Q3 2019 Earnings Call
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I'd now like to turn the conference over to Michael Shaffer. Please go ahead.
Thank you Sarah good morning, everyone and welcome to Cyrus ones third quarter 2019 earnings call.
Today, I'm joined by good topic, President and CEO and Diane Morefield CFO .
Again, I would like to remind you that our third quarter earnings release, along with a third quarter financial tables are available in the Investor Relations section of our web site at Cyrus one dot com.
I'd also like to remind you the comments made on todays call and some of the responses to your questions deal with forward looking statements related to Cyrus one and are subject to risks and uncertainties.
Actors that may cause our actual results to differ from expectations are detailed in the company's filings with the FCC, which you may access on the Fccs website or on Cyrus one dot com, we undertake no obligation to revise these statements. Following the data this conference call, except as required by law.
In addition, some of the company's remarks. This morning contain non-GAAP financial measures you can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the investor section of the company's website.
I would now like to turn the call over to our president and CEO , Gary what topic.
Thanks, Jay for walking the Cyrus warns third quarter earnings call.
Let me start by saying that what we've had some pretty good quarterly results over the last a couple of years out a few that had larger bookings numbers I can't recall a quarter that was stronger than this one given the large number of both financial and operational accomplishments and I'm excited about position. We're in as we begin to look ahead to 2020.
Slide four shows the growth rates for revenue adjusted EBITDA normalized FFO normalized FFO per share. We're all very strong in the quarter materially above the peer group, who bought a read averages. This wasn't my view, the best leasing quarter and the company's history with $52 million, an annualized revenue sign and the most diversification we have ever had across mark.
It's verticals and product types, including a big contribution from Europe .
Our backlog is nearly $55 million de risking our growth in 2020.
Have development activity across our markets and both the U.S. in Europe in response to the strong customer demand. We are tracking. We're also recently acquired 20 acres of land, Iowa in connection with the least deliver a unique hybrid cloud solution for enterprises, allowing us to provide the provide the private cloud walk through an architecture that is.
Never get me more efficient centered than the traditional onramp compute node network topology.
Lastly, as you know we have been focused for years I'm getting to investment grade, which will be incredibly important to our future success.
Slide five provides more color on the leasing results then as I just mentioned it was very broad base in both the U.S. and Europe . There were a couple of larger deals, but the biggest was only 5.5 megawatts and seven markets had at least one megawatt of leasing which highlights the benefit of having a geographically well diversified portfolio. We continue to have true.
And the success leasing to enterprises and this quarter, we signed a record $23 million, an annualized revenue to enterprise customers, which is 40% above our prior record.
It's always been a little surprising to me that so many investors view us as a hyperscale data center company seemingly forgetting that the majority of our revenue was generated from enterprise companies.
We have always made the necessary investments and our sales and operational capabilities to serve the needs of the enterprise, which is expensive difficult could do and time consuming and which are the exact reasons why so many other companies shy away from this market and just want to focus on the Hyperscalers. The benefits of these investments are easy to see as we have generated record.
Enterprise sales over the last four quarters, which was particularly important as the hyperscale companies slowed their purchases.
We expect continued strong growth enterprises in the coming years and are better position to capitalize on this the Matt than many other providers, especially as we now have a much larger international footprint that said, we expect that demand from Hyperscalers will begin to increase towards the second half the 2020 and we expect these companies will continue to contribute significantly.
To our growth as we expand internationally.
Moving to slide six as you can see our European business has really taken off we expected to do well when we decided to expand into Europe . Unfortunately, we are doing even better than we had originally anticipated we made the decision to build the European platform. After receiving so many requests from our hyperscale customers to develop our product in Europe , which a store.
Basically has been an interconnection focused datacenter market that lack the large scale data center deployments, that's iris mourn is well known for delivering in the U.S.
Well, our original underwriting assume we would leverage or hyperscale business to initially grow the European market. We are absolutely focused on developing equally strong enterprise an eye ex businesses there similar to what we built in the U.S. This will take a few years to develop but we know that the returns are well worth it.
Europe revenue grew 81% year over year and is now $70 million on an annualized run rate basis, which is nicely ahead of our expectations.
To date, we have signed nearly $40 million, an annualized revenue, which represents over 40% of our total year to date bookings and as a result and is really strong considering that we haven't even launched our Irish another ones facilities, which will that doubles the size of our portfolio in Europe , we're developing over 50 megawatts across all the key European markets.
Combined with your European capacity. Once these projects are completed we will have nearly 150 megawatts in Europe .
Which represents nearly 20% of our overall perspective footprint.
As I mentioned, where we were launching our European expansion I want it Europe to be about 25% of our revenue in three years and we are executing according to that plant.
Slide seven provides an update on another substantial business that we have organically built from the ground up that also never seems to get much attention, which is our interconnection business similar to where strengthen the enterprise market. Our interconnection business also seems to get over look as if this quarter is generating $50 million, an annual revenue and it grew 20.
4% year over year, which I believe is the fastest growing interconnection business in the industry.
We have seen consistently strong growth in our I ECS business, which is the result of a noticeable change in data Center network topology that is underway.
The change in topology is being driven by the growing importance of compute and storage notes and the early days of the Internet Eyeball acquisition was the primary motivator for companies that were looking to distribute their product to customers over the internet, which in turn placed a high value on establishing interconnected datacenters. However, what we're seeing now is that day.
It is becoming the new gold of the Internet and as datasets become so large they are becoming these digital black holes that continue to grow at an exponential rate.
The network nodes that dominated the growth of the datacenter industry for the first 30 years are becoming less relevant and we believe will be subsume at that hyperscalers compute and storage nodes, which will be where the next wave of internet value creation comes from.
All of the potential value creation that people believe will be generated from art Hatfield artificial intelligence will primarily be generated and the compute and storage nodes of the datacenter and to a lesser degree in the network nodes.
