Q1 2021 CoreSite Realty Corp Earnings Call
[music].
Greetings and welcome to the core site Realty's first quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and.
As a reminder, this conference call is being recorded I would now.
Like to turn the conference over to your host Kate Whoopee manager of Investor Relations.
Please go ahead.
Thank you good morning, and welcome to course items first quarter 2021 earnings Conference call I'm joined today by Paul Zurich, President and CEO, Steve Smith, Chief revenue Officer, and Jeff Fan and Chief Financial Officer before we begin I would like to remind everyone that our remarks on today.
This call May include forward looking statements as defined by federal securities laws, including 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.
And 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 SEC.
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 and 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 Paul.
Good morning, and thank you for joining our first quarter earnings call.
I will cover the quarter's highlights and Steve and Jeff will discuss sales and financial results in more detail.
We delivered strong first quarter financial results, including operating revenues of 157 $6 million, resulting in 7% year over year growth and <unk> per share of $1 40, a year over year increase of eight 5%.
First quarter sales results included new and expansion leases of $7 million of annualized GAAP rent.
Which consisted of $6 2 million of retail Colocation and small scale leasing slightly below the trailing 12 month average and zero for an $8 million of large scale leasing.
We remain encouraged by our funnel and ongoing customer discussions coupled with extensive available capacity, which makes us more competitive for a wider range of large contiguous deployments as a result, we expect more large scale and hyperscale leasing in future quarters, the timing of which is always hard to predict.
We will continue to bring together on our campuses retail and scale customers of various sizes.
Along with selective hyperscale deployments in order to both benefit from and to continue to grow the value of our diverse customer ecosystems.
Turning to our property development.
La three phase II construction project is on track for its estimated Q4 2021 delivery and.
And we signed a zero point $8 million large scale lease on April one and not included in the Q1 results, which brings la three phase one leasing 289% just six months after being placed into service.
We also continue to labor through permitting and power procurement for SB nine and hope to start the site work preceding vertical construction sometime this summer.
He said that we have experienced a slower than expected process and cannot predict with certainty when it will be concluded.
On the operational front, we achieved power and cooling uptime of 100% for the quarter.
We also continued to expand our connectivity options and relationships and Chicago, we added on net connectivity to Microsoft Azure Express route bolstering our campus model and hybrid cloud performance and Optionality and the Chicago market.
We announced the availability of Vmware cloud on Dell EMC, a fully managed local cloud as a service offering available across our national platform, which strongly supports hybrid cloud AI machine learning Internet of things and <unk> use cases.
And we announced upgraded on net availability of AWS direct connect supporting 100, Gigabits and for of our markets, Los Angeles, New York, Northern Virginia, and the Bay area.
Demonstrating our strength as a leading integration point for hybrid <unk> architectures.
This past year pandemic grid and as it has been highlighted the resiliency of course, such data center space and our unique positioning through differentiated network dense data center campuses with robust ecosystems of enterprises networks, and cloud providers and key U S markets a year.
Later these extensive customer communities are even more clearly as central for the most interactive elements of digital transformation for businesses governments, and finance healthcare and academia as they grow and to operate and the world moving toward continuous digital access and increased collaboration.
And unprecedented improvements and data utilization.
And by providing such unique major market campuses and interoperability with superior flexibility and scalability and secure high performance connectivity options, we feel well positioned to capitalize on the higher value elements of the secular tailwind and the data center space.
In closing.
We have a lot of work ahead of us to build on our solid start to the year by continuing our success and retail co location and small scale leasing well, adding large scale and hyperscale leases throughout the rest of the year and.
And we believe the fundamental drivers of our customer focused strategy will combine well with market forces to drive long term value creation with that I will turn the call over to Steve.
Thanks, Paul and Hello, everyone and.
I'll recap, our first quarter sales results and discuss the key drivers.
We delivered new and expansion sales of $7 million of annualized GAAP rent during the first quarter.
Which included $3 6 million revenue.
GAAP rent from retail collocation leases.
$2 6 million for GAAP rent from small scale leases and point $8 million GAAP rent for large scale leases.
Our new and expansion sales were comprised of 33000 net rentable square feet.
Reflecting on an average annualized GAAP rate for $209 per square foot.
As well as 32, new logos that were added to our customer ecosystem with opportunities for future growth.
Our sales results were primarily driven by retail co location on small scale leasing.
Presenting on 89% of our total annualized GAAP rent signed.
While our Q1 retail colocation and small scale leasing was strong.
And we're working to achieve more large scale and some hyperscale sales results throughout the remainder of 2021.
While the actual timing and remains to be seen.
