Q3 2021 CyrusOne Inc Earnings Call
Okay.
Good morning, and welcome to the Cyrusone LLC third quarter 2021 earnings call all participants will be in listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero.
For todays presentation, there will be an opportunity to ask questions.
That's a question you May press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Michael Schafer SVP of Finance. Please go ahead.
Thank you Anthony good morning, everyone and welcome to Cyrusone third quarter 2021 earnings call today, I'm joined by Dave Bergman interim President and CEO, Catherine <unk>, CFO and John Hayden CFO before we begin I would like to remind you that our third quarter earnings release, along with the third quarter.
Tables are available on the Investor Relations section of our website at Cyrusone Dot Com I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward looking statements related to Cyrusone and are subject to risks and uncertainties factors that may cause our actual results to differ.
<unk> expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on Cyrusone Dot com, we undertake no obligation to revise these statements. Following the date of this conference call except as required by law. In addition, some of the company's remarks. This morning contain non-GAAP financial measures.
You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the investors section of the company's website.
I would now like to turn the call over to our President and CEO, Dave Bergman.
Michael and welcome to Cyrusone third quarter earnings call, we have a number of positive things to discuss today and we will move to the quarterly results and provide an update on guidance sharp shortly but I want to start with two key points first we delivered great results this quarter with strong financial.
Leasing performance, including a significant bookings contribution from Europe, and healthy pricing across the deals we havent been in the seat for three months.
Had an opportunity to meet with many of our stakeholders I cannot say I'm, even more excited about the outlook for this business than I was on our first call.
Over the last three months I visited many of our markets and I'm really impressed with this team their passion and commitment are second to none and their willingness to jump through hoops to make customers happy it's simply part of their DNA.
Secondly, I want to directly acknowledge and address the recent speculation regarding the company.
I'm not going to comment on any market rumor, what I will say is that we are open minded.
All avenues and alternatives to maximizing our shareholder value.
Our board and management team are committed to this our assessment of the best way to maximize value is to keep our shareholders interest as our top priority. This is our guiding principle.
In any case, we have to continue to execute the <unk>.
<unk> results, we posted this quarter show that we're focused on succeeding in doing just that.
Beginning with slide four you can see our key financial metrics for the quarter, which Catherine will discuss we.
We signed 20 megawatts totaling approximately $38 million in annual GAAP revenue.
As of the end of the quarter, our revenue backlog totaled approximately $106 million position positioning us well for growth next year and beyond.
Turning to slide five.
We brought 38 megawatts online during the quarter most of which is leased capacity in the U S. Our development pipeline as of the end of September consisted of 49 megawatts across London, Frankfurt and Northern Virginia. We also acquired parcels of land in Frankfurt and San Antonio each would estimate.
The power capacity of 21 megawatts.
Our balance sheet remains strong and we had more than 2 billion in available liquidity as of the end of the quarter to fund our growth.
Moving to slide six.
Annualized GAAP revenue signed during the quarter was 10% higher than the prior four quarter average.
M. A R or per kw signed was nearly $160, reflecting strong relative pricing on hyperscale deals in Europe, and good enterprise demand in the U S.
The long weighted average lease term of nine years is in line with the average lease term for deals signed over the prior three quarters, extending the maturity profile of our portfolio.
The Pie chart at the bottom of the slide shows 55% of rent is from Hyperscale customers and we expect that percentage to continue to increase over time, given the significant growth in their footprints in both the U S and Europe.
Moving to slide seven.
Our European markets continue to perform very well accounting for 27 million in annualized GAAP revenue signed in the third quarter and $53 million through the first three quarters of the year, representing nearly half of our total year to date leasing.
The site acquisition in Frankfurt gives us additional runway for growth and our strongest European market to accommodate demand from our hyperscale customers as they continue to scale takes.
Taking into account the development projects underway in Frankfurt and London, we have a near term European footprint of nearly 220 megawatts, which represents over 20% of the companys near term footprint.
Turning to slide eight.
Global supply chain concerns have been dominating the headlines in recent months, we continue to actively manage our supply chain and have not experienced any significant near term headwinds as we have discussed before we have a robust and flexible supply chain that is designed to mitigate a lot of this risk our key vendors.
Old inventory until we need it and we have forward purchase contracts on long lead time items with fixed rates to help protect against near term pricing pressure.
We have long term relationships with key suppliers and we benefit from having a standardized design that standardization combined with the significant development that we have across the portfolio allows us to purchase at scale and achieve better pricing.
We also have resiliency built through the supply chain with key components dual source. Our internal teams are tightly integrated and work closely together to ensure accurate capacity planning and the ability to deliver our product when and where it is needed to meet demand from our customers.
Overall business has been minimally impacted by the broader inflation and supply chain disruption issues and we are well positioned heading into next year.
In closing the outlook for the industry remains strong and the team is working hard to ensure we are positioned to capitalize on opportunities in front of us and focused on maximizing shareholder value.
We continue to see robust demand and we're having productive discussions with our customers and we have capacity across our markets as well as liquidity to fund our growth with that Kathryn will now provide more color on our financial performance for the quarter and an update on our guidance for the year Catherine.
Thank you Dave Good morning, everyone, continuing with slide 10 revenue, excluding the impact of metered power reimbursements grew approximately 11% with similar year over year increase in NOI and slightly better growth in adjusted EBITDA at 13% the adjusted EBITDA.
