Q3 2020 CoreSite Realty Corp Earnings Call
[music].
Greetings and welcome to Coresite Realty third quarter 2020 earnings call.
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I would now like to turn the conference over to your Investor Relations host Kate Rupee. Please go ahead.
Thank you good morning, and welcome the Coresites third quarter Twentytwenty earnings Conference call.
Joined today by Paul <unk>, President and CEO, Steve Smith, Chief revenue Officer, and Jeff Finnin, Chief Financial Officer.
Before we begin I would like to remind everyone that our remarks on today's call may include forward looking statements as defined by federal Securities laws.
Putting statements addressing projections plans or future expectations.
These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons.
We assume no obligation to update these forward looking statements and can give no assurance that the expectations will be obtained.
Detailed information about these risks is included in our filings with the FCC.
Also on this conference call, we refer to certain non-GAAP financial measures such as funds from operations.
Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of our full earnings release, which can be found on the investor relations pages of our website at <unk> Dot com with that I'll turn the call over to Bob.
Good morning, and thank you for joining us I will cover our third quarter highlights followed by Steven jobs more in depth discussions of sales and financial matters.
Q3 highlights include new and expansion sales of $12.5 million of annualized GAAP revenue.
Operating revenue of $154 million, representing year over year growth of 6.3%.
FFO per share of $1.33 a year over year increase of five cents per share or 3.9% power.
Power and cooling uptime of 100% for the quarter, thereby sustaining seven though it's about time year to date.
Completion in October I believe three phase, one and commencement of our previously announced 4.5 megawatt pre lease.
And the issuance of our third annual corporate sustainability report.
The state of the economy in recent months appears to be leading more enterprises to raise the priority of their digital transformation initiatives.
Dynamic seem to help our new and expansion sales execution during the third quarter, leading to good new and expansion sales and good progress in building a robust sales pipeline for future quarters.
Our sales customer support and data center operations teams have been extremely agile, helping our customers navigate these challenging times and plug into the value of our ecosystems as part of their hybrid cloud architectures.
As discussed last quarter, we continue to see some elongated sales cycles for traditional enterprises due to the COVID-19 pandemic, but the overall size of our sales pipeline seems to compensate for this challenge. However, we ultimately have to execute on those opportunities and convert them into successful sales.
Some activities are returning to normal we resumed in person data center tours, making sure. They follow COVID-19 safety protocols.
We have also seen more customers taking comfort in these protocols, which support the safety of our onsite staff and customers leading to more normal volumes of customer visits and our data centers.
At the same time, we continue to see increased remote hands activity and use of our customer portal.
As I mentioned earlier, we recently published our third annual corporate sustainability report sustainability is an important ongoing goal of course like every focus holistically on a broad range of success measures that take into account all of our stakeholders.
Report summarizes our continued commitment to our customers colleagues into communities, including providing our customers with reliable and energy efficient data centers building, a culture of fair and equal treatment respect responsibility transparency innovation and operational excellence.
Fostering communities of customers that work synergistically with each other.
Turning to our property development.
L. Three is our first ground up data center in Los Angeles. So we were pleased to complete phase one on time in October and equally pleased to grant our 4.5 megawatt pre lease with much runway to expand on the success of our Los Angeles campus.
We also completed the N.Y. two power infrastructure project, adding an incremental four megawatts of power to support our existing space.
The completion of L. Three phase one fulfills our multiyear plan commenced in 2017.
For ground up enterprise class data centers to our portfolio with the goal of restocking contiguous capacity to strategically support the expansion of our campuses and our existing customers and to bring new customers to join these communities.
We realized some of the fruits of this plan this quarter through our ability to opportunistically, when a modest and fast moving hyperscale deployments.
As important we're making good progress on the permitting and entitlement for EPS benign our next new data center on our Santa Clara campus.
We continue to see a strong sales funnel for our new stage two data center in Chicago. However, it primarily consists of enterprises with longer and less predictable decision timelines and recently, we executed our Illinois memorandum of understanding providing our participating customers with sales tax savings are.
Increased capacity is crucial to meeting the customer demand, we continue to see for hedge capacity and edge cloud deployments in our major metro markets.
Especially for enterprises seeking the highest performance cost effective secure and reliable co location solutions for multiply and hybrid cloud I'd architectures.
In closing our increased capacity is providing increased sales opportunities driving our strong Q3 sales and our network cloud and enterprise death campuses in major Metro markets are well positioned to benefit further from the secular tailwinds for data center space with that I will turn the call over to Steve.
The.
Thanks, Paul and Hello, everyone.
Well start by reviewing our quarterly sales results and then talk more about some notable wins.
As Paul shared we delivered new and expansion sales were $12.5 million of annualized GAAP rent during the third quarter.
Approximately 35% compared to the trailing 12 month average well.
Which included $5.6 million of core retail Colocation sales six.
$6.9 million upscale leasing.
And an impressive 37, new logo wins with opportunities for future growth.
Our new and expansion sales were comprised of 72000 net rentable square feet, reflecting an average annual GAAP rate of $173 per square foot.
