Q2 2020 CyrusOne Inc Earnings Call
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I'd now like turn the conference over to micro Michael Shaper, Vice President of capital markets, an Investor Relations. Please go ahead.
Thank you Sean good morning, everyone and welcome to Cyrus One second quarter 2020 earnings call today, I'm joined by Bruce Duncan, President and CEO and Diane Morefield CFO before we begin I would like to remind you that our second quarter earnings release, along with the second quarter financial tables are available on the investor relation.
Section of our website at Cyrusone, one dot com I would also like to remind you that comments made on todays call and some of the responses to your question deal what forward looking statements related to Cyrus one that are subject to risks and uncertainties doctors that may cause our actual results to differ from expectations are detailed in the company's filings with the.
Yes, he tea, which you may access on the Fccs website or on Cyrus one dotcom, we undertake no obligation to revise these states. 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 and 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 Bruce Duncan.
Thank you Michael.
And welcome Desirous of one second quarter earnings call.
First.
Let me take a moment to pay cash for his leadership and interim president and CEO.
Particularly in guiding the company during the early buys the pandemic.
And also for as long as distinguished career at Cyrus one.
I would like also like to thank you very real Catholic in founder, Dave Bergman, where their vision and hard work and building a bit.
Helping to put us into strong position we're in today.
It's an honor and privilege you're following their footsteps.
And most importantly.
I'd like to thank the entire Cyrus one team.
Which has done and is doing an outstanding job taking care of our customers.
Executing our business plan.
As a results reflect.
I've only been would the company for a few weeks.
And I'm continuing to get acclimated.
Well one of my first observation is that we have fantastic people.
They're smart hardworking customer centric and wants to win.
I'm very excited be part of this team.
I will have a much broader commentary on our next earnings call.
After I finish my conversations with.
With my fellow teammates.
Our customers.
Our current and prospective investors and other stakeholders as.
Well, it's been that most of our data center assets.
Moving onto results for the quarter, beginning with slide four.
Normalized FFO per share grew 14% versus last year.
And the leasing by remained strong with $37 million, an annualized GAAP revenues.
The backlog as of the end of June.
Nearly $100 million, which positions us well for growth in.
In 2021 and beyond.
Turning to slide five we completed construction I 212000 square feet called <unk> <unk> locations space and 27 megawatts in the quarter primarily in the U.S.
We have another 336000, colocation square feet and 82 megawatt under development.
With nearly 80% of this square footage freely.
We continue to strengthen our balance sheet.
Raising nearly $300 million in forward equity during the quarter through our ATM program.
Giving us a total of more than $410 million in a b animal forward equity as at the end of June.
We're also announcing a 2% increase in our quarterly dividend.
I'm 50 cents to 51 centsper share in the third quarter.
Slide six provide details on our leasing results for the quarter.
Both revenue and M.R.R. per kw side, we're up.
Compared to the prior fourth quarter period.
The higher end <unk>, our per kw, driven by particularly strong pricing on enterprise deals in the second quarter.
The weighted average lease term was seven years.
And the relative big long average term.
Reflects the significant contribution.
From Hyperscale companies.
The $10 million enterprise booking is within the quarterly range, we have consistently seen in recent years.
And we added three new Fortune 1000 company as customers.
The leasing it was well diversified across markets and industry vertical.
Which has also been a long term trend.
Reflects the broad appeal of our platform.
Hyperscale companies accounted for 72% revenue signed in the quarter.
During the first half of the year. This segment accounted for approximately 77% of total revenue side.
Up significantly and 51% in 2019.
As we have been communicating.
Early in the year.
We have had much more productive leasing discussions with the hyperscaler as compared to 2019.
They are addressing near term capacity requirements.
Across both U.S. and European markets.
And this has been reflected in our leasing results for the last two quarters.
We continue to maintain a good dialogue and are in discussions with these customers on a number of opportunity.
Although it's obviously difficult to predict the timing and certainty of closing these deals.
As of the ended the quarter this vertical accounted for 48% of total portfolio rent.
Moving to slide seven.
Our interconnection revenue increased 15% in the second quarter compared to last year.
And nearly 90% leased is fine had interconnection component.
The interconnection growth continues to be primarily driven by a couple of factors.
The first being the expansion of ecosystem within our data centers.
Resulting in additional demand for cross connect.
Additionally, we continue to see strong take up.
SDN enabled offerings, particularly for Megaport, it's part of our customers implementation of hybrid multi cloud solution.
On the right half of the slide we have provided updated.
He portfolio metrics for the company.
Turning to slide eight Europe continues to produce very strong leasing and financial results.
We signed $19 million, an annualized revenue across these markets in the second quarter.
In line with the average over the prior three quarters.
This represented approximately half of our total bookings.
With the man driven by our U.S. hyperscale customers as they continue to increase their presence overseas.
The current run rate revenue for Europe.
Based on annualized second quarter revenue.
Nearly $105 million up 73% from a year ago.
And the leasing success in these markets should help continue to support strong growth next year.
At the ended the quarter, we had a total of 107 megawatts across Frankford London Amsterdam.
And upon completion of the project in our development pipeline.
We'll have a footprint of 163 megawatts in Europe.
This will represent nearly 20% of the company's total footprint.
And we believed that the contribution from Europe will continue to increase in the coming years based on the demand trends, we're seeing there.
Slide nine provides an update on the impact of the coping 19 pandemic to our business.