Excluding the impact of mirrors power reimbursement was up approximately 120 basis points driven by the contribution of lease commencement in Europe as well as relatively flat SG&A expense compared to the same period in 2020.
Rent churn for the third quarter was at the lowest level, we have seen in the year at one 5% as we have been able to delay some rate churn and proactively work with our customers.
We are decreasing the upper end of our full year guidance range from 6% to 5%. The revised churn range is now 4% to 5% and we are currently trending towards the lower end of that range.
The lifestyle Library, New York population continues to be a relatively small part cooler and the weighted average rate on these renewal was up 1% on a GAAP basis and down 3% on a cash base at.
The spreads were positively impacted by the pushout of the return that I just mentioned.
Turning to slide 11, the revenue contribution from our European market has increased to approximately 17% that's up from 11% as of the beginning of the year.
We expect this contribution to continue to increase over the time, given the profile of commencement and strong demand trends across these markets and we are focused on ensuring that we have the capacity to meet our customers' future needs.
During the quarter, we brought online the first phase of our fully leased data center in Paris.
Further diversifying the portfolio geographically with revenue now across five European market.
Moving to slide swaps, we have 211000, Colocation square feet, and 49 megawatts under development across U S and Europe, including 43 megawatts in London, and Frankfurt, our two strongest European Mark.
The development pipeline continues to be mostly really with 82% of square footage contractually committed to customers and we remain focused on closely aligning development spend with signed leases.
We also have nearly 470000 square feet of powered shell under construction in Northern Virginia, San Antonio and love that giving us the ability to deliver capacity quickly in response to increasing demand across these key markets.
Upon completion of the projects in the pipeline, we will have a 1000 megawatts of power capacity.
22% from a year ago.
Turning to slide 13.
At the end of the quarter, we had more than 2 billion of available liquidity to fund our growth, including $303 million in available forward equity.
Our leverage as of the end of the quarter was five and a half time at the lower end of our targeted range.
Moving to slide 14, our backlog remains high at $106 million. The decrease from the second quarter is the result of significant lease commencement.
Third quarter.
After nearly $71 million in annualized revenue expected to commence in the third quarter of 2022 and beyond we anticipate approximately 37 million will begin in the second half of 2022.
Weighted towards the end of the year.
Turning to slide 15, we.
We are raising our 2021 guidance, we are increasing the lower end of our guidance range for base revenue by $10 million.
Zelle thing in that $5 million increase in the midpoint.
This is primarily driven by a more favorable full year churn outlook, including the timing of the impact I mentioned earlier.
As well as accelerated commencement compared to our prior.
Look.
Additionally, we are increasing both the lower and upper end of our guidance range for metered power reimbursements by 15 million as a result of higher usage across our market.
We're increasing the lower end of our adjusted EBITDA guidance range by $10 million, resulting in a 5 million dollar increase in the midpoint.
This is driven by the increase in base revenue and slightly lower anticipated property operating expenses.
Finally, we are increasing both the lower and upper end of our normalized <unk> per share guidance range with the midpoint, increasing by five and a half that.
The increase in the midpoint is primarily driven by the increase in adjusted EBITDA guidance midpoint and slightly lower than anticipated interest expense.
And we're also narrowing our capex guidance range and maintaining the mid point at $925 million.
In closing as we head into the last couple of months of this year. We're excited about the outlook for the business and we remain focused on execution of our plan and positioning the company for continued growth in 2022 and beyond.
We appreciate you participating in our call, we're now ready to take questions.
And operator, please open the line.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yes.
Our first question comes from Jon Atkin with RBC capital markets. You May go ahead.
Thanks, very much I was wondering if you can maybe update us on how the CEO search is going.
You bet you bet John.
So it's an ongoing process and.
The board is looking at all and exploring all opportunities available.
Available to the board.
On execution, and making sure the business performs and.
The process is ongoing.
Yeah.
Got it and then I wondered if you could then talk a little bit about.
Inflation, that's driving up presumably development capex per megawatt, which is something I think the industry has seen and any implications.
<unk> that you think that'll have on on.
Pricing on new Hyperscale commitments going forward.
Hey, John It's Katherine let me take that one.
You know so we work very closely with our vendors and suppliers and our procurement is globally optimized between Europe and the U S and so the relationships that we have are usually on their fixed base contract forward. We ensure that we have the procurement.
And the capacity with our vendors for our development pipeline as we go forward. So far we have not seen inflationary material inflationary pressures on our supply chain as well as in our construction costs, but I think we're working with our customers and as contracts come up.
For renewal will manage it through our efficiencies and our forward looking contracts.
And then finally Europe was a strong quarter I think you've talked about $27 million.
Was that.
How evenly distributed was that across one or two large signings or.
Can you maybe give us maybe a way to ask the question is what would be the magnitude of the largest lease are two largest leases that you signed in the quarter.
Yeah. So we don't speak about individual leases or individual customers, but I would say, it's heavily focused on hyperscale customers as European region is our Hyperscale region is with our existing customers and that's fairly large deployment.
Thank you.
John I'll add to that.
Year to date.
We have 72% of our bookings are from Hyperscale.
Compare that with two years ago, where we had 48% so.
Definitely trending towards a long hyperscale contracts.
Got it thanks, so much.
