Q3 2021 CoreSite Realty Corp Earnings Call
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Greetings and welcome to the course like really cheap Realty Corporation third quarter 2021 earnings Conference 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.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Kate Rupee Investor Relations for of course site Realty Corporation. Thank you you may begin.
Thank you good morning, and welcome to core sites third quarter 2021 earnings conference call I'm.
I'm joined today by Paul Zurich, President and CEO, Steve Smith, Chief revenue Officer, and Jeff <unk>, Chief Financial Officer.
Before we begin I would like to remind everyone that our remarks on today's call may include forward looking statements as defined by federal securities laws, 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.
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 in the supplemental information that is part of our full earnings release, which can be found on the investor relations pages of our website at <unk> Dot com with that I'll turn the call over to Paul.
Good morning, and thank you for joining our earnings call I will cover our third quarter and year to date highlights and Steve and Jeff will discuss sales and financial matters in more detail.
We delivered another strong quarter financial results, including operating revenues of $164 million, resulting in six 4% year over year growth.
Adjusted EBITDA was $86 million, resulting in growth of five 2% year over year.
<unk> per share of $1 39, or four 5% year over year growth.
We also reported strong operating performance, including cash rent mark to market year to date of two 9%.
Churn year to date of four 6% in line with our expectations and 5.0% year over year MMR or per cabinet equivalent growth driven by strong power and interconnection revenue growth.
Today, we will discuss leasing results of $8 $9 million comprised of third quarter leasing of $7 $2 million in annualized GAAP rent and a $1 $7 million scale lease it at three seven signed on October seven.
<unk> continues to be positive for deployment and agile interconnection and our network and cloud enabled data center campuses in major metropolitan edge markets, and we believe supply and demand are generally in balance.
As Steve will mention sales cycles are a bit longer due to other distractions for certain scale customers, but our sales funnel continues to be at a high level relative to our history.
Turning to our property development.
We executed pre leases for some of L. A three phase two during the third quarter and we completed construction of phase two in October.
L. Three phase one is now 93% leased less than 12 months after placing the project into service, reflecting the strength of our position in the Los Angeles market and continued solid sales activity.
And what to phase four a four megawatt computer room also remains on track for a Q1 2022 delivery.
And we continue to make good progress on the remaining preconstruction activities to bring <unk> to a shovel ready state complete.
Completing demolition of the existing building and working with Silicon Valley power to finalize power procurement by the end of the year.
We are fortunate to have very strong customer ecosystems on our uniquely positioned network and cloud enabled campuses, which drive diverse demand with good margins and attractive returns, reflecting the value customers can achieve in our environment, a very capable team continues to add to our campuses.
As important customers with potential for future growth.
And our purpose built power efficient and scalable data center campuses.
Differentiated by our flexible and diverse interconnection platform provide ideal environment for secure high performance multi and hybrid cloud solutions that enterprises require in order to be cost effective agile and forward thinking and their deployment of digital solutions.
In summary, we are pleased with the progress made during the quarter and see more opportunity ahead to participate in the ongoing migration to a hybrid cloud world with extensive interoperability among customers with that I will turn the call over to Steve.
Thanks, Paul and Hello, everyone.
I'll review, our sales results and then talk about some notable wins.
To begin we had new new and expansion sales of $8 $9 million of annualized GAAP rent.
Comprised of $7 $2 million signed during the third quarter and a $1 $7 million large scale lease at SB seven signed on October seven.
We believe including the $1 $7 million lease signed in early October for purposes of our discussion today is instructive given the size and that this customer lease is back filling a portion of the churn.
Three seven which we have previously disclosed.
Alicia metrics discussed in the rest of my prepared remarks are inclusive of the $1 $7 million lease signed on October seven.
Keep in mind, our reported new and expansion sales results only include the rental revenue component of the new leases.
The $8 $9 million of GAAP rent for new and expansion sales reflected 62000, net rentable square feet at an average annualized GAAP rate of.
$443 per net rentable square foot.
Which was lower than the trailing 12 month average due to lower than average densities for certain scale deployments.