This is a trend that has just started and we believe will only accelerate over the next five years, playing to Cyrus ones core competencies of building massively scale low cost data centers.
The recent development, we have announced in Iowa as validation of this trend whereby we will build an enterprise data center in close proximity connected with the direct fiber bad to a leading hyperscale hyperscalers compute and storage nodes, which we used for hybrid cloud deployments.
Bypass and interconnection facility driving significant improvements in performance cost and security for these developments, making it a very attractive value proposition for enterprises, particularly those with the massive data sets I referenced earlier.
Turning to slide eight we have been showing these property level development yields for years, including the past several quarters. This quarter. We wanted to highlight Austin, three which has 60000 square feet a raised floor and additional capacity for growth.
It was commissioned in the fourth quarter of 2015 any yield progressions very similar to the yield progression of the other facilities on the slide that we have shown recently all of these started negative what we delivered the initial capacity or in a lease up phase and overtime. They progressed to the mid to upper teens range. This is the trend we have seen throughout our markets for years.
Thats. The reason, we continued to make investments across the portfolio as they are highly accretive I continue to share. These development yields slides every quarter as I think it's important for investors to understand the yield progression of our properties.
We continue to invest in or an and best inorganic growth and expansion activities with 13 expansion projects across end markets and five countries. These projects will initially generate negative yields button every investment we have shown the yields turned positive and start generating great returns and we expect that trend to continue.
I would point out that excluding acquisition related funding, 100% of the equity raises we have done over the past 24 years has put a 24 months has produced massive value creation for shareholders. Despite the initial dilution.
Our investment and no data has meaningfully increased in value as the company has gone from having two megawatts of contracted power to more than 14 megawatts and still remains in the early stages of expansion Ricardo and the team have ambitious goals expanding outside of Brazil, more recently into Colombia, and most recently into.
Into Mexico.
Similarly, we have also create a tremendous value by our GDS partnership which continues to be the fastest growing datacenter company in the world William and his team are managing an incredible ride over there trying to stay on top of really strong growth rates.
Slide nine highlights the significant outperformance for the quarter compared to the pure data center recruit and the broader reach universe. We are growing in the 20% range across all of our key financial metrics, which is three times faster than our peers and substantially faster than other Reits.
The reason, we have consistently been delivering industry, leading financial performance as because we have methodically and consistently invested a substantial amount of capital inline with the customer demand. We are generating this quarter youre seeing the convergence of our AFFO per share growth with revenue and EBITDA growth, which is the result of the incremental operating leverage we generate as our.
Initial developments, which are all essentially equity funding get sold out which drives significant value accretion across our assets as I highlighted on the previous slide.
Given that we currently have the capacity the triple the size of our footprint with powered shell in land inventory, we should be able to generate additional value for customers for years.
The last thing that I want to discuss the achievement of being given an investment grade rating for those of you have been evolving Cyrus one since our IPO you know that one of my objectives has always been too and obtain investment grade rating. This was something that I had my original business plan that I developed 10 years ago and it's the only objective from that plan that I haven't achieved in fact.
We have exceeded every other financial and operational objective by a large margin except for getting investment grade rating. So this is something that is personally one of the most rewarding accomplishments we have achieved basically because it's taken us so long to do it.
As I've mentioned in the past all of our customers are concerned about the financial sprint of their datacenter partners as they are entering 10 to 15 year contracts with us and need to know that their partners are financially secure as they are.
For reference there are only about 400 investment grade companies in the country. So we're one of the few companies that have an investment grade designation.
In closing the business is firing on all cylinders, we had a tremendous leasing quarter aren't sitting at $92 million in bookings year to date. So we've already achieved our $20 million to $25 million quarterly guidance for the year through the first three quarters.
Our decision to expand in Europe was clearly the right one that that business is growing very quickly and you are now beginning to see the benefits of the investments we have made there.
Combined with our business partnerships in Asia, and Latin America, we have established ourselves as one of the very few providers that can meet our customers' needs across the world. We're also in the strongest financial position in our company's history, which will support a robust set of growth opportunities, while lowering our cost of capital last seen in the quarter. We became the number one best perform.
Being rate in the R&D as measure from the time of our IPO.
Before I turn the call over to Diane who will provide more Colorado financial performance for the quarter, an update our guidance I wanted to discuss some market rumors as you may be aware several media outlets have report it in some of you have speculated that we're we're in discussions and Barrett with various third parties regarding potential sale the company.
We're not currently pursuing a sell the company we remain focused on our strategy and creating long term shareholder value. We do not intend to have any further comments on the recent media reports and market rumors, but look forward to discussing our results for the quarter I will now turn the call over to die. Thank you.
Thanks, Gary and good morning, everyone as Gary mentioned, we had a great quarter with very strong financial and operational performance as slide 11 shows revenue and adjusted EBITDA grew 21%, 20%, respectively normalized AFFO per share grew 18% and as Gary indicated this is a significantly higher growth rate compared to.
The broader reach.
Churn with again low at 1% and we continue to trend toward the lower end of our 5% to 7% guidance range, turning to slide 12, and a lag or 18% on an adjusted basis.
The decline in the margin year over year was driven by higher pastor metered power reimbursements as a percent of the total revenue which results in zero margin contribution I.
Adjusted EBITDA grew in line with done Hawaii, and the increase in normalized FFO was driven primarily by the increase in adjusted EBITDA as well as lower and lower interest expense.
Moving to slide 13, we maintain a balanced geographic contribution across our markets with the leasing success, we've had in Europe and our continued expansion there the contribution from those markets will continue to increase overtime.
The percentage of CSF lease for stabilized.
Properties was down slightly compared to the prior year that remains high at 88.
Percent, despite a 16% increasing capacity.
Turning to slide 14, they've ever bought development pipelines are strong leasing results with projects across a number of our markets in both the U.S. in Europe . The pipeline is 45% preleased on the CSF basis, which is up significantly from the prior quarter. The overall part portfolio will roughly.