As Paul mentioned, we started Q2 with April 1st execution of a large scale lease for point $8 million of annualized GAAP rent, bringing la three phase one to nearly 89% leased within six months on construction completion.
Our team is working hard to build on this momentum with other opportunities and our pipeline.
We also saw a strong organic growth during the first quarter from our existing customers, who accounted for 83% of annualized GAAP rent signed.
Organic growth was primarily driven from the enterprise vertical.
Including and expansion into new markets by a rural cash transfer center looking to solve its hybrid and multi cloud needs.
And our first scale on deployment.
<unk>, two data center, where low latency and connectivity for essential for the customer to extend.
<unk> cloud platform.
From a geographic perspective, our strongest markets for new and expansion leases in terms of annualized GAAP rent signed.
For Northern Virginia, The Bay area, and Los Angeles, which combined represented 70% for annualized GAAP rent signed during the quarter.
Turning to new customer acquisitions.
32, new logos on represents $1 $2 million of annualized GAAP rent for approximately 70% of our sales during the quarter.
Our well established customer communities and our cloud enabled network dense data center campuses continues to be a magnet for new enterprise customers, which accounted for 82% of annualized GAAP rent from new logos signed during the quarter.
Among these enterprises, where the following notable new logos.
One of the largest private investment banks and the U S, which is joining our growing high quality.
Financial services ecosystem, and the New York area.
And the U S sports betting and online gaming platform experiencing rapid growth and building. This digital transformation foundation with core site.
As we look forward to Q2 and the second half of 2021.
We're optimistic about the demand trends, we're seeing and our markets and we believe our existing capacity positions us well to meet that demand.
We're encouraged by the solid execution of our sales and our retail co location and <unk>.
Paul scale deployment categories.
Our sales funnel for appropriate for large scale and hyperscale opportunities was positive.
However, we ultimately have to translate those opportunities into sales throughout the remainder of 2021.
We have the available contiguous capacity to provide the flexibility and scalability required by customers to execute their hybrid and multi cloud architectures, we are well positioned to capture the demand for edge use cases, the value of our differentiated interconnected portfolio ecosystem.
I will turn the call over to Jeff.
Oh.
Thanks, Steve Today, I will review, our first quarter financial results and discuss our balance sheet, including leverage and liquidity.
As Paul mentioned, we started off the year with strong financial results.
Operating revenues of $157 $6 million represents 7% growth year over year, and one 7% sequentially and.
Including growth and interconnection revenue of 10, 3% year over year and 1% sequentially.
Driven primarily by growth and volume of fiber cross connects.
Customer lease renewals equaling $15 9 million of annualized GAAP rent.
Which represents a cash rent mark to market of two 3% and GAAP mark to market of six 1% and.
And we reported churn of <unk>, 8% for the quarter, which marks our lowest level of quarterly churn and more than three years in line with our expectations.
Commencement of new and expansion leases of $5 9 million of annualized GAAP rent.
Revenue backlog, consisting of $9 6 million of annualized GAAP rent or $19 $3 million on a cash basis for leases signed but not yet commenced which is inclusive of the large scale lease at la three phase one signed on April one.
We expect approximately 70% of the GAAP backlog to commence on the second quarter of 2021 and.
And substantially all of the remaining GAAP backlog to commence during the third quarter of 2021.
Adjusted EBITDA was $86 1 million for the quarter and increase of nine 4% year over year, and 4% sequentially, representing an adjusted EBITDA margin of 54, 6%.
Looking at the trailing 12 months adjusted EBITDA margin was 53, 8% up 10 basis points from the previous trailing 12 month average.
And as I've stated previously the near term expansion of our margins is dependent on us increasing our overall occupancy to our goal of a high eighty's leased percentage.
And leasing capacity and phases, two and three of our ground up developments like La three CH, two and three where we generally achieve higher revenue growth flow through enabling us to scale our operations.
Net income was 51 per diluted share and increase of <unk> <unk> year over year and five sequentially.
<unk> per share was $1 40 and increase of 11.
Or eight 5% year over year, and <unk>, <unk> or four 5% sequentially.
Our Q1 financial results reflect and approximately <unk> <unk> per share onetime benefit.
Resulting from certain compensation and benefits related accrual true ups.
Moving to our balance sheet, our debt to annualized adjusted EBITDA decreased to five one times as of March 31.
Inclusive of the current GAAP backlog mentioned earlier, our leverage ratio is four nine times and.
And we ended the quarter with approximately $278 $7 million of liquidity, providing us the ability to fully fund the rest of our 2021 business plan.
In closing we started off the year strong financially and our business fundamentals are solid.
