American Tower Corp (AMT) — Q4 2019 Earnings Call Transcript

Thank you. Good morning and welcome to CoreSite's fourth quarter 2019 earnings conference call. I'm joined today by Paul Szurek, President and CEO; Jeff Finnin, Chief Financial Officer; and Steve Smith, Chief Revenue Officer. Before we begin, I'd like to remind everyone that our remarks on today's call may include forward-looking statements as defined by federal security laws including statements addressing projections, plans, and 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 our full earnings release which can be found on the Investor Relations page of our website at coresite.com. With that, I'll turn the call over to Paul.

Good morning and thank you for joining us. Today I'm going to cover our 2019 financial highlights and recap our 2019 priorities and key accomplishments. Jeff and Steve will follow with their respective discussions of financial and sales matters. Our 2019 financial results included new and expansion sales of $55 million, a record which nearly doubled the $27.7 million of annualized GAAP rent signed in 2018, operating revenue of $572.7 million, which grew 5.2% over 2018 and FFO per share of $5.10, an increase of $0.04 year-over-year. A year ago, I shared four priorities for 2019: translating new construction into more abundant sales, acquiring additional new logos, bringing new connectivity products online to increase sales, and delivering a great customer experience along with ongoing operational efficiencies. I'll review each of these relative to our 2019 accomplishments. We executed well in our first priority of translating new construction into higher sales. In 2019, we placed 224,000 square feet of data center capacity into service, including 108,000 square feet for the first two phases of FDA, our ground-up development in Santa Clara, and 116,000 square feet of campus expansions in Reston, Los Angeles, and Boston. As a result, we restored our available and developable capacity to 25% in our top five markets at the end of 2019, compared to 16% at the end of 2018. We used the new capacity to achieve a record leasing year, including leasing 100% of the first two phases of FDA and 74% of LA3 phase one a year in advance of its expected completion in late Q3 of 2020. Our 2020 development pipeline continues to be strong as we expect to deliver at least 196,000 square feet of new projects, including two ground-up developments, CH2 in Chicago and LA3 in Los Angeles, the final phase of SV8 in Santa Clara, and the data center expansion at NY2 in our New York market. Importantly, as we shift in the latter half of 2020 to delivering new computer rooms instead of completely new buildings, our agility and development yields should also increase. Our second priority of acquiring new logos also generated strong results. For the year, we acquired 145 new logos, our highest in three years. We attracted valuable new strategic accounts in multiple markets and grew annualized GAAP rent from new logos by 50% over 2018. Steve will provide more detail on these new logos and their attraction to our hybrid cloud-friendly ecosystems. Our third priority was to bring new connectivity products online to increase sales, which we also executed well on in 2019. We increased participation by 44% in the SDN-based Open Cloud Exchange format we launched in late 2018. We added inter-site service for connectivity between markets, providing route and site diversity to enterprises. We continued to expand our relationships with and offerings from key cloud providers with additional on-campus edge cloud products and availability zones. Our fourth priority was to deliver a great customer experience and ongoing operational efficiencies. We achieved several major accomplishments in 2019 that significantly benefit our customers. We achieved an exceptional Eight 9's of power and cooling uptime for 2019 across our portfolio of data centers. This level of uptime is well above our Six 9's target and even higher above the Five 9's industry standard. High uptime is key to minimizing customer disruption and increasing loyalty, especially for high-performance hybrid cloud deployments. In addition to our long-term record of customer compliance certifications, we added a new NIST assessment that helps customers meet certain compliance regulations related to federal government deployments, which helped us win some of our new logos in 2019. We again improved our power utilization effectiveness this year by 4.8% on a same-store basis compared to 2018. Our commitment to ongoing power efficiency improvements helps our customers and us maintain margins while making us all more environmentally sustainable. Finally, we deployed a new product in our customer portal, which gives customers ongoing visibility into their operating environment to streamline the management of their CoreSite deployments. Our 2019 achievements reflect a capable and committed team of colleagues and continuing strong demand across our markets. Even Northern Virginia, which was slow for most of 2019, saw good traction in Q4 leasing. However, we encountered some unusual headwinds in 2019 that offset some of our accomplishments. Our churn was well above our typical range, with heavier lease expirations and terminations from customers with business and service models affected by competition from the public cloud. Importantly, we believe we have significantly reduced our exposure to these types of customers. Meanwhile, abundant supply in Northern Virginia extended the normal J-curve on our new developments in that market by making large scale and hyperscale leases more attractive, which drove us to focus our leasing efforts near term on retail customers to preserve longer term returns. As we move into 2020, our priorities are to build on our 2019 successes. Our primary goals this year include: Completing on time our new data center buildings in Chicago and Los Angeles and translating that new capacity into sales that build on our market-leading customer ecosystem in LA and create critical mass for our ecosystem in Chicago; Improving on our strong 2019 performance and attracting major new enterprises to our hybrid cloud ecosystem; Thoughtfully expanding our products to help enterprises with their hybrid and multi-cloud needs; and Maintaining high levels of facility performance and customer service while continuing to invest in PUE improvements and other sustainability-focused opportunities. In closing, we believe our diverse network and cloud-dense campuses and the interoperability we enable for customers through our ongoing capacity growth, new connectivity products, and superior customer experience position us well to benefit from the secular tailwind for data center space and the demand for high-performance hybrid cloud solutions. With that, I'll hand the call over to Jeff.