25% bigger honestly, it's up basis compared to year ago. Upon completion of these projects.
Moving to slide 15, as Gary mentioned, we're thrilled to finally achieved investment grade status SMP. It up graded our issue level rating to triple B minus a year ago and with Fitch initiating coverage recently with a triple B minus rating. We now have the two ratings, we need for investment grade index eligibility to be able to access that.
Good.
Additionally, Moody's recently upgraded us to one notch below investment grade.
As you know we've been focused on getting investment grade for years and in addition to the obvious financial benefits are also significant strategic benefits. Most importantly, it improves or access to capital, which is critical in a capital intensive business and ensures that we are able to take advantage of the secular demand trends in the coming years.
I'd like to high yield market investment grade bond market never shuts down and in periods of economic distress or a recession. It will give us a significant strategic advantage since we can be opportunistic potentially acquire assets at discounted prices.
As Gary also mentioned, it's very important to our customers, particularly the hyperscalers, but also enterprise costs.
Pardon me company to know that they have partners that are financially sound.
And to support their growth. They also want to know that the providers. They ensure their mission critical gear will be would be around to the long haul and financial risk is just as important to them at the security and reliability of the data center infrastructure.
It also no doubt will improve our profitability and we estimate that weekend.
Steve savings of at least 100 basis points as an investment grade issuer compared to the high yield market.
And with our build cost advantage. This helps insulate us from aggressive pricing decisions by other providers.
Turning to slide 16, we believe we've had an investment balance sheet of an investment grade company for years and now that we have finally reached that status. We will continue to manage our leverage in the mid five times range to protect our rating. We ended the quarter at 5.4 times net debt to last quarter annualized EBITDA, we have no near term maturities.
And with nearly 1.3 billion and available liquidity.
We executed two swaps in the quarter to better position the business for the long term.
First we said statically converted 500 million of our term loan maturing in March 2023 into more attractively price euro denominated debt, resulting in a nearly 200 basis point decrease in the average interest rate over the remaining term based on the current LIBOR and Europe or forward curves this better aligns our long term.
Our funding requirements with our expected growth in Europe over the next few years.
Also as a result of the inverted yield curve, we converted the remaining 300 million of this term loan traunch into fixed rate debt decreasing the interest rate on this tranche to approximately 2.5% and increasing the percentage of fixed rate debt to 54 person at the ended the quarter.
As we've mentioned on prior calls now that we are investment grade we plan to increase the proportion of fixed rate debt and our capital stock share.
We had 475 million outstanding on the revolver as the end of the quarter, but 450 million of that has been swap to euro denominated debt totaling praxis approximately 400 million euro.
We expect to term out that into long term fixed rate euro market that by the end of the share.
We also plan to reevaluate we plan to evaluate refinancing or 1.2 billion in existing notes maturing in 2020, foreign 2027, which are at high interest rate.
Expect this will generate significant interest savings.
Finally, we will also look to recast our credit facility at some point early next year.
Slide 17, our backlog is more than doubled in size compared to the ended the second quarter to nearly 53 million. This includes approximately 5.5 million revenue associated with a paid reservation expected to be exercise in the next 12 months.
The backlog combined with the full year impact of leases that have recently commenced provides a nice baseline for continued referred new growth into next year.
Turning to slide 18, we are slightly adjusting our guidance ranges given we are closing in on your act we are decreasing the midpoint of the revenue and adjusted EBIT arranges each by less than 1%, primarily reflecting a push back and commencement timing for a few deals as compared to our prior outlook, we're increasing our normalized after.
FFO per share guidance midpoint by 2.5 cents, primarily as a result of lower interest expense that we had previously anticipated again. This is mainly driven by the impact of the slot that I just described.
Lastly, we tightened our guidance range for capital expenditures to the 900 to 950 million range given the projected development pipeline spending for the balance of the year.
In closing, we're very pleased with our results for the quarter, particularly having had one of the strongest and broadest leasing quarters in the company's history again getting to investment grade was a significant step that was years into making and we are now in an excellent financial position to continue to prosecute our business model and expansion.
Lands in the coming years. Thank you prefer to expand the call them right now happy to take your question.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using US speakerphone. Please pick up your handset before pressing the keys.
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At this time, we'll pause momentarily to assemble our roster.
The first question comes from Frank Loosen with Raymond James.
Please go ahead.
Great. Thank you. So I guess question you may still may not comment you say, you're not pursuing a sale I'm. Just curious is that you're not entertaining offered or definitively not for sale and then can you comment a little bit on the revenue trajectory.
For the for the back half implies kind of flat to down.
For a offer revenue give us some color on what's driving that.
Yes, Hey, Frank So my comment on the on the market rumors with just that we just felt it was appropriate to.
To come out with a statement, but that's all that's all I have to say on that point with regard to add to the revenue.
Look I think we had a really strong quarter going to get you on the on the guidance for the quarter, but for the second for the last quarter, but but in general I mean, you know we're up around 18, 20% year over year of that our organic growth was about 14, 14%. So is really strong for us for for the quarter.
Yeah, we took down our die a guidance a little bit just to some of the delayed installments in bookings.
For the quarter, but we feel really good about where we're sitting right now, particularly as we head into 20 with though with me other strong as backlog in to really long time.
And can you just to clarify on your comments on 20, you said you expect sees more lifestyle activity in the back half I think the March had was maybe looking more front half does that mean bookings or does that mean actual starting to get the revenue from what you've been booking or or how should we think about that yeah. We're we're still not you know not there in terms of calling.
The turnaround for that market I mean, we're seeing clearly more activity and particularly this quarter for us in Europe in particular, but.
But at this point or we don't see that same frenzy really kind of turning around if it does that would be great, but we feel more that's probably a second half issue than it is a first step issue and I'm talking about bookings not not revenue.
And frankly, if you're if your comment on revenue.
Being slightly down compared to second quarter remember, we had 17, a half million in equipment sales in the second quarter and only about two and a half.
