunities in our data centers and so far we're seeing that pricing hold up pretty well although that does vary by market.

So from a geographic perspective, our strongest markets in terms of annualized GAAP rents signed in new and expansion leases were Los Angeles, Silicon Valley, Northern Virginia, and New York, New Jersey, collectively representing 89% of annualized GAAP rents signed. I would only add that given our low leverage, I don't think we would tap the preferred market.

Hi, I wanted to ask about the churn event in Q4, so far rental revenue has been growing on a dollar basis at a very nice rate, how should we think about the impact of that churn event and then going into '19, what the quarterly impact will be?

Richard, let me see if I can address that and add any additional commentary. So we updated our guidance this quarter related to that particular churn event and just given some incremental visibility we have, we know that that particular customer is going to churn about 70 basis points of their deployment in the third quarter and we are estimating the remaining 130 basis points of churn in the fourth quarter. So I'm not sure I could add any more commentary associated with it beyond that other than to say that it's obviously a customer we continue to have conversations with and we will ultimately what they end up doing during the fourth quarter but at this point we are modeling as if they churn but we don't have perfect visibility into that as we sit here today.

And Richard that, even that it just puts our churn in our normal historical range year-over-year.

Yes, I appreciate that Paul, I think we typically expect as though we are continuing to expect 6% to 8% churn for the full year of 2018.

Hi, thanks. I would like to follow up on the last question. What kind of interconnection footprint does the customer that is churning have? Additionally, regarding the scale leasing opportunities, how does the pipeline for that compare to a year ago, and do you expect it to continue to grow?

Yes, regarding the interconnection footprint, typically with larger leases we have interconnection amounts that are smaller compared to a couple of smaller deployments, whether viewed on a per square footage or per kilowatt basis. I don’t have the specific numbers available, and I’m uncertain if we will disclose them anyway, but it’s not a significant amount in the grand scheme of things related to our interconnection landscape. When considering scale leasing, as I mentioned earlier, it can be uneven in terms of the deals we finalize, but our overall pipeline remains healthy. Looking ahead, we are optimistic; it’s about aligning the key deployments that appreciate our ecosystem and are prepared to fairly compensate for it. There are lower cost providers who don’t offer the same value, and if their focus is merely on space, power, and cooling without recognizing that value, they may not be a suitable match for us. There are many kilowatts being sold out there that probably wouldn’t be a good fit for us, and managing our pricing and offerings within our ecosystem is the strategy we follow. Overall, we remain optimistic, and it appears feasible.

And regarding the extended development timelines, how should we think about CapEx into next year, can it be higher than 2018?

Yes, Ari, as you think about it typically when we have ground up development starts like what we would expect to see with LA3 in 2019 that's typically going to drive CapEx at the higher level than we would normally see. Without giving you some specific numbers, I would just anticipate it. I wouldn't see it decreasing meaningfully from what we expect for this year, let's just say that. I would expect it to be a little bit elevated like what we saw again this year.

Hi, guys. Just one from me as computing seems to kind of continue with positive momentum, what sort of opportunity do you think that presents for CoreSite?

Yes, I will address that. This is Steve, and I believe it's a tremendous opportunity for us. We continue to observe innovation in the marketplace that is transforming new businesses into global leaders. Traditional brick-and-mortar businesses are being overturned and are now operating in more electronic ways that demand low latency. All of this is being implemented at the edge, alongside advancements in artificial intelligence and the rise of 5G in mobile technology. This creates a critical need to enhance end-user speeds, which means edge computing. We feel we are well positioned for this because it requires interconnection and networks to facilitate these changes. We believe we have a solid model that supports the interconnection footprint and our capacity to handle mid-scale deployments that typically accompany edge environments.

Great, thanks. I will just ask one. I know you said last quarter you are operating at a slightly lower level of sellable inventory that you had historically, you could just update us on where you sit today, your inventory levels we look out towards the second half to 2018 and whether I need potential capacity constraints could impact your ability to continue your momentum with scale leasing over the course of the year? Thanks.

The good news is that we have restored our sellable inventory to more normal levels. We ended the quarter with approximately 265,000 square feet of sellable inventory and have completed 147,000 square feet so far this year. Additionally, we have 161,000 square feet of initial development phases in different stages of construction or development, and in those buildings, we could quickly add another 167,000 square feet of capacity. We still have some capacity in other markets for expansion. Looking back over the last two years, we went from having one building under construction in July 2016 and no new land for development to currently having four projects under construction or in development on new land, all of which are progressing smoothly. We feel like we have rebuilt the pipeline, and while the timing related to permitting can be unpredictable, it should only take a short amount of time before the new capacity comes online at a steady pace. Thank you for joining us today. I do want to thank my colleagues for another solid quarter. We are all very fortunate to work with a talented group of people here at CoreSite. I also want to congratulate Steve and Maile Kaiser on their new roles of Chief Revenue Officer and Senior Vice President of Sales respectively, and thank them for taking on those larger roles. I look forward to seeing if Steve and Maile can both further drive growth with their broader responsibilities. It is great that this exciting industry and our organizational ethos combine to enable us to provide these kinds of growth opportunities for our team. We look forward to the future. I hope you all have a great day.