Thanks, Paul. Today I will review our fourth quarter and full year financial performance, discuss our balance sheet, including our liquidity and leverage expectations, and review our financial outlook and guidance for 2020. Looking at our financial results, for the full year, operating revenues grew 5.2% year-over-year, reflecting increases in new and expansion lease commencements of 46.8%, growth in interconnection revenue in line with our expectations, offset by the elevated churn we experienced in 2019. General and administrative costs were $43.8 million, reflecting 7.6% of revenue in 2019 compared to 7.4% in 2018. Net income was $2.05 per diluted share, a decrease of 7.7%. FFO per share was $5.10, an increase of $0.04 over 2018, and adjusted EBITDA margin was 53.8%, a decrease of 60 basis points year-over-year. For the quarter, operating revenues grew 5% year-over-year and approximately 1% sequentially. We commenced new and expansion leases of 86,000 square feet during the quarter, reflecting $16.6 million of annualized GAAP rent. Our sales backlog as of December 31 included $15.6 million of annualized GAAP rent for signed but not yet commenced leases, or $19.8 million on a cash basis. We expect about 40% of the GAAP backlog to commence in the first half of 2020, with the remaining 60% in the second half, weighted to the fourth quarter with the completion of LA3 phase one. Adjusted EBITDA was $79 million for the quarter and increased 6% year-over-year and 1.4% sequentially. Moving to our balance sheet, in November, we amended our credit agreement, extending our near-term maturities. We also extended the maturity date of our revolving credit facility to November 2023, with a one-year extension option, and we added an additional $100 million of liquidity. We ended the year with $386 million of total liquidity, providing plenty of liquidity to fund our 2020 estimated data center expansion plans, which includes $179 million of remaining construction costs for properties currently under development. Our debt to annualized adjusted EBITDA was 4.7 times at year-end. Inclusive of the current GAAP backlog mentioned earlier, our leverage ratio is 4.5 times. As previously stated, we are comfortable with increasing leverage to five times. Based on our current development pipeline, and the related timing of capital deployment and commencements, we may temporarily trend higher than five times leverage in 2020, with the expectation of moderating leverage based on our backlog and timing of commencements. I would now like to address our 2020 guidance. Let me start with some perspective on our outlook for 2020. Our mission for the last couple of years has been to increase our development pipeline to provide more capacity in our markets. We invested significant amounts of capital and made substantial progress in 2019 on that objective. We've had a record leasing year, which was enabled by our new capacity, and supports our view that we continue to benefit from secular tailwinds for our strategic edge markets. At the same time, we experienced elevated churn in the last half of the year, which we attribute to customer business models that were not as strong as they were historically. We estimate that there's a minimal churn exposure in our remaining customer base in annualized GAAP rent for these types of customer use cases. We will be delivering additional capacity in 2020 to provide greater contiguous space, allowing us to further meet market demand. We expect the benefits from this new capacity will be mostly back-end loaded to Q3 and Q4 2020, given construction timing, and we will be focused on achieving pre-leasing of this capacity, including LA3 phase one, which was 74% leased at year-end. That brings me to our 2020 guidance, which reflects our view of supply and demand dynamics in our markets, as well as the health of the broader economy. Our guidance includes operating revenue estimated to be $600 million to $610 million. Based on the midpoint of guidance, this represents a 5.6% year-over-year revenue growth, which reflects the timing of our development pipeline. Our guidance also reflects the impacts of elevated churn, which we've estimated to be 9% to 11% for the year, based on our current expectations related to customer timing. About 250 basis points of this expected churn is from one customer in the Santa Clara market. Given the current market dynamics, we are optimistic and actively working to backfill this capacity. In terms of timing, we anticipate elevated churn in the first and fourth quarters related to customer relocations. Additionally, we expect cash rent growth on data center renewals to be fairly consistent with 2019 at 0% to 2% growth for the full year. Interconnection revenue is estimated to be $80 million to $86 million, representing 9.6% growth at the midpoint. Adjusted EBITDA is estimated to be $318 million to $324 million, and at the midpoint represents a 53.1% adjusted EBITDA margin and 4.2% year-over-year growth. FFO is estimated to be $5.10 to $5.20 per diluted share in operating units, at the midpoint reflecting growth consistent with 2019 or approximately 1%. Capital expenditures are estimated to decline to $225 million to $275 million, decreasing as expected from the approximate $400 million of capital spent in 2019. This includes $215 million to $250 million for data center expansions, primarily including the completion of the ground-up development at CH2 and LA3. With our investments in 2018 and 2019 and the initial phases of ground-up development at VA3, SV8, and the anticipated 2020 completions of CH2 and LA3, we have the flexibility to bring on data center expansions quickly and at higher returns in the future as we build out new computer rooms as needed within the existing buildings. In closing, we remain optimistic related to business drivers and secular tailwinds for our services. We're executing on our priorities to bring on capacity and translating it into increased sales opportunities. We also now have the capacity to accommodate additional growth should demand exceed what is assumed in our guidance. Our balance sheet is strong. We continue to stay in tune with the markets, opportunistically pushing out maturities and improving our borrowing position, and we believe we are well positioned for the long term.

