Q4 2019 Earnings Call
Greetings and welcome to the Coresite Realty is fourth quarter 2019 earnings call.
At this time all participants are in listen only mode. A question answer session will follow the formal presentation.
Anyone should require operator system started conference Please press star.
As you're on your telephone keypad as a reminder, this conference is being recorded I would now let's turn the conference over to your hurt your host curled Jorgensen, Vice President Investor Relations and corporate Communications. Please go ahead. Thank you. Good morning, welcome to Coresites fourth quarter 2019 earnings conference call I'm joined today.
Today by Paul Durham, President and CEO, Jeff Finnin, Chief Financial Officer, Steve Smith, Chief revenue Officer before we begin I'd like to remind everyone that her remarks on today's call may include forward looking statements as defined by federal security laws, including statements addressing projection plans or.
Your expectation. These statements are subject to a number of risk and uncertainties that could cause actual results or facts to differ materially from such statement 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.
Formation about these risk is included in our filings with the FCC.
Also on the conference call, we refer to certain non-GAAP financial measures such as funds from operation Reconciliations of these non-GAAP financial measures are available in the supplemental information as part of our full earnings release, which can be found.
On the Investor relations pages of our website at <unk> Dot com.
With that I'll turn the call over to Paul.
Good morning, and thanks for joining us.
Today I'm going to cover our 2019 financial highlights and recap our 2019 priorities at 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 pitch $5 million, a record, which nearly doubled the $27.7 million evangelize gap brand saw into 2018.
Operating revenue above.
$172.7 million, which grew 5.2% over 2018 indefinite FFO per share a $5 in 10 cents, an increase of four cents year over year.
A year ago I shared four priorities for 2019, translating new construction into more bundled sales.
Acquiring additional new logos, bringing new connectivity products online to increase sales and is delivering a great customer experience and ongoing operational efficiencies Oh route overview each of these relative to our 2019 accomplishment.
We executed well our first priority.
Do you have translating new construction into higher sales in 2019, we placed 224000 square feet of dataset or capacity into service.
Including 108000 square feet for the beer first two phases. That's the eight our ground up development in Santa Clara and 116000 square feet of campus.
Expansions in Reston, Los Angeles and Boston.
As a result, we restored our available and to develop the book past due to 25% and our top five markets at the end of 2019 compared to 16% at the end to 2018.
And we used the new capacity to achieve a.
Record leasing year, including leasing, 100% or the first two phases of SB, eight and 74% ability three phase one a year in advance of its expected completion in late Q3 2020.
Our 2020 development pipeline continues to be strong as we expect to deliver.
For at least 196000 square feet of new projects, including two ground up developments CH do in Chicago in Delhi, three in Los Angeles.
The final phase of SB eight in Santa Clara and the data center expansion, they didn't want to and our New York market.
Importantly, as we shift in the latter half of.
2022, delivering new computer rooms, instead of completely new buildings or 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 are highest in three years attracted valuable.
New strategic accounts in multiple markets and grew annualized GAAP rent from new logos by 50% over 2018.
Steve will provide more color on these new logos and their traction through our hybrid cloud friendly ecosystem.
Our third priority was to bring new connectivity products online to.
Increased sales, which we also executed well on in 2019, we increased participation 44% in the SDN based open cloud exchange format, we launched in late 2018.
We added inner side service for connectivity between markets, providing route insight diversity to enterprises.
And we continue to expand our relationships with and offerings from key cloud providers with additional on campus edge club products and availability zones.
Our fourth priority was to deliver a great customer experience and ongoing operational efficiencies.
We achieved several major.
Into 2019 that significantly benefit our customers.
We achieved an exceptional eight nines of power and cooling uptime for 2019 across our portfolio of Datacenters. This level of uptime is well above our six times target and even higher above the fivenines industry standard.
Hi, uptime is key to minimizing customer disruption and to increasing loyalty and is especially important for high performance hybrid cloud deployments.
In addition to our long term record of customer complied certifications, we added a new and I ask T. assessment that helps customers meet certain.
Slides regulations relating to federal government deployments, which tells us when 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.
Our efficiency improvements helps our customers and us to maintain margins, while also 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 their management of their coresite.
Excellent.
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 we did encounter some unusual headwinds in 2000.
Hi, Jane which 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 development in that market by making large scale and hyperscale leases at attractive therefore, driving 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 number one 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 L.A.
Okay and create critical mass for our ecosystem in Chicago.
Number two improving on our strong 2019 performance in attracting major new enterprises to our hybrid cloud ecosystem.
Number three thoughtfully expanding our products to help enterprises with their hybrid and multi cloud needs.
And number four maintaining high levels of facility performance and customer service, while continuing to invest in Pee Wee improvements and other sustainability focused opportunities.
In closing.
We believe our diverse network and cloud dense campuses and the interoperability we enabled for customers.
Through our ongoing capacity growth, new connectivity products and superior customer experience position us well to benefit from the secular tailwinds for datacenter 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.
Growth in interconnection revenue inline with our expectations.
Offset by elevated churn we experienced in 2019.
General and administrative costs were.
$83.8 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%.
AFFO per share was $5.10 and.
Increase of four cents 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.
As of 86000 square feet during the quarter, reflecting $16.6 million of annualized GAAP rent.
Our sales backlog as of December 30, Onest 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 commence in the first half of 2020 with the remaining 6% in the second half of the year weighted to the fourth quarter with completion of valet three phase one.
Adjusted EBITDA was 79.
$9 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.
Well I have 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 cost 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're 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 six significant amounts of capital and we made substantial progress in two.
2019 on that objective.
As a follow on we've had a record leasing year, which was enabled by our new capacity and supports our view that we continued 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 and we estimate that there is a minimal churn exposure in our remaining customer base of annualized GAAP rent for these types of customer use cases.
We will be delivering additional capacity in 2020 to provide greater.
Thank you a space, allowing us to further meat market demand.
We expect the benefits from this new capacity will be mostly back and loaded to Q3 in Q4, Twentytwenty given construction timing and we will be focused on achieving pre leasing of this capacity, including la three phase one which.