And we are optimistic about our outlook for the remainder of the year.
With that operator, we would now like to open the call for questions.
Yeah.
Yeah.
Ladies and gentlemen, we do apologize and there were some technical difficulties. However at this time, we will go ahead and.
And and conduct our question and answer session.
If you'd like to ask a question and please press star one on your telephone keypad and confirmation tone will indicate your line is and the question queue. You May Press Star two and if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up on your handset before pressing the star keys when when we please while we poll for questions.
Our first question is with Sami Badri with credit Suisse. Please proceed with your question.
Okay.
Hi, Thank you for the question.
Just to kick things off I wanted to just talk about your cash renewals and they were probably a bit higher than your annual rate and I. Just wanted you know something you guys can breakdown strength by market, where are you guys seeing some strength, where some markets slightly weaker on the renewable side.
This was the first of all apologize to the the whole items for the delay there obviously some technical issues, but we appreciate you hanging in there as it relates to renewals, we were a little bit positive too.
The trend this quarter and I think you can expect that as well.
And we go through the year there'll be some some lumps and some peaks and valleys as we go depending upon to your point market as well as size of the opportunity how long they've been with us and the strategic importance of each of those opportunities. So.
And that just really speaks to more of the variability of it but.
Jeff mentioned in his prepared remarks, our overall <unk>.
Guidance remains unchanged at this point given that we just do not update guidance typically after our first quarter.
As it relates to overall markets.
You can see.
Strength.
Primarily in the Bay area as well as L. A.
Virginia is overall stabilized as we've seen over the last several quarters.
And New York is pretty stable as well. So overall as you look at our pricing trends youll see pretty pretty stable results over the trail.
Got it thank you.
And our next question is from Jon Atkin with RBC capital markets. Please proceed with your other question.
Thanks.
Steve you talked.
Indirectly about other other opportunities and the pipeline and I'm wondering if you could talk a little bit about.
Later stage larger deals.
And.
The environment that Youre, seeing and say, Santa Clara Los Angeles or elsewhere.
Where would you expect to see the bigger deals.
And we have large chunks of space for sale.
And then the.
And the MLR on slide 13, the MLR metric jumped up a bit I wonder what drove that and does it kind of stay at that level or continues to grind higher.
Sure well, maybe I could ask for the first question regarding the pipeline and what that looks like and then I'll turn it over to Jeff for the MLR commentary.
As far as the pipeline is concerned and more of the large scale and hyperscale opportunities I think it is and the typical areas that you would expect primarily in the Bay area and Virginia, but also seeing more scale and larger scale opportunities and in New York area as well so.
As Paul mentioned and as in his earlier remarks, we do we do have a good opportunity going forward with over 40 megawatts of capacity that we can sell to that are spread out across all of our markets. So.
And in General I would say that the opportunity is pretty consistently building across each of those markets.
Ultimately, we need to convert some of those larger scale and hyperscale opportunities as we go through the remainder of the year.
But those will be based off of.
How they fit within our portfolio, how they value or contribute to our ecosystem and that remains to be seen so more to come there, but we're optimistic about where things look for the future.
Okay.
Hey, John on the second part of the question regarding MMR per cab be just a quick reminder, obviously the first quarter were always going to restate, our new same store pool and sell at the beginning of every year. So that obviously happened here just just.
So everybody's aware in.
In terms of the increase it was largely driven by growth and our interconnections consistent with what youre seeing on the overall growth of the company.
And with the largest contributor to the growth of that MMR per cab.
As you look forward I would see that year over year growth percentage being at that two 7% and true.
Trending slightly higher and maybe up to the mid single digit growth rates. So call. It two and a 5% to 5% is what we would expect going through the rest of the share.
And then on SB nine there was an item in the press and.
About.
Just some delays and and I think the.
And the planning commission kicked it over to the city Council and and there is some.
Little bit of a delay around the permitting and the underlying issue I.
I guess it relates to some environmental topics and emissions around the generators.
Is that something that is new.
Or kind of something that comes up for sporadically and are there other.
In markets, where you're seeing that.
As a possible area of discussion going forward. Thanks.
John Thanks for the question and I think we're seeing the normal vicissitudes around zoning and entitlements in California.
We got very fortunate with SBA.
And much faster than average pace I think what we're experiencing with the <unk> is more typical and there have been some changeovers and.
And.
The people that hold the seats on city Council and planning Commission and you see that a lot.
But I think and Santa Clara and other markets like perhaps Loudoun County, and others Youre seeing.