Thanks, Jeff, and hello everyone. I'll start off reviewing our quarterly sales results and then talk further about our sales successes for the year and key drivers. We had a solid quarter of new and expansion sales; we delivered $6.6 million of annualized GAAP rent, primarily reflecting core enterprise leasing, including 31,000 square feet with an average annualized GAAP rate of $216 per square foot. Included in those results was a sizable multimarket hybrid lease, leveraging the unique capabilities of our campus platform to support their dense architecture and complex interconnection requirements. As a second example of how business continues to evolve and leverage low-latency, high-performance technology, we believe this and others, like this customer, will provide additional interconnection opportunities, as well as stickiness to our platform. Winning new logos has been a key driver for us throughout 2019, contributing importantly to these quarterly results. In the fourth quarter, we won 36 new logos. Two-thirds of these new logos were enterprise customers, which included some notable strategic accounts. Turning to pricing, overall pricing in our markets is fairly stable, except for Northern Virginia where pricing is softer, especially on larger deals, as we've been saying for the last three to four quarters. We were pleased with our fourth quarter sales in Northern Virginia, which outpaced each of the prior three quarters on a volume basis. Renewals are another key aspect of our releasing focus. During the fourth quarter, our customer renewals included annualized GAAP rent of $21.9 million, representing rent that decreased about 1% on a cash basis. Similar to last quarter, we had a few customer renewals negatively impact our cash flow growth for the quarter. This includes five customers that went excluded from our cash mark-to-market, which was a positive 3.4%. Churn was 2.9% for the quarter in line with our expectations. Next, I'll share some highlights of our sales wins and the related business drivers. Our 2019 sales set a new record for the company with $55 million of new and expansion sales in annualized GAAP rent, which was nearly double our leasing at $27.7 million in 2018 and included retail leasing of $23.2 million, a 19% increase over 2018, and scale leasing of $31.8 million, nearly four times higher than $8.2 million in 2018. Driving our new expansion sales this year were several key factors, including ongoing strength in new logo sales, strategic scale leasing, contribution from our channel sales, and the overall secular tailwinds driving customers with hybrid and multi-cloud needs to our data centers, enriching and broadening our ecosystem, deepening our communities of interest and in turn creating a network effect as our vertical markets became more diverse and more interconnected, all of which we believe enhances our competitive moat and further differentiates our data centers. Let me touch on these drivers. Our new logo annualized GAAP rent was the highest in three years, increasing 50% over 2018 and 172% over 2017, reflecting substantial progress on a goal we set two years ago to attract high-quality new customers that value our platform, which can help drive future growth as their IT needs evolve. Strategic scale leasing in 2019 was an important part of our results, helping us with pre-leasing at two ground-up developments in 2019, including 100% of SV8's first two phases, as well as 74% of LA3 phase one. Our channel sales were also an important driver, which increased to nearly 12% of our annualized GAAP rent in 2019. Importantly, overall absolute production from our channel sales grew 136% over 2018. As a final thought on key drivers, despite higher 2019 churn and that expected for 2020, on balance, more enterprises are buying from us as demonstrated by our new logo additions. We also believe our increased sales in 2019 more accurately reflect our market position and mid-term growth opportunities as we continue to take advantage of our growth capacity program to compete more effectively in the marketplace. In closing, here's a recap on why we win and what drove our 2019 results. We are located in strong edge markets, which uniquely position our assets to serve highly connected workload environments. Customers in every segment are seeking help in their ever-changing IT journey as they interconnect their hybrid cloud and multi-cloud needs into a seamless service for their end customers as they deal with increasing data growth, heavy reliance on technology to develop new products, serve new customers, and high-performance needs with no room for latency. We continue to focus on winning and growing with these customers as we help them solve their IT challenges to address the changing dynamic needs of their industry and their business. We're pleased with our execution in 2019 and look forward to further helping customers solve their IT challenges. With that operator, we would now like to open the call for questions.