It 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.
I will cover the key highlights of our 2020 guidance, but point you to our complete guidance on page 23.
One of our fourth quarter supplemental information for further details.
Operating revenue is 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.
Flex 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 and given the current market dynamics, we are optimistic and actively.
We 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 will be fairly consistent with 2019 at zero 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.
0.1%, adjusted EBITDA margin and 4.2% year over year growth.
FFO is estimated to be $5 in 10 cents to $5 in 22 cents per diluted share and operating unit.
At the midpoint this reflects growth consistent with 2019 or.
Only 1%.
And capital expenditures are estimated to declined to $225 million to $275 million.
Decreasing as expected from the approximate $400 million of capital spent in 2019.
This includes 215 to.
$250 million for datacenter expansions, primarily including the completion of the ground up developments at CHF, two and La Sthree.
With our investments in 2018 and 2019 in the initial phases of ground up developments at VA three.
SV eight and the anticipated.
2020 completions of CH too and la three.
It provides us the flexibility to bring on datacenter 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.
We remain optimistic.
Related to business drivers and secular tailwinds for our services remains strong.
We're executing on our priorities to bring on capacity and translating into increased sales opportunities.
We also now have the capacity to accommodate additional growth should demand exceeded.
What is assumed in our guidance.
Our balance sheet is strong and we continue to stay in tune to the markets opportunistically pushing out maturities and improving our borrowing position.
And we believe we are well positioned for the long term.
With that I will turn the call over to Steve.
Thanks, Jeff.
Hello, everyone.
I'll start off reviewing our quarterly sales results and then talk further about ourselves successes for the year end two drivers.
We had a solid quarter of new and expansion sales were delivered $6.6 million of annualized GAAP rent.
Primarily reflected in core enterprise leasing including 31000.
Square feet with an average annualized GAAP rate of $216 per square foot.
Included in those results was a sizeable multi market hybrid lease.
Leveraging unique capabilities of our campus platform to support their dense architecture and complex interconnection requirements.
Oh, the secular 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 and weren't important contribution to these quarterly results.
In the fourth quarter, we won 36 new logos.
Two thirds of these new logos 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.
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 or another key aspect of our leasing focus.
During the fourth quarter, our customer renewals included annualized GAAP rent of $21.9 million.
Our renewals represent a rent but decreased about 1% on a cost basis.
Similar to last quarter, we had a few customer renewals negatively impact our cash rental growth for the quarter.
This included five customers there were excluded our cash mark to market was a positive 3.4%.
Churn was 2.9% for the quarter inline 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 and annualized GAAP rent.
Which was nearly.
Our leasing of $27.7 million in 28 team.
And included retail leasing or $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 onto an expansion sales.
This year were several key factors, including ongoing strength, the new logo sales strategic scale leasing.
Contribution from our channel sales.
Overall secular tailwinds driving customers with hybrid on multi cloud needs toward data centers, which enrich and broaden our ecosystem deepen our.
Trust and in turn create a network effect as our vertical markets became more diverse while also more interconnected.
All of which we believe helps to enhance 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 28 team and 172% over 2017.
Reflecting substantial progress on our goal we set two years ago to attract high quality, new customers that value our platform, which can help drive future growth as there are two needs evolve.
Strip.
Your next scale leasing in 2019 was an important part of our results, which helped us with pre leasing.
To ground up developments in 2019.
Including 100% of SPD, its first two phases as well as 74% of Lsthree phase one.
Our channel sales.
We're also important driver.
<unk> increased to nearly 12% of our annualized GAAP rent in 2019.
Importantly, overall absolute production from our channel sales grew 136% over 28 to.
As a final thought on two drivers.
Despite higher 2019.
Turn and that expected for 2020.
On balance more enterprises are buying from us as demonstrated from our new logo additions.
We also believe our increased sales and 29 team 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, there's a recap on why we when and what drove our 2019 results.
We are located in strong edge markets, which uniquely positioned assets to serve highly connected workload environments.
Customers in every segment are looking for health and there ever changing Archie.
Journey as they interconnects their hybrid cloud and multi cloud newts into a seamless service for their end customers as they deal with increasing due to growth.
Have you reliance on technology to develop new products and 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. So there are two challenges to address the changing dynamic needs of their industry and their business.
We're pleased with our execution and 29 team and we look forward to further helping customers solve their IC challenges.
With that operator, we would now like to open the call for questions.
Thank you.
Ducking your question answer session.
Good question, you May press Star one on your telephone keypad.
Confirmation Tom would indicate your line is any question Q you May press star to if we would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset.
Before pressing the star key.
Our first question comes from the line of Colby, So diesel with Cowen and company. Please proceed with your question.
Great. Thank you.
Power as a percentage of rental revenue.
Came down in the second half 2019 in your revenue guidance for.
2020, I think was below street expectations I'm curious if.
Any of this has to do it to customer who is moving out of SB seven I think they made actually already moved out math based might be vacant.
And that's what I'm thinking of the explanation mom, hoping could fill that end.
And give us some color on what the expectation is for power.
In 2020 that might be haven, and thinking the delta between what the street was expecting and what you've guided to and then secondly, as it relates to Capex.
Im 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 and power revenue is directly attributable to the customer.
Add SB seven.
So as you think about 2020, I'd I'd, probably put it in simplistic terms from the standpoint, given the guidance. We've given you can see we've guided to an increase of.
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 relative.
Relative portion is between rent to power, which is.
Two through address one third power I should 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 it will obviously as we work through 2020 will.
Of the need hopefully in the opportunity to add additional development projects that will disclose at that point in time at this point time, we don't have any incremental land purchases in our guidance not to say, we're not looking not to say we want executed on it but at this point none of that is embedded into the guidance for Capex for 2020.
Great.
Thank you.
You bet.
Our next question comes from the line of Jordan Sandler with Keybanc capital markets. Please proceed with your question.
Hi, So I just wanted to come back to the churn.
So 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 if I I feel like you ended up.
A little bit higher for some reason was there something that was missing.
Or.