Yeah.
Our next.
Western comes from Richard Choe with JP Morgan you May go ahead.
Hi, a quick follow up to the CEO search can you give us any update on timing or expectations around timing.
It's an ongoing process Richard and Unfortunately, I just don't have any any expectations I can set.
On timing.
And then to follow up on Europe, another strong quarter in terms of the volatility in energy are you seeing customers shipped any demand or expectations, whether it's market or region for.
For you.
We're seeing strong demand across across all of our markets.
And if you look at our first quarter bookings it was 95% in the U S and if you look at our third quarter bookings you know it was 71% in Europe.
So we.
We see demand all over the market, we can't as we all know control timing.
But because of the distributed platform that we have.
And as the platform continues to grow we're certainly taking some of the lumpiness out of the business and you know Richard So when you think about a pressure on the energy and most of our customers are on their pass through metered power in Europe. It's the majority of type of scale customers.
We do see an increase in metered power reimbursements, we do not see that impacting their decisions on where they need capacity.
Great. Thank you.
Our next question comes from Ari Klein with BMO capital markets. You May go ahead.
Thanks, just following up on Hyperscale it looks like in the U S. You know nothing was leased for Hyperscale I think the rest of this enterprise.
And last quarter is pretty light too. So obviously lumpy, but maybe you can provide a little more color on what youre seeing in those markets in the U S market.
Yeah, you know look it's always been lumpy, we have strong demand across the hyperscale all the hyperscale or is in the U S.
So we don't see we don't see any.
Any of that relenting so.
It's been lumpy, but we're still confident that our footprint in the U S is very attractive to the hyperscale.
And I would say, we have very healthy conversations with our customers in the U S. They just don't run their business on a quarterly basis or a monthly basis. So we work with them on the long term relationships.
Got it and then on the fastener commencement as he noted is there anything specific that's driving that and is that a trend that may continue.
I'd say its a complement to our operations team. So that's what's driving the faster commencements. Thanks Catherine.
Now are you on that I mean listen the team is always focused on delivering as early as possible right. So we work with our customers and get them installed as quickly as we can and that's always been the focus of the company and it continues even in the environment we are today.
Got it and then just maybe one last one on the CEO search obviously.
Not saying a lot here today, but you know given your earlier comments about keeping an open mind and shareholder interests in mind, how do you balance that with the Ceos search connecting those run concurrently.
I do.
I don't understand the question.
If you were for sale does that make it difficult to added more difficult to hire a new CEO, while running running a potential process.
We just don't comment on any of any market rumors or how they correlate to any anything in the business.
Alright, thank you.
Okay.
Our next question comes from Simon Flannery with Morgan Stanley You May go ahead.
Great. Thanks, so much so I.
I Wonder if Catherine.
Library, a little bit more on your comment on the backlog timing in the second half of next year is there something new going on there about people taking down a longer lead time on some of these deals how should we think about that and then there was a report that you are looking to outsource your facilities management in the U S. T. J L. L. I Wonder if you could comment on that.
Yeah, So let me start with the backlog.
We normally our backlog is focused on kind of nine to 12 months timeline. So we don't see any new developments or extended lead times.
What do you do have in that backlog remember our parents small tier deployment that kind of skews the backlog towards the longer term.
But without that.
It is usually deployments are a heavier focus towards the end of the year rather than the beginning of the year. It's just how the timing works. So I don't see any extension of the lead times I think the backlog is healthy it decrease as I mentioned in my prepared remarks, because we did accelerate.
Some of their commencement so that's again, that's a timing.
We feel good about our backlog and were well positioned going into the future in terms of operational how we run our business we work with all of our vendors.
When the contracts come up for renewal, we negotiate with the vendors. It's a normal process of the business. So there is not really any comments to add to that.
Okay. Thank you.
Next question comes from David Barden with Bank of America, You May go ahead.
Guys. Thanks, so much for taking the question. So I guess the first question I have would be if Catherine maybe you could just give us the precise mathematics around <unk>.
Energy cost exposure for the business.
In terms of percentage pass throughs and of the remainder how that will work in terms of hedged unhedged and what the potential sensitivity is to the business and then second.
The question, we'd be getting a lot of I'm sure you've heard.
The say the Facebooks of the world massively increasing capital expenditure question is whether hyperscale or are preparing to make multi year investments in their own facilities.
Or whether they are preparing to take significant space incrementally from.
They are the lessee vendors.
I would love to kind of hear your guys' perspective on which of those two things do you think it is thanks alright.
Alright, So let me take the power of math.
So over 90% of our customers are on that pass through metered power reimbursements.
So and then for.
With that I would say the majority of all in customers that are in the U S or all of that our OLED customers are in the U S. So they've been.
On the fixed rates and we haven't seen any.
Material exposure to us from the raising power costs on that in terms of hedging our policy is hedged approximately 50% of our purchases.
And we passed through.
Our savings as we obtain it to our metered power customers, so hopefully that answers that and David I'll take the the <unk>.
Scale question.
We're seeing strong demand from but I think we've always seen that these hyperscale is do they do a lot of everything and so where we're seeing them make very very big investments into our.
Our our assets in fact, you know when when a hyperscale are deployed with us. They invest in addition to what they spend they they invest about $20 million per megawatt.
All that goes in including all the network capacity they bring in the network core the dark fiber all their gear. So these are very very big investments and we of course work with them as a partner.