This quarter, so that was really the swing up here, if you're looking at that trend.
Okay. Thank you very much yeah, we had called that out last quarter sample should would would know about that.
Our next question comes from Simon Flannery with Morgan Stanley . Please go ahead right.
Great. Thanks, very much good morning, Gary I'm Council bluffs interesting concept can you just give us a little bit more background about how this all came about and what visibility do have into the demand profile or pre leasing to get you.
Committing to that build is this and is this a model that you could move into other markets.
With similar profiles and then just I am just quickly on the paid reservation is this a client a customer option to take this space and is this something we're starting to see more off and what what gives you the confidence that they will execute that so any color on that'd be great sure I'll take the first part of the question Simon So yes. So this is a.
Really interesting development for us so we've been talking for a while now in terms of where we see the data center network topology, changing so that the nexus so that for the next wave of this is more going to be focused around the compute and storage nodes as these datasets get bigger bigger and data becomes where the the new gold is and people start trying to monitor.
Hi, guys that you're going to need larger and larger facilities for people to.
Action upon that near particularly AI being one of the yet the great applications. There what we've done that and that location is we're bringing on Florida have megawatts of capacity, it's half of that capacity is sold out.
Location of is right along the 40 Onest parallel that is the major east West Internet hubs.
And that's why a lot of the the big Hyperscale datacenter companies are located along that parallel across a across the country from Salt Lake back back East. So what we're looking at doing there is putting a datacenter in close proximity to to some of the hyperscalers, bypassing and interconnection of and allowing those enterprise companies to do.
Hybrid deployment, where they would put a lot of their their managed equipment in our facilities, but then connect up too.
You know Hyperscale Datacenters in close proximity. This is something that I think is going to continue to expand over time as a as the datasets get larger and larger we've been working on a number of different initiatives in Houston in particular for our oil and gas customers because what we're seeing is at the datasets that they're dealing with our just so massive that.
It's not really efficient for our customers there to put that data into a cloud because the ingress and egress fees going moving that data from and back and forth through the cloud is really prohibitively expensive. So we're we're expecting this type of topology to the happen more more as a datasets get larger over a overtime and I'll turn.
The second part of the question over to Doug, Yes regarding the paid reservation.
And our bookings called it out the that at this point. It is just a reservation it is.
Ill.
One of our top customers and its contiguous to an actual leaf that will be commencing.
Next year, so we feel at the high probability that they would actually take the space and it is that their option.
Thank you.
Our next question comes from John Atkin with RBC. Please go ahead.
Thanks, So yeah on the council bluffs topic, you've got Quincy and then I guess, you've got like AG report setting and do we think about those three in kind of the same vein around.
Single tenant or at least maybe Multitenant Hyperscale type server farm deployments is as that.
In essence, what you're trying to you in all three locations.
No actually the Agra port facility in the Netherlands, and Quincy was really more single tenant Hyperscale focused that's what that's what we believe well well, obviously sort of anyone but the original underwriting was was based on hyperscalers choosing those those locations. The council bluffs investment here is very different this is.
To really establish an enterprise focused data center going after the hybrid market.
With the enterprise customers going in as well as cloud customer linking up the cloud customers data centers. So that they can get in close proximity to the hyperscalers compute and storage nodes.
Got it.
And and then just a couple of kind of cats and dogs, but Jed I contracts.
And.
It's been awarded but there's quite possibly a challenge coming and I wanted to kind of what you read is having a significant presence northern Virginia on how that might affect the sector sure yet okay, well see how this will work out I mean, the government works at a pace that is really really slow so I'm I, probably have a better shot of growing hair before.
Before that deal actually gets a that gets closed.
But but I think we're in good position we clearly.
Microsoft one that contract that is really good.
Particularly given that we're big customer of ours. So.
So we think we're positioned really well we've got about 130 megawatts of capacity that we are bringing under shell online. So we'll be able to handle that to the extent that we were to win it but I think in general it's a really good healthy signed for the Northern Virginia market.
Whether we get it or someone else gets it just means that a lot of the supply that is a has been delivered there is going to get utilize which I think is is better for the market overall, because as I've said I thought you haven't still do that the northern Virginia market is a bubbly market I think it as you know there's too much capacity. There is over built so I think it's going to take some time.
To work through all the capacity that has been brought online there.
The good news oxo related.
Yes.
We have tremendous capacity, though.
Whether it be shallower to build out shell on three different campuses to be able to accommodate.
There is leasing related to that contract.
Yeah, and then the past week.
Federally federally built datacenter so high security Datacenters, we have a lot of experience building out those those facilities as well.
Related to that I was wondering if you have any sort of updated observations on the behavior of unlisted entrance in markets, such as northern Virginia, or even Phoenix or elsewhere in terms of pricing that they're showing to customers or their pace of development has any of that changed.
Yes, so I think the pace of development has definitely slowed down.
Which is which is good I think some of the pricing.
Numbers that you're seeing tossed around is is what people do when when they're over you know over extended that theyre willing to take pricing that to me is just ridiculous I think what you've seen in our pricing this quarter.
Was really strong focus on the appropriate return on capital we walked away from a number of deals that we thought were just ridiculously mis priced.
Our hope is that.
Some of the folks that were coming in and speculatively building out some of these facilities will stop that.
And we think that if if the continued hyperscale kind of slowdown and purchases continues we think that theres going to me some of those other smaller players that are going to probably take a different strategic choice go forward.
And then any any update on Santa Clara.
We're continuing to.
To develop that property that is going to be the largest datacenter campus in northern bridge. It I mean in Santa Clara we won't have.
Property online there to sell until the end of next year at the earliest.
Thank you very much.
Thanks.
Our next question comes from Robert Gutman with Guggenheim Securities. Please go ahead.
Hi, Thanks for taking my question, So 23 million enterprise you'd mentioned last quarter I believe a five megawatt deal that have been side after second quarter and think it was San Antonio with another potential five behind it and.