Thing that happened during the quarter that you Didnt anticipate 90 days ago that caused sort of an increase in that churn that you could sort to speak too and I guess sort of similar question for 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 if it even seems like this customer move out exposure in the fourth quarter of 20.
It feels like a full exposure to the customer as opposed to half of the exposure that customer I can clarify that if it doesn't make sense.
Add Jordan, let me, let me see if I can address that and 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 and.
2022 received 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.
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 midpoint of 10% inclusive of 250 basis points from that one customer visit QST in Fourq you have 20 and 250 in Fourq you have 21, Jeff.
It's 215 for.
For Q2 thousand 20, and it will be less in the fourth quarter of 2021, just to give you an idea.
Five megawatts. This year four megawatts next year just to give an idea how that deployment will 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.
And I would point to two things.
As it relates to our our churn in 2019 and in 2020.
We had some of the some of that some of that churn that we expected.
To ultimately take place in the fourth quarter of this year, so little bit earlier than we anticipated.
And then as I said in the prepared remarks, we expect to also have some.
Our churn in the first quarter of 2020 to be elevated the full year, we still expected 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.
What we expected as a result of that we expect first quarter churn to be somewhere around 325 to 375 basis points.
And those two elements of 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.
The combination I guess of the elevated churn.
Lower re leasing spreads lower capex, particularly relative to size the company today and.
And higher leverage they all seem to point to slower growth profile for your domestic data center portfolio.
Even though demand does seem like it's going to persist.
Longer term for data center space 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 even 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.
Record sales reflect.
New data business models and use cases that seem to 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.
Which means that the amount of that churn should wayne, especially to the extended has been accelerated into 2019 and 2020.
And the lower Capex just relates back to what I said in my prepared marks remarks that we have we are shifting.
From the need to build out entirely new buildings, which for over the last though over the last year plus this year into the phase, where we're building out new computer rooms in existing buildings, which we can do more quickly and and have higher returns. So.
I mean look we're like like every company that has grown you get bigger your denominator gets bigger.
Yeah.
And the industry has matured some in terms of new capital coming into the industry, but we still feel really good about our business model and our markets.
We actually have.
More markets that we can grow win that we practically had or had as a practical matter.
A few years ago, because we used to be highly dependent on three markets. We didnt have scale in Chicago, and New Jersey was moribund for a few years, but now we're building scale in Chicago.
And New Jersey has really picked up as a nice enterprise market. So.
In terms of being able to deliver I think above standard growth to compared to the rest of the read industry and serving an industry with significant tailwinds I still feel very optimistic.
But.
No we are impacted last year and this coming year by this accelerated churn from these older business models.
Okay, I just feel near the.
The only thing I would add their Jordan as just a kind of point you back to some of their prepared remarks, there as well and just the overall demand.
Iteris six that we've seen over especially the last year and new customers coming to the platform. We had more customers that are contributing more revenue.
Significantly more revenue and the average size of those customers is also significantly up so I think as you look at the overall demand currency of the business and those customers adopting course items.
Actually stronger than ever.
Okay, I'll I'll jump back in the queue. Thanks, guys.
Our next question comes from the line of Robert Gutman with Guggenheim Securities. Please proceed with your question.
Yes, thanks for taking the questions. So it looks like.
30000.
Yes.
Square feet leased in the quarter about half that was mostly the Virginia and northern Virginia DC market in Denver.
Where was it's hard to discern where the other half was that was markets wise and so.
Second question on renewal pricing.
The week renewal pricing or the.
Recurring sort of low renewal pricing.
2020 is it can you characterize it a little more is it.
Broad number of customers concentrated customer and early middle end of year.
Yes, just give you some perspective on.
No no the strongest markets, which kind of implies where some of the larger leasing came from that were la in northern Virginia in New York. So hopefully that gives you a little bit more color as to the where those leases came from.
And the second part your question there.
Some color on the on to the sort of muted.
Renewal.
Pricing this year as it.
Few customers or is it sort of widespread is it can be uneven pace through the years at concentrated with one customer in the second half I mean.
Just trying to figure out why again, the renewal pricing is kind of weak.
Yes, that's a pretty addictive sorry.
As I pointed out in the prepared remarks around Q4 leasing where.
We had a few customers the drug down our mark to market to our negative 1% and 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.
Side with us back typically in the 2015 or prior era and as they've been.
Hi.
Annual escalations in their rent.
And some of the pricing in those markets has been stable or in some cases decreased we've obviously had to make some adjustments that have brought down the overall.
Overall expectation there so.
There is little bit of that sprinkled throughout the entire guidance, but thats also baked into the overall.
Assumptions the guidance for 2020.
Okay. Thank you.
Our next question comes from the line of Jonathan Atkins with RBC capital.
But all markets. Please proceed with your question.
Thanks, I got a couple of those interested in and on the demand side any markets you would call out is seen as seen elevated levels of current demands.
Compared to last year and then.
Wanted to get added.
And on the SB seven backfill situation. If you could provide it's a little bit more color than than what you've provided during the script that's possible.
Then finally, the customer relocations in one Q4 Q.
Which markets usage occurring in and of these customers that are moving to the cloud.
Our.
Just downsizing the right going through consolidation or what are the factors that are that are leading to this current thank you.
Okay.
I mean, the markets, where we've seen pickup in demand as we've mentioned you know in mob in a comment I made earlier.
New York is really improved Santa Clara continues to be strong. We obviously had strong demand until late last year.
And and frankly as Steve mentioned in his sales comments, Virginia picked up in the fourth quarter. So those are those are the primary markets.
Better plus on the demand side.
And.
The current demand so it sounds like so so what you called out it was was kind of backward looking at that then continuing perspectively into this year.
Yes laser energy market in terms elevated demand levels based on our sales funnels, they still seem to be.
To be good markets.
The.
The relocations, primarily that's the SB seven lease that you talked about.
And as we mentioned in the past that's just a customer that realized that their applications were not performance sensitive didnt need to be in Santa Clara moved it or.
That to a lower cost market.