Well the situation remains very fluid we're monitoring developments closely.
And as of now the impact continues to be relatively minimal across all areas of our business.
All of our data centers are operational.
And we have adapted for posterity safety measures, including enhanced screening mask requirement increased claim frequency.
Pardon me everyone does the conference operator, it appears that Bruce lunch has dropped from the call. Please hold while we reconnection line.
Thank you.
[music].
Line of Bruce Duncan I will now turn off the hold music and Mr. Duncan you May proceed.
I hope you enjoy that hold music I hope it was soothing, but let me finish my part my apologies for that.
All right, Yeah, I think I left off in terms of with the impact to covert 19 situation remains fluid, we're monitoring developments closely and as of now.
Minimal impact across all our businesses.
Demand standpoint, there are several notable observations obviously companies that had to address how their IP infrastructure to support their business requirements in this new remote virtual environment.
Yeah, but significant increase in the adoption of and use.
Collaboration platforms to facilitate communication workflows and companies are recognizing what their needs and limitations are as workers work from home.
And I mentioned earlier demand from Hyperscale companies, it's been strong over the past few months.
And we continue to have positive discussions regarding potential deployment across our markets.
In the U.S. in Europe.
Additionally, business isn't are not only thinking about their near term requirement, but also how to optimize their data center architecture over the longer term carefully considering how their needs may have changed as a result of the pandemic.
We think it's clear that after this in the world will have evolved in many ways.
And central to much of this change will be it increased reliance on and use of technology.
Well, that's how we work play.
Hi thing interact with others or take care of ourselves.
Technology Ugly and Datacenters in particular will play a significant role in our lives.
And supporting the global economy.
Even an unprecedented times the business is performing well in all areas.
We are well position to capitalize on continued strong underlying demand fundamentals with capacity across our markets in the U.S. in Europe and substantial liquidity to support our growth.
I want to close by doing two things first by again thanking my teammates rather good work and I very much look forward to working with getting to know you in the coming weeks ahead.
And secondly, and very very importantly, I want. It then they can acknowledge our wonderful CFO, Dan what was going to retire at yearend.
I have no diaper over 20 years, and what I've always appreciated about her it's how correct. Yes. She calls it likely see that they're Adobe has.
And that is a great attribute any exact either but it is a critical quality for our world class CFO, which is what she it.
All of US on this call will have ample time to celebrate.
Our third quarter call, earning call is that would be her last call. It CFO and I look forward to everyone's contribution to this effort.
With that let me turn the call over to Diane who will provide more color on our financial performance for the quarter and an update on a guidance for the year Guy.
Thanks Bruce.
And I really appreciate your comments on me personally.
It has been really an incredibly rewarding an exciting for years here, it's I respond and I couldn't have worked for the better team. It's been a great Ron and I look forward to continuing to partner with Bruce and the whole team. During this orderly transition period with that let's talk about another very strong leasing quarter for Cyrus bond and solid Q2.
Financial results turning to slide 11 revenue growth in the quarter with 2% well adjusted EBITDA grew 7% as noted in the presentation equipment sales in the second quarter of 2019 were unusually high at 17 million compared to approximately 7 million in the most recent corridor excuse.
Putting these sales in both periods revenue growth was actually 6% and more in line with our adjusted EBITDA growth for the quarter.
Turning to second quarter was 1.1% similar to levels in recent quarters, and we continue maintain our full year churn guidance range of 5% to 7% moving to slide 12, and a wide for the second quarter increased 6% compared to last year increases in the in Hawaii and adjusted EBITDA margin.
Nearly attributable to the impact of the high equipment sales in the second quarter of last year that I. Just mentioned these sales typically carry a margin and 10% range and as a result, they had a meaningfully negative impact on margins and the second quarter of 2019.
As highlighted on slide 13, the revenue contribution from our U.S. markets remain well balanced our continued European expansion will further diversify or portfolio and a substantial portion of our backlog consists of deals in these markets. Besides 14 shows we have an active development pipeline just corner strong leasing results.
With projects underway across both the U.S. and Europe.
Nearly 80% of the Colocation square feet under construction is pre lease which is toward the upper end of the range of historical quarter on levels for our pipeline and as we've discussed before construction of data hall, the tied to our late stage sales funnel and this level of pre leasing obviously de risks our capital investment will have nearly five.
Million Colocation square feet across our portfolio upon completion of all the projects in the pipeline.
Gene summarizes our balance sheet, an investment grade credit metrics, which continue to position us well to calm the growth of the business.
Bruce mentioned during the second quarter, we executed forward sales through our ATM equity program, resulting in nearly 300 million proceeds on ultimate settlement combined with our first quarter ATM forward sales, we have a total of 413 million in available forward equity on a pro forma basis inclusive of the impact of this time.
Equity our net debt to last quarter in lies EBITDA is five times.
And we have more than 1.5 billion in available liquidity liquidity, including our Undrawn revolver balance.
But the project in our development pipeline, having a total completion cod.
Exactly 350 million at the midpoint, we have significant runway to find potential capital requirements in support of leasing well into next year.
During the quarter, we settled the board sale agreement that we entered into in the fourth quarter 2019, and this resulted in net proceeds of approximately 97 million, which were used to pay down a portion of the amounts outstanding on our unsecured revolving credit facility.