Great, thank you. Power as a percentage of rental revenue came down in the second half of 2019. And your revenue guidance for 2020, I think, was below Street expectations. I'm curious if any of this has to do with the customer who's moving out of SV7, I think they may have actually already moved out and that space might be vacant. That's what I'm thinking is the explanation, but I'm hoping you could fill that in and provide some color on what the expectation is for power in 2020 that might be the delta between what the Street was expecting and what you guided to. And then secondly, regarding CapEx, I'm just curious what you've assumed for additional land purchases? Thank you.

Good morning, Colby. It's Jeff. Let me see if I can take your first question. You are correct, that some of that decrease in power revenue is directly attributable to the customer at SV7. As you think about 2020, I'd probably put it in simplistic terms from the standpoint of the guidance we've given you can see we've guided to an increase in revenue of about $32 million at the midpoint. We've also guided to interconnection revenue growth of about $8 million at the midpoint. The remaining $24 million, I would allocate that pro-rata to what our full year 2019 is, the relative portions between rent to power, which is about two-thirds rent, one-third power, as you think about modeling those components for 2020. In terms of CapEx, we have obviously the projects that are under development at this point in time. And as we work through 2020, we will have the need for the opportunity to add additional development projects that we will disclose at that point in time. At this point in time, we don't have any incremental land purchases in our guidance, not to say we're not looking, not to say we won't execute it on it, but right now none of that is embedded into the guidance for CapEx for 2020.

Okay, thank you.

Hi, so I just wanted to come back to the churn. It seemed like you had the guidance for the full year laid out last year, and we ended up at 11.1, just above the high end of the range. I'm kind of curious – I feel like you ended up a little bit higher for some reason, was there something that was missing? Or something that happened during the quarter that you didn't anticipate 90 days ago that caused an increase in that churn that you could sort of speak to? And I guess sort of similar question for 2020. I feel like you discussed last quarter on the call the normalized level of 7.5% to 8% plus a little extra from this customer move-out. But it even seems like this customer move-out exposure in the fourth quarter of '20 feels like the full exposure of the customer as opposed to half of the exposure that customer. I can clarify that if that doesn't make sense.

Yeah, Jordan, let me see if I can address that and see if we can clarify some things. But let me just start with the 2020 churn and then I'll come back and talk about the fourth quarter. As it relates to 2020 churn, what we tried to communicate last quarter is that we expect our churn in 2020 to recede back to its normal levels of call it 7.5% to 8% with the exception of the fact that we have to add another, as we just said on the call, 250 basis points related to that specific customer. So all in, you're going to have churn somewhere around 10%, which is what our guidance is. We tried to communicate that last quarter, and I think it got lost a little bit in the translation. And so I just want to make sure we're clear on that. So we expect the midpoint at 10% inclusive of 250 basis points from that one customer.

Is it 250 in 4Q of '20 and 250 4Q of '21, Jeff?

It's 250 in 4Q of 2020, and it'll be less in the fourth quarter of 2021. Just to give you an idea, it's five megawatts this year, four megawatts next year, for context on how that deployment will mature.

Okay.

And then as it relates to the fourth quarter, Jordan, obviously, the full-year churn came in slightly ahead of and higher than what our guidance was. I would point to two things. As it relates to our churn in 2019 and in 2020, we had some of that churn that we expected to ultimately take place in the fourth quarter of this year, so a little bit earlier than we anticipated. And then as I said in the prepared remarks, we expect to also have our churn in the first quarter of 2020 to be elevated. The full year, we still expect it to be in line with what we anticipated, but the timing associated with it got moved into the first quarter where some customers are moving out sooner than we expected. As a result of that, we expect first quarter churn to be somewhere around 325 to 375 basis points. Those two elements of some of that moving sooner than we anticipated are obviously weighing in on some of the guidance we've given for 2020.

Okay, and then I have a bigger picture question for you, Paul. Is it fair to say that we've passed the point of maximum valuation and/or maximum growth for data centers in the US?

No, Jordan, it's a good question. It may seem odd or contradictory that we have, for example, record sales and record churn in the same year. But it makes sense if you view them as two sides of the same technology coin. Our record sales reflect new data business models and use cases that have significant tailwinds behind them, as reflected in our growing new logo sales and edge in major metro cloud sales and continuing growth from customers acquired in recent years. The churn primarily reflects business models that are waning and, as Jeff mentioned, have become a significantly smaller part of our portfolio, meaning that the amount of that churn should decrease, especially as we extend this accelerated churn into 2019 and 2020. The lower CapEx relates back to what I said in my prepared remarks that we are shifting from the need to build out entirely new buildings to a phase where we're building out new computer rooms in existing buildings which we can do more quickly and have higher returns. We should emphasize that as the company grows, your denominator gets bigger and the industry has matured somewhat in terms of new capital coming into the industry. We still feel very good about our business model and our markets. We actually have more markets that we can grow in than we practically had a few years ago because we used to be highly dependent on three markets. We didn't have scale in Chicago and New Jersey was more urban for a few years. But now we're building scale in Chicago, and New Jersey has picked up as a nice enterprise market. So we believe we can deliver above-standard growth compared to the rest of the REIT industry, serving an industry with significant tailwinds. We feel very optimistic. However, we were impacted last year and this coming year by this accelerated churn from older business models.

