Q3 2020 CyrusOne Inc Earnings Call
So I was just one LLC third quarter 2020 earnings results Conference call.
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<unk>, Vice President of capital markets and Investor Relations. Please go ahead.
Thank you Greg Good morning, everyone and welcome to Cyrusones third 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 third quarter earnings release, along with the third quarter financial tables are available on the Investor Relations.
Section of our website at Cyrus one dot com.
I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward looking statements related to Cyrus one and are subject to risks and uncertainties.
Doctors that may cause our actual results to differ from expectations are detailed in the company's filings what the FCC, which you may access on the Fccs website or Cyrus one dot com where.
Undertake no obligation to revise these statements. Following the date of this conference call except as required by law. In addition, some of the company's remarks. This morning contain non-GAAP financial measures you can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the investors 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 to <unk> third quarter earnings call.
To begin the call let me address the leasing results for the quarter.
I like to be straight forward and the only thing I can say about our leasing results for the third quarter.
They were very disappointing.
We have talked about the lumpiness of the Hyperscale business.
Now the timing of these larger deals.
Can impact bookings from quarter to quarter.
This quarter is right.
The fourth quarter of 2019.
Which is followed by two very strong quarters in the first half of this year.
But the bottom line.
We have to produce much better result in the fourth quarter.
And we are confident that we will.
It did not.
This I was wanting to.
To deliver.
We continue to be very positive.
On the broader demand signals.
And are encouraged by what we're hearing in discussions with our customers.
Beginning with slide four.
You can see the financial results for the quarter.
Which diane will discuss in her remarks.
We at least $107 million in annualized revenue was good.
First three quarters.
Which is higher than our.
Total 2019 bucket.
[music].
The result.
Revenue backlog remains high at $82 million.
Position us well for continued growth.
In 2021 and beyond.
[music].
Moving to slide five during the quarter.
We delivered 45000 square feet six megawatt finally data hall.
Sorry can't location and the New York Metro area.
Additionally.
We have 345000 co location square feet instead.
88 megawatt under development.
With customer committed lease commitments, 63% of the square footage.
To support our continued growth in London.
We recently acquired 33 acres of land.
We have capacity for probably 100 megawatts.
Which would give us plenty of runway in that market.
However, this will be a longer term development as the land required rezoning.
We continue to strengthen our balance sheet.
Issuing $400 million of 10 year notes with.
With a coupon of 2.15 per share.
We also raised nearly $220 million forward equity.
ATM program during the quarter.
Atlanta for $10 million and available at <unk>.
Our leverage remains low and.
We have substantial liquidity to fund the business.
Slide six provides detail.
Third quarterly and year to date results.
The high average pricing for the quarter reflects the significant waiting towards enterprise deal.
With 86% of revenue side attributable to that segment.
And it would be out of the quarter the revenue contribution from enterprise and Hyperscale customers across the portfolio was roughly equivalent.
With enterprise accounted for 51% of revenue.
However, we have seen a significant increase in hyperscale 18 by him.
This segment accounting for over 70% bookings year to date.
Compared to 51% in 2019.
In addition.
We're very pleased with the success, we've had in Europe, which is accounted for over half the new revenue side.
The pricing had been healthy at $129 per kilowatt.
And the weighted average lease term is nearly eight years.
Turning to slide seven.
Our high margin interconnection business continues to grow at a mid teens rate.
Third quarter revenue of 15% compared to last year.
This is down nearly $60 million run rate business that represents approximately 6% of total company revenue.
Importantly.
We also recently announced our hero carbon by 2040 pledge.
Under which we have committed to operate carbon free my 24th.
Details on that.
Another U.S.G. priorities and initiatives it.
It's included in our 2020 sustainability report, which was published earlier this month.
And is available on its iris one dot com website.
The report provides a comprehensive overview of our efforts encompassing area.
Clay energy and carbon.
Water conservation.
Social responsibility and garden.
We are a bit behind it doing it.
It is important to us not only because it is important to our customers and shareholders, but because it is the right thing to do.
Moving on to slide eight.
The quarter was very busy.
As I mentioned on the last earnings call in with my hope and intention to visit all of our people and our facilities in the United States and Europe during the quarter to help me understand what our priority should be.
Unfortunately, as a result, the covert situation I was not able to do all of this.
However, I was able to meet with our European team.
Toward their sites and the satellite.
As well as a few in the United States.
There is more to do and I plan to see the rest of the Empire.
For the year.
I came away from these recent bid what they needed even greater appreciation for the quality of our people.
Their relentless focus on taking care of our customers.
And the power of our platform.
I would like to give the entire Cyrus one gene my shout out and big. Thank you for all that you weren't doing taking care of our customers and business during.
During this very strange time.
We've made a number of important changes in our senior management ranks.
And have assembled a strong group of smart experienced and talented people to lead the company forward.
I'm very excited to welcome John Hey, I'm back to the team.
Keep operating officer.
And you know Jonathan instrumental into the growth and success of Cyrus one for nearly a decade.
Yes, more than 20 years of industry experience.
The only data centers for some of the largest financial institutions in the world before joining Cyrus one in 2011.
In his previous role with the company as executive Vice President of data Center design and construction.
John developed and implemented improvements to design the processes that decrease cost and accelerated delivery times, particularly for scale bills.
As a result, Cyrus one had tremendous success growing its business with Hyperscale company.
Generating attractive returns.
He is well known and well respected in the industry.
And he had very long standing relationships with many of our customers.
John here in the room with us today.
Answering your questions.
Our new CFO.
Katherine Mike.
Sure for the last five years as CFO of your.
Africa.
In America at American Tower.
Which as many of you know and the leading global infrastructure right.
The enterprise value of nearly a $140 billion.
Are all their oversight divisions with total revenue of over two and a half billion dollars.