That's great highlighted in his remarks, we are announcing a 2% increase in the third quarter dividend of 51 cents a share up a penny firmer second quarter dividend. This represents an annualized the all of approximately two and a half personnel. Since 2013, we've increased the dividend on the cumulative basis nearly 220%.
Im 29 to nearly 90% of the payout was return of capital. We also continue to maintain one of the lowest payout ratios among <unk> in order to retain internally generated cash flow to reinvest in the be business.
Moving to slide 16, our revenue backlog as of the ended the second quarter stood at 97 million. This is the highest quarter on backlog in the company's history and positions us very well for continued growth into 2021 and thereafter as a reminder from last quarter note that 26 million up the.
Backlog is associated with 22.5 megawatts expected to be deployed in four and a half megawatt blocks annually from mid 2022 to mid 2026 subject to receiving the ongoing necessary permitting as a result, even with the record backlog a meaningful portion of the robin on the associated capital.
Requirements will be deferred beyond 2021, we also want to point out that included in or 37 million a bookings. This quarter was the exercise of a reservation for four and a half megawatt representing approximately five and a half million an annualized revenue.
This paid reservation, what's included in our gross leasing results in the third quarter 2019, and we highlighted that that time, that's the impact of the anticipated exercise of the reservation was included in that total on page 25, or supplemental disclosure, we removed that reservation.
The third quarter 2019 bookings for blocks to reflect actual amar are signed in that quarter in the future. We do not intend to include reservations and leasing results until those reservation become executed leases.
Turning to slide 17, we are reaffirming our guidance ranges for revenue adjusted EBITDA and normalized FFO per share, we're increasing our guidance for capital expenditures to a range of 850 to 950 million an increase of 100 million at the midpoint compared to our prior guidance.
This increase reflects additional spending to support the strong leasing throughout the first half of this year as you update your models I want to highlight a few items for your consideration that will impact results on a sequential basis first we received approximately 3 million in lease term fees in the second quarter, which is primarily an acceleration of revenue.
<unk> associated with an early termination from one of our customers. Additionally, during the third quarter, we expect slightly higher maintenance capex spend.
Which we estimate will have an impact of approximately three cents a share. We're also anticipating an increase in stock based comp and a reduction in the income tax benefit compared to the second quarter, which we estimate will be another two cents per share impact on a combined basis.
Actually we will have the full quarter impact the approximately 1.6 million shares issued at the end of June associated with the drawdown afford equity that I referred to earlier.
In closing, we're pleased with our results for the quarter in through the first half a year, particularly well operating under circumstances, none of us could have ever imagine we remain focused on ensuring we are well positioned to support a customer needs and to continue to generate strong profitable growth.
Appreciate appreciate you purchased spam calls and we are now happy to take questions.
Please note the Bruce Mike on Iron separate location. So it would be helpful. If you direct your quick question specific equated to one about since you asked them.
In addition, given the number of questions in the queue. We kindly request that you limit your questions to one question per person to give everyone a chance to participate in the queue anyway, but that thank you and Sean Please open the line.
Thank you 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 are using a speakerphone. Please pick up your handset before indicate if at any time. Your question has been a dress and he would like to withdraw. Your question. Please press Star then too that's a reminder leaves.
Limit yourself to one question. So we can get to everyone in the Q E.
The first question is saying will come from Frank Louthan with Raymond James. Please go ahead.
Great. Thank you I will boosting congratulations on on the spot in Diane congratulations on on the retirement.
I talked with a little bit about the nature the bookings that that you're currently seeing.
And and <unk> and and what customers are kinda demanding and maybe get contracts that a little bit with what it was six months ago versus year ago, and how we should think about the outlook for the business and types of products that are that that you'll be selling to customers.
Well I would say that Bruce I would say that again.
This quarter with great quarter in terms of the hyper scale business, you know our European to doing fantastic.
The Oh, we're very bullish on that I would say that the enterprise business continues to be good or you know.
Normal ranges $10 million versus 12 last quarter, but again, it's good bids we like it we like having a diversity.
First occasion.
Okay. Just in general business, you know the demand it is very solid but again, it's all on up to deliver but.
Pretty encouraged by what we're saying.
Alright, great and any adjustments to the salesforce with kind of the new environment, either you know maybe rely more on channel or.
Yeah in different ways that you you you approach customers and how do you how's that affecting their their productivity.
Well I would say again channels or a small portion of our business, that's about 10 or 11%. So.
And the strength I think at this company is our relationship with Uh Huh.
As I mentioned my remark is a very customer centric business and our company is fantastic at it I mean I come from a world, where we have tenant we don't have tended to be.
Really care about them, we care about trying to figure out solution for their issues and ER and we do we we have done a good job in a tough that continued good job deliberate the goods for them, but so I wouldn't anticipate major changes I I would say that I think that this new environment. It is.
Good for our business is good the data center business and.
It's up to US you get archera that business.
Alright, great. Thank you very much.
The next question will come from Jonathan Cohen with RBC capital markets. Please go ahead.
Yeah. Thanks, So I'm I'm interested in maybe maybe just a little bit more color around you know the geographic mix of where you're seeing demand from from Hyperscalers, you know going forward it would that would that and deferred compared to what you've seen year to date and then as you think about the.
The the management team and some of the changes that are there that are happening and I apologize. If you. If you might have addressed this in the script that or are there.