I'm wondering if that seems to be part of it plus if you add in the thank you said two two and half megawatts in Iowa.
Assuming you're counting that as enterprise to.
No thats not being counted as enterprise that's okay.
But then in total was all the enterprise in the U.S. There was any of that in Europe . It was a little bit in Europe , but it was predominantly you asked and you're you're you're spot on for for San Antonio.
That was a big win for us at the beginning part of the quarter.
And and again there I mean this is this is just kind of a validation of how important that investment grade rating is while we didn't have it then we spent a lot of time with that particular customer.
With going through financial diligence on us they wanted to make sure that there was a part of that they're working with it was going to be around for awhile and and they decided to go with US and this was when we were added capacity. So we agreed to go build this facility for them and they decided that it was an or interest to wait.
For us to go deliver that facility basically because they like to our financial position versus some of the other folks that they were looking at doing it. That's why we're really excited about what the ITC rating will do for us.
So in the future as you know as you know the likelihood of recession kind of comes further into view, we're heading into that and that with a stronger balance sheet as something that I think is going to be much more important for our customers go forward.
Great Thanks, and one other.
Okay.
To provide a little more color and Gary said this in a formal remarks, but it was such a such a broad leasing or bookings quarter and yet there wasn't like one huge deal that you did the largest lease of the said was 5.5 megawatt almost 80% of the IMO EMR with greater than 500 killer.
So as a nice.
Abroad blend of between 500 kilowatt and 5.5 megawatts and have the ones over 500 kilowatts.
Roughly 25% of that was enterprise, so again really really.
Nice mix that we hope to see continue.
Great. Thanks can you also just update us on near term availability for for leasing in Europe based on what you've delivered and what's coming online near term.
Sure Yeah, we've got a we've got plenty of capacity available and more coming online in a in London.
Frankfurt is our tightest market were effectively sold out we're bringing on capacity that will have online there.
Right around June July next next year, we'll have a couple of megawatts available to sell after that we're looking at securing another property there Amsterdam will have online at the end of this quarter at four and a half Mag CEO of that we sold out a couple of megs of that three three or so megs of that ready. So we've got a little bit left still working through some of the.
Yeah, the nitrous oxide emissions issues in the an ABS short in other words into as well as the moratorium in Amsterdam, but we think we're in good position there.
Dublin is coming on line.
And we'll have plenty of capacity there that will be delivered I think in the third beginning in the third quarter of of next year as well. So we feel like we're in a really strong position heading into next year our hope.
Is that this Brexit issue gets settled out and people get back to out to buying London has obviously been the weakest market in Europe that I think to a big degrades because of all the the concerns around Brexit.
Great. Thanks, Yes.
The next question comes from Erik Rasmussen with Stifel. Please go ahead.
Yes. Thank you maybe just on on the on European topic, and then you kind of talked a lot about the development and some opportunities in a lot of those markets.
And bringing capacity, but you know looking at then sort of capex.
So this year have you know where this quarter you just you you bumped it up a little bit how should we be thinking about though the level of capex heading into 2020, obviously measuring future demand in having capacity in land.
Bank availability to kind of meet a lot of that future demand in some of the things you just talked about.
Yeah, I'll take that one so.
Not in a position together.
Guidance for 2020 on any of the metrics, including Capex and we'll do that on our February earnings call.
And clearly our capital spend is based on the success of our leasing and we clearly had a very strongly our bookings quarter, which will factor into our capital budget going into next year I think it's important to point out also we remain committed to continue to grow honor for European markets as well as Santa Clara.
But we'll give guidance in February .
Okay, and maybe then my follow on.
On the leasing front seems like a deal sizes are increasing and I think.
In the slide deck it seem like a a good percentage over three quarters are greater than the fiber into kw.
Is this sustainable is this is sustainable number or do you think deal sizes revert back to maybe closer to the average.
You know, maybe just any sort of color there would be helpful. Yeah.
This quarter in my mind was really really good because of the broad amount of deals we did.
So you know as I as I mentioned to what are the earlier callers I mean, our biggest deal on a quarter was only five megs and typically when we when we've had these type of record quarters has always been a really big deal like a 20 or 30 Meg type deal that is really skewed at what was great. About this was that the biggest deal was five mags we did.
We did you know a megawatt in several several different markets across the across the country and in Europe . So it shows about the diversity of that the other thing is that our I ECS business was really strong that was up 24% year over year, which is a really really great number I mean, it's a $50 million run rate business.
Yes, and and you know the other thing is just half of that half of that.
So sell this quarter was for the enterprise I mean $23 million, an enterprise bookings was by far and away the biggest quarter. We've ever had so so that was a really strong quarter without the typical hyperscalers in there where they had we had some hyperscalers in there, but there were taken small amounts of capacity. That's why we think we're positioned really well for next year we.
Expect that that Hyperscale market is going to is going to turn around and you know given where we're sitting from an inventory perspective, we're going to be able to respond quickly to close a lot of those deals that we expect are going to come back around.
Thank you.
Our next question will come from Cobiz nasal with Cowen and company. Please go ahead.
Great.
[laughter] I've heard where now.
Thanks, Gary.
I will tell you another offline.
So a few questions. One is I know, you're not obviously, giving guidance for 2020, but dine in the past you had.
Mentioned on calls this quarter that you guys generally expect to see mid single see mid teens.
Revenue and EBITDA growth next year, and I believe low double digit.
Thats all for share growth I'm wondering if you could at least just reaffirm that and then secondly.
You talked a lot about pricing, which I greatly appreciate I.
I know that you guys aren't chasing those deals and is there a lot you walked away from some you mentioned.
This quarter, but I'm curious what you are expectations are as it relates to renewal spreads.
On your current business called over the next next year I can imagine.
Many of those customers are going to look for a reduction in price and you're either going to have to go and matched what they're asking for or risk then potentially leaving so I'm curious how you're going to approach that and then lastly.