And to a certain extent the other relocation is the same kind of thing and it's out of milpitas and and they they have they are making the same kind of cost rationalization.
Decision.
No. We did you have I mean at.
All I can really say about the SB seven situation and John you know as well as anybody.
How the scale and Hyperscale leasing in Santa Clara tends to come in lumps and ways, although they tend to come.
Quarter by quarter.
We're very significant amplitude between quarters.
As opposed to you know year by year, but.
Our sales team is out there working with our customers and work in the market for.
Backfills for that space.
Customer itself as you know has hired a brokerage firm which worked for the customer.
We don't have any control over what they do time will tell if their efforts are distraction or if they provide value.
To the customer and indirectly to us.
But so there's no theres a good coverage out in the market vol. All the opportunities that are potentially out there to backfill that space before the end of the year.
Thank you.
Our next question comes from the line of Nick Billeadeau with Moffettnathanson. Please proceed with your question.
Hi, Thanks for Thanks, a question.
So first when you look across your entire book of business not just leases for doing in 2020, how do you feel about mark to market risk, particularly.
Early in Northern Virginia.
So.
You know you can see how we feel about it that's baked into the guidance Jeff provided.
I think it's harder to look beyond that because it really depends upon how supply and demand.
Evolves.
In each of our markets.
But I do believe it's a little bit like the churn thing that some of that will go away as we go past certain vintages.
Past leasing.
Okay.
Got it and then it's Steve you noted pretty significant.
Both in deals the cancer.
Do you expect additional growth in channel deals and 22000 beyond and how do you think about the cost or acquiring revenue why the channel versus in house and minimizing potential channel conflict.
Yeah, I'll start with the last part of that question then going into the first part.
Definitely as a balance right, so I do see value and extending the channel and we have some efforts internally to continue that growth and actually look at some other channels to broaden our reach and deepen our reach into key customers.
We look at the market I think those are a great opportunity out there for.
The mid to large enterprise that has really.
Wrestling with how they evolve their right to challenges and.
Much of that involves partners to help them with that evolution. So working with those partners to mix of that were part of that conversation is definitely part of the strategy.
So but it does it is.
Because in some cases that does come with.
Cost associated with it I would say that in some cases as well good actually brings more value and stronger pricing. So just kind of depends on the channel and how we how we manage that mix.
Got it it seems like a number of your peers or are leaning harder into the channel as well.
How.
Do you think that's just kind of a natural function of call. It.
New enterprise is being potential customers going forward or is there risk that people become too heavily reliant on the channel.
But I do think it as a balance right and it is important to manage that risk or that thought that mix rather but.
I do think that is such a complex environment out there for enterprises that they need help in managing that evolution of their Archie strategy and so as they look to partners colocation as part of that and their cloud onramps on and how they bring that into a seamless architecture for their customers and their employees.
So they need help doing that and partners.
Our various flavors are a key part about whether its system integrators.
Resellers and otherwise so.
I think thats, a good opportunity to help our enterprises come to our platform as well as a good opportunity for us to leverage kind of off payroll resources to help us find demand.
Got it thanks, Steve.
Yes.
Our next question comes from the line of Michael Rollins with Citigroup. Please proceed with your question.
Hi, Thanks, and good afternoon.
I guess two things if I kind of first can you help frame.
Take a look at the.
Sign leases.
2019 is about $55 million annualized rent.
Can you frame for US split the total opportunity that you were pursuing.
Dollars in 2019 gives your relative sense.
And are you finding that you're.
Just maybe less available in the market for.
Certain areas that you may want to fill or.
Purposely.
Moving away from those.
Because of price your returns or some other factors and then the second thing.
You just you take a step back.
Are there things in the portfolio that.
Of course.
Foresight would benefit from overtime.
Larger sales force.
Different systems.
Certain geographies are there certain things that you're finding incremental.
To pursue the gross and wallet share opportunities that you're looking to achieve thanks.
So.
Michael typically we don't give out specific sales forecasts and so you know we probably shouldnt.
Retroactively give out comparisons to sales forecast, but.
Obviously, we were very happy with having a record sales year last year and what it tells us about.
About the market.
In terms of the latter part of your question, it's really good question and.
You know kind of balances between strategy and execution and what you're doing what we're doing.
Strategy is obviously really important.
And we had our board take it seriously then we evaluated regularly.
Really.
But there's a if you'll pardon me use of the expression Theres no Polish proverb to the effect that execution each strategies lunch.
And we have consistent as Youve as you pointed out we have put more focus on execution in the last few years and I think you see some of that's showing up in our results.
It's already.
We are building faster better and more cost effectively and.
Passively is crucial for sales.
We're selling more effectively including the difficult transition to selling hybrid cloud datacenter solutions to enterprises, who are relatively new to co location, which shows up.
And our rising new logo sales.
We've made agile changes in our product offerings.
That we've talked about better specifically targeted to facilitating the customer journey to the hybrid cloud while easing the transition to a co location model.
Every one of those products as.
This making it easier to switch from one cloud to another making it easier to provision redundancy for both resiliency and cloud SL lays making it easier for companies to flatten there when networks and be able to save significantly on their overall network costs as they move.
Moving to a hybrid cloud model and even giving them the same visibility into their co location environment.
In terms of temperature humidity power. Another features that they would have that they were using on premises datacenter facilities again easing that transition in that comfort level.
In the go into the co location. So it's been a big area of focus for us and frankly, I don't want to underestimate the importance of operational effectiveness.
It's reflected in our vastly improved uptime record are significantly better PCU, we which by the way is a frequently frequent comment from.
Surprise customers moving into co location is how much they are saving in terms of power costs in energy efficiency by moving into this environment.
As well as the improved operating efficiencies at the datacenter level again. These customers that may have some discomfort moving from on Prem to co.
And our putting a lot of.
Their digital transformation into this hybrid cloud model, they really really take a lot of comfort inn in those operational improvements.
So again wrapping up and as I mentioned earlier I think you know I think we have more markets that.
We can grow in now relative to what we had historically and ill reiterate what I've said on other calls that pound for pound or share for share I think we have a higher concentration of exposure to strong growth markets than probably any of our peers.