And so we haven't seen that demand slowdown, we don't know how they split it up they would probably do it differently.
But we're seeing we're seeing strong demand in all of our facilities.
Thank you guys.
Sure.
Our next question comes from Matthew <unk> with Deutsche Bank, You May go ahead.
Hey, thanks for taking the questions.
One on churn and then one on margins.
First on churn if you could talk a little bit about what's driving the lower churn is this deferral into 2022 and if it is in fact deferral into next year, how does that sort of a shape the expectation for 'twenty two and then secondly margins ex pass throughs I think improved by about one.
20 bps a.
Year on year, just wondering if you could maybe give a little more color on what drove the improvements and whether we can sort of extrapolate a similar.
Magnitude of improvements going forward. Thanks.
Yeah, So Matt let me take that churn so first of all I got.
You know our negotiations with the customer and the renewal conversations are ongoing and are very proactive and we have been able to delay some of those negotiations.
Negotiations and a renewal and the rate reduction that we've anticipated earlier this year.
It's not an exact date that we have agreed with our customers in the future. So when that turn takes place we'll report on that.
It's a little too early to talk about 'twenty. Two so if you hold that question until we get to our guidance.
Our guidance and expectations.
For the next year that will address that I'll take a note of that.
And then I want to add a little color on the on the churn and renewal picture.
We actually had some good surprises this year, we had projected some churn for a couple of enterprise deals that actually renewed for a really healthy and long term renewal at a zero percent reduction in price we.
We have one in Houston and one of our legacy facilities, we had.
A bunch of a bunch of renewals and.
I think it's important to understand that our like for like renewals are 89% of our renewal population.
And the cash roll down, which we talked about earlier was 3% the gap was actually a 1% one 6% bump.
And so what we're seeing.
Is.
Customers are still trying to.
Manage their architecture and some are going to the cloud and some are re architect it to the private cloud we're still playing a very large role in our strategy of the enterprise at scale is having a very very positive impact and the renewal rates are certainly better in fact, we were averaging.
The enterprise.
30% or better above the spot market rate on our renewals and so.
You know I know, we had flagged some stuff earlier and some will be timing, but a lot of it is.
It is actually.
It's just we were very conservative in our projections.
Yeah. So now let me take your margin question. So we have we are very pleased with our margin performance in the third quarter and the expansion of 120 basis points is primarily contributed to two factors. One is the commencement in Europe, which is basically.
Growing the business and.
Increasing our scale in Europe that as we talked about it at our analyst day is one of the avenues that we are looking to help expand on our margin 300 basis points by 2025, so it's not necessarily a linear progression, but as we grow our businesses in Europe.
And run it more efficiently, we expect opportunities for margin expansion there and the second one is at a slightly better operating expenses as well as flat SG&A and some savings on SG&A that we experienced in this quarter.
Thank you very much sure.
Yeah.
Okay.
Our next question comes from Frank Lubin with Raymond James You May go ahead.
Great. Thank you.
Can you give us an idea on on on what exactly you have permitted and power available in Europe and it seems like that's going to be more of a scarcity there and do you think you'd be able to pick up some incremental business as you know power power availability gets harder to source over there from some of the customers.
Okay. So let me start and maybe John can complement me.
So our existing footprint, we have permitting on and we have avail about available capacity in our existing in Frankfurt and London, and we are starting and we got our parents online, but it kind of percent leased.
The new land that we've secured will still need to be permitted and we're working through that process. Both in and lend that we have available in Frankfurt as well as London.
Yeah, Frank it's John on that.
Sure.
In Europe, it's a it's a five six year outlook right. When we look at the land Bank, we look at the power and we look at the permitting because it takes time in these markets. So I mean, it's really not I really don't want to get into a site by site, but I mean, thats really the outlook we have for those markets.
And we think about that bank, the land bank and power banking.
Short medium and long term outlook that takes us well beyond six years.
Alright, great and a follow up question.
Looking at looking back to the rent roll Downs Youre looking at in the in the analyst day to what extent do you think inflation will will help mitigate some of that do you think that can help help makes helped improve some of that pricing as you look at look forward to the rent roll downs that you've got you've got coming in you had.
Pretty decent.
Right.
But how do you think about that going forward.
Yes, Frank I mean on the inflation side I mean.
Modest inflation that we have.
<unk> for our business I mean, we are a scale player.
And I believe it's going to help us in the near term.
And remember then when we talked about renewal spreads, we compared that our rates in the future to current spot rates so to the extent inflation drive current spot rates.
Stability or increases that.
It'll help renewals, but we'll see how that works out.
Alright, thank you.
Our next question comes from Sami Badri with Credit Suisse. You May go ahead.
Hi, Thank you.
One of your peers earlier this week talked about how there would be capacity potentially to negotiate higher leasing rates with some of your existing customers as renewals come up but at the same time your same peer and I think you guys have alluded to relatively fixed costs that go into the builds and the development of new capacity.
Now when we look at what happened over the last couple of years, specifically cost of developments have come down with scale and sizes of developments and and rents have actually come down alongside it could you give us just color on if.
If you are potentially seeing similar types of dynamics that could be a tailwind to rental rates and then could you just give us an idea on when your suppliers and vendors may potentially be unable to be pricing equipment at the current rates that they are just given that they are absorbing a lot of fixed costs coming in due to rising component input prices and.