We continue to see elongated sales cycles, but we benefited from strong sales funnel and the hard work of our sales team producing both good volume and some strategic wins for the quarter.
Additionally, we continue to see elevated demand in that market supporting our efforts to build a robust pipeline for future sales.
If our current pacing continues 2020, it will be our strongest year recruiting new sales opportunity volumes.
However, we open them, we need to convert these opportunities into their structural sales transactions over the next several quarters.
Looking at new logos for 37, new logos represents $1.7 million of annualized GAAP rent, our best quarter since Q3 2019.
New logos accounted for approximately 13% of our total annualized GAAP rents signed up during the quarter and were strongest in the enterprise vertical.
We're excited about the quality of the new logos and believe they will drive future growth. That's the right you need to evolve.
Notable new logos included a global markets company does one of the world's largest financial derivatives exchanges were signed and commenced during the quarter.
Our mobile marketing platform the fuels, many popular mobile games through its studio and marketing technology and.
Every major participant in the investment industry.
Attracting and winning new customers that value our platform remains a key area of focus.
It's great to see it continue to bear fruit.
Our sales results were further supported by strategic wins from existing customers, which enhances the attractiveness of our data centers and connectivity platform.
As Paul mentioned, having the capacity to provide flexibility for our customers to scale their deployments well benefiting from data cloud on ramps and robust interconnection collectively delivers unique value to support today I T requirements. The few others can match.
Customer demand realize this value to support their hybrid and multi cloud needs continues to be evident through some of our Q3 existing customer expansions.
Two of our most notable wins across verticals and build the sectors this quarter, where the signing of a communications cloud based technology company that provides video and collaboration services and a high Tech financial services and mobile payment processing enterprise.
In summary, the strength of our third quarter sales results reflect our initiatives to improve retail skill and new logo sales that further enhance the value of the ecosystem effect on our campuses.
We remain optimistic about our opportunities going forward as our pipeline for the fourth quarter and 2021 remains strong.
And we continue to focus on trends like in our pipeline and capacity into new sales and revenue.
With that I will turn the call over to Joe.
Thanks, Steve.
Today, I will review, our third quarter financial results discuss our balance sheet, including liquidity and leverage and conclude with some items to consider for the fourth quarter and 2021.
Looking at our financial results for the quarter operating revenues were $154 million, which represents 6.3% growth year over year, and 2.3% sequentially, including growth in interconnection revenue of 10.8% year over year and 1.2% sequentially.
Customer lease renewals equaling $20.7 million of annualized GAAP rent, which represents a cash rent mark to market of 2.9% and we reported churn of 1.9%.
Commencement of new and expansion leases.
$1.2 million of annualized GAAP rent.
Our sales backlog as of September Thirtyth consisted of $17.8 million of annualized GAAP rent or $23.6 million on a cash basis for leases signed but not yet commenced.
We expect approximately 60% of the GAAP backlog to commence in the fourth quarter and substantially all of the remaining GAAP backlog to commence first quarter of 2021.
Net income was 50 cents per diluted share an increase of three cents year over year and a decrease of two cents sequentially.
FFO per share was $1.33, an increase of five cents per share or 3.9% year over year, and a decrease of two cents sequentially or 1.5%.
Adjusted EBITDA was $81.4 million for the quarter, an increase of 4.5% year over year and consistent with the previous quarter sequentially.
Moving to our balance sheet.
Our debt to annualized adjusted EBITDA increased slightly as expected. It was 5.2 times at quarter end include.
Inclusive of the current GAAP backlog mentioned earlier, our leverage ratio is 4.9 times.
We expect to finish the year with leverage slightly higher than the current quarter at approximately 5.3 times.
We ended the quarter with $326.8 million of liquidity.
Which provides us the ability to fully fund our 2021 business plan.
Turning to our work ahead, we have accomplished a great deal in the first nine months and we are focused on continuing that momentum.
In regards to the fourth quarter, we still anticipate elevated churn as a result of the first of two move outs associated with the customer in the Bay area that we have discussed the past several quarters.
And expect churn to recede to our historical levels of 7.5% to 8.5% in 2021 inclusive of the 200 basis points related to that specific bay area customer during the second half of the year.
Turning to 2020 guidance.
We increased our 2020 guidance related to net income attributable to common diluted shares to our new range of $1.92 to $1.96 per share from our previous guidance range, which was $1.81 to $1.91 per share.
In addition, we increased our 2020 AFFO guidance to our new guidance range of $5.26 to $5 or 30 cents per share from our previous range of $5 and 15 to $5.25 per share.
And we increased our 2020 adjusted EBITDA guidance to $323 million at the midpoint from $321 million previously.
The increase of eight cents per share at the mid point of F., all or 1.5% is largely driven by approximately two to three cents per share and net covert related savings such as travel entertainment and the conferences.
And five cents per share attributable to lower than anticipated property taxes insurance and other operating expense savings.
As it relates to 2021, we will provide detailed annual guidance during our fourth quarter earnings call. In early February However, I'd like to leave you with a few thoughts.