You know for certain key performance, perhaps from sales of operations or whatnot, but are you all queen kind of retention packages fix we'd done offering any retention back I think it honor and privilege for everyone to work here and I didn't do a good job of their people like people love it but I've been impressed with its how people love this comp.
People are.
Our committed to destiny and let's look at it was off and we had you know people talked about the term well Oh and the other thing but look at it look at the result, and the results are good and the results are good because it's that one or two people with this day big organization with great people throughout the.
Organization. They really are high quality people people were executing and people are pride in their work. So I think this is I think this is a very good culture, I think people care and a it and the results speak for themselves.
Thanks, and then on just a kind of geographic okay hot spots, you're seen in terms of demands and how that might influence the future leasing mix.
Well I again.
This year, it's been the year, the hyperscale versus the enterprise enterprise very important last year. It carried the day in terms of Africa.
It did fantastic in enterprise important it's doing very well the hyperscale does it come back and a this year from last year for us isn't that we're seeing a lot of lots the man, but you know that changes again, that's why we only give guidance you get a leasing guidance once a year terms Oh, we don't do an order by order could the lumpy bid.
And the it can come and gone up he will deliver the goods and the failed to deliver deliver them profitably to our shareholders. So.
But we're pretty encouraged in terms of M&A.
Thank you.
And the next question will come from Simon Flannery with Morgan Stanley. Please go ahead.
Great. Thank you very much and Bruce Congrats on her appointment I am best for the future could you share Bruce a little bit on what your priorities our eyes as the board appointed your what they really want you to focus on on that you sure at some of your first impressions around customers and people or any other things that are really struck.
So far and things that you really think you can kind of I'd make a difference with the company going forward.
Thank you Stan I would say that again, what the board I mean staff the board right anything.
Invited me that joined just to try and work with the team and try and make it even better company than than we had very.
Very good comedy and our job is to make it make it better I I think in terms of how we're going to do that you know I don't know I'm spending the right now with my listening and learning tour in terms of going out meeting with everybody in our people our investors our customers and I'm gonna have much more to say and they started.
This call, but we've got a figure this out if you look at the company I.
Again, we've got a great position when we're not to be so we can move the needle with ROE, but we're not whose false it'd be a real financial.
Possibility being investment grade and access to capital. So I think I think where it's a very good position to be Oh, you know pointed out we traded a big discounts were peers. When I look at that I think it's a fantastic opportunity for us so as a team we're going to figure out into strategy into <unk>, we change it if we could it in a bit but.
We have much more to say when we get together in three months, but I'm very bullish I'm very bullish on the quality of our people I'm very bullish on the industry. Yeah. Yeah. This is that really a growth business.
No there isn't any growth businesses is good news and bad it's a good growth the bad news it the track lot of capital so.
Yeah, there's a lot of people entering their business and meet the building data centers the pricing is coming down a bit so again, our I've job the allocate capital wisely and you wouldn't set your way that it's profitable business for us and it's good for our shareholders and we'll be focused.
Great. Thanks very much.
Thank you.
The next question will come from Jordan Sadler with Keybanc capital markets. Please go ahead.
Thanks, and good morning.
Bruce Congratulations on the role and <unk>, Yeah for sure in for.
Getting through those prepared remarks of fluid late.
First time around so.
I'm I'm kind of or you know care elsewhere.
What's that.
Just barely getting through the prepared remark.
[laughter] [laughter]. So they look there's been a pretty remarkable changing the C suite now between Gary and caching Diane.
And your coming into this its a broad organization is you spoke to but different from maybe some of the other property types that you've been exposed to.
In this business.
The customers can represent as you reflected in your commentary I'm really the strength of the business right that the the relationship with customers in the strength of the business I heard you sites and sometimes and often times he relationships.
Can connect and even the highest levels will be organization with the CEO with Chief commercial officer present, your and I'm kind of curious you know.
Given that sort of perspective, how you and the board sort of thought about.
The opportunity here and the ability to sort of execute at the level. The company has historically given sort of you know your your lack of expertise and its domain specific.
Well Jordan, you're gonna have to ask the board for their thinking in terms of my thinking my what I found in business is what the customer wants it.
Listen and you listen to them in here at they haven't you try and find solutions. So my experience is that a is that if the customer knows you're listening and you're working in your and your finds lotion <unk> I'm not sure. They care, who the person is they want to make sure that person is focused on them and trying to solve their.
Our issues and I have to say, we got a great deal team.
Great talent people. It was very impressed with them and you know they've been carrying the water here for many years and carrying that successfully so no I'm I'm I'm optimistic, but again, that's look and see how we do it that way like this and Ah we own it and that the company has done very well I'm very well with all this term well.
You pointed out and I believe the company to continue to execute but again.
I appreciate that answering a question you know you mentioned you sort on the listening tour now I know you'll have more to say going forward strategy that you're going to be devising.
<unk> anything that's sort of yeah as we look at sort of all these changes as outsiders looking and you feel that we.
Need to be aware of or or cautious given the degree of James I mean, it's been a lot of change for a company that seems to be putting up pretty good results right. So.
Hey, George having high prices back price is doing well the companies doing rather than the numbers that were put out this quarter doing well. The team is executing them. This is Pete.
I think some people sometimes people forget the terms organizations that it's not again the top one two or three people that makes it different it's it's the team it seemed locking arm gene executing the plan and we've got a great team, we really have a very very special group of people throughout the organization.
Care, they work hard 20, Fourseven and as I've I've been very impressed with the people I've met and throughout the organization, but a you know.