And our broad international experience will be incredibly valuable to us as we continue to grow our international footprint.
Prior to joining American tower.
Hello, CFO roles within divisions at Ericsson Nokia.
Cadres expect extensive CFO experience and background in both technology and real estate make her a great fit for the role that Cyrus one and we're very excited to have heard join the team.
Brent Bierman.
He's been with the company for the last four years as executive Vice President Solutions Engineering.
Has assumed the role.
Oh executive Vice President sales.
Brand has 15 years of experience in the data center industry, serving as senior Vice President of global sales for both compas data centers and digital Realty before joining Cyrus one.
Mike <unk> brand is well known and well respected in the industry and he also has strong relationships with many of our key customers.
Lastly, we have realigned the HR function under Robert Jackson, Our General Counsel.
Robert It's been Cyrus one for five years and had an x., that's a brief and real estate background.
And I look forward to partnering with him on our account strategy as well if there's other areas of responsibility, including oversight of our Brian Yes. She initiative.
In summary, we have an outstanding team with a great mix of data center real estate and technology backgrounds.
And a track record of success.
Turning to slide nine.
As I mentioned earlier it was a busy quarter visiting our people on site and talking with lots of our stakeholders, including our customers vendors and bastards analysts bankers as well as many other industry participants to hear their thought on where the industry is going and about the opportunity for site.
Just one.
The bottom of the slide highlights some of the key observations on the state and Cyrus one in particular.
The secular demand trends that have driven industry performance or expect to continue providing a backdrop for strong growth over the next few years.
In the United States.
The high return access to attractively priced capital has created a competitive environment well in Europe, the acceleration in demand from Hyperscale companies, along with the more supply constrained landscape.
Resulted in compelling opportunities across these markets.
Our proven track record broad geographical presence and investment grade staff positions as well, but.
But we continue to trade at a man meaningful discount to our peers.
This has been attributed to a number of different factors and we want.
I need to close that gap.
Slide 10 shows our key near term priorities.
First we have to produce stronger leasing results in the United States we.
We have lost share over the last couple of years and we need to improve in this area.
We have capacity across our key markets, which was an issue at times last year.
And it's well known that hyper scale development yields have compressed.
We're targeting we are targeting yield on these developments in the 8% to 10% range, which we believe will allow us to be very competitive while still generating good returns for our shareholders.
In Europe.
We remain focused on ensuring we have the capacity to position ourselves to capture the hyperscale business.
These companies continue to expand their footprint across key European markets.
And are increasingly taking down larger quantities of capacity.
We have development projects ongoing across these markets as well as powered shell and land to support our continued growth.
Upon completion of the 56 megawatts, we have under development, our near term European footprint will be 163 megawatts, representing nearly 20% of our total footprint.
Lastly, the senior management team will officially be put in place at the end of this week when Katherine join the team.
With the team in place.
We will now be evaluating together all the key areas of the business, including among other things our capital allocation strategy, our existing portfolio that assets, our funding strategy and our cost structure.
We're going to be very focused on closing the valuation gap between us and our very good competitors.
We know that to do that we need to have a consistent message with clear and consistent goals.
We need consistent execution.
Quarter in and quarter out.
To that end, we expect covert unwilling to having person investor day in 2021, and we're targeting mid year.
I will give all our investors and analysts and opportunity to meet and here from the leaders of our company.
At that meeting we plan to articulate our strategy in gold coast, which can be used to measure our progress and evaluate our our results.
In closing.
As we head into the last couple of months of the year.
We were in a strong position with capacity across our markets and.
And significant liquidity.
The demand trends remain strong and.
And our team is focused.
On increasing our bookings.
Capitalizing on a strong platform we have built.
And then after that.
The silence one team to get it done.
And I'm confident we will.
Diane will provide more color on our financial performance for the quarter.
Give an update on.
Our guidance for the year.
But before I turn the call over to her.
I'd like to congratulate her on a very distinguished career.
Hi, thank her for her outstanding contribution to Cyrus one over the last four years.
I have known the guy for over 20 years.
And not only does she have tremendous respect within the real estate community.
She has also a truly wonderful human being.
I think I speak for everyone at salaries one.
In saying that we will all miss her leadership.
Her wisdom.
And her enthusiasm.
I wish her all the back in her retirement.
Although she will be here both times through the end of the year to assist with the transition.
I know going forward.
She will keep plenty busy with all her aboard commitment.
So thank you die.
Good morning, everyone and thank you burst for those very kind words I have truly enjoyed my four years here its iris one having the opportunity to work with a great group of people and being part of an exciting company and platform and a dynamic industry that play such an important role at the intersection of real estate and technology.
I've also enjoyed working with all of you in the investment community not only heard Cyrus one well with many of you over the years in my previous roles as well and I. Thank you for all your support over the years.
Turning to slide 12 revenue and normalized FFO per share each grew 5% compared to the third quarter up 29, Tina Turner.
Churn remained low at 8.6% in the corridor so.
So we are decreasing the upper end of our churn guidance range from 7% to 6% for the full year, we anticipate churn to be between five and 6% were actually trending toward the lower end of that range. Although we do expect the fourth quarter churn will be slightly elevated compared to recent quarters.
Moving to slide 13, and Hawaiian adjusted EBITDA increased 4% and 3% respectively compared to the third quarter last year. The slight decrease in the N. Hawaiian adjusted EBITDA margins were driven primarily by higher percentage of zero margin pass through metered power, we conversants this quarter as compared to last.
Last year.
Slide 14 shows the revenue contribution from our U.S. markets remains well balanced our continued European expansion will further diversify our portfolio and a significant portion of our backlog consists of deals in these markets.