Other inflationary factors.
Yeah. So I mean, the development is based on the six kept fixed costs, but when you re lead second generation space you do have some savings from that cost structure. However, I think we have not had.
<unk> renewal on that level to talk about really yet.
Yes family on the on the development side so.
The the headwinds, let's say on inflation or supply chain.
You know.
When we think about it holistically, it's offset by the things we talked about on our Gen. Three design when we push density and we pushed topology.
And in cooperation with our customers to keep costs.
In line right.
Really what we're seeing so it's not a it doesn't flow through dollar for dollar right because there's all these other dynamics that are happening on the build.
And the scale like you mentioned right I mean, the scale is a huge huge help on development costs. So while we are managing the supply chain like we always have.
We we keep focused on all the levers to maintain our development costs and if inflation drives spot prices up I mean, that's good for that's good for US right as Katherine mentioned.
And then maybe just one follow up to the prior question I asked is when would your suppliers or vendors look to increase the price lists of their products. Just given they are you know I think in your slide set fixed for two to three years, maybe that doesn't apply to everything but maybe a place of some things, but when would your vendors that are currently absorbing relatively.
Higher input costs when would they come to you and say we need to talk about this again regarding what you're paying for what component.
So Sami it's the same thing on the vendor base, a little bit when we think about scale right. So if we're seeing impacts on unit cost metrics for generator, let's say.
We're looking to those vendors to say whats. The next size generator, we could get what's the next size UBS, we can get to offset some of that increase with scale at a unit level.
Got it okay. Thank you.
Our next question comes from Erik Rasmussen with Stifel. You May go ahead.
Yeah. Thanks for taking the question, so maybe just coming back to the churn.
Obviously, it has continued to trend lower.
And I appreciate Katherine Youre, not going to offer guidance for next year, but just trying to get a sense of sort of the magnitude of how the changes throughout the year. The improvements that you saw.
Where could we sort of.
Expect maybe the churn.
You know to settle I mean, obviously, a 4% to 5% range doesn't seem a sustainable part but.
No no.
Dave You said you were seeing.
Some improvements in some good surprises so I'm just trying to balance all of that with.
Hi.
Where could potentially churn.
What's that what's that normalized range when you take sort of factor in all of the things we talked about on the call.
Yeah. So Eric there are a couple of things that play into the customer need and renewal conversations and then the broader sense expect expectations longer term for churn in our business. If you remember we said at the analyst day. The multiyear was still kind of look at that 4% to 6%.
Lower end of that range and as our base of business and the revenue base grows obviously the churn as a percentage kind of tends to decrease in that we also see that.
Yeah.
In terms of the leases are extending the leases that we signed today versus the leases that we signed three or four years ago are a lot longer term, which obviously decreases their renewal population as it happens and so if you were to see the churn at 5% to 7% couple of years ago now we see.
At four to six on the lower end I do think at some point those contracts still come up for renewals. It's the success base of those renewals that we've seen an improvement this year and how we've been able to renew these contracts because of data gravity because of customer relationships because of our.
Our track record really.
Okay. Great. Thanks, that's helpful. And then maybe I know Hyperscale, you talked about could be lumpy, but maybe if you could just comment on what you're seeing specifically in northern Virginia.
The opportunities in that market and maybe just a.
It's obviously a competitive market.
How do you sort of see that market for you.
Coming quarters, because it's been sort of pretty quiet the last few quarters no look opportunity. This Dave opportunity is strong.
Pricing has firmed up and we're really Oh.
I'm confident about northern Virginia.
Yeah, and we have capacity there. So we're working with our customers right. That's just if in Latin right. It's not if it's when so well we feel good about that that region still.
Yes, Eric.
I think it's in the release, what Theyre shell capacity, we're standing up right now land Bank is big we've secured power.
Cross that market at our sites with both Nowak and Dominion So.
Excited.
Stay tuned.
Great. Thank you.
Our next question comes from Colby sign a sale with Cowen you May now go ahead.
Alright, great. Thank you.
Hey, Dave I'm surprised but I appreciate the comments you made to start off the call that your or that the board is.
Open to all considerations.
I guess it'd be helpful. If you can share any color as it relates to you know what I see as two.
Potentially conflicting views one is that you may have.
Some shareholders.
Perhaps actavis that are more motivated to maybe see something happen sooner rather than later, but.
But on the other side just hearing you speak today about the demand that you're seeing and then going back to what you guys mentioned that your June analyst day about.
Looking to sell off some legacy assets.
Which would obviously take some time.
To the extent you were successful with that demand and selling off some of those assets one can make the argument that.
The company could be potentially where it's significantly more.
Within perhaps a year's time.
How does the board think about those two potentially conflicting views and then secondly.
As I mentioned already sound pretty bullish on the demand environment across our markets both in the U S.
As well as Europe.
And perhaps to some degree you might be a victim of your own success in terms of just having so much leasing done already is there a risk that you guys could find yourself flat footed in terms of having available capacity.
In the markets, where that demand is to actually sell in Q and then just lastly, I think you guys missed Simon's question earlier as it relates to the J L L dealing and giving us a little bit of color in terms of.
Why that may have been done thank you.
You bet Tobey So first of all we talked to all of our shareholders right.