That's why they pay you the big Bucks to make your decisions, whether you think it's a good I'm going back to like that that for but I watched knows the team focused on.
Doing some good things for shareholders.
Great. Thanks for the did Everest.
The next question will come from Erik Rasmussen with Stifel. Please go ahead.
Yeah. Thank you and Bruce Best of luck on the appointment and Diane no. Congrats on a new upcoming retirement for you.
Oh, maybe my one question.
Maybe my one question I'll circle back with Hyperscale. You know are you talking about the you know results.
We've seen good momentum and things picking up no, but you know we're seeing a you know it's been a strong sort of recovery and improved demand.
How are you seeing this market the northern Virginia market and your opportunity you should maybe can you just comment although the markets, where you're seeing and improvement versus maybe what you thought.
Just 90 days ago. Thank you.
All right Eric. Thank you I would say to me, it's interesting northern Virginia.
You see an increased activity no question about it that's the good news the top news is the pricing I mean, it is that is very very aggressive pricing. So the issue is for us different times. We do you you know what price you do you do it and what price you said about why don't you.
But you know we like are you don't get me have capacity now in northern Virginia and that much of it last year.
Coming on stream now and it by the year and so even a decent position there in terms of accommodate demand and it's going to your question finding the right. The REIT transaction, but there's definitely that's definitely activity and a network.
Yeah to Bruces point, Eric We you know we have multiple campus is there that.
Built out at least stop and ER on what we refer to its can core or we have a shell our third building going up there, but it won't be ready till the end of year and on our newest large campus, which we refer to as Tolson is you know that shall just got completed a couple of months ago, and we have some leases that have been signed.
But part of that was we didn't have really shell capacity.
That was really coming online until more into you know mid to late this year.
Great. Thanks to the color and Bruce Good luck next 90 days.
Thank you.
The next question will come from Richard Choe with JP Morgan. Please go ahead.
Hi, I'm churn seems to be running very low and you didn't change churn guidance is there something that you're worried about going forward or just being conservative and then I've a follow up.
Hey, Thanks, Richard Yeah, We've said five to seven so the way it's been running for the first half the years feels like it's kinda probably being the lower end of the range, but you know weve pretty consistently ended up in that range year after year. So.
Yeah, we feel we feel pretty good about probably the lower part of the range.
And then for Bruce in terms of the business mix I'm.
Signings were very strong are you worried that your skewing a little too much to the Hyperscale or do you feel comfortable died and have you seen any changes over the past few weeks in terms of the.
Conversations or signings that you're seeing from your sales team.
I I would say.
We like are we likely diversification, we have between enterprise and hyper scale, but again, the hyper feels very lumpy, we love that a good business. We're good data, we've got great customer relationships. So.
Again, we're we're glad that that business is back and where it was in 2019.
You know.
Yeah, I would say were were good in terms of how conversations in the last few weeks I think it got to get away from thing what fabrication last two weeks to three weeks or last day. This business again, as we said, it's a lumpy business. The conversation don't need a lot until the committee execute and get it get to lease and so.
So I guess.
The most that thing what people are focused on a sign leases and Oh, well report them every quarter.
Yeah, and Richard Chad on the first it's kinda feel weve pretty consistently.
Said that you know Hyperscale now is that around 50% of our revenue and that we see it growing to the 60% to 70% of total revenue range and not too distant future just because of the size of those deals. The good news to on those deals as you know the risk adjusted returns are attractive we know that that the capital.
So we have line of sight to one just put out the capital because some of these larger deals have a ramp. So you can match the capital spend with the ramp so yeah, we loved that business, but again the enterprise business, it's still a great.
They find and very profitable business for us and so we've always been pretty agnostic in selling to both hyperscale and enterprise and that really hasn't changed.
No the enterprise business in Europe seems great I guess my one follow up to that is [laughter]. When we talk about hyperscale living we used to focus on the top five and now it seems to have expanded are you seeing more.
Demand from the top 20, and it's not the top five or is it in the top five that are.
Driving the demand.
No I eat it by me and everyone right. I mean, you did this is I mean, everyone is focused.
Focused on it.
Yeah, and eight of our top 10 customers certain Hyperscale category and then if you expand into our top 20 customers. It yeah. It's it's a much larger than just fine.
Okay, So you're seeing demand from a lot of places.
Yep.
Thank you.
The next question will come from Nick del Deo with Moffettnathanson. Please.
Please go ahead.
Hi, This is Michael Surat for Nick Thanks for taking my questions and congratulations Bruce on your appointment and I had congratulations on your upcoming retirement on maybe the first one for Bruce in light of the 100 million dollar increase your expected Capex. This year could you share some observations.
I'd have regarding your sales funnel or maybe anything notable in terms of overall size of the funnel maybe the average deal size installation the timing and composition of the deployment type.
Michael we're getting away from talking about the final we're going to be just talking about leasing that we end up getting done but from our standpoint.
The reason the Capex is up and because the yields you know we've signed there are no common assigning so we're spending more more more money, but I am going that way.
Yeah that the Capex spend it on the increase in our guidance is really directly related to yeah. We in the first half of the year, we sold almost a 100 million of annualized revenue.
So we when we give our capex guidance is based on you know projected cash spend in a given calendar year and again with the strong leasing we out we needed to raise guidance to where we think will end up for the full year at this point.