We have brought a significant amount of capacity to the market with for ground up data center developments over the last three years, which supports our leasing efforts as our sales team has more contiguous capacity to meet a broader range of customer requirements keep.
Keep in mind.
The operating expenses related to the recently completed and pre stabilized projects are higher at the completion of phase one bend subsequent phases, and therefore typically negatively weigh on investment returns.
As we look forward to 2021.
We have the ability to bring consistent amounts of capacity to the market through incremental computer rooms, and infrastructure development within our existing data centers.
This enables us to bring capacity online more quickly and invest lower levels of capital per incremental computer room compared to the requirements for the initial phases of each new development like the Athree CH too.
La three and SV aid all delivered in the past 12 to 18 months.
Ultimately, culminating in higher returns on the incremental capital as compared to capital invested in building the core and shell during the initial phase.
The expected capital investment in 2021 is currently estimated to be approximately $185 million to $225 million and continues to be dependent upon sales activity through the end of the year and the anticipated timing related to additional capacity requirements.
In closing.
We have ample liquidity to fully fund our 2021 business plan our balance sheet is strong with no near term debt maturities. Our business fundamentals are strong and we believe we are well positioned for the long term.
With that operator, we would now like to open the call for questions.
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One moment, please while we poll for your questions.
Our first question comes from the line of John Atkinson with RBC capital markets. Please proceed with your question.
Thanks, So a number of markets, where you've delivered multiple megawatts is as you mentioned Jess towards the tail end of your remarks, and I wondered if you could maybe talk across the kind of the competitive environment.
Pricing expected yields demand environment across each of the four to just give us a flavor for how you view things commercially at present.
John This is Paul Thanks for the question I'll try to answer that.
And Steve and Jeff can jump in if I leave something out.
Obviously, the biggest markets in terms of volume for us as Jeff pointed out were Santa Clara in Los Angeles, and New York.
And.
But we also see good volume and good opportunities in Virginia.
In Chicago, Chicago is a bit behind for the reasons I mentioned, but the pipeline there looks looks good we've got to execute on it. It didnt help that it came up in the early stages of Covance, which.
[noise] slowed some things down.
I would say that our pricing comments would be consistent with what they've been in private prior quarters.
In most of our market supply and demand is pretty much in balance price.
Pricing is solid.
You know it may vary in a particular market depending upon the density of the and the.
Deployments that are one in that market in any given quarter, but quarter over quarter, they seem pretty stable.
You know Virginia is still is a is most challenging market from the standpoint of pricing.
But it hasn't it hasn't changed.
It hasn't gotten any worse in the last couple of quarters and may have even improved a little bit we.
We continue to target and believe we can achieve on average our historical yield targets those haven't changed.
And at.
At this point in time with the development that we've completed and the inherent expansion capacity that we have within our existing portfolio.
You know the the main determinant of our future is going to be how well we can translate these sales funnels into sales how well we execute on that and just to put the capacity in perspective, because I know there was some.
Appeared to be some confusion and analysts notes coming out of the lease with a handful.
We currently have the ability to increase in existing buildings, both with available space and computer rooms, we can turn up quickly within six months.
Roughly 88 megawatts of capacity.
And we have land that is either already entitled or in the <unk> in the in the entitlement process is like SB nine to turn up another 126 megawatts of development. So as our sales continue to succeed we have a tremendous pipeline to.
Developable capacity behind them to pursue those sales does that cover your question.
Oh, yes, let's Jeff was going to add more.
John the only John the only thing I would add just a little bit around pricing is there were some questions in terms of our pricing this quarter.
On the signed deals on a per square foot, which is simply stated if you just look at the composition of our scale leasing this quarter versus our retail co location.
A much higher percentage this this quarter and scale, which compressed that pricing a little bit.
And then as we think about the SB seven you had success you've had some success at SB eight I'm curious about SBH Sunny.
So I mean, it was with the earlier customer that you signed with SB eight last year.
And then there has been quite a lot of demand in Santa Clara.
With a large build to suit project and kind of we peak demand from from from the cloud vertical I'm curious your thoughts on on filling Sq, seven which would that type of demand or whether the built to suit commitments that have happened recently have kind of saturated.
Customers appetite.
Hey, John This is Steve I can probably give a little bit more color on the sales the pipeline and our place in deals and seven eight or otherwise.
As you as you mentioned, we have quite a few buildings in Santa Clara and as we build out our campuses, which is a great example of where we have multiple multiple buildings within the campus. It really does give us a lot more flexibility on where we placed customers based off of their unique requirements and.
And our capacity within each of those buildings. So as we went through Q3 the opportunity to really maximize.
The but.
The capacity within SB eight made a lot more sense than just deploying and breaking up space and SB seven and we do have a customer that we forecasted to churn out.
Just turned up some of their space and will turn out the rest of it next year.
That's been forecasted for quite some time and we are encouraged with the pipeline that we see for the potential to backfill that potentially with a single tenant but that remains to be seen.
Thank you.
John John you did seem to ask you about the.
Expansion of SB, eight was the existing customer and SV and it was not.
Okay.
Thank you.