Turning to slide 15, our development pipeline largely reflect projects to support the revenue backlog as Bruce mentioned was 63% leased and I see us up basis, and roughly 70% in terms of megawatts as of the end of the corner in.
In addition to 70 megawatts of power capacity under construction, which is weighted toward our European markets. We also have 321000 square feet of powered shell under development.
The total cost to complete the projects is approximately 300 million at the midpoint of the estimated range I mean its.
Dan to liquidity to fund the construction.
On completion these projects our portfolio will consist of nearly 5 million co location square feet.
Moving to slide 16, we continue to strengthen the balance sheet and as Bruce mentioned in September we took advantage of historically low interest long term interest rates issuing 400 million of 10 year senior notes with a coupon of 2.15%. The net proceeds were used to repay 300 million of outstanding indebtedness under.
On secured term loans maturing in March of 23 and for general corporate purposes.
The transaction further smoothed and extends our maturity schedule, increasing our weighted average remaining term of 6.3 years and a weighted average interest rate on all of our debt remains very low at 2.13% and our percentage of fixed rate debt has increased to 77%. The fixed floating mix is now in line with our top.
Didn't mix given our investment grade that data and is more in line with that of our peers and other I.G. rated green.
Slide 17 summarizes our key balance sheet metrics and as you can see we are well positioned to continue to fund growth opportunities and maintained significant financial flexibility with 1.7 billion in available liquidity as of the ended the quarter.
Again as Bruce mentioned during the quarter, we raised nearly 220 million and forward equity through our ATM program and combined with ATM for its sales during the second quarter. We have a total of 413 million in available forward equity you bet.
A little proceeds from sales made during the quarter replaced nearly 220 million in equity that we did draw down during the quarter to reprice revolving borrowings outstanding and manage our leverage ratio.
We continue to Opportunistically monetize our GDS investments totaling approximately 160000 shares during the quarter generating net proceeds of approximately 13 million year to date, we have sold approximately 400000 shares and raised a total of approximately 33 million in proceeds as at the end of the quarter, we still on track.
Actually 1.9 million Judea shares with a total value of 155 million based on their share price at September Thirtyth.
Adding the value of this position to the value of the port equity raised through our ATM program. We have a total of nearly 570 million in available equity and equity substitute to fund the business going into 2021 and to continue to manage our leverage.
Turning to slide 18, or 82 million revenue backlog positions us well for growth next year and beyond just over one third of the revenue is expected to commence in the fourth quarter and as I've mentioned in prior quarters 26 million up the backlog is associated with 22 and a half megawatt.
Did the 0.4 and a half megawatt blocks annually for mid 2020 to the mid 2026.
The corresponding capital commitments for this lease is also phased in over the four year ramp period to align the capital spend with the commencement of the revenue.
Moving to slide 19, we have updated our guidance ranges for the full year based on results through the first three quarters, we've tightened the ranges for total revenue and adjusted EBITDA, while maintaining the mid point, we have increased the lower end of the guidance range for normalized FFO per share by five cents, which increases the midpoint of the range by two.
And a half times appear trading finally higher on this metric as a result of our actual year to date performance.
Based on our guidance midpoint, you'll note, there's an implied sequential decline in normalized FFO per share in the fourth quarter compared to the third quarter. This is primarily driven by a European income tax accrual true up as well as the full quarter impact of shares issued in the third quarter.
Associated with the drawdown of equity I just mentioned.
Lastly, we are increasing our guidance for capital expenditures to a range of 900 million to a billion, which is an increase of 50 million at the midpoint compared to our prior guidance and is primarily driven by the London land purchase.
Clothing, we're focused on ensuring we are well positioned to support our customers as they continue to grow and expand its Bruce mentioned the demand outlook remains positive with a continuation of the underlying trends that have driven growth in this sector.
We appreciate your participation on the call and we're now happy to take any questions.
Given the large number of questions that are in the queue would you kindly request that you limit. Your question to one main question to give everyone a chance to participate in our key money that thank you and grant. Please open the line for questions.
We will now begin the question and answer session.
That's a good question, let press Star then one on.
Your touchtone phone.
Curious on Speakerphone, please pick up your handset before pressing kids.
Sorry. Your question. Please press Star then too.
At this time, well pause momentarily to assemble our roster.
Our first question will come from Jonathan Atkin with RBC capital markets. Please go ahead.
Oh, Thanks, very much I wanted to ask about we seed and about operations. So on the leasing side I Wonder if you can give us a flavor for kind of how many at bats. You had you know again for Q is it broadly distributed across a number of markets in the western Europe or is it a smaller number of larger deals that you'd maybe give us a little bit of flavor.
For for that opportunity that you're looking for two and four Q in terms of leasing and operations if Sean wants to maybe provide a little bit of a comment on the company that he left the company, but he is now a COO of what are kind of your observations on what's changed what's different what are your.
I already it's going forward that the Red sea along seat thanks, very much great well I remember.
We start I would say again, what we were looking at it in the fourth quarter and Uh Huh.
We're very bullish in terms of where we are you know that the enterprise business has been steady for us. So you know it was steady in the third quarter and I continue to think that will continue to be steady, but the hyperscale business has to pick it up and.
Got lot watch things going on in both Europe, and the U.S. and again, it's incumbent upon us our team to execute and we got to get it done, but again were very optimistic and positive Uh huh.
Where we stand today.
John you want to talk about your reflections welcome welcome home. Thank you. Thank you Bruce Hi, Jonathan how are you.
So you know I loved about a year and a half ago and you know all I could say is you know this business has continued to evolve and continued while I was gone and.
You know, it's kind of a constant thing in this business I've been doing this for a long time and.
And I think you know priority for me and the team is really get focused on.
Creating the right products for our customers, rather hyperscale or enterprise right.
And you don't make sure we're doing the right thing by our customers and our shareholders gun.