I would just add, Jordan, to point you back to some of the prepared remarks there as well. Look at the overall demand characteristics we've seen, especially in the last year and the number of new customers that have contributed more revenue. The average size of those customers has also significantly increased. Overall demand is strengthening.

Okay, I'll jump back in the queue. Thanks, guys.

Yeah. Thanks for taking the questions. So it looks like at the 30,000 square feet leased McWhorter, about half that was mostly the Virginia, Northern Virginia, DC market and some Denver. Where was – it's hard to discern where the other half of that was market-wise? And second question on renewal pricing, the weak renewal pricing or the recurring sort of low renewal pricing in 2020, can you characterize it a little more? Is it a broad number of customers, concentrated customers in the early, middle, end of the year? I'm just trying to figure out why, again, the renewal pricing is kind of weak.

Yeah, just to give you some perspective on the strongest markets, which implies where some of that larger leasing came from were LA, Northern Virginia, and New York, so hopefully that gives you a little bit more color as to where those leases came from. And the second part, your question.

Just some color on the muted renewal pricing this year. Can you characterize it? Is it a few customers or is it sort of widespread? Is it an even pace through the years? Is it concentrated with one customer in the second half? I mean, just trying to figure out why the renewal pricing is kind of weak.

Yeah, and it's pretty indicative. As pointed out in the prepared remarks around Q4 leasing where we had a few customers that dragged down our mark-to-market to a negative 1%. When you exclude those five customers, we actually had a positive 3.4% cash basis. So as we look at some of those aging customers, those specific customers signed with us back typically in the 2015 or prior era, and as they've had annual escalations in their rent and some of the pricing in those markets has been stable or in some cases decreased. We made some adjustments that have brought down the overall expectation there. So there's a little bit of that sprinkled throughout the guidance, but that's also baked into the overall assumptions in guidance for 2020.

Okay, thank you.

Thanks. I got a couple. I was interested in any markets you would call out that have seen elevated levels of current demand compared to last year? And wanted to get an update on the SV7 backfill situation if you could provide us a bit more color than what you've provided in the script if that's possible. And then finally, the customer relocations in 1Q and 4Q, which markets is it occurring in and are these customers that are moving to the cloud or just downsizing or going through consolidation? What are the factors that are leading to this occurrence? Thank you.

The markets we’ve seen a pickup in demand for include, as I mentioned, New York has really improved. Santa Clara continues to be strong. We obviously had strong demand in LA last year. In Virginia, good traction in Q4 leasing. The relocations primarily relate to the SV7 lease you talked about. That customer's applications were not performance-sensitive, didn't need to be in Santa Clara, and they moved it to a lower-cost market. Another relocation is out of Milpitas; they made a similar cost rationalization decision. Our sales team is working with existing customers for backfills for that space. The customer itself has hired a brokerage firm for their leasing, and we'll see how that plays out.

Thank you.

Hi, thanks for taking my question. When you look across your entire book of business, not just leases we’re doing in 2020, how do you feel about mark-to-market risk, particularly in Northern Virginia?

It’s hard to look beyond that since it depends on supply and demand in each of our markets. But I believe that some of that will go away as we pass certain vintages of past leasing.

Got it and then Steve, you noted significant growth in deals that came through the channel. Do you expect additional growth in channel deals in 2020 and beyond? And how do you think about the cost of acquiring revenue via the channel versus in-house and minimizing potential channel conflict?

It definitely is a balance. I do see value in extending the channel, and we have some efforts internally to continue that growth and actually look at some other channels to broaden our reach into key customers. As we look at the market, there's a great opportunity for mid to large enterprises that really wrestle with managing their IT challenges.

Okay, got it. Thanks, Steve.

Hi, thanks and good afternoon. Could you help frame if you take a look at the signed leases in 2019 and the $55 million of annualized rent? Can you frame for us what the total opportunity was that you were pursuing in dollars in 2019? Is there less available in the market for certain areas you want to fill? Are you purposely moving away because of price over churns or some other factors? And then the second part, are there things in the portfolio that CoreSite would benefit from over time, a larger sales force, different systems, or certain geographies? Are there things that could be incremental to pursue the growth and wallet share opportunities?

We typically don't give out specific sales forecasts, and we probably shouldn't retroactively give out comparisons to sales forecasts. We're very happy with having a record sales year last year. In terms of your latter question, it's about executing strategy effectively. We've put more focus on execution, which you see in our results. We’re selling more effectively, especially with the transition to hybrid cloud data center solutions.