Thank you. Our next question is coming from the line of Sammy Baldry with Credit Suisse. Please proceed with your question.
Hi, Thank you for the question first one just for Josh.
Just to have been looked at this at the light transcript, yet but for churn and 2021 did you say, 7.5% to 8.5% inclusive of the 200 basis points expected churn in the second half 2021.
That's correct Sammy.
Okay. Okay. Thank you for that clarification, and then for just back on Backfilling right and this is kind of tied to pricing are you able to find customers willing to be paying Shane hurdle rate or that same price point that you guys had in a couple of years ago for that capacity that that it now.
Becoming vacant or have you guys been engaged in situations, where you need to be a little bit more lenient on pricing just to get the capacity signed up and occupied.
Yes, I mean, you're talking specifically around Santa Clara.
That's right.
Yeah, I would say that the pricing.
It remains to be seen as to how we actually lease.
The backfill for the customer that you're referring to but I would say that the pricing that that customer had been paying is I'm right in line with market. So.
Depending upon densities and no the overall dynamics of the pipeline and the customers that may take that space.
Can vary of course, but overall the the current pricing in the market is very close to what that customer had been paying.
Got it got it thank you.
Thank you. Our next question is coming from the line of John Peterson with Jefferies. Please proceed with your question.
Great. Thanks, Good afternoon, guys and good morning, your renewal spreads this quarter, we're pretty good on a cash basis I think the strongest we have seen in.
Over a year I'm curious if you know I guess kind of high level, where you feeling more emboldened this quarter in terms of pushing rents.
Or is that more just a function of the mix of what you are renewing this quarter.
Hey, John how are you yes.
Yes, a lot of what impacts those cash renewal spreads.
Is largely dependent on the market in which we're renewing those customers and then secondly, the types of deals.
Deployments I, he retail colo versus scale and.
And so that.
That has a big impact in terms of what we're doing from a mark to market perspective, but I think it's it's.
Representative of what Paul alluded to earlier in terms of the markets being a relatively balanced in supply and demand, which just allows us to continue to drive some reasonable economics and.
Ultimately performed at a very good level this past quarter can't expect that every quarter, but we're very.
Happy with the outcome for this most recent quarter and still expect to finish the year.
For 2020 inside our guidance range of zero to 2%.
Okay got it and then you mentioned a lot of the demand came from I guess, Santa Clara La and New York, but what about Northern Virginia are.
How are the dynamics changing there is it kind of opening back up in terms of.
In terms of demand or is it still a tough market for you guys.
Hey, John This is Steve overall, I would say that the market still remains strong in Virginia, we've been a bit more opportunistic on me.
More of a hyperscale that you see the bigger headlines from.
As to how they value our ecosystem and bring value to our campuses.
But if you look at the results that we've delivered even our first baby that Virginia that they've actually been pretty good and the rate that we've been able to to to acquire there has been quite strong in comparison to the overall market. So you know the the larger hyperscale and scale opportunities are still pretty lumpy, but.
Appears to be picking up and as Paul mentioned in his remarks I think the the overall the market is probably more in balance now then it than it has been.
Okay, Alright, great. Thank you.
Thank you. Our next question comes from the line of Colby.
Colby Sarna sale of Cowen. Please proceed with your question.
Hi, great. Thank you.
Yes, my sense is that the company aspires too.
High single digits, maybe even low double digit type revenue growth.
And when we look at the interconnect enterprise oriented demand I guess non scale. That's a business that's growing in the mid single digits, So really to kind of get those higher level you need to do more.
Hyperscale or scale deals and the data to your point, it's been fairly lumpy and maybe not as consistent as I think when investors here. Maybe you went to compete would would want to see.
Is there a.
A thought about potentially lowering your your hurdle rates, taking the returns down recognizing that the market has changed and that you can be a lot more successful and also equally important that the market or industry is unlike the accepting I'm those lower returns.
Recognizing there's maybe a better appreciation for.
The business that you have today and maybe just a few years ago and then secondly.
Hi, guys I missed the first 10 minutes or so of your call, but can you repeat where that the larger scale leasing was done in the quarter and it gets to that point.
What is the the thoughts around New York and in New Jersey in terms of what you're seeing from a scale demand perspective. These days. Thank you.
So Colby let me start with your last question, we had threescale leases with three different customers, Santa Clara Chicago, and New York.
In terms of you know look I think were pretty.
On top of or our business model and our pricing and what we're going after and respect that you may have a different view on that but we believe that we can deliver the right levels of sustainable growth and be better positioned to deliver that.
Year in year out by continuing to provide a higher level of value to customers through growing these customer ecosystems that enable them to save a tremendous amount of money and effort.
By co locating with each other and with their network and cloud providers in major Metro markets.
And that that higher valued customer translates into higher returns and we believe that there is sufficient amounts of that.
If we continue to execute to enable us as we said in the past to achieve mid to high single digit growth in AFFO per share on a sustainable basis.
Especially once we get through this recent churn episode that we've had.
And once we start leasing up some of these newer buildings that are fairly fresh and right now are bit of a drag on our growth, but I think in the long run.