Kind of do what we used to do right.
Thanks very much.
Operator, our next question will come from Frank with them.
Raymond James Please go ahead.
Great. Thank you so Bruce.
A little bit about your just want a little bit with the with the bookings you know what what's what change you had good pretty good momentum in the in the first half what's changed in and you know what specifically are you are you changing how you make your get put in place with the sales organization or what have you to kind of really pick this up.
And get get the bookies back to where you you'd like one of the big.
Well Frank would change it wouldn't have number one.
We said yeah, we've been saying that this last quarter when I was on the call, but before that is you know the hyperscale business is a lumpy business. So it's not sort of you know it's not like the enterprise. It just steady yet it's very lumpy. So I'm not sure. It again, we had one of these in the fourth quarter of 19 in terms of the slow slow quarter, So I'm not sure that change.
They get business is good.
And we were expecting a good fourth quarter Terabit changes I made a couple of changes I would say looking at that terms and drive business number one we have a new head of sales.
Brent Behrman is a new head of sales you know he was he ran sales of digital ran sales for comp as data centers are very good leader well respected by the team and I I I'm very very.
We're glad he is taking on this role are these taking all of the band. It. So I think that the focus and the second thing is in terms of the returns. The chart that were looking for as you saw it in my remarks here you know our view of the Unlevered returns. If you will have a 10% again that gives us doing that using the leverage we use with a high level.
You are levered to five and a half times or whatever you can get mid teen returns for the equity. So we think again by being a little bit more aggressive or that that would help us business too, but we're encouraged there's good demand out out out there, but it's up to us to de lever and as I mentioned I don't Mince words, we get.
I was disappointed in our leasing hyperscale leasing in the third quarter and I don't plan to be disappointed unaffordable.
Alright, Thank you very much. Thanks, thanks, guys.
Our next question will come from Colby Synesael Cowen. Please go ahead Colin.
Great. Thank you Bruce you made a lot of management changes or not.
Pretty short of the amount of time and I know I feel the questions on that I know you haven't as well what did you see in that and that just few months that you've been there that pushed you to make so many changes just just so quickly I imagine it wasn't just the trajectory of what you're expecting for for Threeq leasing and then.
Secondly, when you think longer term, how do you think about balancing topline growth versus.
Versus near term dilution, we're starting to see some of your peers, giving some targets in terms of how much they want to be growing there I felt oh, that's AFFO per share recognizing that while the demand out there they want to be cognizant not diluting investors too much in that near term.
They can pursue some of those bigger opportunities how are you guys thinking about that thank you.
Okay, well, let's start with the first one in terms of the team when I came here and did my listening tour and see what's going on I.
The team wasn't Boston as well as a team in terms of and there were some some some areas. That's all we can do better so to me I'm very excited about John coming back John is action oriented he's focused.
Is that you know he's a proven commodity in terms of and he's got great relationships are not only within the company, but outside the company with our key customers and asking yeah.
Some car salespeople, they would say that could only one person to come into a meeting to close a deal with a cost would be John hate them. So that's in fact, you know and I Didnt meet John until probably two months into my you know listening tour in it but I kept hearing go talk to John topic, John So I talked to John we had a number of conversation.
They said you know it'd be great to come back in.
Like partner in terms of tracking running this thing and I'm glad he's back and he's a great teammates. So I think that's great I would say you know Robert in terms is taking on each are very very strong person. This is additional responsibility and we've got a good very good HR group that he's working with I think that that's good Brad we talk.
I think he's a very good leader you've done this before for a number of companies right running sales and we needed to get we underperformed over the last couple of years, especially in the U.S. I mean, you get to pick it up and die I couldn't convince the state. So a you know she she's leaving like Lady that but that with her.
Help in whatever we found a great rate, replacing for I think you all be very impressed with Catherine I think she's a she's she's very good. So you got there have been changes or even changes very quick but I'm I'm a great believer in if you see something you should actually you know.
Make the moves and move forward lock arms and get things to happen. So no gap. It starts at the end of this week as I said and the team did.
Things are going to be hard at work.
As it relates to how we view top line and a sort of bottom line I would do you need about what do you need you need to grow the top line growth, but I think it does come back to looking at how you.
You could lever on a per share basis, so I think you're going to see.
More focus on that as well as the topline growth it will be much more focus on on a per share metric.
Great. Thank you.
Our next question will come from Jordan Sadler with Keybanc capital markets. Please go ahead.
Thank you and good morning.
Bruce I guess I was interested to hear sort of your sort of hundred they take an assessment and.
Hey, good ways and the one thing that struck me as sort of a new.
It was towards an initiative to increase the recruit the U.S. leasing share.
And I'm kind because it seems like in Europe. You know you will stay the course and other wage and stay the course.
So.
This.
A change in the cadence your strategy is that the right read that this is the primary shift that you see right away. Following the first hundred days and then what do you plan to do that sorta implement that change.
Well I'd say the U.S. again, we've got a big position the U.S. I mean, it's the dominant part of our company right now Europe next year.
20%, but so what we need to do again, when you lose share to figure out why you're losing share in that good positions in terms of capacity throughout and we just got to make sure. We're focused on on on getting the attention that capacity. So again its sales driven I think the changes.
What we're doing about as I mentioned, we have a new leader in the sales area and we're going to you know in terms of new figuring out better incentives to try and get focused on these assets, but oh, there's going to be focused on these assets because we you know.
We think there's a good opportunity there is great demand out there, but we you know.
We've got to win our share.
I guess I made it very well.
Sorry.
I wanted to clarify my question because the one thing I sort of missed there was I know you guys bought this land in London again this quarter. The prior management team had sort of actively shifted capital y.
Way from the U.S. and toward Europe.