Growing concerned about how much increased data center capacity. There is on the other hand, there is a lot of support for the data center industry, because it's very positive for municipal finances, and the economy and the local economy, especially the tech and innovation economy.
At the planning commission level, the majority of the people that could actually vote and there were two spots that couldn't vote.
<unk> supported the proposition and now goes the city Council and.
We're still optimistic that we'll get clear.
Third there, but it is as I said and my preferred and my prepared remarks, it has taken longer than what we expected.
And hopefully we'll be we'll be through the permitting and the next two to three months.
Thank you.
And our next question is from Jordan Saddler with Keybanc capital markets. Please proceed with your question.
Okay.
Thanks, Good morning.
So.
Just wanted to come back to the Hyperscale discussion and sort of final and <unk>.
Specifically as it relates to backfill and <unk> and I feel like that's something we've talked about in the past and not sure if I missed any any detail on that but.
And I feel like what.
Little bit past that point and when we would have expected to hear something there.
And I'm just curious if there's anything in particular.
And sort of obstacles.
And getting something done there is it competition price.
<unk>.
Scale or complexity of the deal.
And so you would shed some light on what's going on.
Hey, Jordan this is Steve.
I guess the first to just directly answer your question no. There is no obstacles to fill that space and as you look at our results coming out of the first quarter. It was primarily around retail and small scale opportunities and as I mentioned on prior calls one of the benefits of having a campus is our ability to really kind of maximize.
Our customers fit into individual spaces throughout that campus in order to drive the best possible utilization and therefore yield of each of those facilities. So that's really where we've been focused and as we look to the remainder of the year, we do expect to sell more scale and hopefully some hyperscale that fits the criteria of the space that we have.
And specifically to that SB seven space so.
We're still very optimistic on where that's going to land and I know that there was some.
Some discussion and whispers on the street around some potential hyperscale opportunities within that SB seven space and.
And those things come and go and right now we're looking to continue to pursue those opportunities as they as they represented themselves, but and maybe more beneficial for us to make that multi tenant then than single customer going forward. So we'll just see how the pipeline plays out, but we're still very optimistic about how that plays into our.
2021 sales and our 2021 results as far as revenue is concerned.
So you no longer expect that to necessarily be a single tenant and backfill.
It remains to be seen but we're exploring all of our options and not just banking on a single opportunity.
Okay, and then Steve maybe if you again last quarter, we talked about.
And the long dated.
Leasing process and some of the challenges.
How quick would you characterize the trend and and your win ratio.
<unk> proposals.
Yeah. Our win ratio is one thing that we do track very closely and look at the various reasons for it and so forth and.
And we.
We have been trending better in that regard over time, so we look at it by market by vertical and so forth and try to analyze what the the underlying reasons are there is there is always.
Drive to try to improve that but at the same time.
Winning every deal at the expensive of earnings is not the best place to land either so we try to balance all of those things to make sure that we're doing the right thing by our customers, but also by our shareholders. So overall I would say our win rate is actually improving and we're just trying to balance that out with the overall pricing and the yields that come along with.
Okay. Thank you.
Youre welcome and our next question. Our next question is from coal.
And as with Cowen and company. Please proceed with your question.
Alright, great. Thank you just following up on that I believe the 2021 guidance assumes some level of.
Backfill for SB seven.
In the back half and this year and and I believe the presumption had been that you and we set for one or two.
Bigger customers, you kind of get a decent fund on a revenue and the door at the same time.
And I guess based on where we are and the calendar year.
That becoming and in jeopardy, and our guests.
They respond to Jordan's question. If you are looking for now maybe.
And do that multi tenant.
And that also going to make it more difficult to achieve whats already been presumed in and the guide and then just quickly the <unk> onetime benefit and as Jeff referenced just curious if that had been assumed.
When you gave your guidance for 2021, thank you.
Hey, Colby.
And just let me start with the second question first.
The two cents and.
<unk> had not been Jeff are incorporated into the guidance.
More broadly to your other question around <unk> seven and its impact on guidance I, just think it's fair to keep in mind and Theres always going to be some puts and some takes and all of our.
Our results relative to what we expected as we head into the year.
As I mentioned in our prepared remarks, we had a strong start to the year.
We're optimistic as we look to the rest of 2021.
And I would just say add some additional commentary specific around guidance more broadly and that is that.
Over the last years or over the last few years, our cadence has been.
To provide annual guidance in February with our Q4 call.
And then we update that if and as necessary and connection with our Q2 earnings call.
And just keep in mind, our expectations relative to the midpoint of our guidance may have changed.
But we're just follow on the practice of many other public companies whereby we only update when there has been a material change.