So.
So we feel good about where we are we continue to look in to look at and evaluate other opportunities.
But we believe these ongoing improvements in execution, coupled with the Tailwinds. We believe will be strong for a few years plus our scale and strong ecosystems in key markets is.
Is what makes us optimistic going forward and I think would what is showing up in our sales levels.
Thank you.
Our next question comes from the line of Sammy Badri with credit Suisse.
Please proceed with your question.
Hi, Thank you are looking at your annualized rent mix by customer type Unsurprisingly cod revenues keep growing as a percentage of mix now at 33% of annualized revenues as a for Q2 thousand 19, but.
If I look at the total enterprise rent or the other enterprise mix that move to 44.6.
On an annualized basis, it was actually down slightly on for Q 19, net was down a little bit more on a sequential basis in threeq to 19. So can you just give us more color and why this is happening and should the enterprise footprint in your facility on an annualized revenue base continued to decline as a percentage of total mix or should it be.
Around this 33% of annualized rents level.
Well I think what you're seeing Sammy is just another data manifestation of the churn versus the sales.
I believe and Jeff will correct me, if I'm wrong that the vast majority of the churn that we have been.
Period seeing this year in last year that relates to these older business models has been categorized in the enterprise bucket that's correct yes.
So as as as that bucket.
Those enterprises have shrunk as a percentage of our portfolio and eventually that churn.
You know wayne's because we just don't have that much more left there.
Theoretically that should see that should drive up the percentage of of our of our share of enterprise with the caveat that as we saw last year, we are seeing more edge cloud use cases.
Yes.
You know cloud demand for availability zones in these high performance markets. So that that may that made counterbalance the growth in our enterprises.
Just to give you a little little bit more color around the new logos that are buying from us about 78% of them our enterprise versus.
Was 20% on cloud him and a few new networks as well so.
Just gives you a bit of color as to where the new logos are coming from and I do think you'll see some big lumps in cloud as a.
Thats sub advice.
Got it and then just as a follow up as you look at your interconnection revenue that.
Outpacing rank growth on a year on year basis, what does do 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 which customer type is driving.
Yes, and do you think that this could accelerate given the change in the data manifestation business types.
Asset Sammy let me give you some some information related to that and see Steve has anything else to follow more broadly.
But in terms of that interconnection growth.
Revenue growth.
Historically as we've said you get about two thirds of that revenue growth that come from sure increase in just the volume of the cross connect products and then you get your other one third of that growth really comes from those customers moving from.
Lower priced.
It into a higher price product as well as customers renew you get some price increases from those conversations as well as on occasion, we look at what our list prices are for our various products. So thats what captures that remaining one third.
As you as you think about.
Going going forward and.
Where we're seeing some of that growth.
It's important to look at ultimately.
Who our customers are ordering connections to and where we're seeing outpaced growth as compared to overall are those customers connected to our cloud customers and that has been consistent for the last couple of years, it's probably two to three times.
Higher from a percentage basis than the overall growth and and that just lead to a lot of the ecosystem, the Steve and Paul if commented on but anything else to add the.
You spoke about well there Jeff.
Think about enterprises connecting their hybrid architecture as we've mentioned before.
It really does need to be.
Well conducted in low latency.
Fashion and.
With some of the upgrades that we made them our ROE CX platform as well as adding new on ramps to our campuses. That's helped facilitate all of that as well as some of the newer products that we provided as far as intersect capabilities and so forth. So.
We've seen some good uptick in.
Products as well.
Got it thank you.
Our next question comes from the line of Frank will often with Raymond James. Please proceed with your question.
Great. Thank you I want to go back to the churn and just get a little more detail.
You did mention that.
I'm, giving customers impacted going public cloud you think this is going to kind of slowed down give us some more color. What so what is that based on is that customer feedback or is there particular vertical that you had the exposure to and why you're confident that after the next couple of quarters.
Calling out the elevated churn that this this situation you found yourself.
And is going to correct itself.
Yes, Frank this is Jeff just provide little bit of additional color around that whole, but I hope that helps.
And we obviously spent a lot of time energy and effort in 2019, just continuing to Peel back the onion and better.
Stand some of the contributors to the churn and specifically related to some of those business models and some of what we found just to give you some color around into our.
As an example, some of the resellers in the marketplace or an example of some of those business models that are not as strong today as they.
Were historically in you saw some of that impacting our 2019 churn some of its impacting 2020 and then there is other business models that rely heavily on the need and desire for burst capacity does at various times during the year some of those customers rely on the cloud other customers rely on us in terms of.
At of adding capacity.
And when you look at that those are those are the areas that have some exposure to migrating some are part of those to the cloud or to just that may not be a strong and may migrate out of out of our datacenter entirely.
When you look at and quantify what remaining exposure we have.
We have as I commented on it's much lower today than it has been historically, we're at about 4% to 6% of our annualized rent that's embedded in our base today.
That's why we get comfort that.
As we look beyond 2020, we believe those churn levels will recede back to the historical levels of seven half day percent and Thats.
We're we're modeling and why we continue to be optimistic.
And in relationship to some of the comments we provided today, so hopefully that helps.
Okay, great. Thank you.
Our next question comes from the line of Mike Funk with Bank of America.
Please proceed with your question.
Yeah. Thanks for taking the questions a couple if I could.
Going back to your comment on FCC, seven and maybe just quickly you can you let us know what's expiring rent is there.
Relative to market rates.
Follow up questions after that one.
You know we've tried to not talk about customers.
Specifics.
You know.
We have mentioned in the past that this lease was signed when market conditions were fairly tight in Santa Clara, but they seem to be fairly tight in Santa Clara today as well, so it's really hard to predict.
Great.
And then secondly, you mentioned the.
Part of the move driver is outperforming the centric applications, maybe not being as performing to centric as the customers thought.
Look at some of your higher profile locations to how good visibility do you have into the use cases of your customers and those facilities and maybe risk a further churn as.
Customers look at the.
The need to be paying peak rents versus being say 100 miles away.