Just curious what the Companys interest is in terms of expansion outside of Europe , you've obviously done really well kind of following the bouncing ball. If you will curious how important it is to be and even more markets.
Over the next comp medium term, you're going to call. It 2000 2021. Thank you sure I'll take the last two questions and diagnostic first but.
With regard to.
Where we're going to go in new markets. I mean, we continue to look at different markets throughout Europe .
When we went into Europe , we went in to build a big presence there were for the key markets right. Now there is clearly one of the other flaps that were a that we're not in now so you should look for us to continue to look for expansion there at a couple of the other markets as we build out our portfolio again, it's all it's all relative to the customer.
Demand that we're tracking the conversations that we're having with customers and that really kind of dictates.
Where we go and the pace at which we're going to deploy that capital with regard to to pricing. I mean look this is on renewals I mean that has been a trend that we have seen for many many years and we've been managing through this.
You know for you know since since since we've gone public and and having a this concern about other people coming in at lowering the price I mean, something you've had to deal with the reality, though is that it's really difficult for customers to to move and while you know the cost the rental costs that were going to charge and for the space is one.
Part of their overall build material that they're paying each month, it's actually probably the most insignificant part relative to all the other expenses that they have for that datacenter and so while they can could potentially get a lower price elsewhere theres a lot of risk and moving it a lot of additional capital required to do it efficiently and we kind of manage through that I think.
I think for some of those companies that are out there offering.
That pricing, which I think is pretty a pretty remarkable I think those companies longer term Martin business for the long term because it's hard to sustain.
Adequate returns at those levels and I think the concern, but I have for the customers that went in there as whether they have a partner that is going to be around for the long term and clearly we've been focused on the long term since we booked this business Thats why weve never taken short term decisions and stretched our balance sheet. We've always maintained really really solid leverage in order to get them.
Last one grade rating because we're building this company for for the long term. So are you going to win some deals are going to lose some deals, but I think what you saw this quarter is we've won more than our fair share of deals and took a took a tremendous amount of market share even when we walked away for some of those deals that were pretty a pretty ridiculous.
And on our actual revenue all that signed this quarter. It was basically flat up up a little yes has that gap or cash.
That I've got it Thats gap.
Was cash the same.
And probably down I don't know it look at that but it's probably down I don't know what the duration of those were.
Okay, and then on the guide or that color for 2020, and just reaffirming what you said before.
For 2020, we're not giving guidance and obviously so much of what will drive it is.
One leases command.
Looking for lighter in first half that has picked up so that that will come in over time next year. So yeah. We're just not in a position to give guidance for 2020.
Okay. Thank you.
The next question comes from Sammy Badri with Credit Suisse. Please go ahead.
Hi, Thank you I just have some quick ones and then I have some other questions. The quick ones are.
What were the percentage of revenues from direct efforts with your salesforce to customers versus what came in through value added.
As part of 100% under 100% direct okay. The other one as how many cross connects did you guys have at the ended the quarter.
Oh, you know I don't know.
Hey, Mark that detail yet.
Okay. The a longer question as you mentioned in your prepared remarks, you mentioned European leasing was driven by U.S. hyper scale, and that's tracking above or below your expectations, because I know the the metric or the hurdle rate. We were discussing a while back was about 70% of potential activity in Europe was going to come from U.S. hyperscale customers or.
Just U.S. customers are well above or below the 70% hurdle yeah. We're we're above so.
So so something when we went into Europe , we assume that 100% of basically 100% of all of our underwriting assumed all the growth. There were initially it was going to come out of the U.S. a.
Relationships that we havent predominantly hyperscalers, that's that's turned out to be exactly the case. However, what we've also mentioned is that we're planning on building out an enterprise focused sales force attacking the market that is difficult to do it's a really long sales cycle and and we have really done a nice job and building out.
That portion of our sales funnel any enterprise space, we expect that we're going to continue to do work there, but and eventually that is going to turn to the nice business, but that was never our underwriting going in so far it's turned out exactly as we anticipate it's mostly a U.S. hyperscalers there.
Great.
Got it. Thank you and then last question for you is on page number eight regarding the development yield. So if we were to look at these development deals and we split this up into two buckets co location or traditional power and cooling and Interconnectivity, an IMAX what percentage of revenues for these facilities is coming from I acts as of the last quarter as of these well.
Hi point development yields, yes, so so 5% or overall revenue is a desire back so you can.
You get some some some flavor for for that so I mean, if it's broadly distributed I mean, probably there's less of an eye ex component in Austin and arisen some of our other other other facilities. So it's not really a big big driver. The bigger driver is just kind of the blended basis between.
You know the the enterprise companies and the Hyperscalers that we put in those those facilities.
Got it okay. Thank you, yes sure thick.
Our next question comes from Nick del Diablo Moffettnathanson. Please go ahead.
Hey, Thanks for taking my questions.
First Gary can you expand a bit on what underpins the viewed hyperscale come back in the second half 2020 is that just based on customer discussions and then kind of scrapping the roadmaps are there other inputs and yet.
Tony globally, or just the U.S. yeah, no its a.
I'm sorry, it's predominantly US commentary I mean, you know are we are seeing really strong.
Demand in Europe not of the same scale that we are seeing in the U.S. So the commentary is predominantly associated with that with U.S. demand and it's based on just conversations that we spend a lot of high meeting with all the customers us sitting down with im talking them about their needs, where they're going to need it and you know the art comes in terms of trying to understand like.
You know you how you know how focused they are needing capacity quickly and while theres a lot more conversations about a their need for capacity in different markets now it's not nearly at the pace. It was while ago and and so we're still not ready to call that that market is going to turn around anytime soon if it does that way.
Would be great, but we're not planning on that for a for 2020 yet.
Okay got it and then maybe switching gears a bit.
No you often times complained that the market kind of systematically under appreciate the value of your expansion opportunities.