Keep that in mind and I think it's helpful. As everyone looks at our results and guidance for the rest of the year.
<unk>.
So I just wanted to make sure I added that additional commentary.
And Colby just to give you a bit more color around single tenant.
Revenue contribution for the year versus multi tenant.
And actually as you look at the single tenant scenario as Jeff has mentioned in prior quarters.
The likelihood of that impacting the very tail end of the year is really what was planned for.
But I would also tell you that whether we go single tenant or multi tenant and the case of multi tenant and it actually opens us up for shorter term revenue contribution and then longer term revenue contribution so.
We can deploy customers much quicker and a multi tenant scenario and therefore drove more shorter term revenue and likely at better returns and so we're just evaluating all of those various possibilities, but just to give you a bit more color there.
So I mean, just to kind of sum it up and it sounds like then the way that you guys are describing it as.
The first quarter was a solid quarter youre trading above the mid point and while even if you don't put in a single tenant and cash as the seven and the combination and the strength from the first quarter plus potentially bringing on multi tenant customers earlier.
And arguably more than offset that potential risk.
And I think you said it well.
Thank you.
Yeah.
And our next question is from Mike Funk with Bank of America, Please and we'll see what's your question.
Yes, hi, good afternoon, and thank you for the questions.
First on interconnection.
If I could guide and I think last quarter, you said there are a number Paul.
And takes.
And I went with volume as well as transition share.
Relatively solid growth and first quarter, they ought to have around 10% year over year. So does that fall in line with your commentary from from last quarter's call for where you are tracking ahead of growth and first quarter.
Hey, Michael it's Jeff.
Yes specific around interconnection as you just highlighted our first quarter growth came in at about 10, 3%.
When you look at our interconnection revenue growth over the past several years.
What has contributed to that growth on a quarterly basis as you you've seen roughly two thirds of it.
Being driven by increases and just pure volume of our interconnection products.
And then the other third really coming from increases and pricing or certain customers migrating to higher price products.
And when you look at that ratio for the first quarter that ratio was really driven and 80% by volume growth. The other 20% by pricing and customers migrating to higher price products. So it took a step and the direction we anticipated.
And it remains to be seen whether or not it settles in at that ratio or whether the pure volume continues to increase to drive that revenue growth.
But that's what we've seen so far year to date, but it did step and the direction, we anticipated and.
And we'll see how the rest of the year plays out.
Great and then just higher level question, if I could I know we discussed in the past.
And the need or not having need for having scale.
Outside of the U S and it across more markets just love to get your updated thoughts on that and whether or not you're losing deals.
Smaller scale versus some competitive areas. So we're not haven't seen kind of geographic reach.
And to hear your thoughts there.
Thanks, Mike.
I think our thoughts on that are similar to what we said in the past with a focus on building the density and scale of the campuses ecosystems and our major metro markets.
We see plenty of opportunity and plenty of opportunity and more importantly to sell the value of that ecosystem, which enables us to get ultimately better results are better or better yields are not our target there are derivative of creating sales, creating and selling value and these campus.
<unk> systems and major metros as I said in the past there clearly are probably some I think in aggregate smaller opportunities that.
Where people were prospects or their service provider just insist on a global footprint, but there are and have been increasing numbers of customers, who are deploying globally through cloud and other service providers, who make and access with direct interconnection and <unk>.
Ecosystems. So we continue to feel very strongly about the better our strategy has more strength than.
Offsets.
And it continues to perform for us and we are optimistic about how it's going to perform this year.
And I guess for more if I could see opposite direction with that.
And your thoughts about recycling assets, you've seen very strong demand for data center assets.
Barry you showed a 60% increase and data center revenue. This quarter is there opportunity for some financial alchemy here to maybe divest some non core assets and take advantage of those evaluations.
I don't think to any material extent and our.
And our portfolio right now.
On 90 plus percent of our buildings are actively contributing to the value of our campus ecosystem and a major metro area.
Great. Thank you very much.
Our next question is from Frank Louthan with Raymond James. Please proceed with your question.
Great. Thank you.
Is the pace of new logo adds this year versus last year, and and where do you think that that can and up and then.
Secondly.
Where are you as far as the sales force head count for the year and how many do you think youll be able to grow that by by the end of the year.
Go ahead, Frank and Steve.
We came out of Q1, there were close to 32, new logos and.
And thats pretty much on peso for where we've been and the trail.
You can expect that to grow slightly over time and as I.
We look at the overall mix of those logos.
We look to look for them to be.
More kind of larger scale opportunities as we go forward, but that remains to be seen.