And I guess, what I'm wondering is well capital you think shift more toward use of capital Allocator, you, making the decision to shift capital more actively back towards the U.S. No no no I. We you should not take that you could take that said we've got a we've got a lot of land its position in the U.S. that we need to maximize that is.
Grant money, we've invested that we haven't got any value for so we need to get value out of that in terms of if you look at in terms of the new land parcels were working on bought or whatever I would say we are you know.
Focusing strongly on on the European markets and again, we believe that there is great opportunity. There. So don't take this that we think that we're allocating new capital to the U.S. Im forgetting about Europe I would say the focus is making sure. We have all we can in Europe to handle the growth we're seeing there and you.
Yes, we have a lot of capital that's in place or land available that we need to get some traction on that we've been you know a.
A little bit weak in terms of time fine.
Customers for.
Got it. Thank you. Thank you.
Our next question will come from Eric Berg with Wells Fargo. Please go ahead.
Great. Thanks for taking the question Bruce just on the the 8% to 10% return requirements in the U.S. So do you think that maybe you missed out on deals in the past in the U.S. because you weren't aggressive enough on price or do you plan to change that going forward do you think it was more supply related because you didn't have inventory in certain markets like Ashburn last year.
And I guess as you look longer term do you think that range is sustainable have you seen any signs it's kind of stabilization of pricing in the U.S. given the number of competitors, both public and private.
Thanks.
I would say we missed for two weeks in some cases, we missed last year or whatever because it didn't have product in the market I would say we missed some this year last few because it was too aggressive and we thought that the.
Pricing was too aggressive and we didn't want to play at those those rates and I guess from our standpoint today as we look at the 8% to 10% would be put a modest leverage I'm can get mid teens returns on your equity and that's that's not bad with long term leases. So I think we're a little bit more and more aggressive as it relate to that.
And Hey, Eric It's John So.
Well I mean, we definitely see opportunity on the development side to kind of maintain yields right with whatever you know whether hyperscale customers really need.
In the space, what their priorities are and our enterprise customers. So.
Yeah like I said earlier, it's key for us to get on the operation side to make sure we're matching our product for what our customers need what the rates are in the market with the competition is in the market.
And you know we have we have a phenomenal platform to do that.
Great. Thank you.
Our next question will come from Nick Telltale with Moffettnathanson. Please go ahead.
Hey, you know Bruce if the basis of competition for Hyperscale deals is.
Shifting even more towards pricing or the returns it that operators are willing to accept that.
You know how well positioned you feel you are to compete on that dimension you think of the scale. Your biggest competitor gets him any sort of structural leg up and how much more volume do you think you need to drive using the new return target to create a similar amount of value as you would a one year old targets.
Well I would say a couple things I would say I think we have a big enough scale to take care of our our customers who can't be everywhere, where they are but when you look at what's going on but when I look at it when we look at like Northern Virginia. There are a lot of people there that are international we're competing against it we don't have a lot of in footprint and they're getting.
[noise] deals done so it's not like the customers just saying, we're not going to do business with you because you don't have an international footprint. So for US again, we've got great relationships with with many companies and we have those relationships because we've been able to deliver and meet their expectations on many fronts not just price price is really the last thing.
You got it you know there's lots of other factors that are very important factors and sometimes I would think relationship.
Getting better pricing because they want to do business with you, but it's still very competitive so.
And we're seeing that.
Yes, so [noise].
Nick on me.
The dynamic with the platform that we have right that we've developed over decades here right to really initially focused on the enterprise.
And you know the things that the hyperscalers need in the space I mean, there's.
It's not a commodity you know we talk about it being you talked about being a commodity business, but it's not really I mean these guys have requirements just like they have requirements for their own facilities.
Not really no.
Suisse's fit into a platform that we can deliver right into larger players in the space can deliver.
All right. Thank you.
<unk>.
Our next question will come from Sami Abboud true with credit Suisse. Please go ahead.
Hi. Thank you. Thank you for the question I want to go back to the 10% yield and.
Maybe Bruce just to get an idea on how you think about this number is this a year one type of number as it right when the facilities up it's a certain utilization rate and then you get that eat the 10% or is that is that like for the life of the deal or a certain period of time like three or four years and that's part one of the question part two of the question.
And do you see the European leasing dynamics being in line to that range below or above and then same same framework against the U.S. dynamics would be very helpful for us.
Alright that 8% to 10% yield it is really a stabilized yield.
Getting it up built and leased over time, because you know, there's usually phases whatever in terms of how we compare that U.S. to Europe I would say right now your has a little bit more favorable economics.
To the U.S., but you know that can change over time, but right now it is a better environment to invest.
And then what were seeing like in Northern Virginia.
Yeah, when we got it and then it could lead to long term steel yeah. There is typically some ramp but even for the hyperscale. They tend to ramp fairly quickly sorry, yeah. We we underwrite started going then average and ending yield but the stabilized as what we're saying in that range.
Got it got it and then maybe just a follow up it sounds like there is some productivity in the background. There are things going on in the pipeline how should we be thinking about your capex and 2021, because some of your peers are already alluding to a pickup in capex spend that looks very similar to 2020, and 2021 and I guess that ends up.
Translating it to some of your per share economics for your per share metrics. We just get an early idea on what we should be modeling or thinking about from a capex perspective.
Look for to give me that in our fourth quarter call in February 21.
Got it thank you.
Our next question will come from our clients the amount of capital markets. Please go ahead.
Thanks.
Given all the changes at the top what are you seeing from employee attrition standpoint, particularly on the sales front and what kind of heavy lifting east.
It does there need to be done there, maybe a hiring standpoint as well.
We've seen zero.
No.
Yeah sure Yeah zero people, leaving on the sales front I think people are pretty energized, having breadth in that position. So.
So right now I know you know.
I think it's good.