That's probably part of what fueled expectations you might want to go private.
I guess are their rules of thumb that you use yourself to assess.
That expansion option value when you think about what your stock is where is that it might be worth sharing.
Yes look I mean, we've got about a close $2 billion of Ah investments on our balance sheet. If you take the Sip and some of the GDS investments that we have there and so thats roughly $10 per share and so if you think about you know you think about that relative to whatever number you going to put if you put a 15% return on it you are looking at.
A 15% return on $1 billion of investment Thats, a substantial amount of of growth I mean relative to what we generate roughly 600 million a better like 15%, 25% up so you're looking at you know.
Pretty.
Pretty substantial potential value creation on that even on a growth adjusted basis. Even if you just looking out a book on a book basis, It's worth 10 Bucks a share.
So so I don't know how people value I think in general I think most are dedicated real estate investors do not ascribe a lot of value to to development Ah two developments and I think thats with good reason because most.
Most real estate asset classes don't really have the networking effect associated in their business that we do right. If you look at our business 70, 580% of our businesses generated from customers that are in more than one location and what we have seen since inception has been once you get a customer and a door the growth rate that you could see from that customers over.
Over a 20% CAGR. So so you know I can see you know in some other real estate industries, why there's not really the same networking effects. So they don't ascribe a lot of value to their development business that is absolutely not the case in this business at all what I think about our business and the development aspect of it that's where I see all the potential value creation come.
From I mean, you know we're sitting here in a position now and what we've just demonstrated this quarter is we just launched into Europe .
And we just leveraged all of our over us relationships with all of our customers over here after having gone into that into a picnic entirely new confident in one year and it's and it's played out exactly as we envisioned.
And that's why we were comfortable going into four different markets. There because that's exactly how the company has been built from the ground up since inception, we started to one one market in Houston, or Cincinnati, and and just kept growing methodically organically over time, and we've built a really nice business and so so we expand and these other markets.
We did it with the expectation were going to be able to bring our customers their turned out to be exactly true and that's why we feel really confident about our ability to continue to deliver capacity.
And make a make the returns that we've done over over really long sustained period of time.
Got it thanks Gary.
The next question comes from Arete Klein with BMO capital markets. Please go ahead.
Thanks, Gary can you talk to the visibility you have in the pipeline and the timing on deals it doesn't seem like you're expecting this kind of leasing performance just 90 days ago. So so what kind of played out differently than and you are expecting yes. It was some subsidiaries we had a really bad quarter last quarter. I mean that was that was that was weak quarter four.
For US you know we.
We have $13 million in the quarter, which was the lowest we've had in several years. Fortunately, we close that one deal right at the beginning of July so you'll get that was like a 26 million dollar quarter. So so if you if you back off the 13 from the 52, you know we're up about 50% above where we where we're expecting to be and that was again, it's just another.
Number of deals that were.
Ill focus on trying to close I think got accelerate I would not expect and don't show no. One should assume that this level of performance is going to be repeated again next quarter. We feel good that that were basically ahead of our annualized bookings number which was between 80 and $100 billion for the year, but yes, we expect next.
Order, it's going to get back down to a much lower number than it was a but it was this quarter worked out well that everything kind of came together. This this quarter, we closed a really big.
A big number of deals.
Got it and then I think you mentioned built potentially building more enterprise and I expect this data centers in Europe .
To what extent can you look for acquisitions there versus development.
Yeah, No look I mean.
It's difficult theres not many properties out there I mean or platforms out there that you can acquire and that's why that's why we're going you know the organic path, it's a little slower, but we know the returns that were going to make on it or are going to be better. We can control the quality of the product in the whole integration into our system as a lot easier when you do it from the.
Ground up.
Clearly, we'll look for other assets that that become available, but but the reality has been a lot of these deals have just gun that you know at multiples that are just not not you know attractive to us I mean are really really expensive, we can't afford to play at that at that level and we've decided to take a pass on that we.
So last year I mean, we're under water pressure to first quarter last year predominantly because of his any acquisition, which was a very dilutive as well as some of the expansion that we're doing and what you. Just saw this quarter is that our revenue for zirconium as up 80%, our EBITDA is up over 100%.
And and we're now starting to get the benefit of that acquisition with those assets that we acquired plus with the addition organic developments that were putting around it to complement it.
Thanks.
The next question comes from Richard Choe with JP Morgan. Please go ahead.
Hi, I just wanted to clarify a little bit given the I guess the bookings this quarter, but backing out earlier deal and the strength in your can you kind of go back to what the enterprise business in the US is looking like and what Youre seeing there and kind of the follow on with that can you sustain I guess.
Given the new business mix with Hyperscale being pushed out the 20 to 25 million in bookings a quarter or is that needs to be reset.
Downward.
No I think I think the 20 to 25 million a a quarter as.
As a good estimate that we should be able to continue to deliver on.
I think once the you know whats the some of the Hyperscalers come back into market again, I think you're gonna get quarters like this one where you're going to get a big deal and it is going to pop and it'll basically a go over that that number but if you look over the last.
Four or five quarters, we've been putting up that $20 million to $25 million quarter not as been predominantly.
Focus on the enterprise business, we've had record quarters and enterprise sales over the last couple.
Even in spite of just kind of kind of muted demand from from Hyperscaler. So what's the hyperscalers come back I think we'll be able to be above that but we're not willing to to call that turned around just just yet.
And again it varies so much by quarter, just comparing second quarter in third quarter. So it's.
Yeah chance.
That's why we say more though.
Baseline of the 20 million annualized.
Yeah.
Pretty reasonable.
And I guess is asking along with that but the pipeline for the enterprise deals in the U.S. remains robust or is it more neuro or can you you've got a little differentiation there.
Yes, I know the enterprise deals are you know are almost all predominantly U.S.. We've got we've got you know that funnel building any less for the enterprise business, but.