But I think thats, probably a fairly rational number we've been and anywhere in the 30 day to mid <unk> I guess over time and I think that number will remain consistent although the mix may shift a little bit.
Okay.
Far as head count is concerned.
Being able to solve for the sales requirements and each of our our markets with the current head count, which is roughly 28% to 30 salespeople that we have out there with additional <unk>.
Support teams that overlay them between sales engineering solution architects channel resources, and so forth and we feel like that's really the right number that we need to meet their business plan as it exists today, we have modified where some of those resources sit and how they report and order to try and get better efficiencies out of those and we continue to monitor that and make adjustments accordingly.
Alright, great. Thank you.
And our next question is from Michael Rollins with Citi. Please proceed with your question.
Thanks, and good morning, just curious.
If you.
Go to the new disclosures over the last couple of quarters on how you segment deployment size retail Colo small scale large scale hyperscale.
And if you look at that relative to the annual rental churn rate guidance range of 65 to eight 5% how did the each of these buckets perform or are expected to perform on churn.
As you look out over the next 12 months share overtime.
Mike It's a good question.
I think in addition to the market share referenced and I think the best way to think about it is the.
Our lease distribution table and it shows up on page 14 of our supplemental.
And when you take a look at that you can see that while we have an overwhelming majority of the number of Lisa sitting in our retail bucket if you will.
The Rev.
Revenue contribution from each of those buckets is actually pretty well distributed.
20% on the low end up to about 27% on the high end and so on.
Look at the overall contribution from a churn perspective. It is relatively representative in close proximity to what you see here is the overall composition of the of that distribution.
And so the churn rate and therefore is kind of similar and each of these buckets for us one significantly lower and one percentage rates significantly higher just because of the velocity of the business.
And now Youre going to Youre going to Youre going to get some variability on a on a quarter by quarter basis, just based on.
On the mix of when those customers are leaving but when you look at it on a more on a longer period of time over a 12 months 18 months and time, it's going to be fairly representative of the actual composition and equally distributed among those four buckets.
And just.
Back to the Hyperscale leasing question.
And how strategic yet in the same.
Figure, you're referencing and you have 12 leases with the Hyperscale how strategic are these hyperscale.
Appointment on your campuses to bringing in other customers across your different customer verticals and.
And have you thought about the.
Kind of debt cost benefit of becoming more aggressive on pricing to get share on these hyperscale customers.
Mike Thanks for the question I mean.
Not all Hyperscale is the same some hyperscale for edge cloud use cases, and especially what we're seeing though that we expect will support <unk> and other.
Edge use cases, and the future just drive a lot more cross connect activity and attract and utilize other customers.
More significantly.
Some hyperscale has very low.
Ratios of cross connect and so I don't think it's as simple as going out and being more aggressive just to get more hyperscale I think Steve and his team have done a good job of focusing on getting hyperscale, where it's in a market where the value of that hyperscale to the customer.
And is very high.
And primarily focusing on hyperscale use cases that dramatically.
Improve our ecosystem.
And just one other quick when and if I could on the Capex side. The development schedule doesn't really have a lot in there in terms of actively.
Active data centers being built but the capex guidance is.
Significantly larger than that are there anything.
And so or any developments that we should just be mindful of on the capex side as you move through the year.
And Mike.
Just keep in mind also we've got obviously L. A L. A three phase two that you're referencing is obviously under development and will be spending capex as we roll through the year for that we also have our deferred expansion dollars that we will.
And incur as we work through the rest of the here and Thats really.
Spent throughout each of our markets small dollars on at each of our facilities as we need to add power capabilities or cooling capacity as customers deploy gear et cetera, so some of that well being and embedded into the capex guidance as well.
Further as we work our way through the year and as we have better visibility in terms of where we need more capacity, we will bring some additional developments online.
And once we have better termination of where exactly that needs to be.
Thank you.
Okay.
And just as a reminder, if anyone has any questions you May press star and one on your telephone keypad and doing so and ensure that you join the question queue and.
Next question is from Eric Rasmussen with Stifel. Please proceed with your question.
Yes, thank you for taking the questions.
Yes.
More on lines, where the Hyperscale conversation, we've had but it seems like large scale has been challenged the past couple of quarters and I know you've mentioned contiguous space, who sort of what are the hurdles there but are there any other sort of challenges for you for.
And for you to win some of the business from from.
Net debt side of the.
And those types of customers.
Alright, Eric and Steve No there really isn't I mean, it really does come down to fit and timing and how we align and the various markets. If you look for the results coming out of Q1, the very solid results as we as you look at the trailing 12 quarters, it's right in line with six of the past 12 quarters. So.