In our <unk> I mean, yeah for myself coming back I mean, the team I left the year year and a half ago was here right and you know that was the team that helped drive a lot of our success historically they are.
They're excited about the new leadership I mean, they're excited on back and are excited to work with you know brenton team and everybody to kind of get back to win it.
And I would echo in the.
Finance, Oregon really across the organization, we have very minimal attrition and look I think.
Something to recognize particulate people are in the read industry to data center industry. It's a great place to be yeah. There's a lot of other industries, Hey, Matt Yeah. [laughter] that for example, you know work in some of those that are much more stress. So I think people are excited about working for Cyrus on our platform some of it.
Ranges have been re energizing and this is a great industry to be a part of it. So I don't I don't think people are jumping ship.
Just try [laughter], yeah, yeah, maybe I'm not smart woman room, I guess [laughter] Garlock lives in Florida, and but then just briefly you highlighted the mix of that asset markets and in markets and your focus on one of your focus area can you just elaborate a little bit on what that would mean are there markets.
In the U.S. potentially exit or additional markets you'd consider entering.
I think there's yeah I think we're looking at everything in terms of where you might slimmed down we might exit we like you know.
There's a lot we don't look at so again, we'll be back to you, but again the team is going to be.
All over that in terms of Woodward, let me start together as a team as of Friday.
Thanks.
Our next question will come from Simon Flannery with Morgan Stanley. Please go ahead.
Great. Thank you very much.
Good to hear the commentary on the fourth quarter leasing outlook could you just take us out a little bit more on the medium term on.
And they work really has happened in a post cobot environment in terms of digital transformation. What are you hearing from the hyperscalers and be a bit to the enterprise in terms of how they're thinking about the medium term demand and the sustainability of the strong leasing the industry seen in 2020. Thanks.
I would say the Hyperscalers are very encouraged in terms of you know when they look at their business. They are there.
Exceeded theirs.
I don't think this is a blip. They think this is you know there's good growth over the next next few years and they're planning accordingly, So we're very encouraged.
Andy.
Yes, Simon I mean, the second that you know just coming back in from the time I was away I mean.
The demand is real I mean, cobas you know logically just kind of push the demand for you know technology up which obviously, we're in underlying foundational component of that so.
So it's good I mean, even the enterprise customers that we talk to it's amazing that we you know, we still keep conducting business and everything keeps running and whether people are home or on sites.
The demands demands and I.
I think you know the capacity that was kind of store like but the hyperscalers thought they had who's going to less than a couple of years is kind of been consumed and they're looking for growth.
Any change in their desire to in source fat or or outsource.
Yes, so on the on the in sourced first outsource I mean this has been a constant theme for for years with the Hyperscalers and I mean, I think they come out and talk about you know they target like a 50%.
Build versus doses lease and you see some variance right between some of the hyperscale or some of that's based on timing, but haven't heard anything that would change that assumption.
On the fact that they find very long term leases is that they are going to maintain a good portion of their data center footprint, obviously in third party facility.
Thank you.
Our next question will come from Eric Larson with Stifel. Please go ahead.
Yeah. Thanks, first and best of luck in your retirement and certainly nice working with you. If this is in fact, the last call [noise].
Maybe just a trip Bruce.
You back again to some of the priorities, but are you worried that you may have lost too much momentum a and maybe miss some of you know the hyperscale cycle. This time around especially in the U.S. and what key markets like Northern Virginia.
And then how how does that you know a new yield range of 8% to 10% what does that do to integrate sort of the discussions with customers and how they've been receptive to that thank you.
Well again I think we lost you know we had we had a quarter that we feel is the missing quarter I would say in terms of hyperscale, because but again as we say its lumpy. So the conversations didn't stop it and then maybe you could just.
It gets pushed into the next board. So I I would say that I don't think we missed you know why we may Miss some business over the last 18 months on on pricing and not having having product available, but I don't see that as an issue going forward and I think that from our standpoint, we think we've got a great product, we think with John coming back or even be better.
Product and I think that relationships with our customers and are being a little bit more flexible in terms of on pricing that we should be able to continue to show some pretty good growth, but again, it's up to us to deliver.
Thank you.
Our next question will come from David or you know with Green Street Advisors. Please go ahead.
Hey, Thanks papers. This one's for you I'm just kind of wondering given your real estate background and I'm sure you've been monitoring the supply picture given all the new interest in capital we've seen a branded company. Since this year's kind of started so I guess, how do you think about the supply landscape and how you think that will evolve as we head into next year and could we possibly see a disk.
Tradition of the leasing pie shipped away from Cyrus one to some of those new competitors.
That's interesting I would say we are seeing again I was in a northern Virginia, a few weeks ago and in terms of demand and supply there. It is.
I agree.
But you need to see new money coming into it I again, I think it's a function of your they're coming in there because there's demand and as long as there is demand and demand at a price that people can get decent returns you're going to continue to see that supply. So.
I think the one thing.
Yeah, Cyrus one has a lot more to offer than a lot of these new players. We have a platform. We have a platform with people. We can deal with all the different issue, which is their front and center safety security is it you know.
They go through a they want to make sure. This is important to them and they want to make sure that dealing with people who have a proven track record. So I think that's a big plus the John anything you want to yet yeah. I mean, we've seen it for many years right. David I mean, you know were some small players have come into the space they'll get a deal from Hyperscaler in you know sometimes that hyperscale it doesn't get another bit of bid.
This or you know they look somewhere else you know like Bruce said its not all about prices for these folks obviously, it's important right and they have to they have to keep making money, but you know it's it's the platform I think it's super important for you know for us larger people in the space.
That's helpful that makes sense and then I just had a follow up to <unk>.