Our results also included 28, new logos or $1 $9 million annualized GAAP rent, our best quarter for new logos in terms of annualized GAAP rent since the third quarter of 2019.
I'll review a few specific new logo use cases in a moment.
The $8 $9 million of gap brand also includes a number of leases signed at three seven which represents approximately $2 $99 of annualized GAAP rent.
Turning to pricing, new and expansion pricing on a kilowatt basis. This quarter was above the trailing 12 month average by mid single digits, reflecting the mix of both size and location of leases signed.
From a geographic perspective, our strongest markets for signed leases were Los Angeles, Silicon Valley, and Northern Virginia, which combined represented 88% of annualized GAAP rent signed.
Looking at organic growth existing customers continued to provide strong demand, which is in the central part of our strategy.
Existing customer expansions accounted for 78% of annualized GAAP rent signed.
As more businesses adopt digital solutions to meet today's evolving marketplace.
Noteworthy expansions from existing customers included a scale deployment from a global online gaming platform, expanding its footprint and to our Los Angeles campus.
Our multi market expansion by a network service provider in Los Angeles, New York and Northern Virginia.
And a large scale deployment from a subscription based digital content streaming company in the Bay area.
Turning to new customer wins, the $1 $9 million of annualized GAAP rent represents approximately 22% of our sales.
As I mentioned it was our best quarter for new logo sales since the third quarter of 2019.
Successfully attracting high quality, new customers that value the interoperability of our portfolio ecosystem deepens core sites competitive moat and helps drive future growth.
Enterprises contributed $2, 55% of new logo annualized GAAP rent signed during the quarter, which included a leading data management and storage systems company in the Bay area.
And email and social networking and marketing firm in Northern Virginia.
Our cyber security company, providing prevention and detection solutions, signing the scale deployment in the Bay area.
And a well known domain registrar and web hosting company, joining our robust Los Angeles customer community.
Lastly, total data center occupancy decreased slightly this quarter, primarily due to the previously forecasted single tenant lease exploration that SB seven.
Which was also included in our third quarter churn.
But the majority of this customer's lease expiration now behind US we have a clear path towards our targeted occupancy goal in the high <unk> range.
As we finish out the year, we are encouraged by our solid execution of our core business.
However, we have noticed slower processing and response times for certain customers seemingly is distracted by other issues such as supply chain and staffing for which we're all aware.
We are specifically revised practices to improve the process and timing of existing certain scale customers and keeping leasing on track as demand for high performance edge use cases, and strategic metropolitan markets continues to grow.
Our diligence and discipline and are tracking and winning deployments that value or add value to our ecosystem remains a primary focus.
We are driven to provide continued profitable growth by attracting high quality, new logos and delivering incremental value to our customers and shareholders through higher value lease up across our portfolio.
With that I will turn the call over to Jeff. Thanks.
Thanks, Steve Today, I will review, our third quarter and year to date results.
Discuss our balance sheet liquidity and leverage and then touch on our 2021 capital expenditures guidance.
Looking at our financial results for the quarter operating revenues were $163 9 million, an increase of six 4% year over year.
Lease renewals of $18 7 million of annualized GAAP rent were completed during the quarter, resulting in cash rent mark to market of 2% and GAAP mark to market of five 7%.
We also reported churn of two 5% for the quarter, which was in line with our expectations and includes a 160 basis points of churn related to the single tenant lease at SB seven.
Commencement of new and expansion leases of $7 1 million of annualized GAAP rent.
Our revenue backlog consists of $9 9 million of annualized GAAP rent or $17 $2 million on a cash basis for leases signed but not yet commenced inclusive of the $1 $7 million scale lease signed at <unk> seven on October 7th.
We expect approximately 60% of the GAAP backlog to commence in the fourth quarter of 2021 and substantially all of the remaining GAAP backlog to commence during the first quarter of 2022.
Adjusted EBITDA was $85 $7 million for the quarter, an increase of five 2% year over year.
Net income was <unk> 50 per diluted share for the quarter consistent year over year.