The only way for us to focus on maximizing values to execute.
We land bank, we get power, we build data centers, we installed customers, we take care of them and that's what we do we block and we tackle and we will continue to block and tackle and we talked about capital recycling, we talked about portfolio optimization, which is a strategic objective.
Our strategy going forward is focusing on digital gateway markets, focusing on enterprise scale and Hyperscale and so all capital recycling would be considered strategic based on our go forward plan with respect to capacity.
You know fundamentally.
We're seeing strong demand in markets, where we see significant data gravity, which is exactly what we planned for when we announced this kind of a digital gateway market strategic objective and on analyst day.
That's where we're investing we're investing where there's more and more demand in the market. We've had great success in.
With the demand and with the growth in both the Hyperscale are in market and the enterprise at scale, we feel like we're really well positioned and we're making good investments and we're certainly not going to deploy a bunch of capital before we have kind of we have good line of sight to leases. So we're going to play it we're going to play it safe we are going to play it smart but.
We think right now protecting our turf and getting land and equipment wind up is probably the best thing to do at this moment and then I'm going to let John handle the question around the suppliers.
Hey, Colby.
Listen we have we have hundreds of outsourced vendors that we utilized all the time there is no I think the key here is that there's no change in our operating model across our sites. This is to vendor and we have lots of them and we have all kinds of relationships, but nothing nothing is changing operationally no change to how we were.
Run the business day to day.
And then did the jail I'll deal replace someone else that you had previously or is or is this I guess the outsourcing of some of your facilities, a new way in which you're operating those facilities.
We don't talk on specific customers, we don't talk on specific vendors.
So there's no change to operations as John pointed out.
Okay.
Oh.
Our next question comes from David Corvino with Green Street, You May go ahead.
Thanks, Hey, Dave you talked about maximizing shareholder value through development and I wanted to ask you about the San Antonio market, where you just bought some more land how do you think about underwriting long term risks of building data centers for a single tenant when that same tenants already self build wind and a large scale in that market.
I asked just because I think it's approaching close to 100 megawatts of capacity in that market and just kind of curious how you think through another tenant who could backfill that space that whenever needed.
So baby, David It's Katherine maybe I'll take that since underwriting it kind of falls under my umbrella.
We underwrite deals we look at a stabilized development yields we do not differentiate single tenant versus multi tenant our intend on a campus base scale.
And we offer capacity to tenants when they are interested at the right prices. So I don't think there is a difference between underwriting.
One versus the other we have had great experience and a lot of success and San Antonio markets. We continue expanding that because there is demand in that market for us and we've done really well there.
And we have Hyperscale and enterprise demand in San Antonio.
A fantastic market.
You know, we're we're excited to continue to expand there.
Yeah.
And then maybe sticking on the Hyperscale or a number of Nova announced their intentions to reduce the environmental impact. They have from data centers can you maybe talk about conversations you've had with those tenants about what they might want to replace to achieve their green goals and then ultimately who bears those costs does that cyrusone has kind of put the cost or is that that none of the tenant.
David I mean, we're in constant conversations with these customers as you can imagine around all components of the data center and the environmental impact of the data center footprint. So I mean, that's green energy purchases.
Looking at solutions to replace diesel generators.
So all of those things will.
They will come to fruition because the market is going to demand it does and the cost of that will get reflected in our rates and we're working to maintain our yields with our hyperscale customers, if they're going to pay more for power, which.
Some cases green power cost more they are willing to pay for it that's their corporate initiative and where we are here to help them get there.
Great. Thank you.
Our next question comes from Jordan Saddler with Keybanc capital markets. You May go ahead.
Yeah.
Thank you and good morning, just wanted.
One more clarification on the CEO search did.
Did you hire an executive search firm.
The board's decision George and it's the board's decision Thats not the management decision.
Right. So how does the board higher than executive search firm. So we have many many relationships with advisors and we do not comment on the particulars I can tell you. It's an ongoing process and I'm very confident the board will make the best decision.
And I think that's all.
All we can say about the CEO search.
What can you speak to the process a little bit instead, it's an ongoing process can you maybe describe what's going on.
There are parties involved traditional search there's a committee of the board.
<unk> on the board that's working on it.
My focus is on execution.
We've got some significant objectives.
And my focus is on day to day execution and there is a committee of the board working on that so.
We simply are I can tell you, it's an ongoing process and I think it's a pretty traditional process.
Okay, and then on the asset recycling.
I wanted to circle back there you did touch on gateway markets, a number of times in the straight to take priority.
Then of course this quarter you bought these six acres in San Antonio I'm, just kind of curious maybe if you can characterize a little bit.
For us what you guys view to be gateway markets versus asset recycling markets or opportunities.
Yes, Jonathan So let me take that first of all our recycling initiative that we announced earlier in the summer is aimed at optimizing our portfolio. So you are absolutely correct, we're looking at and focusing on our key gateway markets, which were.
We look for is diversified demand will look at high growth areas, where we see.
Opportunities for us to expand on our current footprint as well as expand on it profitably and in terms of San Antonio that's more of an extension of our existing footprint not necessarily entering or expanding a different market. So we're just.
Yeah.
Meeting the demand in that market right now.
Yes, Jordan to add to that the diversified that I mean, that's what we're looking for right diversified demands and a digital gateway market and its demand Hyperscale and enterprise at scale right. It's not just limited to one customer and I think thats the point about how we classify these digital gateway markets.