As we've said in the past there is always a dynamic related to this because.
You know some customers just don't have that type of visibility, especially where in the start when they're in the startup phase.
And are scaling up.
Having said that.
We don't have you know we've got we've got to this one big chunk I don't don't believe that we have anything comparably sized that would be subject to this dynamic elsewhere in the portfolio.
And then maybe just kind of comment on some some other comments from the quarter. So I.
I guess comments on their call I'm, you know mentioned, they project, 5% to 10% decline and power generation.
Because we're seeing some slippage of construction from nine start from 20.
And the 21, I think Google said the.
I expect to have more of their spending budget allocated towards servers over over data centers. So I mean, certainly some mixed commentary out there just about the kind of the strength of the data center market and demand in general.
I'd love to get your thoughts or commentary on that.
So again, we have hard time seeing what's going.
On outside our markets.
And our customer activity, but from what we see demand still seems to be strong.
Having said that if you just look broadly from what we can all see their markets that have.
That.
We have low barriers to entry saw significant private capital go into development platforms over the last two years.
And probably got over built.
You know to some extent, we've mentioned that in northern Virginia, and the spec construction that took place in 2018 and 29.
In which appears to have abated quite a bit so that may be part of it and I think you've got similar dynamics going on in markets like Phoenix, and Dallas, So and maybe other markets that you know or or less visible to all of us, but that may be a part of it.
Of what you're seeing there Michael I don't I don't know.
So that.
We see any slowdown I mean, you do you look at.
The overall growth trends of the major csps are they still seem to be in absolute terms.
Growing the same volume year over year.
In any of your comments imply that maybe some the speculative capital is pulling back out of those markets.
They are coming in.
The last two years into markets, where you do compete are you see any kind of specific changes in our main competitor behavior may be less aggressive before.
Or more address any kind of change in behavior.
I mean, the only one where we've really seen a significant amount of that has been that we're end has been.
Virginia, and I believe we absolutely seeing a pullback in privately funded speculative development.
And I want to its three or four of those development platforms have explicitly announced that they're not.
They're not going to go forward with us.
Spec development, they're trying to trying to you a mutate into a build to suit model.
And then one final one I appreciate all the time here I'm just to clarify so what does your exposure if any to some of the some of the second tier dataset and providers.
I guess uneven guys like flex central sex.
Rob.
Internationally do you have any exposure there stars on leasing leasing space.
I think thats a covered in Jeff's comment about how our exposure to that kind of sector in general as declined that has been in some in some respects some.
Of our churn.
At least with respect to one of those cup one of those companies.
But again, we don't have much of that left.
Great Thats in the that's not low single digits that you called out the 46% for the business right.
Exactly thats great. Thanks for clarification.
Our next question comes from the line of Erik Rasmussen with Stifel. Please proceed with your question.
Thank you.
So in terms of your 2020 guidance.
Should we think about.
The range of your your revenue guidance of six 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.
Possibly 2021.
Hey, Eric It's Jeff Let me just keeping.
I am feedback on your first question related to revenue and I think.
Similar to what.
Paul alluded to in his prepared remarks, we've got the capacity today.
As compared to the last couple of years, where I think it gives us the agility to compete more effectively where we can see some of that demand assuming the demand continues I just think it gives us the.
Capabilities to compete more effectively for especially for some of those scale deals that might be in the marketplace. So I think we're optimistic about that.
But we got to see ultimately, how the market evolves and where those.
Opportunities arise in as we've said historically those tend to be fairly lumpy.
In terms of your question longer.
From.
The ability to return to double digit growth.
No I would say that as I look near term and call. It. The next two to three years I think we're optimistic to get back to those high single digit growth rates, assuming we continue to execute to on some of the priorities Paul laid out.
And assuming that the churn received back to those levels, we've seen historically and I think we're optimistic about getting back to those high single digit growth levels in the near term and I'd. Just add you know remind you. The comments I made earlier that were bigger Cup made the denominated bigger the industry is more mature.
And yet relative to other reach sectors I think our prospects for.
You know for recurring annual growth over the intermediate term are better than probably all the other ones I can think of or at least most of them I can think of and I think thats a good business model.
Great. Thanks, and then does the athree seem to make a nice progress despite no scale deals in the quarter.
Hi, how are you starting to see any movement, where leasing dynamics are improving where you view would potentially participate in this market when it comes to larger deals.
Yeah, I would I would just say you're exactly right I mean, our fourth quarter was actually the first quarter. We've had in two years. So.
And if you look at the makeup of that as as you look in the overall numbers. It's all you know.
Retail type of business good enterprise business that we've been selling there so we've been able to really sell effectively.
Into our first phase there and now into.
The second phase and we have seen good pipeline and good results. There so we're optimistic and.
Opportunities present themselves both in the retail and scale.
There is scale opportunities out there that value that type of platform that.
We book now have a capacity for as.
As the interconnection for those low latency applications that exist out there we just.
As we've said in the past we are.
Trying to be diligent and.
Pragmatic about those opportunities in true they add value to the platform and deliver the returns that we expect.
Thanks, and maybe just slow.
Yes, just following on that theme.
Obviously last year was a great year for for your scale Colo business I mean, I think it was up.
Forex of what it was the prior year is that it where we are today this sort of an achievable target for the company this year or.
It's still too early to tell.
So when we're waiting on sort of some of these key markets to come back.
Well.
Jeff mentioned, we're optimistic about the growth opportunities that we see ahead of US there was a record year for us and as you can back into the math of our our current guidance.
We have not expected that.
Same type of result in our current sales mix for 2020.
But we're pretty optimistic about them.
But but that opportunity for us, but those are those deals and that leasing.
Is very lumpy as weve depicted in the past and so trying to forecast that type of growth is.
This challenging.
Thank you very much.
Our next question comes on line of Nate Cross it with Birenberg. Please proceed with your question.
Thanks, guys.
Lots been answered already but what do you guys expecting for interconnect pricing going forward.
It looks like MMR per cabinet the growth rate has trended down of rate now what's kind of a stabilized long term growth rate that we should be assuming for that.