Got it thanks, and maybe just one for Diane to what degree did lower T. any expenses and people are prices help EBITDA and maybe to what degree that.
Those benefits might roll into the second half of fear.
Well, obviously all that captured in our in our EBITDA guidance range, but yes. There was on an operating side there were no heightened expenses due to call, but at the data center level, you know much more frequent cleaning and PPV and other things, but to your point those were.
Meanwhile, offset by obviously, a significantly reduced a t. any at the corporate level, particularly for sales team and our executive since everybody pretty much working.
From home, but it's pretty much a wash I think between the you know the pluses and minuses.
Thank you.
You're welcome.
The next question will come from Tim along with Barclays. Please go ahead.
Hi, Good morning. This is Brendan Lynch on for Tim.
Rescued both your gruesome Diane I.
I wanted to talk a little bit about Jude, yes, I see that you're trending you're holding there.
But just.
Bigger picture.
Yes, I understand it's very early days, but maybe you could talk about what other type of partnerships or joint ventures, if any that you would like to see a longer term.
Alright, well I I'd love to do about six more GDS is you can have a profitable at that that was a fantastic investment team did and and and Ah you know we here so.
More shares there left to sell overtime, but I would say that she me what the beautiful thing about joint ventures. If you can do something like what we get there or you know we've got to position Oh data of about you know I believe that's between 10 and.
15% or so I would say, we like that because we think we can add great value.
With our partner in terms of given our relationships with the idea that hopefully over time, we can expand that relationship and or more.
I would be helpful to them as they did grow but again in terms of joint ventures I've done a lot of joint ventures in my life. I think you know Bakken circumstance for each deal what you're trying to accomplish in terms of and what the pricing is in terms of what what the what the returns that.
Partners are looking for but I I think that there's you know in this world that there's a lot of opportunity to do some joint ventures, and we just got to figure out where it makes sense for us look good.
Great. Thanks for the color.
Thank you.
The next question will come from Michael Rollins with Citi Investment Research. Please go ahead.
Hi, good morning, and congrats Bruce and Dan figure retirement.
Two questions if I could just first on just performance during the quarter can you share of the cash renewal spreads.
Experience and then secondly, just more of a high level question, if interest rates have well work what does that mean for the perspective returns on capital to get figure Hyperscale product.
The rate having influence on ultimately where you're able to lease out those assets over time. Thanks.
Well, Michael let me take neighbors, yeah, I'll take the person numbers can address the second but.
You know, we again, we capture any rent roll down.
In our just churn number so that's in the little over 1%.
Well, well, we don't disclose and it's a positive is one lever a new leases often time, there's an increase in the amount of space empowered that a renewing customers take.
As well as obviously then fines for much longer lease term again, so the total contract value on need it's typically a net positive but there is on the margin you know depending on the lease and how long ago.
The lease was originally underwritten there is some rent roll downs for sure, but again nothing that I mean that is completely captured in our churn number.
Just a role there any problem.
No.
It adds to the Uh huh.
Yeah, right in that adds to anything as it relates to the.
Long from interest rate you know it getting the 10 year to date or things like 53 basis points. So it's unbelievable how cheap things are getting race. It below it now for the last 234 years. So it's not like it and I don't think that impact that much in terms of or on the spreads you're getting or not but again it would have thought that races.
This loaded designer.
So hot but.
But our big brother.
Yeah, no getting fantastic.
Yeah. He has had an impact and getting to investment grade lab falling lease financing all our debt we saved over 200 basis points on.
On our interest so between the you know very low rates and paying a much lower margin spread as as an investment grade that bad that's huge plus for us, particularly when competing with private platforms or other data center reach that may not have oh, they [noise] as.
Cost of capital.
And just to that point Diane point, when you think it when you think about it in terms of you get construction loans today.
On this.
And this pricing is very very difficult and God, having our line of credit and be able to build on our line of credit that big Big advantage to did dies point.
Yeah, just following up on that observation, so when you're going into the pricing conversation sales team and the customer are you generally targeting a certain for return or minimum that you're looking to achieve or is it really just about the spread to how you look at your cost of capital and that's what ultimately.
Fine pricing.
I would say that again typically what we try and get into certain return you. That's what we're looking at it.
<unk>.
On our money in terms of.
Not just not just the spread here.
Spread spreads can come and go we're looking for a total return or yeah that makes it return on invested capital exactly.
Thank you.
You're welcome.
The next question will come from Matthew Niknam with Deutsche Bank. Please go ahead.
Hey, Thank you for taking my question first maybe Bruce based on your initial observations I'm curious just to get your take on Cyrus ones competitive positioning in the industry and whether you think the company me more global scale to effectively compete against the two larger public peers in the space and then.
Just one follow up I know hyperscale conversations have been very robust and the demand tailwinds as kicked back and I'm. Just wondering you guys have been pretty good predictor is in the past around.
The lumpiness in cycle or any sort of indicators around when these hyperscale customers and I guess the broader vertical could go back into a digestion phase later this year. Thanks.
All right. So in terms of I wouldn't the for three months in terms of.
Strategy in terms of going you know other places and and talking about that first we need again, what I said earlier, which I really believe very strongly I like our positioning being not the big Gorilla as you know we've got great competitors in this space they do a great job, but I like being smaller.
It gives us an opportunity to be a little bit more nimble and you don't have do as much to move the needle. So I like that in terms of growth. We've been successful you know I think Europe's been great for us and again, we've got to make sure. We just focus on.