Okay that makes sense and then one clarification for you. David you you mentioned I think I heard an 89% of your.
Like for like renewals.
We're are of your renewal pool, where like for like.
I thought that was interesting can you guys quantify the.
Volume of renewals in the quarter in terms of dollar value.
Sure.
Okay.
Yes, Jordan I don't have that in front of me what I can tell you is that.
<unk>.
Well I'll tell you what I do have.
That 89% of our like for like.
Just this past quarter I'm talking to this quarter.
And we will continue to report on this as it happens and we can we can get you some data but.
And I can tell you were traditionally these are almost all enterprise so enterprise at scale and they are across most of our large markets. There is even a couple of legacy markets that we got some really good renewals.
There, they're only 3% cash.
Roll down in one over 1%.
GAAP uptick.
And so we can get you that quantified data, but I don't have that at my fingertips.
We can follow up thanks, guys.
Our next question comes from Eric Loop Co with Wells Fargo. You May go ahead.
Thanks for taking the question, so sorry to keep hammering the renewal.
Question.
Just curious.
Your analyst day, you talked about how your renewals through 2024, maybe weighted a little more heavily towards enterprise. So I would presume those have slightly more favorable mark to market versus hyperscale. So maybe you could talk about hyperscale explorations for next few years.
Any kind of ballpark and where do you think those mark to markets are today.
And related to that.
You mentioned that that 18% to 22% cash decline was relative to spot rates in the market, but I would presume that when youre doing a renewal you have more leverage.
At a premium to market prices given the difficulty in moving so maybe there was a presumption that you were being ultra conservative because I think you mentioned earlier on that 18 to 22 and you should come in meaningfully ahead, especially with some of the cost inflation and potential for price increases across the market. Thanks.
You bet I'm going to let Katherine handle the Hyperscale question.
We'll tell you that the renewals.
Are definitely.
Coming in when we do a renewal there is significantly less risk theyre significantly less cost and disruption to our customers. So they are paying us on average over 30% above the market spot rate on that renewal, okay, and so what that's translating to at least in this quarter was a 3% cash turned down instead of the 18 to 22.
So yes, we were we were pretty conservative.
And so as that continues over over each quarter, we'll report on that but this is the data for <unk> for the quarter and and so yes, we do think.
There's a shot that our conservatism prevails.
Kathryn I'd love for you to answer the question about the Hyperscale renewals and when they are coming due yeah. So Eric I mean today. Our revenue is 50 50 between Hyperscale and enterprise, but the majority of the renewals that are we are seeing in this year or have been all enterprise as you rightly pointed out eventually half.
Of this revenue and that will come up for renewal with hyper scaler and as we work with them well.
Basically apply the same approach still renewals as we do with our enterprise customers all customers are facing the same cost of moving the.
The same data gravity and the rate.
Goalposts that we talked about at the analyst day off cash on cash.
Brad it's when we look at our profile of rates, where they are going to be in the next three years and compare them to today's spot rates does not necessarily indicate that the plan is to renew at those rates. It's just.
Establishing the playing field.
And what we've experienced is we tend to renew at higher rates than the market rate of the day.
Okay. Thank you.
Okay.
Our next question comes from Brendan Lynch with Barclays. You May now go ahead.
Great. Thanks for taking my questions I wanted to follow up on the capital recycling and.
We've seen some transactions recently at pretty low cap rates and to the extent that you're.
Active on that plant at this point.
Maybe you could give some commentary on the bidders that you are seeing in the process.
Potential bidders has expanded beyond what has been seen in the past.
Passengers.
So Brandon we just announced the recycling program in June and we said that we are planning to recycle $1 billion to $2 billion in the next three to four years. There is not really any progress or any results that we can report at this time and as we continue on this program.
And executed on it then we'll talk about what we're seeing in the market.
Okay that makes sense and then David you mentioned you taking a tour around.
Your marketing, presumably you had conversations with customers and employees. After you kind of reengage in the business.
Can you give us an update on your willingness to stay on it in the CEO role on a permanent basis.
So first of all I had a great tour in Europe and got to meet.
A lot of our team.
I had a fantastic time in Chicago with our enterprise team and several of our customers.
Of course, Nova customers in Dallas and in several other markets.
I'm here to let the board make the best decision they can and they are looking at all opportunities and.
I'm really just focused on executing right now so I haven't made any any any.
Decisions regarding anything except for.
I'm, the interim CEO and we're working on execution and.
Everything that I see in this company is just incredibly powerful powerful and positive.
Okay fair enough. Thank you.
Our next question comes from Michael Rollins with Citi. You May now go ahead.
Thanks, just a couple questions first on the some of the additional items that you provide that are used in your historic presentation of the peso.
Curious if you could discuss the deferred revenue line. It was I think about $29 million in the quarter.
$55 million year to date, what's driving that significant year over year increase in that deferred revenue and how is that affecting the GAAP reported revenues for equipment or non rental revenues and then secondly, just curious for a balance sheet question on.
Historically the company management team has talked about the importance of investment grade debt ratings and maintaining an AG credit balance sheet and just curious how important is that going forward as you look at capital opportunities and are there any updates in terms of your expectations to use equity.
Or ATM to continue to fund development.
Hi, Michael it's Katherine.