Hey, Nate.
Hi, guys as you look at that EMR per Kabi and you look at the results for the fourth quarter.
Sure.
Really what contributed to the I think it's 4.1% overall growth rate year over year is the largest contributor to that was the interconnection revenue growth.
And.
Historically, we've been in that mid single digits, you know for that EMR per can.
The growth I would expect that as we think about twentytwenty to be probably low single to mid single low to mid single digits for 2020 in largely that's because of the guidance, we've given around our mark to market on renewals being a little bit lower for this year. So that's how I would think about it as you head into 2020.
Given where we are today.
Okay, and then it's just going on that cash for knows what would the 2020 guidance had band if you stripped out some the larger roll downs or is it just across the board roll Downs everywhere.
Just trying to get a sense of normalized pricing.
Yeah I think.
I would look at it from the perspective of what we experienced the last two quarters, which is.
Both in the third quarter and in the fourth quarter, we had a handful of customers, where we had some roll downs and Steve alluded to it in his prepared remarks and thats dependent upon their size is dependent upon the.
Some of their leases and and more specific into the market, which was renewals are.
Once you strip those out the pricing in both the third and fourth quarter was positive I think it was 3.4% last year or I'm, sorry last in fourth quarter and I think it was 2.8% as my recollection of third quarter. So thats the dynamics you're seeing.
And I think that dynamic will continue as we go through 2020, Jeff would it be helpful for him to understand for every 100 basis points of churn or combination of churn and mark to market what that means in terms of dollars for us and that falls to the bottom line.
Yes, I think.
They specifically I think we I think what Paul is alluding to is if you just think about our 2020 guidance and and forecasts.
When you look at our churn from 2018. It ended the year at 11 Dot, 1%, if you get that down to a more normal range, where we have been historically, so just strip for.
Four percentage points off that to make the math easy that type of.
Elevated churn in 19 that net four percentage points adds another $12 million or roughly 25 cents per share to our bottom line in 2020, and I think that gives you an indication of some of those headwinds we face headed in two.
2020, and it makes it real when you start to quantified from off from that perspective is that what you're looking for.
Yeah, I mean, that's helpful.
Just completely different topic now when do you guys doing on DSG freind it turns out its commitment to clean energy.
What are the targets you guys had put out and then maybe can you speak.
You want the financial impact.
Would be or could be by going.
For example, 100% Green.
So.
First of all just refer you to the SG report that we put out every year.
Our primary focus quite honestly has been on energy.
Currency.
Dollar for dollar that's the largest impact.
On the on.
Our and our customers.
Greenness and frankly, we're already providing a lot of that greenest customers. We we know one customer for exam.
Well that is able to qualify their new compute environment as one of the 10 greenest in the world just by moving into our more power efficient datacenters from from there on premises go look at broad premises deployment.
So thats, where most of our focus has been as we said in the.
Past, we will purchase renewable energy, where it is allowed by the local utility.
And where the cost is basically competitive I, he will not adversely impact our customers.
And that tends to be the focus of our customers and.
And that is what we have been that's what we've accomplished.
We also quite honestly a encourage our utilities.
So to do generate and allocate other low carbon or non carbon sources generation.
But because we don't have control.
All over the power mix and are more regulated markets.
We don't have any specific targets, but we do advocate.
For.
For a non carb and renewable generation sources and we do.
As often as they allow us and we.
Can do so competitively.
Purchase and wheel in those sources of energy.
Okay. That's helpful. Thanks, guys.
Our next question comes from the line of Richard Show with JP Morgan. Please proceed with your question.
Hi, I just wanted to clarify on the.
The.
Annualized run cash rent growth the five customers and you mentioned the 2015 vintage is this something that's going to allow us.
Just through 2020 or is it going to last for a few years.
Since it just started in the second half of last year, just wondered gives us.
How long you might be facing some of these rolldowns going forward, yes, So Richard Richard as I've said I think in response to an earlier question.
It's hard to predict beyond 2020, because you don't know what supply and demand will be in each market and what that will mean for market pricing in each market.
But we do believe it's like a lot of like even the churn that we're experiencing is that you do go through these vintages and then eventually you know the effects of the certain vintage or to go away and so.
We don't we don't really have visibility beyond.
2020.
But if history is any guide we should see some improvement in these areas going forward past 2020.
Hi, Richard.
Hey, guys are the only thing I'd add is on page 15 of the supplemental just take a look also at our lease expiration table you give you an idea what those.
Ones are on a per square foot to compare that to our current pricing and then just monitor that as we move forward I think it gives you a better idea, maybe where thats going to be longer term.
Good Thank you bet.
Our next question a follow up question from the line of Jordan Sandler with Keybanc capital markets. Please proceed with your question.
Thanks, I was 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.
Okay.
I don't know if we want to I don't know theres, it's difficult to to disclose what market pricing is theres. So many factors that go into a price for a given customer.
Dependent upon their density the size of the deployment.
As well as their interconnection requirements. So that's why the.
Moment of silence, there because it's really difficult.
To the kind of quantify given market price given all the different factors it feasible for a scale requirement to beat do better than $250 for K debt.
All in that you're talking about yeah yeah.
I guess it.
And that there is just depends on the deployment and there's a lot of different ways to configure a pricing parameter around a different given customer based off of their power draw their density levels.
All those different factors so.
Just challenges from it even give you a straight answer and honestly, we encounter different dynamics.
Another other companies do because.
Our ecosystem has a different value than you know a campuses that don't have the same.
Density of and diversity of customers, who are using all the various services and want to do it with the lowest.
C or zero latency in essence highest bandwidth the highest security for exchanging data.
And so there's you know it's it's it's like saying in the other forms real estate you know, what's the market price for space in particular.
Mixed use development a lot of that depends on what the mixed use development is compared to what other alternatives are.
The only other thing I would just kind of round out my comments, where those you know as you build a contractual agreement where the customer there's theres lot of factors that go into that part of it as size and density and so forth, but also expected.