To date, all the bookings for the most part on the enterprise have been in us in aggregate didn't even actually mentioned this in my point, but our our funnel is and this is that I didn't even have it in my prepared remarks, but our funnel is down a couple of percent like two or 3% versus versus last quarter and its down around 14% or so from last year.
Sure. So typically I give that my prepared remarks, but I forgot to do that I give you some color on the on the quarter.
From our from a funnel perspective.
The next question comes from Michael Funk with Bank of America Merrill Lynch. Please go ahead.
Hey, good morning, guys. Thank you for taking the.
Questions here, a couple of quick ones, if I could you know we've been hearing that.
Due to some other betrayed tensions maybe there were some slowdown or a duane and some of the deals coming from Asia ever end of the you asked some questions. The hyperscale guys over there. So you know wonder if you're still seeing that and if you expect to recovery there in 2020.
Hey, Mike Yeah, we absolutely have I mean that that business was going really strong. It's it's dramatically slowed down over the last couple quarters.
Your guess is as good as mine.
As to when a you know when both governments can work out a workout to trade deal I've always been an optimist I've always thought both both of you know the a the presidents are very.
Commercial so I think they both want to get a deal done so I'm hopeful that the that they will.
And then Gary that your earlier comments about you know not not pursuing anything at this time and I I. Appreciate you wanted to clarify things.
Things given all the press about you know just just wondering if you were trying to.
I would take control the neighbor the narrative.
You know in front of what might be a I'm kind of a history of deal when it was announced recently and if your comments about taking a pass implies that you have been part of a process.
And have been looking to maybe to stepped away because evaluation.
As as you noted and then kind of in the second part to their you know to them to the question I guess from either you or your comments imply that you're not open to a sale. Okay. I've always thought I guess any companies for sale to write price or just the there is not a process going on right now, yes, with Mike I mean, there were so many news releases that got.
Now that we felt that appropriate to kind of put out a statement to cut a you know just kind of bring some clarity to that and you know I think my comments and there were pretty much spot on and that's that's you know that's really what we wanted to get across to everyone.
Okay. Thank you for clarifying and then final question, we're going to call starting here in the second.
Just on capital needs, Diane had a potential jvs fit into your capital needs.
And you've kind of commented on the potential need to raise equity in the last few quarters sand that you don't have any need to the near term just wonder if you could update that commentary.
Yeah.
Nothing really to comment on in the JV category and you know as I mentioned in my prepared remarks, we'll continue to manage our leverage in the five and a half times range. That's what we've committed to the.
The rating agencies in order to protect our investment grade and I think it's fair to say that as we've done in the past, we expect opportunistically utilize our ATM to issue equity to manage to that leverage range and fund the development pipeline, depending ultimately on you know what are our capital capital spending.
At your needs are.
Great. Thank you so much of the questions and we'll see in a few weeks that I like.
Absolutely.
Our next question comes from Jordan Sadler with Keybanc capital markets. Please go ahead.
Thanks.
Sorry depressed on this but I feel like it's really not entirely clear.
You've said do not currently pursuing a sale.
But.
Is it fair to say from your commentary that you assess some offers and ultimately decided just better to be a public company.
And then again.
I think in the last quarter, we got same questions and we told everyone or is no comment on it or a bunch of subsequent news reports are releases and speculation on it we wanted to provide some clarity which was what we attempted to do again to say basically no comment on it but actually more affirmative to say that theres no deal here.
And I don't think we could be anymore quicker than the net okay, not not running a process.
And then I appreciate that and then in terms of the any other comment on different M&A transaction that was in the market. This week any any thoughts on sort of.
How that might.
Impact the competitive dynamic in Europe .
Yes, I think that's a great deal I think a you know bill Bill got a really great great asset there and it was great to.
To see Dave I'm willing to a two to do that I think in general.
Losing Dave ultimately as a competitor is good for US right. I mean is is a great competitor to market and having one less a company in the in European market is a is going to be good I think for US I think in general what you saw when the when you know digital acquired a Dupont and it was one less player in in North.
The Virginia that we benefited by that I'm expecting that we'll we'll continue to do well in a in Europe basically because.
Yes, a lot of the customers want to a spread around their purchases. So that they don't want to be so so what it to a particular a player. So I think a general is going to its going to benefit us, but I think also that digital is going to do phenomenally well interaction is is a fantastic asset.
Fair comment.
And then just stay in back to the financing in funding. We spent you guys spent a lot of time on the investment grade rating congratulations.
How do you have you communicated your perspective funding of growth to the rating agencies in other words.
What's the expected mix of debt and equity and what's the upper end of than net debt EBITDA threshold.
No as I said, we we committed to managing and the mid five times range and that's what they expect from us.
So the math works out to pretty similar similar capital structure regarding are sound of equity in person to that to our current balance sheet. Because we ended the quarter at 5.4 times net debt to EBITDA over time, obviously, our EBITDA growth. So we create.
More leverage.
Capacity through that but as far as where we're managing to that's where we're managing to do it sounds like you softened up a little bit on the view toward equity right I mean, I feel like earlier in the year you kind of maybe it was the stock price.
You guys kind of waived it often said look we don't need equity were going to internally fund.
It doesn't sound like you're saying that right now for say where am I missing it.
No I think it either way and I mean on that George So getting investment grade is something that we are absolutely going to protect there's only theres only 400 companies that have an investment grade rating and now we're going to be one of them and so the strategic importance of having that particularly as as we head into an economy that is kinda.
A slowing down is going to be really important. So you should assume that we're always going to do the right thing for the long term interest of of the company and if that requires getting equity in there. That's what we'll that's what we'll do.
Thank you for the time sure. Thanks welcome.
This concludes our question and answer session I would like to turn the conference back over to Gary Wojtaszek for any closing remarks.
Great everyone. Thanks for a thanks for joining the call. We'll see you in a couple of weeks that they right and if you have any other questions don't hesitate to reach out to a schafer or Barry are here take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.