And the third quarter <unk> per share was $1 39, an increase of six or four 5% year over year.
Turning to our financial results year to date total operating revenues were $483 6 million.
Reflecting year over year growth of 7%.
Adjusted EBITDA of $259 $1 million.
Increasing seven 2% year over year, and representing an adjusted EBITDA margin of 53, 6%.
And <unk> <unk> per share as adjusted of $4 20 inch.
Increased five 8% year over year.
Each of the above items are in line with our goal to achieve mid to high single digit growth levels.
Moving to our balance sheet, our debt to annualized adjusted EBITDA increased to five two times as of September 30th as expected.
Inclusive of the current GAAP backlog mentioned earlier, our leverage ratio was five one times.
We ended the quarter with approximately $235 $4 million of liquidity, providing us the ability to fully fund the remainder of our 2021 business plan.
Looking at our 2021 capital expenditures guidance.
We have spent about $103 million year to date compared to the midpoint of our guidance at $205 million in total capital expenditures for 2021.
We are continuing to work through the remaining pre construction activities and SV nine.
And we anticipate breaking ground sometime in 2022.
But timing is ultimately dependent on overall absorption in the Bay area.
As a result, we now expect to invest approximately $140 million to $150 million in total capital expenditures in 2021.
Which is reflected in our updated capital expenditure guidance.
I refer to page 21 of our supplemental for our fall 2021 guidance.
As it relates to 2022, we will provide detailed annual guidance during our fourth quarter earnings call in early February.
In closing with the majority of the SPE seven single tenant lease exploration now behind US we have more visibility into increasing our occupancies, which will achieve even greater flow through of revenue growth to margins.
Leading to margin expansion and value creation for shareholders.
With that operator, we would now like to open the call for questions.
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Our first question comes from the line of John <unk>.
Kim with RBC capital markets. Please proceed with your question.
Yeah.
Thank you so I had a couple of questions the pricing on new leases signed just like it was.
And at a multiyear low and that doesn't include obviously.
Obviously the impact of what you did in October which was Oh, we saw an EBIT of second generation space. So given that dynamic around backfill that's the setting and what you posted in pricing journey tweets, you anything to kind of expect going forward around pricing.
Hey, John It's Steve I think overall as far as pricing is concerned on a square footage basis. It was down a bit this quarter, primarily just due to lower than average densities.
So we have fluctuations in density is based off of sales mix every quarter, but collectively pricing remained strong and I think you'll see that if you look at it on a per kilowatt basis reflects that.
And that includes taking.
Second generation space, as well or could that dragged down some of the recent trends that you've seen on a kind of a per kw basis.
That holds true overall.
John then just go ahead, John sorry.
Just point you back to Steve's comments in his prepared remarks about power pricing being actually higher.
Then prior on a per kilowatt basis then.
Our pricing on a per kilowatt basis being higher than prior quarters.
Got it.
And then wondered if there was any trends that youre seeing in the federal vertical.
Whether it's a government agencies or soi is.
Doing work for federal agencies and debt.
If you've had some success with that as anything.
Anything around general demands that you are seeing if it potentially benefit from.
Yes, we are seeing more pipeline growth, there, which is encouraging to see and we have had some success there in the past.
I would like to see more and I think there's a good opportunity to improve our results. There. So that's good to see the pipeline improve there.
We think there's a good opportunity.
And then lastly on the new logo generation what are you seeing around.
Well its connects take up rates.
Within within kind of your new logos some of the use cases that you mentioned.
Sure well as I mentioned this is one of our best quarters as far as overall revenue was concerned.
That's a big focus of ours.
My team and our marketing messaging and so forth is to ensure that enterprises are new logos see the value in core, citing the uniqueness it brings to helping them navigate the hybrid multi cloud environment. That's out there we feel like we've got a very unique value proposition in the mail.
Out of networks and native on ramps to those cloud providers that very very few other providers have.
And our messaging and our.
Our sales objectives are really to ensure that we attract and win more new logos as they become the basis for the overall growth of the company and what you saw on our typical results.