We talk about pricing and you know I appreciate the disclosure on what hyperscale yields out today, but one of the questions. We constantly get asked and we're trying to figure out or how low can we see you go before it just doesn't just aside I'm starting development projects and maybe just kind of give us some color on how you think about you know where you have to go before you guys would just kind of throw.
On the towel on new projects.
Well I mean, I I think if you look at a yield I mean it.
If you look at yields that are in the you know, 6% range and you put 50% leverage on it whatever you probably you know like a nine or 10% yield or whatever rich return on equity, which isn't that exciting you know in terms of trying to do that so that yeah.
And again it depends on how much leverage you know these private guys can put up on more leverage if they can if the banks will do it at some point that will stop so for US. We think that we think there's plenty of business around that we can do in this 8% to 10% range and again, it's incumbent upon us to make sure we can finally.
You know good customers and transact.
These rates because when you put 50% leverage on still a return on equity of 15%. Yeah. We still got again very steady business from enterprise because almost all our data centers are co locations. So a blended did that help the blended yield go to the higher side because the small.
Our deal.
Not priced as aggressively as the large long term hyperscale.
So.
Thanks, that's great and Dan it's been great working with you. Thanks.
Our next question will come from Matt Niknam with Deutsche Bank. Please go ahead.
Hey, Thank you for taking the question Bruce you talked a bit about wanting to sort of close that valuation gap with peers and so I'm wondering what do you see as the next steps or milestones in helping close that gap with peers and now that you've got.
The pieces of the management team put in place how should investors think about the timeline before these new piece is kind of a gel together to help hold up better improve leasing share and enhance returns. Thanks.
Well again.
He said in the remarks are going to be looking a lot different different components in terms of you know capital allocation portfolio mix and all that it is.
With the team together my hope is that we can do this in fairly short order so that by the.
The next time, where together they will have a real a plan in terms of what we're trying to accomplish and and and where we're going so I would.
We're going to be all over this.
Good that's just just one follow up also in terms of the lighter leasing volumes in Threeq, you, particularly around Hyperscale. It sounds as though you know that the demand side is still there the customers are still pretty active.
And it seems like it was a little bit more in terms of company specific issues, but I'm wondering have.
Have you seen any signs of you know hyperscale customers entering more of a digestion phase after a very strong first half of the year.
No.
We think that there we think the appetite is still very strong.
Great. Thank you.
Our next question will come from Michael Rollins Citi. Please go ahead.
Well, thanks, and good morning, and I've also got Michael Bilerman unwind and we each have a a question for you. This morning, So first and over your one Oh my God. They bring [laughter] yeah. We thought it was one per person, okay, all right and I have always try.
I am showing no. Okay go ahead.
[laughter]. So so I'm just curious if I look at the ready schedules.
It looks like domestic rents were up about 2% year over year and presumably within that the hyper scale is it growing can you unpack, what's happening a bit whether it's by region or customer vertical in terms of where some of those headwinds on domestic rents may be and I'll turn it over to.
Michael.
What do you want that I'll, let you answer that one and then I'll come back on yeah, yeah, because that we might forget if I could get for your question [laughter].
Yeah, Yeah, you at revenue when we do that.
I had one obviously is churn in the U.S. and again really from our Hyperscale <unk> I'm, sorry, but that backlog from our enterprise customers the enterprise customers, particularly in some of our legacy assets. Those leases are written a long time ago added different point in the market as far as market rates.
So that that's definitely the headwind I'm, obviously, we're still increasing revenue in the U.S., but not to the extent of Europe, just given the European growth new assets were building there.
And there is more pricing power in Europe, and we have zero turn in Europe. So that that's really what's driving it and the markets that I've been you know under the most pressure in our portfolio is certainly Houston and that's as much about just the concentration of oil and gas customers. There and then some in Cincinnati.
And you know a bit in Dallas, but generally that's what that demand I'm sorry, that's that's pressures there.
And Bruce Goldman. Thank you, it's good to be back on terrorists one calls after multi year absent.
Thank you for that well come home.
Thank you for [laughter], So I want to go to this the 100 day listening tour and you listed a wide variety of constituencies that you spoke with [laughter] pretty wide ranging in terms of people and getting their views [laughter] and you know the last bullet on slide nine where you're talking about the valuation.
Have you sort of talked about turnover management turnover the leasing.
Seen execution communication.
And it appears as though you've already addressed a lot of those to try to move forward. What I want to know is how consistent was the feedback across all of those constituencies you you spoke to and what are these some although when you when you say other factors what would some of those other factors be to address.
Oh for all.
I would say that the feeling about the company is that we set a lot of different things.
And there's a lot of different things that not just consistent with what we said so that it wasn't clear with what what was the priority and where we were going and so we need you know.
The market really didn't understand what the program was that Guy what would you add yeah.
Yeah, I think it was bad but also yeah, having said that I think there were a lot of things that were done right. I think you know the company was always pretty good seen where the puck was going in and being ready to hit the hyperscale customers. When we were an enterprise based and certainly there's any acquisition.
And then having a footprint in Europe has proven to be very very.
Very success, so, but I think the other thing that's always been price pressure on our multiple discount is just the level of capex as compared to our side and particularly when we were smaller you know we were consistently spending more capital than even our revenue and that I just think yeah.
Is that a bit of a risk factor that you know again depressed our multiple let's at some level I guess in terms of the amount of development and all came out of the amount of equity ratio right and there is a lag when you're doing that much development either one is pre leased there's certainly a lag before it shows up in your financial metric.
So I think it's like it was just the combination of a lot of things, but I I think we shouldn't lose sight that it's a great platform and the companies had a lot of things right.
That's a very good point, yeah again, it's a very good company.
We've got a great platform and again, it's incumbent upon us to take it as a team.
Yeah, and they hired me four years ago that was brilliant [laughter] and now you are maybe [laughter].
Thank you.