Power draw from that customer and how you manage that in relation to the rest of the draw back computer room in the building. So it really is very challenging really impossible to give you just a market price without knowing the exact parameters of the customer. Okay. And then just follow up maybe for Jeff Jeff If you thought.
What about the potential exposure to prop 13 for Coresite.
Yeah, Jordan, we we have looked at it over the last couple of years and.
Basically when you look at.
That portion of our property tax expense, that's isolated to specifically, California and then.
More specifically to those leases, where we do not have the ability to pass through the cost increases.
It's limited to about $3.5 million that sits inside our portfolio, that's equal to about 15% of our total property tax expense.
And so what's important also about that.
That direct exposure to California property taxes is three and half million.
For that portion in which we cannot pass cost increases to customers right. Yes, that's correct, so three and half million and just to give you. Some other data around that I think helps as we look at this.
The leases associated with that.
$3.5 million it they on average have a remaining lease term about two and a half years.
So obviously well have plenty of opportunities near term to have continue to have conversations about.
Maintaining and pricing it accordingly, but we're watching that closely continuing to monitor the overall effects too.
To our business Jordan I'd only add that these are estimates based on what we believe the impact on property tax valuations would be.
Obviously, you know if this thing passes.
And it gets implemented latter part of 2021 into 2022.
[music].
Some of those things will be will be determined more specifically.
Right right.
Okay. Thank you.
But.
Our next question comes from the line of Michael Parliament and with Citigroup. Please proceed with your question.
Hey, thanks for sticking on.
I was wondering.
On the churn just in terms of.
You discussed last year. It caught you by surprise and you have spent a lot of time digging into it Jeff said peeling back young into really understand things what have you done from an organizational perspective in terms of changes in terms of reporting lines maybe.
Left the organization to people, who joined the organization I guess other than just sucking it up and having a lot of churn last year and this year. What are you doing differently you get the street comfortable that this won't be a recurring problem.
Well I've, obviously, Jeff and his team as these mentioned have.
I've done a lot more digging in analytics around the customer base.
But we have also made at the high priority with all of our.
All of our general managers in each market.
Working collaboratively with the sales team to have specific.
Perfect.
For a specific responsibilities and reporting around churn risk expectations, what's being done with respect to each customer.
We've laid out a new rubric for determining.
How to address customers.
When they.
Come in at renewal and want a pricing change or something like that when do we give that when do we not.
The main the main the main focus being to at least not be surprised by it but having said that I think even had those efforts been in place.
Year to 18 months ago are those.
New processes in place year to 18 months ago, I don't think it would have changed.
Our experienced that much because quite honestly a significant part of the probably almost all of the unexpected churn is churn that really wasn't to be expected based on lease.
Yes.
Customers churned out before their lease term was up or even customers that at one stage in the discussions were planning to renew and then somewhere late in the game change their mind so.
We should be able to have and I think the biggest comfort as.
He said for the Street is just the fact that a lot of these business models have significantly declined as Jeff described as a percentage of our portfolio.
I guess, there's an element of the leasing decisions initially right. So in the banking world, we're all familiar with claw backs.
When something you do.
So that's not in the right thing.
No I wonder just on your initial leasing.
Is there changes there that need to be made in terms of the types of customers, you're bringing into the portfolio that may have a higher risk of churn in the future. Thanks are you, making better leasing decisions today and also.
It sounds like you're taking it a lot seriously trying to manage the outgrowing the customers from churn. So so I think we're making good leasing decisions today.
I can't really say that they are better because when you look at some of these customers that came in and you know some of them have been in place for 789.
In years.
At Viber business models at the time and.
No I think needed they nor most people really expected the significant disruption from cloud that started occurring no four five years ago. So.
That's that's always a part of this business.
Yes, it's why we stressed the importance of constantly acquiring new logos.
Thats why weve tried to build great relationships for edge cloud use cases.
With the major Csps, who are good to work with and are obviously good credits.
So, yes, I think that as we work through.
Through this is these churn episodes, we come out with a stronger portfolio, but.
I think the company has always been pretty careful about leasing decisions that shows up in our very low bad debt expenses.
Right.
And just specifically on the 10% for next year, so it sounds like Threeseventy.
In the first quarter.
250 for specific tenant in the fourth quarter.
Which leaves about threed spread over.
Second third and fourth just from what I guess I would call normal so 120 basis points quarter.
Is that just make sure I got the math right is that right.
Yes, I think Thats, that's close Michael I would say 350 was our midpoint for first quarter series you were just a little bit high there, but that's not leave you have about 400 basis points for the for the rest of the last three quarters.
And is that I guess, just knowing that number is that enough right I mean, I guess that you're being conservative.
No.
On the level of and anticipated higher churn that normally would would occur outside of what you know today right. If it's going to be really high first quarter, what's to say that it won't stay that an elevated level through the second third and fourth quarter.
Yes, yes, now it's it's obviously.
Really something we look at as we're going through all of our renewals over the next call. It 24.
Months, and it's our expectations that it would be lower typically on a typical quarter for us it's usually 1% to 2% is what we've seen historically so those numbers don't.
Sound out of line with what the remaining portion is and Michael just as Jeff mentioned earlier, the higher churn in the first quarter is.
Basically one customer in the higher churn in the fourth quarter is another customer and absent that we don't see any other customers have significant.
Magnitude of similar magnitude that are in that category.
Okay, obviously right. Thank you closer to those couple quarters, we get better visibility right. So.
Yeah.
There are no further questions in queue I'd like to hand, the call back over to Paul generic for closing remarks.
Thank you.
Thank you all for your time in your interest today those are lot of good questions I'd, just like to wrap up by thanking my colleagues throughout the company for all the progress they've made and proactively inefficiently building new cap new capacity, expanding our sales to new enterprise customers as 40 customers with new connectivity products.
And exceptional operations I'm very fortunate to work with this group of people.
And just to recap we believe the ongoing benefits of these improvements along with the secular tailwinds for our campuses should lead to a resurgence of growth if we outpaced churn per our expectations.
We look forward to working to achieve.
Future and we hope all of you have a great day, thanks very much.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.