That investors will appreciate is our ability to deliver more value on our capital, while delivering a very healthy and more sustainable growth rate and not pursue extensively lower yield deals that eventually mean, you just have to do more and more developed.
Shipment or spread investing every year.
Just to just to keep to tread water as opposed to having a value added business model that is more sustainable for growth year over year now maybe maybe that means we're sacrificing an opportunity for double digit growth in a particular year to I don't know, maybe not but I think as a sustainable business.
Model that focuses on delivering value to customers that translates into value to shareholders.
It works pretty well and should continue to work well.
Obviously, we just crazy that we just have to keep executing.
And just so thank you for that and just one quick follow up and then the three scale deals that you mentioned, we are now relatively evenly balanced your did it one market have a notably bigger deal perhaps than the others.
What the Santa Clara deal was bigger than the other deals, but they were all in the scale category.
Great. Thank you.
Thank you. Our next question is coming from the line of Michael Rollins with Citi. Please proceed with your questions.
Thanks, and good morning curious if you talk a little bit about how you think of investing in your platform product development going forward.
As you think about introducing additional managed services.
They could buy for your customers or even.
Sexualizing your role.
As others in probably yourself explore that the concept of the edge data center and getting infrastructure closer to.
What people are using the information in accessing the information thanks.
Hey, Michael this is stable.
Give you my response, and Jeff and Paul can chime in as needed here, but no I think how you finish that question is really where we start to know which is providing that foundational hyperconnectivity scaled data center that is at the edge.
Each of our markets that were in starts with a mature hotel that is highly interconnected that's been tethered to a modernized.
Modernize scalable data center that allows for modern workloads to be deployed there and leverage that low latency and that so within those downtown Metro cities. So that's a unique offering that very few others can provide out there as I mentioned in my remarks. So it starts with that and then how we built that out to provide even more value to our customers over time and in fact.
Just in the last year or is it really connect those together we're done we have intersect connectivity between those campuses to where customers can have diversity on how they deploy their their their architecture, but you have diversity as a.
As it relates to accessing different availability zones for different cloud providers.
There is a lot of value that has been extended within each of those markets through the debt offering that we just rolled out about a year ago.
That combined with our any two exchanges that really provide the purion, but many of the service providers cloud providers are looking to exchange traffic on as you know any two is the largest exchange in the whole west coast has unique value. There. So there is a lot of embedded value that really we started with and then if you look at where enterprises are moving today.
Hey, and really migrating from there many many cases a an existing.
Data center that they manage and own themselves into more of a hybrid.
Performance oriented architecture, where they are leveraging our data center like ours to connect to those other cloud providers.
They need help right so to your point around managed services and and others around cloud adjacent type services. We are working very closely with those third party providers that are very good at that and really developed ecosystem for there to count them to come in and thrive and know where we play and where we don't play.
To where they can come in and invest in our ecosystem, though that the what the the kind of the guidelines are around that ecosystem and how they make money and how they deliver value to our customers. So we've worked hard over the last several years to really educate our sales team educate our partners on how we extend that overall value chain to our customers.
I can really have a full range of services and how they held it back out there overall pretty architecture. So it's a bit different than how some of our competitors have rolled out some of their offerings, where they've chosen to compete with our ecosystem.
And we've been very diligent thoughtful about how we ensure that we support endorse that ecosystem and reward our sales team and those partners a covenant to invest.
Mike I would just.
Refer you back to my comments to Colby about the business model.
Much of our success is driven by helping our customers succeed.
And Steve is described a number of ways that we do that.
And a big part of that is getting the right providers in our datacenter communities in making it easy for customers to work with each other so that it is a much more efficient and effective way for them to architect their identity and their digitization over the over the near term, but also to return.
Saying, the Optionality and to continue to explore better ways of doing things over the long term without having to leave that data center.
I think one of the biggest things just to kind of wrap up on is that enterprises are looking for is flexibility and choice over time.
As you all sorts of data center, it's not a trivial exercise and it's really a long term, but so the potential to be locked into either a single provider with single or limited access to networks or cloud providers or other services that are around there because they have chosen to get into that business themselves.
I think we've proven out over the last.
15 years of data center providers that that's probably not a great model.
And just one follow up on the sales cycle that you described being elongated.
I know, it's tough to get the most environment, what the future may hold but have you learned.
You know the catalysts for decisions from your customers on balance are they looking to the results of the election to try to get in a position to make decisions are they waiting for Jeff.
A larger part of their workforce to return to office.
Or just having some stabilized strategy of how to manage through this and there is some learnings that we should just be mindful of whereas if something evolves in the environment or for the macro economy that we could appreciate how that might help or slow that sales cycle for your customers.
Yeah, I haven't seen the the political climate come into play in any discussions that were having at this point.
I think a lot of customers or just navigating it individually as to their individual circumstances.
As you can imagine.
Technology is more important than ever for enterprise, it really any kind of enterprise and business to be operating at all today, So how they haven't.
Do you have a bid that technology into their success in their overall business strategy is different from one to another we've had some some adjustments that we've had to work through over the last six months or so and how we.