Welcome Michael.
Welcome back.
Our next question will come from Richard Choe with JP Morgan. Please go ahead.
Hi, I just wanted to follow up a little bit and given your I guess pre stabilized capacity and the development table. If things are continuing the way our I assume the development table won't change, but if things weaken is there the ability to pull that back.
And maybe just give us a little color on how you look at the current development table because it is kinda substantial from Fourq you in one Q.
Just to get a sense there.
Yeah, our development are obviously geared towards our successful leasing and yeah our backlog.
So the and as we mentioned the development or currently under development in the table on the supplemental disclosure is roughly 63% lease on a square footage basis, but almost 70% megawatt.
So that can vary quarter to quarter and this is a really strong pre leasing statistic for what we are spending capital on so we're pleased with that but then you know part of our C.I.P. is shell because we do you don't want to build shell and we mentioned that there were times, particularly in northern Virginia that we didnt have.
So capacity is able to meet a timeline for some of the larger deals that were getting done. So we do have shell in all our key markets.
Well and then we build out obviously the data how as we lease as we pre leased.
So I think we're in good shape with our current development capital and again, we increased the total for the year, but that was really with the land purchase we made in London in the third quarter.
Yeah, Richard I mean to add to that I mean.
20% of that cost right. When we think about a build is the land and the show right and the 80% it's kind of that data center fit out right, which is you know in our platform in the U.S. like we get kinda shuffle. That's a you know wherever we need it wherever the actual leasing happens, which gives US an advantage you know to move quickly and you know alleviate the risk of those things.
The capital side.
Great. Thank you.
Sure.
Our next question comes from Tim Long with Barclays. Please go ahead.
Thank you maybe.
Maybe one and then just a real quick follow up on just talk a little bit about the enterprise in the quarter could you just give us a little color on kind of the new logos compared to existing customers and.
And kind of macro covisint impacts in that part of the business.
And then just not do the Q4 churn going higher or anything specific to that and is that more short term in nature. Thank you Michael I take the first one on the topic.
Yeah, we know the vast majority of the leasing with enterprises isn't it in the third quarter was with existing customers. We added I think eight new logos.
We did $9 million or we see again as you see in our deck. The vast majority of the leasing in the quarter was with enterprises and that $9 million is in line with historical trends. So.
For the most part the leasing with the enterprises in the third quarter was consistent with what we've seen over the last couple of years, obviously hyperscale, we got to do a better job.
And with respect to the churn in the fourth quarter. There's nothing unusual about that if you look at our expectation for the year the range of 5% to 6% we brought down the upper end of that range, but that.
That level of churn for the year is consistent with what we've seen historically, it's just so happens to be weighted towards the fourth quarter, but nothing unusual to call out.
Okay. Thank you very much.
Our next question will come from Michael Funk, Let's take America. Please go ahead.
Yeah. Thank you for all of extending the call for me I. Appreciate it a couple if I could first Diane for you, but I'm in a store question looking back can you comment earlier about about messaging being one of the things you heard from the constituents you know in January of this year, you put an 8-K out talking about a pullback in hyperscale activity.
You know I thought a more kind of tempered expectation that you turned around a record or near record first half of the year and then obviously the debt back in Threeq. You. So is there a change in visibility or sales cycle on the hyperscale side.
I don't recall lots in the first quarter talking about pullback in hyperscale like going into 2019, particularly in northern Virginia I recall, we did say that we thought the hyperscale activity in northern Virginia in 19 over 18 would be down and it wasn't that down like 50%, but that was last year, yeah, yeah yeah.
You put out in January I thought you said that.
When you announced the head count reductions in January he said I expected, maybe lower expectation I can double check I think I was more referring to the slow down from 19, let us.
To the the Rightsizing of our headcount and we knew we had to grow in Europe, and so does the head count reduction was primarily in the U.S. So I think it was more of a reflection of the slowdown in 19 than what we thought 20, what's gonna be it's I'm sorry for that that was a competitor that's edge but.
Yeah, I I think that you know again.
When Bruce and the team will continue to lock look at the cost structure, but like any good business, you're always looking at your cost structure and that's there's things you can do on the margin there.
But no but no change in the sales cycle Microscale went up and you have seen.
No. It's just yeah, I mean, Michael I mean, the only thing that's really changing is the the size the cycle last cycle, there, they're bigger gulps, right, which yeah those to more lumpiness right in that business right that would be a if I can squeeze if I can squeeze one more I know, we're kind of going longer on talking to squeeze one more quick one as well.
Bruce So so you're listening tour I mean, I'm, assuming or are expected to be off to talk to some of the larger customers and you know wondering what you heard from them on reasons, maybe that you didn't get the share you deserved I'm on the Hyperscale sorry.
I would take it easy questions or whether you have the product where they want it.
And in some cases, we don't have the product where they had other times you know.
Maybe your price isn't or maybe someone else is something that is something that is different than you. That's beneficial for what they want or it's more it's more traffic in terms of where there are others, where there are other facilities are and.
It's better than where our facility is sort of I think locations a big part of it but I think our customers.
In talking to our customers I think you're very happy with the performance.
How we what we've done to them not just on these initial leasing but more importantly day in day out dealing with issues I hope would be it.
Security safety you know.
It's important to them and and we.
Team under John's leadership now in terms of operations.
It's all over this.
Yeah, Michael Okay, guys. Thank you very much Bruce Mackey Diane.
Thanks, Michael.
This concludes our question and answer session I would like to turn the conference back over to Bruce Duncan for any closing remarks. Thank you operator again. Thank you for joining us for this call. We appreciate it very much. We appreciate your interest and we look forward to continuing our conversations they have any clue.
Actions you know I.
Hi, Mike or myself, and we look for the bank. Thank you bye.
The conference has now concluded thank.
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