And then lastly, I wondered if you could just give us a view on.
M&A and to what extent.
You feel like it might make sense at some point to become part of <unk>.
Larger platform, whether that's you acquiring somebody the other day of apps.
You know as we've said many many times in the past.
We have looked at many acquisitions and we they have to fit from the or potential acquisitions. They have to fit from the standpoint of strategy pricing value creation, and our particular model.
And we don't.
We don't expect any change in that kind of surveillance.
As to the rest of your question.
We've also said frequently our policy is not to comment on any sort of speculation around that type of activity.
Thank you very much.
Thank you. Our next question comes from the line of Frank Louthan with Raymond James. Please proceed with your question.
Alright, great. Thank you.
What are you seeing any any impact from inflation on any current leasing negotiations do you think that how you think that will work and then can you give us a little bit more detail on some of the contractual obligations you've got with some of your some of your facility.
Facilities needs from the suppliers or the length of those terms and how well protected.
Yes, I think from a leasing perspective, I can I can give you that.
Side of it.
Frank.
It's definitely.
Interesting world out there for sure I don't think it's necessarily impacted the leasing dynamics per se.
The increase or the.
The importance of working closely with our vendors and how we coordinated not just the co location of our spec, but theres a lot of different moving parts to get customers deployed whether it's servers cage material on whatever it might be to actually deploy that so we've implemented additional measures with all of our teams to ensure that we're ahead of that.
Planning for any changes in pricing or supply chain in that kind of thing and navigating that as closely as possible.
Frank Frank maybe I can just give you some additional color on some of those additional obligations I would look at it from really two perspectives are lumpy and the development side, which.
We've substantially locked in all of the development. We're doing today just given when we started those projects. So we don't we don't see any inflationary pressures on what we've got under development today. Most of that was ordered well before we started development there, but on the operating perspective.
We do look at and go out to contractually locking in some of those operating costs.
Usually out in periods of two to three years and we generally roll those depending upon the type of service. Some of those are up and we're in the midst of bidding for some of that here over the next couple of years and then some have a couple of years before they roll off.
Hats off to our vendors they've stayed with their contractual obligations on those obligations, even though we know theyre getting some pressures.
And we'll just have to monitor and see how this next round of contractual obligations go with what we've got out in the market today will know those results probably over the next two to four months.
Alright, great. Thank you and maybe I missed this but did you guys discuss what your exposure is on power and power costs and whether you are hedged on that.
Yes, right now we didn't touch on it yet.
To give you some idea when you look at our power utilization across our portfolio, we have about 30% of our power use that occurs inside our deregulated.
Markets I pointed to that because that's the area that near term, where we probably see the most impact.
When you look at and factor in ultimately what's in those deregulated markets. How much of that is really subject to cost increases, it's really our brand card power model, which certain mostly our retail customers pay us a fixed price and thats, probably where we've got the most exposure when you go through the math.
There we've got about if you assume about a 10% increase in power costs in those markets. It would have an impact of about <unk> <unk> per share assuming you don't pass any of those costs on to our customers. We do look at that on an annual basis and assess.
How much of that we're going to pass on to our customers. We do have that right inside our contractual rights and licenses with our customers.
Okay. Thank you.
Yes.
Thank you. Our next question comes from the line of Sami Badri with Credit Suisse. Please proceed with your question.
Hi, Thank you very much the question.
Around this time of every year.
Jeff and Paul you, because historically given us some kind of color on what the Capex trajectory looks like in the following year could you give us you know.
An idea on what that looks like just because your capex guidance is moving around now.
And I have a follow up.
Yeah, you bet, Jamie I think you probably saw the notes and heard the commentary on the prepared remarks around.
The timing around SV nine and its impact on our 2021 capex.
As you think about 2022, we'll obviously give detailed guidance in early February.
Here's how I would think about it when you look at us over the past few years, we historically have had somewhere around $200 million of capex in those years, when we're building out inside existing core and shell, so without including any type of ground up development.