Top customers through that selection process, how it fits into their model.
How they evaluate alternatives virtual tours those kind of things I think you hopefully you know just the results you've seen we're getting better at it customers are getting more adept at it.
The elongated sales cycles as I mentioned in my prepared remarks are still there I think it's still takes more time for people to coordinate their internal resources prioritize capital all those kind of things that you would imagine but.
Actively the pipeline as I mentioned is quite strong and I think were now catching up with a lot of those sales cycles. So.
It remains to be seen on how that ultimately translates longer term, but.
We will never get it together and I think we're getting better at it but other as well.
Yeah, we're really hoping that the Dodgers finally, winning a world series, a century would be a catalyst that but that remains to be seen.
But you'd be rooting for your Denver teams.
Got to be realistic there.
[music].
Thank you.
Yes.
Thank you. Our next question comes from the line of Jordan Sadler with Keybanc capital markets. Please proceed with your question.
Thanks.
Sure So on Steve just following up on.
The pipeline a little bit the robust pipeline you guys discussed.
I caught your comments you said that 2020 will be that strong this year for creating.
New sales opportunities.
Our volumes and Youve got to convert these issues. So how does it should translate into actual.
Leasing adoption is that showing it to.
2021 business or is that you know fourq you intend Twentytwenty wonder how do I should add in Turkey.
Yes, well I think as you look at the overall pipeline.
Robustness, so really good.
Good managing this really every every day every quarter for ever since I've been here, but we're just monitoring and managing that as we came into cobot theres a lot of questions out to what the effects are going to be.
Overall, we've seen an increase in interest in our platform and therefore, the pipeline that comes along with it. So that's encouraging and that has continued even.
Through Q3.
The the timing and conversion of that.
Still TBD as I mentioned.
Some of those more immediate opportunities to enclose even in quarter typical our typical close cycle. As is typically 90 to 120 days is kind of normal but.
We are willing to that pipeline that we've seen create so that's a no. We're encouraged so far but again, we're in uncharted territory here as well.
Okay and then.
In terms of I, just want to clarify that scale leases I wasn't sure I heard I thought I heard Santa Clara lay in New York, and then I heard Santa Clara Chicago, and New York can you just clarify.
Yes, we are with the three scale is exactly who is it was Santa Clara Chicago and New York.
Okay.
[music].
Thank you for that.
And then.
The one for Jeff just on churn, so 6.2% year to date, Jeff, but your guide of nine to 11 implies about another 3.8% of churn for Q.
And we know about the $8.3 million in Santa Clara, but are there any other sizable known move outs or may you be tracking.
Below the midpoint.
Of that 10%.
Yeah no. There if you if you look at the one item in the Bay area, that's going to by itself be about 260 basis points in Q4 and so.
That together with our typical quarterly churn.
We would expect our churn in the fourth quarter to be north at or above 4% for the quarter, it's going to be elevated as we've been talking about all year. So just keep that in mind.
Related to not only the churn amounts, but all obviously the quarter Q4 quarterly results as well as you guys think about your models, but somewhere north of 4% square will come in for the quarter.
Okay, and then one more follow up and this can make this theme just sort of you know in terms of quarterly lease deduction last year was a pretty robust year I think helped by some scale leases.
As you look at quarterly production, then sort of the you know the bread and butter retail business.
What are your thoughts around sort of that the level of that core co lo business, and where should we expect that to be now that you've got.
Paul availability of product what are you targeting on a quarterly basis.
Got it was actually do you have a specific I don't know that we're going to break it down specifically to us retail versus scale, but I will tell you that that is the core of our business and that's where we try to drive uniformity across the platform.
Which is exciting to see us now have more capacity in more markets because it allows us to kind of raise that level over time.
Well, we're not just so rely on just a couple of stronger markets, where we now Chicago real over capacity in all of our markets now so on balance that is where about I would say 80% of our overall sales efforts are really geared towards it's kind of got retail enterprise kind of lower scale opportunities.
So as you've seen our sales results in the past can be a bit lumpy most of those lumps or contributed to.
More of those larger scale hyperscale opportunities, which is still part of our mix as part of our business strategy and how weve architected, our our campuses, but I think you can look at the trail and kind of see where those those lumps come in where they leave and that would give you a good indication where our retail and the kind of core enterprise businesses.
Okay. Thank you.
Thank you. Our next question is comfortable a line of Erik Rasmussen with Stifel. Please proceed with your question.
Yes, thanks for taking the questions.
Just first a northern Virginia, you said use.
Seeing some pricing stability and even some improvement in that market. So I guess with that what does that mean.
For you in terms of opportunity as you sort of think about that market going forward.
Yeah, we're encouraged with the market, obviously, we have a pretty big bet in Northern Virginia with our view three campus and are quickly moving through our first phase there. So overall the pipeline is good there the competitive dynamics are still that there are competitive.
And we continue to look for those right opportunities that value our campus. So.
You know all things in Virginia are not equal and those that value interconnection access to enterprises and cloud on ramps. Those are the ones that we really focus on but there seems to be more and more of a preponderance of that so we're we're encouraged with the the outlook.