Places that that are you.
We can continue to grow and grow profitably, but we'll have more to stay in that that that later in terms of the your question is the lumpiness in terms of the Hyperscalers and my experience in most thinks it is it sort of an ebb and flow people end up doing a lot and then they need to step back a little bit in and consolidate.
So I wouldn't be surprised things slow down a level that you know six or nine months, but who knows right now it is.
The growth in very good, but well have to wait wait and see but typically what what's happened let past three or four years you. There had been big years, and then that policies I suppose Dallas with his koby thing and it's working from home and the demand.
I think this could last fall and thinking for pullback.
We'll see.
That's it.
Okay.
The next question will come from Colby sign of sale with Cowen and company. Please go ahead.
Hi, This is Michael onto college two questions. If I may 1st given the headlines surrounding potential ban of certain Chinese internet applications in the U.S. are you thinking about the risk type for these customers, particularly as it relates to new business and a second you know there's some concern surrounding the potential slowdown in enterprise demand on the second half a year.
How did you characterized the demand you're seeing from enterprise currently thank you.
Well the separately the enterprise demand is good were again.
Quarter over quarter results were good in line with what we've been doing so we're not worried about that in terms of the Chinese question, which is a good ones I think that a you know that there is uncertainty I think from our point of view is trying to figure out how how to de risk that in terms of making commitments in terms of.
In case something happened so get a little more security that sort of thing. So just looking at that but you know we'll see how this all what happens over the next you know.
Three months six months nine months, but again you know we always try to look at so look at the risk and downside and try and try and mitigated to some extent.
Perfect. Thank you.
Thank you.
The next question will come from already Klein with BMO capital. Please go ahead.
Thanks, and congrats again I person Diane.
Can you maybe a balances man backdrop of what you're seeing in Europe versus the U.S. articulate rating as it relates to Hyperscale, sorry, certainly a very strong leasing quarter in the U.S. Yoo U.S. Hyperscale remains on the soccer side. So you know.
Sure just elaborate on what's going on there and maybe if the funnel looks any different than then yeah. The recent leasing performance.
I would say that again your we we love our position there the team is doing a great job.
And we've been fortunate to fine you know I have yeah.
Yep.
It's an expansion capacity and again, it's all about execution. So I think that's been our success in Europe right.
Yeah.
And we've been very very pleased with that you know again in the U.S.
Yeah. When you talk about northern Virginia is probably the market that we done.
We haven't done as well that as well as our competitors because again, it's really a function of price from our standpoint, but it didn't have as much the path I imagine, but yeah, we'll see how that goes in terms its uh huh.
The pricing continues to be like that but.
We've had great success in in Europe, and we look forward to new to push that.
And then just on the enterprise side of things it sounds like things are holding steady, but can you talk little bit about new logo addition, whether or not that slowed in this environment.
No I think we added three logos in in the quarter. So Ah you know that was good and it gives us a focus of ours.
We have lower incentive to our people we could bring in a new logo and you know we've got very diverse client base, which we think is very important even though we are dominated by the hype is here.
Yeah, and I think what like what so great about our business and we disclose that and a supplemental disclosure on page 25. It's yeah. This quarter, we did bring on three new logos and we're always pushing to bring on new customers, but 94% of our leasing in terms of direct.
And you booked was you know from existing customers. So what is key for US is that we just continue to do new business.
I you know in additional leases with our existing customer base, both hyperscale and and enterprise, but again were every quarter, we at or we add new customers and that's that's a great baseline because we know well go all those customers overtime.
Yeah, and just to be clear the took three new is three fortune 1000. So 10 total so that's in lie in terms of total new logos with what we've been adding.
I appreciate that.
The next question will come from David Marino with Green Street Advisors. Please go ahead.
Hey, guys question 40 on guidance with all the new leasing activity this quarter and most of the pre leased development pipeline expected deliver a this year can you just help me understand why this didn't translate into an increased in your adjusted EBITDA guidance.
Is it just a function of data centers delivering in December or is it more of a conservative that I'm the guy.
I would say, yes. The biggest piece is just timing of revenue recognition that a lot of the leasing is you know going to impact.
2021 more significantly than this year.
And then the other thing is that you know in my formal remarks, I walk through lease term fees and some increased maintenance capex and some other items that are going to impact you know last two quarters versus you know the second quarter that had you know more one time impacts.
I'll repeat in in terms of a AFFO per share.
Okay, and we don't though and again, we also remember sat on the.
And almost 100 million forward equity right at the ended the quarter. So those shares are now fully impacting the last chapter there.
Yeah, I get I was I think it more on the adjusted EBITDA, which wouldn't be impacted on that but.
Yes, and deliver correct I think that's more yeah maintenance maintenance capex and somebody other things.
Okay and then you know my second question all right. So last week your largest tenant announced that they're going to stop relying on diesel power generators in the near future and you know given that's just a really costly component of building data centers I'm. Just wondering if you had any conversations with them about you know what that change might look like in the future and how that going in.
Back to probably really renewal negotiations with them.
Yeah, obviously, we're aware of that and and saw the.
Articles in our sales people will be speaking with that particular customer about that to determine what their goals are in that area, but it's really too early to comment on.
That for that particular topic right now, but we should have more visibility by the next earnings call.
Great. Thank you.
Welcome.
The next question will come from Eric New Chow with Wells Fargo. Please go ahead.