And so I would think about 2022 in the range of $200 million and then it could be elevated when and if we start development that ground up development in SV nine and as we said in our prepared remarks, that's going to be dependent on overall market absorption.
And.
As Paul alluded to finalizing our agreements with Silicon Valley power, but that's the way I think about it $200 million and then probably elevated from there.
And when do we start development on SB nine.
Got it.
Now.
I do have a follow up it just slipped my mind completely so you can hand it over to the next time. Thank you.
Promise and I'll get back in the queue when you can.
Thank you. Our next question comes from the line of Erik Rasmussen with Stifel. Please proceed with your question.
Yes. Thank you for taking the questions just circling back on the comment you made about <unk>.
Customers re slower response times in response to the.
Supply chain. So we're just trying to is this just through scale or is this enterprise or is this all customers that you're talking about is this sort of the main reason why we haven't seen much scale business beyond sort of this early Q4 deal that you've booked at SB seven.
Yes, I would say it becomes more magnified with the size of the deal just because the amount of the moving parts that are are going on there right. So definitely becomes.
More complicated.
But I would say overall as far as the scale pipeline is concerned and our overall pipeline, we are confidence and where it sits today and the opportunities that it presents for us going forward.
Some of these larger deals do take more time.
And have more components as I mentioned and if you think about the deal that we announced in this earnings call.
That had a lot of moving parts to it that we had to work very closely with the customer in order to get it across the line.
But I think the important factor to stay focused on is our main goal which is <unk>.
Maintaining and achieving mid to high single digit <unk> growth, which is not just driven from top line revenue, but more by pricing interconnection and power margins that we remain focused on so that's the main thing I think.
Is it focused around.
Great and maybe just.
A follow up on that and this speaks to sort of the lack of scale deals we've seen but you had the $40 million leasing guidepost for the year I think year to date, you try it year around $24 million.
Based on where we sit today, how realistic is it as you sort of look to close the gap on this or.
Timing of this in these large scale deals is so lumpy that maybe it's just the things sort of slide into next year.
Maybe there's a better setup for even next year.
Well, we are absolutely striving to hit it and as I mentioned were.
Opportunity Opportunistically encouraged by our our funnel and has an opportunity to get US there at the same time those are our large deals that <unk>.
Swing that number pretty significantly I mean, if you look at our core business, we performed very well in that regard, which does drive the majority of our <unk> growth. So.
As I mentioned in my prepared remarks, we're trying to remain disciplined and diligent around how we ensure we're driving returns for our shareholders, but at the same time not sacrificing topline growth to do that so it's a balance and we've got good opportunity to achieve both and we strive to do that.
Okay.
Great. Thanks.
Thank you. Our next question comes from the line of Richard Choe with Jpmorgan. Please proceed with your question.
Hi, I just wanted to follow up on the new logos in the signings.
The lower density, but will that change over time as those customers mature and.
Can you remind us what the kind of normal process, you see we're signing new customers and how they take more space and power over time.
So I think as far as new logos are concerned I don't think we are saying that the new logos in themselves were lower density I think overall the bookings were.
Lower density I am not sure we have the exact numbers on the density of the new logos at this point, where we can get you that.
But overall I would say collectively densities continue to.
<unk> increased slightly.
As customers become more efficient.
Hardware becomes more efficient so.
Collectively you just got to look at the trend line.
One of the benefits of how were structured and engineering, our datacenters is too.
Really manage that overall collective density across the portfolio. So youll have some.
Some deployments that are lower than some of our higher dense, but our design allows us to accommodate that to ultimately meet the desired impact.
Richard the only thing I would add on the second part of your question typically when customers deploy.
And their subsequent growth inside of our portfolio I would tell you that for our retail customers.
Once they deploy they will probably get to a.
Stabilized power draw and cross connect utilization, calling within 12 months, assuming they don't take additional <unk>.
Space and power from us on the scale customers. It takes them a little bit longer I would point you are probably somewhere between 12 months to 24 months.