Okay, and then maybe just a follow up but I know a lot of questions on the sales cycle, but.
Yes, we are hearing you sales have talked about it as well improvement on the enterprise side and the sales cycle maybe some.
Improvement on that.
No you know seeing opportunities come through a little bit quicker.
But do you are you seeing that this could be more of a 2021 sort of story or even seeing that improvement carry into the fourth quarter as it relates to sort of be adding back to historical levels.
Well I think we've continued to try to get better at it we've seen some customers existing customers, especially.
That may be deployed with us already that are really going through more of the virtual tour and making decisions on expanding with us without even physically seen this space, which you know a year ago that would likely never happen. So it's very customer dependent but I think customers are getting more savvy about how they buy what they buy them and really kind of going through that evaluation process more.
Pragmatically them more.
More of a physical Gideon onsite and really walk into space. So, we'll see where that plays out but we've seen some of that play out early whether or not that translates into longer term opportunities and what happens with the current pandemic himself, where there's just so much.
The mirror, it's hard to predict.
Sure. Thank you.
Thank you. Our next question is coming from the line of Nick del Deo with Moffettnathanson. That's Anthon. Please proceed with your question.
Hey, good afternoon, guys, yes. Good morning, we are.
I would say the majority are businesses in California can you dimension your exposure if proposition 15 passes.
Hey, Nick.
We can obviously, it's an item we've been watching closely for a couple of years and obviously it will play out here over the next couple of weeks, but.
We have given some numbers historically and just to summarize what we've said if you look at our overall property tax exposure in California specific to those leases, where we are unable to pass through any increases in property taxes in.
In the current leases Eddie.
It equals about $3.5 million and that equals ballpark about 15% of our overall property tax expense for the company and so that's the area that where we have exposure just to give you. Some additional commentary there when you look at the average remaining lease term for those.
Leases.
Where we have that exposure, it's about two and a half years and so for that proposal I think it's going into effect in 2020. Two we'll have opportunities to negotiate with customers over that period of time to minimize that impact and we'll see how that all plays out but that gives you some idea of the exposure today.
Okay. That's helpful. Thanks, Jeff and then you know with your 2021 churn outlook.
Are you talking about your do you get comfort in the context of the changes you've made to your chart your trend forecasting methodology over the past year or two and how you assess the rested it falls outside of that band.
Yes, Nick I give a lot of credit to the teams that had been working collaboratively collaboratively over the last.
12 to 18 months a lot of resources on my team as well as Steve and they've done a really good job of.
Filling back the onion just to better understand where we think that that is headed we're comfortable with with the numbers. We gave earlier, which you know seven.
Seven and a half day and a half percent gets us back to our typical range, including obviously, the 200 basis points from the one customer if you kind of set that aside you'd say would probably down a little lower levels of where we've been historically.
It's not going to be perfect. We obviously do make some assumptions and provide and we always get better clarity the closer we are in after.
We're going through conversations with customers, but I'd say as we sit here today, we're comfortable with.
What our expectations are for 2021 and so.
We've got the numbers and we'll just see how we perform against that as we get into 2021.
Nick the only thing the only thing I'd add to what Jeff said is that.
We just have a declining significantly decline base of those types of customers whose churn.
It was initially harder to forecast coming.
Coming into 2019, 2020, and so that just just having that group.
Reduce significantly helps us have more confidence in our forecast.
Okay got it thank you guys.
Bet Nick.
Thank you. Our next question is coming from the line of Brendan Lynch with Barclays. Please proceed with your questions.
Hi, Thanks for taking the question I wanted to follow up on your commentary earlier about third party technology.
You have available in your data centers, you announced a partnership with Vmware Tech Alliance partner program earlier this month maybe.
Maybe you can give us some color on what this enables here clients and whether this was specifically in response to current customer demand customer demand or rather you are trying to open up to a new sub segment of customers.
Thanks, Brett and as Steve.
I think the announcement with Vmware and Dallas is a great example of how we are looking to try to enable some of the tech leaders to invest in our platform and provide those services out to our customers.
Probably take it into the exact details I would just kind of fusion a little bit and so stay tuned and we will see a lot more detail around that but the antennas for them to to have their their technology deployed to support those hybrid architectures.
They have some technology that I know, they're excited deliver and so delivering a platform. So.
It's really around supporting the enterprise and.
Those those hybrid environments multi cloud environments, where Vmware is obviously very strong and.
We're excited about the partnership.
You know very well.
One of the one of the keys to that though that Steve mentioned earlier and.
Probably being redundant here, but it's working with companies like that to make it quick and easy for other customers to turn up their services in our data centers into and significantly reducing the time and the lift associated with that.
Okay.
That makes sense.
You can see that across other technologies, whether its Amazon outpost and others.
So just trying to make those kind of new technologies available. They know the landscape it they're coming into incentivizing our team to work with them to do so.
So that's really the core of the strategy that we're working towards.
Sure that makes sense and then just one other quick one one of the reasons you started that you raise guidance guidance was lower than anticipated property taxes there.