And without some of those larger lumps and hyperscale or large scale, which we do expect to see some of those throughout the remainder of the year.
And it's just a matter of aligning those workloads as Paul mentioned earlier, not all scale and Hyperscale is created equal and how they both value our ecosystem and or bring value to our ecosystem plays a lot into how that manifests itself. So.
We do have.
A promising pipeline as I mentioned earlier, and we look to execute against that and we've got to deliver those results as we go through the rest of the year.
Okay, Great and then maybe just as it relates to your retail business.
You see any lingering extension of the sales cycle and push out of projects or is this narrative sort of switch to things picking up and activity and if so how sustainable is this as we sort of progress through the year.
Yes, I think the complexity remains.
It is not getting less complex and as you think about hybrid multi cloud environments, having them and our operate seamlessly as this is complex we feel like we bring a unique value to making that easier for customers. Both on the services that we have on our campus.
The low latency and there we provide and make those things happen that is unique for for us compared to other data center providers, but it is it is a challenging.
Construct for customers to work through and that does elongated sales cycles, I think that's not surprising and we've seen it over time, but customers are getting better and navigating that.
As far as the overall <unk>.
Projects on there.
Their likelihood of moving forward.
And especially as the economy continues to.
To rebound.
I think we're bullish about where things sit as far as customers willing to invest in technology and.
And the reliance on technology to run their business, so I think that bodes well for our position.
Makes sense great. Thank you.
And welcome.
And our next question is from David Arena with Green Street. Please proceed with your question.
And could you remind us on the timeframe. It takes you to reach that stabilized yield target of 12% to 16% and if that's changed and all over the past year.
Hey, David keep.
Keep in mind that debt debt yield that 12% to 16% is achieved once we work our way through each of all of the phases of our development. So.
At La <unk> for instance, youre going to Youre not going to hit those returns and until you get through.
<unk>, three and <unk> phase III substantially stabilized or underwriting decision and we're basically has our leased percentage at 93%.
And Ah.
And which we basically utilized for our stabilization and computations.
And so it sounds like it and.
And demand in the market and how quickly you can at least for projects that I guess is there is there kind of a frame of reference you can aggregate three years on average per day, five or 10 years on average.
Yep now and my apologies.
I didn't answer that part of your question I would say it is very dependent on overall absorption and the size of the market I would say in general based on our markets and the overall absorption there and it's probably a three to six timeframe three to six year timeframe.
Okay. That's helpful. And then just one quick one on la three phase two it looks like the estimated development costs declined by about 25 per cent from last quarter. So is that just a change and design in for facility or a different strategy for data center.
Yes, David what happened there is.
Anytime, we're putting up some development assets its really just a and example of how we try to be very disciplined around our capital deployment. So some about $9 million of that reduction really relates to deferred capital. So that's capital that we may end up spending, but we won't know exactly how much of.
It until we finish the datacenter customers start to deploy we can see what type of density each and those customers has as well as power utilization and so that will be spent some portion of it down the road as we get better visibility into into all of that it just helps with our overall returns earlier and trying to be very disciplined around deploying that capital.
<unk>.
Yes, and that makes sense I appreciate the color. Thanks, guys.
You bet.
Okay.
Our next question is from Nick del Deo with Moffett Nathanson. Please proceed with your question.
Hey, Thanks for taking my questions.
First and the past I think you've talked about getting gross kind of sustainably into the high single digit range.
You feel like Youre still on track to get there over over the hope for timeframe.
And then second one for Jeff.
Rent expense ticked down noticeably sequentially was that just from the law for going away or other factors at work.
Okay.
Let me address the rent expenses.
And then Paul can add some commentary on the on the growth rates here.
Now the rent expense declined and the first quarter and largely because we had about $1 million.
Cam charge come through late last year from one of our landlords and so it was a bit of a little bit of a surprise to us given the timing and which that came through and thats really largely the result of.
And that expense drop I did want to touch on allied for because I think it's another good topic.
For US you know, we're working with our customers there and to migrate.
Many of them over to la two and we're on the process of doing that.
And we will continue that effort through the rest of this year.
However, because of our debt.
A decision to <unk>.
And that after the and this year, we are accruing all of our rent expense that we would have incurred over the next two years in this year. So just so you guys are aware, we are being burdened with that to some extent and 2021 that should drop off by and share.
And then Paul anything on the growth rates on Nick.
We've been saying for.
Thank many quarters that.
We believe the sustainable growth rate is mid to high single digits annually and.
And other building blocks for doing that appear to be in place and we're generally executing on them for the big.
The big difference makers is going to be how well, we execute on sales quarter and quarter out.