Hey, Thanks for squeezing me and Bruce a welcome to the party and Diana Best of luck with retirement so Bruce.
Just a broader question you talked on this a bit earlier, but you know your thoughts on kind of capital allocation as you look at the business and I appreciate that he just started and they're looking for a new permanent CFO, but you know historically cyrusone is perhaps the equity markets are some frequency and kind of shied away from you know capital recycling or JV uses the funding source. So you know is that something that you think you'll take it.
Sure look at given the demand you're seeing the funnel you know whether its asset divestitures or in a joint ventures have stabilized assets. Thanks.
Eric wherever look at everything I mean again in terms of just trying to understand what the best way to grow the businesses. So yeah, I would say that over the next.
At a time you know we're going to.
Come to a point of view on things and as I said that a lot of benches.
In my life, but.
Adult question a price. So we will look at Ah Ah capital allocation and said it very important part of the job a senior management and but more to say that as you go to the next call in it.
Going forward.
Okay. Thank you.
The next question will come from Sony Battery with Credit Suisse. Please go ahead.
Hi, Thank you for the question on squeezing me in.
I had a question regarding your route Preleased numbers and on earlier slide reported that about 80% of the development pipeline is pre leased and that's obviously a very good metric. However, we all kind of acknowledge the the path and the trajectory of the industry as well its high growth and oftentimes data center off.
First of engaged an elevated level of speculative construction property is coming on but it's not preleased. She wants to get your your take on how you plan on running Cyrus one are you going to engage more speculative construction are you going to operate more on a pre lease basis. Just so we can kind of got an understanding of like your go to market approach.
The industry.
Well again I would say, it's always nice had something crazy did you can deal with that the problem the negative but that is it you know or you can take long time, the nice thing about having having some inventory ready to raise to operate it usually when the client wants something they want it now and if we have the shelf.
No doubt it and we're ready to go it paces. They we could be we that get operation when they've got to order their equipment too. So it's important to have inventory, so I've sort of a mix on that in terms of.
Larger deals it's been nice to have some pre leasing a but in certain cases, we take the market is good we will have a we will go and.
That's the money because we believe in that market. It's all a function of I'll, probably take the market isn't the supply and demand in that market.
You want to anything yeah, yeah, so really where we what we consider called speculative. It's what we build a shell, but don't build out any data hall, but we need the shell to be able to build out data halls quickly. So what's on the development table right. Now is any you know data halls that we are built.
We now out and 80% of that is pretty late so that's exactly where we want to be to be able to react quickly to customers. Because if we don't have a shell and the key market. You know you're talking you know more like you know six to nine months before we could actually build Michelle in any kind of data hall capacity.
So it's a balance but.
As we even mentioned the out there was a period and no but that we probably didn't have enough shell capacity to potentially react to some bigger deals. So now we really have shall pretty much in all of our major markets. The top markets and of course, Santa Clara we helped to start coming out of the ground. We don't have the permit yet but that should.
Start coming out of the ground in the fall to give us capacity towards the end of 21 into early 2022.
Got it. Thank you for the color and then Diane converts it on the 2.5 megawatt.
Finding that you guys got into the quarters when acquired five was that in the signing and then there's this this type of deal that's going to be more common to see as we see big megawatt findings in the quarter and then 4.5 megawatt take downs or Commencements per year, followed on is it because it's kind of like that European dynamic versus U.S. I know that is something like that.
Deal.
That's the only deal we have like that I, I would say with more Tom and as when it's even when they're large megawatt deal by 18 megawatts are young nine megawatts or something in that range. There's typically some kind of ramp but much shorter yeah, maybe a ramp over six or 12 months Max so that multi year.
A ramp that's the only deal we haven't our portfolio. The that's that elongated so I'm not sure that's a real trend that's more of a unique transaction.
Got it okay. Thank you very much.
You're welcome.
And the next question will come from mid cross it with Baird. Please go ahead.
Thanks for fitting me in guide.
I appreciate the comments I'm waiting before kind of giving more strategy color, but I was just curious to know it you know your largest customers are asking you guys.
Potentially entering new markets and you know, what what kind of guy with any kind of Guy your decision as you expand more globally or not.
[noise] say that again I'm not sure I heard the last part of the question.
Just what's going to kind of guide your decision as to whether it could be more global venue RDR now or not I I think again, it's a question to you know your customers, where they want to go in and what sort of commitment they want to make with you in terms of the go there.
But that's a big factor in terms of again, you know certain things we looked at in terms of to try and you know make sure work and getting to handle their needs, but so you know these conversations are ongoing and you know there's a big growth internationally. So issue is how to folk.
Yes, because again, what I found it might be you got to focus on something that can have impact and you know.
Having conversations with our customers on this and what we'll see where they lead going forward, but there's definitely a good demand.
For new markets, both internationally Oh.
Ross the globe.
Okay. That's helpful. And then maybe just a follow up on the China question that someone asked earlier was there any leasing in the quarter from Chinese these firms.
Oh no.
Okay.
No.
Okay. That's it for me thanks, guys.
Right.
This will conclude our question and answer session I would now lets turn it over to management for any closing remarks.
Thank you Shannon. Thank you everyone for joining the fall. We appreciate it we appreciate your interest in Cyrus one and please reach out to Diane Michael and myself and we look forward to next week of meet a lot of you by video and we look forward to it. So thank you very much.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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