The remainder of the year with municipalities struggling financially in the cobot environment do you anticipate material property tax increases in 2021.
That's great question Brandon.
To give them any room to execute on that I think the reality is when you look at the assessed values across each of our markets.
There are reading the same information everybody else is in terms of the industry and they've been.
I would say aggressive in terms of their valuations and it's just an ongoing effort from our perspective.
To challenge those assessments and those values that they are utilizing and I would tell you. We do it frequently and periodically were successful and I'm actually I'd say frequently were successful in them and Thats. What you ultimately saw and the result this year in terms of next year.
Yes, theres always that incentive and it's just something we're going to have to continue to watch and see what and how it ultimately plays out.
But nothing that I can predict today, but it is definitely an incentive for them given some of the dynamic that's in play with lower revenues. This year as a result of gold.
Sure Thanks for the color.
You bet.
Thank you. Our next question is coming from the line of David Corina with Green Street. Please proceed with your questions.
Hey, guys. Thanks for the question just a quick one from me and with all the interest came from Cyvek tightening entering in the data center space, how much competition, you're seeing in the Colo space or would you say most of that the new competition is more geared towards the Hyperscale data center side. Thanks.
I'm sorry, we couldn't hear the original part of your question Who's coming into the data center space.
It feels like there's a lot more private competitors coming on.
Infrastructure fund.
Just a whole host of private investors coming in from the sidelines.
Yes, thanks for the question David.
Going back to our overall capital allocation strategy.
We try to stay out of the way of where it's easy for capital to get deployed and where is in fact being deployed in creating a seller's market.
So that's why we built our model.
Around interconnection and cloud on ramps in major Metro markets, where it's harder to turn up additional capacity.
Nobody can be completely insulated when there's lots of new capital coming into an industry and obviously, it's clearly made the hyperscale, especially the generic hyperscale much more competitive.
Probably raising asset prices in second and third tier markets and frankly every market.
But but that's a that's one of the dynamics, we factored into and why we focus on the strategy that we have focused on.
Great. Thanks.
Thank you. Our next question is come from the line of Frank Lee with Raymond James. Please proceed with your questions.
Hey, guys. This is Rob one for Frank So whats been the pace of new logo growth for you guys versus 12 months ago, and then going off of that what what's been the nature of the applications that new customers are coming to you guys for all I know you.
Yes, that's we talked about.
You talked about.
Digitization, but but what exactly does that tail and like what does that look like for you guys in terms of the application, but you're selling to customers.
Yeah. Thanks for the question milligrams is obviously a key area that Weve continued to focus on in this quarter being 37, new logos as far as the number is concerned is one of our highest that we've seen I think the last five quarters.
So that's a it's good to see overall I would say the numbers in general are pretty even overall, if you look at the mix of those those logos that are coming in though the quality of them has improved over the last several years and that's been a big focus of my team is to not just sign new customers, but those customers would value the ecosystem that also.
We have the opportunity for for growth. So we look at both the quantity the deployments and the revenue contribution obviously, but also the long term.
Likelihood of them continue to stay customers. So a lot less likelihood of churning out, but also more likelihood of continuing to grow. So that has the quality has continued to get better, especially over the last I would say two years, that's been a key focus.
Oh applications as far as applications are concerned.
As you see kind of the shift towards more of that kind of mid to large enterprise.
It's interesting to see how technology from the cloud providers. This kind of trickle down more to be more available to some of those enterprises, where they can now take advantage of some of the same economies that a lot of large cloud providers have been.
Slowly able to do so whether its hardware virtualization.
Applications that they're running being able to load balance applications across various environments and into the cloud even.
Allows them to really manage their environments within our datacenter differently. So what you're seeing is really customers.
Architecting their design to where they can manage their kind of core workloads within our data center more effectively and more cost efficiently.
While still leveraging cloud for those workloads that are better managed there and also give a better diversity and redundancy. So it really becomes a mix of all of those things and how it comes together with no SaaS software as a service platforms as a service within the core infrastructure, so that mix varies by customer, but we're seeing more of that can.
Celebration of especially mid to large enterprise, where they are taking their their core applications and they are kind of they are more steady state workloads and manage it themselves and managing peak loads and more around the world type applications that need to move from region to region and follow the Sun.
True cloud type providers.
Great. Thank you guys very much.
Well. Thank you all thank you for your interest in Coresite, Kate and Jeff and Steve and I appreciate it.
We're also obviously very fortunate to work with a group of colleagues who have been tremendously agile and innovative throughout this year, whether it's figuring out how to get customers deployed quickly and interconnected very quickly to just getting all this new.
Capacity built in an environment, where.
Safety is a much more difficult thing to achieve and regulations continue to change.
Related to both construction and operations and to deliver such good uptime for our customers.
You've heard a lot on this call about how strong our campuses are about the customer ecosystems about the major metro markets and how they have enabled us to do to drive value for our customers and translate that into shareholder value, but these colleagues that we have working around the country and all these.
Facilities are really what makes it work in and we're very great before.
Thank all of you for your time have a have a good and safe rest of your day.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.