And and how well we support debt with the right connectivity products and other service products to enhance the sales opportunities and.
And the stickiness of our customers and the churn related to that so far all of that seems to be progressing as we expected.
Continue to make improvements and changes across the board and we feel pretty good about it.
And thank you.
Okay.
Our next question is from Richard Choe with Jpmorgan. Please proceed with your question.
Hi, just to follow up on that what kind of signings would you need each quarter to reach that.
Mid to high single digit.
Growth rate.
And I think I think it really depends on what the value achieved with the level of signings is.
But I don't think we would have to meaningfully change from our historical sales right.
For the last year or so to in order to achieve that the.
And the differences are you going to hit mid single digits or high single digits.
And I guess, along with that part of the churn and it was a lot lower this quarter is this because something and the economy or is it the customer weighted basis kind of higher value on now and you are kind of through after the.
The last portion of later this year and <unk> seven.
As churn.
Kind of naturally trend down for you or was this just kind of a good quarter for it.
Hey, Richard Yes, as you noted our churn.
And as I said in my prepared remarks was the lowest we've seen and three years that that reduction in churn. This quarter is right in line with what we had anticipated and obviously is in line with the guidance for churn that we laid out for the year. So.
As Paul alluded to it's a great start to the year I think it helps provide some additional confirmation on where we expected it to be and to come back down to our historical amounts, but there was nothing specific out of it obviously youre going to have some variability on a quarter by quarter basis. When you have a large hyperscale churn out.
As you saw and Q4 and that it will elevated but.
That decrease was right in line with our expectations for this year.
Alright, thank you.
You bet.
Yes.
And our next question is from Tayo Okusanya.
With Mizuho. Please proceed with your question.
Hi, yes, good afternoon.
So quick question on specifically on Chicago.
On some data we are tracking.
And just around kind of absorbs and trends vacancy trends and kind of ongoing development trends and it just shows.
And that Chicago has decent amount of vacancy share amount of ongoing development and kind of so so absorption. So I guess against that backdrop again first of all and I say, if you kind of agree with that.
On the wall against that backdrop, I mean, how.
Do you kind of think about lease up for you know for you for example, your recent deliveries and that market.
Yeah.
Yes, thanks for the question and I'll give you some color on the Paul if you want to fill in and the depths of the great. But overall, we are excited to have our stage two facility online and as we can.
Mentioned in the prepared remarks to get our first scale, Lisa and there so.
With any facility.
And the break in the ICU that first meaningful sale is exciting and.
The pipeline actually looks pretty promising for Chicago at this point.
And there is.
A fair amount of capacity and development and the Chicago Greater area I think we do have a unique position there given the proximity of our stage two facility to the downtown area. The fact that it's connected to our CH one facility and all of the robust.
Networking and connectivity options that are available there and so while there and while there is a lot of options and Chicago, There's very few that have the value proposition and we feel like we bring to the market and.
We're seeing the pipeline increase and are still optimistic about the.
And the future of that site.
And I don't really have anything to add I think Steve hit.
People and so on our view of the Chicago market.
Gotcha.
And in market access, but what are your kind of your light kind of under performing relative to your internal expectations and markets that are outperforming.
It's a good question Teo I think consistent with what we've said in prior quarters.
Virginia is a good market but.
Supply and demand there is and there is more on the supply side and has been for a few years, although pricing there has stabilized.
But it's.
It was one of our top three markets as Steve said.
But.
It's still a very competitive market.
The New Jersey market has improved.
Primarily I think because of the financials and.
And moving out of enterprise data centers, and frankly, we're seeing sort of the same thing in Chicago with more enterprises looking to move out of there.
And their data centers so.
And L a and Santa Clara continue to be strong markets for us as well.
Gotcha. Thank you.
And we have reached the end of on our question and answer session and again I would like to apologize for the technical difficulties there for old downturn on the call back to Paul Zurich for a few closing comments. Please go ahead.
So.
I think we saw midway through this call the importance of a 100% uptime.
And so I'd like to close the call once again by thanking our really great data Center and network personnel, who keep our uptime, so high and keep our customers.
Getting moved in on time and able to execute their digital transformation quickly I appreciate the strong efforts of our.
Our sales teams and our sales support team for for the solid start to the year and and building a base for a good year for sales.
I'm encouraged.
Continue to be encouraged by the opportunities that we see of course site. We have a lot we need to execute on but we have a great team to do it with so that's why I'm optimistic and I. Appreciate all of your all of your participation and the call today and your interest and core site, Thanks and have a great day.
Thank you for joining US today you may now disconnect. Your lines. Thanks have a good day.
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