On deferred revenue.
So it is related to the equipment sales and it is lumpy so in the past historically.
We used to sell equipment to the customer so they would take the title of that equipment and it would be a one time equipment sales.
We have been really doing recently this year.
Is where we do retain the title on the equipment and so the equipment sales.
While they pay for it upfront they're part of the leasing stream. So you would see that in the GAAP reporting and a straight line basis.
In terms of your second question in our balance sheet that we are very proud and I'm very pleased with our balance sheet is very strong balance sheet with over 2 billion in liquidity. So investment grade rating does help with that.
We do have $303 million of available forward equity as we closed third quarter and we look for that equity to fund our development pipeline.
Typically the way, we think about our equity raises is to match them against our development and opportunity.
To build our leasing and commencement and so as long as we stay within the leverage parameters, which is mid to high fives, we supplement that with our equity now we also as we've mentioned in their Investor Day, We launched our recycling program went up.
Purpose of two fold one is optimize the portfolio, but the second part of this program is supplement our equity raise it so we balance the two and if and when we need the capital.
And just a follow up on your comments regarding the deferred revenue.
Whats the margin that you would typically get on those equipment sales and then what's the amortization period for that that straight line and is that causing that some of that inflation in the margin because.
Presumably that the cost of that equipment, and depreciation and not as a cash operating expense.
In terms of margin, it's not that material margin that's not the same margin that we do in our core operation So I wouldn't.
Be focused on the margin. The reason we do this for our customers is there's also a value add.
And it is for the duration of the lease terms. So it's straight lined over the lease term of that specific deployment.
Thanks Scott.
Our next question comes from Nick del Deo with Moffett Nathanson you May now go ahead.
First you, obviously feel pretty good about your supply chain. If you were to disaggregate. The different components are there any links that you'd say, you're keeping a closer eye on than others.
Or do you feel like it's pretty consistent across the board in terms of what the what the risks are and how you are protected.
And then second I think earlier this year you landed a number of.
On ramps from Google I was wondering if you've had any.
Positive enterprise leasing impact or positive conversations with your customers.
As a result of those or if it's too soon to say.
Yes, Nick.
On the supply chain side, so we talked about it in the deck, a little bit, but we've expanded our kind of supply chain base to literally in some cases, three or four providers of that equipment to diversify kind of some of that risk.
And we've been focused on this for.
For the past four quarters really because we kind of saw some of this coming in our conversations with them, but I mean I.
I think we think about all pieces and parts kind of in that OFC I equipment list that we.
We can't.
We can't deliver the data center without any single piece so.
We're kind of focused on all of it.
Nothing sticks out.
So not be aware, we're really concerned about this it's been a kind of across the board focus to make sure that we have enough to meet the demand and really the demand and the timelines of the customers.
On the on the on ramp look whenever you have a native cloud on ramp it's good it attracts.
The enterprise, especially in.
Where we've deployed than we've seen more data gravity and so.
Every time you can you can secure a native cloud on ramp that's a good thing for the asset.
Yes.
Our next question comes from Irvin Liu with Evercore ISI.
You May go ahead.
Alright, Thanks for taking my question.
Hopefully this wasn't already addressed but from a supply chain perspective. It looks like you were able to mitigate the impacts on your end, but could you comment on whether there's potential for supply constraints to impact deployments for your customers.
They're unable to procure procure supplies that they need.
Urban yes, I mean, we talk to our customers all the time I mean, they and our conversations with with our big enterprises scale customers and our Hyperscale customers. They are really doing the same thing we're doing on kind of pre purchasing chips and the things that they need to run their business. So we haven't had any.
But he is saying listen we're not taking the capacity because we don't have chips.
The industry is super focused on it across the board on all layers of the data center and the.
The demands that we see is obviously the same demand that they're seeing on their businesses.
So it's top of mind, but nothing has changed any kind of our delivery time lines and our early commencements that we reported this quarter kind of speak to that.
Everybody is focused on it and everybody is still focused on executing on our business.
Got it got it and then it looks like Europe continues to be a good source of growth for you.
But I'm trying to better understand if your strength here is more reflective or more of a function of the underlying data gravity trends in Europe or is it more of a function of.
Traditionally.
No hyperscale or having or being under indexed in Europe from a data center perspective.
Look.
We have focused on just key markets in Europe right. So.
And we've been able to get really nice scale in the.
The markets in the campuses we have.
So for us.
When a customer continue contiguously grow on the same campus.
You've just got a better position than if you're in another part of town or not on the same campus. So we're seeing the growth because I think coming into Europe, which we did just a couple of years ago, we were able to focus on scale and data gravity.
I can't really tell you what's driving the hyperscale.
Xactly, what's driving their demand, but I do know that there is significant demand in the markets that we happen to be in the conversations we're having with these hyper scaler like John said earlier Theyre not conversations about the next 12 months to 24 months, we're having conversations about the next many many years and so.
And the conversations we're having are around our key markets and so we expect that to continue.
Understood. Thanks, that's all I had.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to David Friedman for any closing remarks.
Thank you Anthony and everyone for participating on the call before we go I'd like to reiterate how excited we are about the industry and about the consistent execution of the company, we remain well positioned to meet the needs of our customers and our team is focused on delivering solutions in both the us and Europe, we look forward to.
Talking with you on the next earnings call.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.