Thanks.

Hi, thank you. Looking at your annualized rent mix by customer type, cloud revenues keep growing as a percentage of the mix now at 33% of annualized revenues as of 4Q 2019. But if I look at the total enterprise rent or the enterprise mix that moved to 44.6% on an annualized basis, it was actually down slightly in 4Q '19 and down a little bit more sequentially in 3Q '19. Could you give us more color on why this is happening and should the enterprise footprint in your facility on an annualized revenue basis continue to decline as a percentage of total mix or stabilize around this 33% of annualized rent level?

What you're seeing, Sami, is just another manifestation of the churn versus sales dynamic. The churn primarily consists of older business models that have shrunk as a percentage of our portfolio. As that churn continues to wane, the enterprise percentage should rise, but we will see more edge cloud use cases and cloud demand counterbalancing that.

About 78% of new logos are enterprise customers. Those new customers reflect the balance of our growth strategy and we do expect those lumps in cloud projects, but that's how they buy.

Got it, and then just as a follow-up, as you look at your interconnection revenue that keeps outpacing rent growth year-on-year, could you pinpoint which customer types are driving this? And do you think that this could accelerate given the change in the data manifestation business types?

In terms of that interconnection revenue growth, historically, about two-thirds of that growth comes from volume increases, and the other one-third comes from customers upgrading to higher price products. As you think about going forward, cloud customers are ordering connections at a rate higher than our overall growth.

Customers are interconnecting into a low-latency environment, and with some of the upgrades we've made, we've seen good upticks in that product.

Got it, thank you.

Great, thank you. I want to go back to the churn and just get a little more detail. You did mention that you have customers impacted by going to public cloud; you think this is going to slow down. Can you give us some more color on what you're basing that on? Is it customer feedback, or is there a particular vertical that you have exposure to, and why you're confident that after these next couple of quarters, the situation will correct itself?

We've spent time digging into the churn contributors related to business models that are not as strong today. Some examples include resellers and other business models that rely on burst capacity, which have migrated to the cloud or lost strength. Our remaining exposure in annualized GAAP rent is around 4% to 6%. We are comfortable that churn will recede to historical levels.

Okay, great. Thank you.

Yeah, thank you for taking the questions. Just quickly on SV7, can you let us know about the expiring rent there relative to market rates?

We try to avoid discussing specific customer details. However, the lease was signed during tight market conditions, but current conditions in Santa Clara remain tight as well, making predictions difficult.

Great, and then just as a comment on some other comments in the quarter, Cummings mentioned a projected decline in power generation due to construction slippage from '20 into '21. Google said more of their budget will go towards servers instead of data centers. What are your thoughts on the strength of the data center market and its demand?

Demand still seems strong from what we see. However, supply is abundant in low-barrier markets leading to overbuilding. In Northern Virginia, that has abated quite a bit. Overall, we don’t see a slowdown, with major CSPs continuing to demonstrate growth in absolute terms year-over-year.

And does that imply a pullback in speculative capital in the markets you compete in?

Yes, specifically we’ve seen a pullback in privately funded speculative development in Northern Virginia. Some platforms have announced they won't proceed with it to pivot to build-to-suit models.

And what exposure do you have to second-tier data center providers?

That's covered in Jeff's comment regarding our reduced exposure to that sector in general. It has contributed to some churn, but we don't have much of that left.

Great, thanks for that clarification.

In terms of your 2020 guidance, how should we think about the range of your revenue guidance of $600 to $610 million? What can drive that to the lower end of that range? And what are your thoughts about the company's ability to return to low double-digit growth in possibly 2021?

Our development pipeline gives us agility to compete effectively, but ultimately depends on how the market evolves. We are optimistic about getting back to high single-digit growth rates, assuming we execute on priorities laid out and that churn recedes.

Relative to other REIT sectors, we believe our prospects for recurring annual growth are better than most. We're confident in our growth strategy and the improvements made in execution.

Great, thanks. VA3 seems to be making nice progress despite no scale deals in the quarter. Are you starting to see any movement where leasing dynamics are improving for larger deals?

Our fourth quarter was actually the best quarter we’ve had in two years, with a good pipeline and results. We're optimistic that larger deals will materialize, and we're focusing on both retail and scale opportunities.

Thanks, and maybe just as a last thought. Last year was a great year for your scale colo business, and you mentioned that it was up 4X from the previous year. Is that an achievable target for 2020 or is it still too early to tell?

We remain optimistic about growth opportunities ahead. However, forecasting that type of growth is challenging since those deals tend to be lumpy.

Thanks for taking my question. When you look across your entire book of business, not just leases we’re doing in 2020, how do you feel about mark-to-market risk and particularly in Northern Virginia?