As they ramp up and deploy their gear and so much of what you see from some of the scale customers over that period of time is increases in the power consumption and utilization and then there are continuing to connect on the interconnection side to those parties that they need to exchange and new business with again that for the <unk>.
Once takes about 12 months to 24 month timeframe before we see them start to stabilize.
Great.
<unk>.
Same store MLR for cabinet increased 5% year over year, and that's accelerating can you give us a sense of what's going on there and can it continue to grow at this rate.
And Richard I mean, that's that is a reflection on very consistent with what I was stating on customers getting deployed and what you're really seeing drive I think Paul commented on that is really increases in our power revenue and increases in interconnection revenue those are really the two components driving that.
At least in the third quarter.
At 5% on average, we generally see that MLR per cabbie growth somewhere in the low to mid single digit growth rates and I think that's where in large part we expect it to be on a go forward basis.
And it will just depend on how quickly we see that based on customer installs and overall utilization of their of their space and deployments.
Great. Thank you.
Okay.
Thank you. Our next question comes from the line of David Guarino with Green Street Advisors. Please proceed with your question.
Hey, Thanks, maybe for Paul a number of your public and private payers has seen really good success outside the U S. So I was wondering if you could just remind us that the reason like of course, I wouldn't want to bring with it.
It's a pretty strong reputation and strong knowledge base outside of the U S.
Well I wouldn't rule it out forever.
But we've had plenty of good things to focus on here and quite honestly, just building a better model and stronger campus ecosystems.
And perfecting the playbook that we can take elsewhere.
I think a lot of what you've seen and I haven't.
I don't have a detailed view into it as you probably do but much of that has been hyperscale and as you know thats, just not our bread and butter, but but we do believe that down the road, maybe theres an opportunity to expand to additional markets.
Domestically or may be abroad.
With the mousetrap that we're building, especially the improved connectivity products that we've been implementing over the last two years to make connective interconnection more scalable and more flexible more dynamic more diverse.
And more automated for customers and therefore avoid the need for them to have extensive network engineering expertise within their own their own systems.
Within their own companies and pairing that up with these very dense customer ecosystems with that a dense with cloud on ramps networks and diverse enterprises. So it's a good playbook, it's a good.
It's a good program.
And we've gotten a lot better at it over the last few years.
Okay. That's good to hear the company is open minded to looking at outside of the U S. And then maybe just one unrelated follow up I wanted to ask about the stabilized yield targets you guys are still holding to that 12% to 16% even with the lower asking rents per square foot this quarter. So.
Is he still realistic return hurdles or do you think there might be some downside risks to the mid point in the near future.
So.
Let me, let me take a stab at that and then Jeff and jump in if he needs to but.
You know, it's important not to focus on a single variable like price per square foot because as Steve explained that will move around quarter to quarter based upon the density and locations of our sales mix each quarter on a per kilowatt basis, we're still seeing the same even slightly.
<unk> pricing.
And Meanwhile, we continue to see.
Good margin increments from.
These these deployments and use cases that drive additional margin from power from interconnection and even from a lesser amount of other services.
So between all of that we haven't felt the need to change our guidance on.
On what our return on invested capital will be and I know some of your peers track that and they see how we continue to do relative to the rest of the industry.
But I want you to remember that it's a ROIC achievement as a derivative of the main focus which is providing value to customers.
And the best way to provide value to customers is to create these campus ecosystems in the right markets, where companies need to inter operate and where the most important data use cases for the future are likely to take place and that makes them more magnetic more sticky and.
More sustainable in terms of growth.
Relative to other ways to deploy capital.
Yeah.
Hey, David the only thing I'd add to what Paul said is I'd just point you to our most recent experience with our most recent stabilized investment which is S V. Eight.
At some point during earlier this year that asset hit stabilization, which as you know we define an excess of 93% occupancy.
The returns we saw at that point in time or just shy of that minimum so somewhere in that mid 11 percentile.
And also as I was explaining earlier, it's still going to take another.
Period of several quarters here before some of those customers stabilize their ultimate architecture and therefore.