It’s hard to look beyond that since it depends upon supply and demand in each of our markets. I believe that some of that will go away as we pass certain vintages of past leasing.

I'll start with the last part of that question. There’s a need for partners as enterprises evolve their IT strategy and for kolocation to help them interconnect.

Got it, seems like a number of your peers are leaning harder into the channel as well. Do you think that's just kind of a natural function of new enterprises being potential customers going forward or is there a risk that people become overly reliant on the channel?

It's crucial to balance that mix, but partners are key for enterprises dealing with the complexity of their IT challenges.

Okay, got it. Thanks, Steve.

Hi, thanks and good afternoon. I guess two things if I could. First, can you help frame if you take a look at the signed leases in 2019 and the $55 million of annualized rent, can you frame for us what the total opportunity was that you were pursuing in dollars in 2019? It gives us a relative sense. And are you finding that you're – that there's just maybe less available in the market for certain areas that you may want to fill? Or are you purposely moving away from those because of price over churns or some other factors? And then the second thing is just – if you take a step back, are there things in the portfolio that CoreSite would benefit from overtime larger sales force, different systems, certain geographies, are there certain things that you're finding could be incremental to pursue the growth and the wallet share opportunities that you're looking to achieve? Thanks.

So Michael, typically we don't give out specific sales forecasts. And so we probably shouldn't retroactively give out comparisons to sales forecast. But obviously, we're very happy with having a record sales year last year and what it tells us about the market. In terms of the latter part of your question, it's a really good question and kind of balances between strategy and execution; what you're doing, what we're doing. Strategy is obviously really important, and we and our board take it seriously and evaluate it regularly. Execution is what drives results and we have focused on execution in the last few years.

Thank you.

Hi, thank you. Looking at your annualized rent mix by customer type and surprisingly cloud revenues keep growing as a percentage of mix now at 33% of annualized revenues as of 4Q 2019. But if I look at the total enterprise rent or the other enterprise mix that moved to 44.6% on an annualized basis, it was actually down slightly in 4Q '19 and it was down a little bit more on a sequential basis in 3Q '19. So could you just give us more color on why this is happening and should the enterprise footprint in your facility on an annualized revenue basis continue to decline as a percentage of total mix or should it be stabilizing around this 33% of annualized rent level?

Well, I think what you're saying Sami is just another data manifestation of the churn versus the sales. I believe Andrea will correct me if I'm wrong, that the vast majority of the operations we've been experienced this year and last year that relates to these older business models has been categorized in the enterprise bucket.

That's correct, yeah.

So as that bucket – those enterprises have shrunk as a percentage of our portfolio and eventually that churn wanes because we just don't have that much more left there. Theoretically, that should see – that should drive up the percentage of our share of enterprise with the caveat that as we saw last year, we are seeing more edge cloud use cases and cloud demand for availability zones in these high performance markets. So that may counterbalance the growth in our enterprises.

And Sami, just to give you a bit more color around the new logos that are buying from us, about 78% of them are enterprise customers, which included some notable strategic accounts. So this gives you a bit of color as to where the new logos are coming from. I do think you'll see some big lumps in cloud as that's how they buy.

Got it and then just as a follow-up, as you look at your interconnection revenue that keeps outpacing rent growth on a year-on-year basis. Would you say some of these new data manifestations or what is driving some of the acceleration that interconnection growth? And if you were to pinpoint on customer types, cloud, network, and the other enterprise category, do you think that this is – which customer type is driving this, and do you think that this could accelerate given the change in the data manifestation business types?

In terms of that interconnection revenue growth historically, as we've said, you get about two-thirds of that revenue growth that come from pure increase in just the volume of the cross-connect products. Then you get your other one-third of that growth really comes from those customers moving from a lower price product into a higher price product, as well as customers renewing and getting some price increases from those conversations, adding the edge cloud customers are ordering connections to at a rate higher than our overall growth.

Customers connecting their hybrid architecture need to be well connected in low latency, and with some of the upgrades that we've made in our OCX platform, as well as adding new on-ramps to our campuses, that’s helped facilitate that interconnection growth.

Got it, thank you.

Great, thank you. I want to go back to the churn and just get a little more detail. You did mention that you have customers impacted going to public cloud; you think this is going to kind of slow down. Give us some more color on what – so what is that based on? Is that customer feedback or is there a particular vertical that you have exposure to, and why you're confident that after these next couple of quarters, were you calling out the elevated churn that this situation you found yourself in is going to correct itself?

We've obviously spent a lot of time, energy, and effort in understanding some of the contributors to the churn, specifically related to some of those business models. Some of the resellers in the marketplace are an example of some of those business models that are not as strong today, which impacted our 2019 churn and some of its impact in 2020. We estimate that there's a minimal churn exposure in our remaining customer base of annualized GAAP rent for these types of customer use cases. As we go into 2020, we believe those churn levels will recede back to their historical levels of 7.5% to 8%.

Okay, great. Thank you.

Yeah, thank you for taking the questions. A couple if I could. Yeah, going back to your comments on SV7, maybe just quickly, can you let us know what the expiring rent is there relative to market rates? Then I've got a follow-up question after that one.

We try to not talk about customer specifics. We've mentioned in the past that this lease was signed when market conditions were tight in Santa Clara, but they seem to be fairly tight in Santa Clara today as well, making it really hard to predict.

Great and then second one, you mentioned the part of the move driver is a performance-centric application maybe not being as performance-centric as the customers thought. What visibility do you have into the use cases of your customers in those facilities, and maybe risk of further churn as customers look at the need to be paying peak rents versus being say hundred miles away?

Visibility varies; some customers may not have a clear understanding since they start scaling. However, we don't have comparably sized dynamics that would be subject to this elsewhere in the portfolio.

And so I appreciate the time here. Just to clarify, so what is your exposure if any to some of the second-tier data center providers, even guys like Flexential, Cyxtera, Internap? Do you have any exposure there as far as leasing space?

I think that's covered in Jeff's comment about how our exposure to that kind of sector in general has declined. That has been, in some respects, some of our churn – at least with respect to one of those companies. But again, we don't have much of that left.

That's great. Thanks for clarification.

Yeah, thank you. So in terms of your 2020 guidance, how should we think about the range of your revenue guidance 600 to 610? What can drive that to the lower end of that range? And then what are your thoughts about the company's ability to return to low double-digit growth in possibly 2021?

Our development pipeline gives us the agility to compete effectively; however, that depends on how the market evolves. We are optimistic to achieve high single-digit growth assuming we continue executing on our priorities.

We believe that our prospects for recurring annual growth over the intermediate term are higher than for most REIT sectors, making us optimistic about growth opportunities despite challenges.

Great, thanks, and then VA3 seem to make nice progress despite no scale deals in the quarter. Are you starting to see any movement where leasing dynamics are improving where you would potentially participate in this market when it comes to larger deals?

Our fourth quarter was actually the best quarter we've had in two years. We're optimistic about the pipeline and are focused on both retail and scale opportunities moving forward.

Thanks, and maybe just last, just following on that theme. Obviously, last year was a great year for your scale colo business. I mean, I think it was up 4X of what it was the prior year. Is that at where we are today – is this sort of an achievable target for the company this year or is it still too early to tell when we're waiting on some of these key markets to come back?

As Jeff mentioned, we're optimistic about growth opportunities that we see ahead of us. However, forecasting that type of growth is challenging since those deals tend to be lumpy.

Thanks for taking my question. First, when you look across your entire book of business, not just leases we’re doing in 2020, how do you feel about mark-to-market risk and particularly in Northern Virginia?

It's difficult to predict due to the dependency on local supply and demand dynamics. I believe we may see improvement as we move beyond certain vintages of past leasing.

There's significant complexity for enterprise customers in the current environment regarding IT evolution and managing their cloud strategies, which creates increased demand at our data centers.

Got it. Thank you, guys.

I just wanted to clarify on the annualized cash rent growth. You mentioned that the five customers and you mentioned the 2015 vintage. Is this something that is going to last just through 2020 or is it going to last for a few years since it just started in the second half of last year? I just want to get a sense of how long you might be facing some of these roll-downs going forward.

It's hard to predict beyond 2020; however, based on historical patterns, we should see improvements after 2020 as the effects of certain vintages recede.

The fourth quarter lease expiration table will give you an idea of the expirations per square foot relative to our current pricing and help us monitor that moving forward.

Got it, thank you.

Thanks. I just want to dial in a second on California for a second. Could you give what you think market pricing is for scale in Santa Clara these days?

It's difficult to disclose market pricing due to various factors affecting pricing for customers. The pricing varies widely based on several parameters including density and interconnection requirements.

Is it feasible for scale requirements to be better than $250 per K?

It depends; different factors come into play in negotiations, making it challenging to quantify.

Different dynamics affect our ecosystem making projections difficult because of how well our interconnected customer base adds value.

And then this is for maybe for Jeff. Jeff, have you thought about the potential exposure to Prop 13 for CoreSite?

We've looked into it over the last couple of years. The portion of our property tax expense that sits within California and we cannot pass through is about $3.5 million, which represents about 15% of our total property tax expense. As we look at that amount, it sits at an average remaining lease term of about two and a half years, so we have many opportunities to have conversations about this.

So your direct exposure to California property taxes is 3.5 million.

Yes, for that specific portion that we cannot pass cost increases to customers.

Okay.

These leases associated with that amount have an average remaining lease term of about two and a half years. We'll have plenty of opportunities near-term to keep conversations going regarding this.

Further contextualizing these estimates, if the proposition passes, it will likely be implemented in late 2021 into 2022.

Right. Okay, thank you.