Appointments, where they'll drive some additional power and cross connects we anticipate getting above that threshold on that asset here in the near future, but that gives us. The most recent data set so I think it's still hitting our underwriting and we have two others that we've invested in the obviously L. Three which is in current lease up and then probably the most recent one before that as <unk>.
And we'll see how we do on those two but we're optimistic we hit those thresholds time will tell whether or not that needs to be modified down the road, but based on the recent history, we're still comfortable with those those thresholds.
Thanks for the color that's really helpful. I mean, given you guys don't have property level disclosure anymore. It's harder for me to figure that out but to the extent you can provide some anecdotes like that that's really helpful.
Always happy to help David.
Thank you. Our next question comes from the line of Jordan Saddler with Keybanc capital markets. Please proceed with your question.
Thanks <unk>.
To come back to you.
The capex reduction for this year.
Think what you said was that.
Essentially due to the slower leasing pace, presumably it as three seven.
Essentially you're slow walking the development investment nine so just a function of market conditions, there and sort of execution there is that.
Summarize that correctly.
No Jordan.
The development schedule as benign and I'm glad you asked the question because I do want to clarify that is driven by more by the timing of permitting and especially now the last.
Important pole in the tent is securing power from Silicon Valley power.
Which we expect to achieve.
By the end of this year, we've done a significant amount of pre construction work already.
Including demolition of the existing building all the offsite work for connectivity and utilities.
All of the design and everything.
We have some decision points that we have going forward as to the other things we can do to shorten the shortened the pub once we aggressively go vertical.
But now.
We don't need the.
Capacity immediately.
But we've got about seven to eight megawatts available in Silicon Valley.
And we've been absorbing about five to six megawatts per year.
So.
That probably gives you some indication of what what our decision tree look like.
But we're not going to do anything obviously of significant magnitude until we finished the power procurement process.
But even and whats the timeline can finish that Paul.
The power procurement process.
Yeah.
I think I said earlier apologize if I wasn't clear, we expect that to be done by the end of this year.
Okay, It and understand it.
It's a process, where you have to get agreement with the power company, which we have in principle.
And then it has to go to city Council for approval.
And then we can execute contracts for it.
And so.
All of the study as planned.
Okay.
Traction.
Thanks, Eric.
Essentially you would rather wait until some of that went to eight megawatts or more fully leased.
Jordan.
I want to have in place.
I mean honestly, it's a it really depends on what the funnel looks like what preconstruction leasing negotiations looked like I can't give you a definitive formula right now that's based solely on absorption.
Okay.
And so.
Short answer is you won't necessarily start construction right away.
In 2022, if all goes according to plan with SPP.
Not necessarily but that could.
It's also possible that we do.
Okay and then.
On the power exposure, Jeff the.
That was helpful. A couple pennies exposure, but could you maybe I know it.
30% of power uses in deregulated markets.
What is sort of what percent is hedged.
In your deregulated markets.
Yes, no great question Jordan.
I should have included that in there our policy generally is to try and hedge about 50% of that power use in those markets.
Give us some idea of balanced we usually go out two to three years.
Okay.
And then what's the policy on passing through.
Power increases how does that happen mechanically in your contracts.
No.
Look at it from two components, one certain of our customers about 45% of our portfolio wide revenue is on a metered basis. So those are just pure pass through irrespective of what's happening right. So those those customers just pay those costs.
The other 55% it's more on a breaker to model some of which is in our deregulated. Obviously some of it's in our regulated markets.
Generally we have the ability to pass through those costs.
To those customers from a practical perspective, we've looked at it on an annual basis.
Because you just havent seen power rates increase that significantly that quickly to where we'd have to do it more regular than that if you start to see power price increases spike significantly short amount of time, it would probably necessitate us looking at that a little bit more timely than on an annual basis, but generally when you look at.
Late in the year like as we're talking today, and then put the process in place to address that early so that it's in place for early the early the next fiscal year.
Okay. Thanks for that color.
Okay.
Thank you. Our next question comes from the line of Colby <unk> with Cowen. Please proceed with your question.
Great maybe just a follow up on those last questions. How much have you seen your power costs go up.
In the deregulated markets.
Maybe year to date.
As you had mentioned I guess for every 10% increase it would be.
It <unk> impact and then secondly.
Yes.
<unk> down today I presume, that's mostly associated with the leasing number.
Really when you frame it against a $40 million number that.
You had initially stated in terms of that the guidance for this year I know you've kind of taken that down a little bit.
Softened up a little bit, but I think that there is still an expectation that we'd see.
Stronger demand, whether it was in the third quarter or the fourth quarter in part based on what you said.
And also take into consideration I think it's also proceed that Silicon Valley is a strong market.
It Shouldnt.
And not to do it.
D a.
The ability and how hard it is to get it but I mean, it shouldn't it shouldn't be that hard to get that Don just given what we perceive to be strong demand.
Are you being just too picky.
In terms of the pricing youre looking for or is there something else there.
And I guess to that point I mean are you expecting the fourth quarter to be your strongest leasing quarter, excluding the $1 7 million dollar deal you just did thank you.
Yeah.
Hey, Colby I'll start and address your first question and then pass it over to Steve.
In terms of what we've seen so far in 2021 and our rate increases in those deregulated markets. It hasnt been all that significant I'd say, depending on the market somewhere around 3% to 6%.
While we are seeing going forward in 2022, obviously, it's a lot of anticipation and that's why we're continuing to watch closely youre, starting to see future somewhere around 5% to 10% depending on the market. It remains to be seen if that ultimately materializes.
But it is something we're watching.
As I said earlier, we generally try to hedge roughly 50% of that exposure two to three years out but that gives you some perspective of what we're seeing to date.
Yes, as far as the $40 million is concerned.
Yeah.
We are striving to hit that as I mentioned earlier.
The pipeline is encouraging that there are some good opportunities for us in there and I think if you look at our core.
Sales year to date.
They are strong in our core business and to your point what is not there as of yet anyway.
It's really Hyperscale I mean that is really the difference and.
<unk> seen some of those elevated results in prior years versus where we are this year, which are are really buying area and whether or not they happen.
To get to your question around fourth quarter, probably can't comment necessarily around fourth quarter results obviously.
But we do have a strong pipeline, we are encouraged with where things are headed and we're striving every day to hit that $40 million.
I mean, presumably if you're still you're not talking down to $40 million, which unless I'm misunderstanding, you're not I mean.
Almost by definition, the fourth quarter should be the strongest quarter relative to the previous three is that.
Misunderstanding.
Well I think the math is right that if we were to meet 40 that would be the strongest quarter, whether or not we can get there as I mentioned, it's there's a lot of larger deals.
Ken and could happen, but they are binary and whether or not they do happen and whether or not to meet the parameters as I mentioned earlier, it's not just chasing.
<unk> bookings that were after and maybe you could call it being too picky, but if you look at the returns on invested capital that Paul talked about earlier and how we're driving the ecosystem, that's really about striking that balance between top line bookings and.
Overall profitability, which includes not just rate, which typically can go down.
If those hyperscale deals, but also interconnection and power margin.
Typically is less on a per square foot.
And per kilowatt basis, as you get bigger opportunity. So it's a matter of time.
Managing pace with volume.
Pricing in all of those kind of things.
So we're trying to do the best we can.
The one real quick follow up on that is are those deals that you haven't logged scent.
Have you seen any of them going to competitors.
Or is it more a function of they just haven't.
Is anything with anyone yet.
And in some cases, both a lot of the pipeline frankly as I mentioned earlier.
Taking longer.
It's a complex world out there as you look around there is a lot of impacts on a lot of different industries.
The complexity around it just takes longer.
We'll see where they play out.
It's a competitive landscape as well so we've lost opportunities there's no question about it.
If we were winning every opportunity that I would say, we're probably have been too aggressive on pricing, but we look to develop that every day and try to make sure that were driving the most value to our shareholders given the ultimate outcome.
Thank you.
Thank you. Our next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.
Great. Thanks for taking my questions.
Just to follow up on SB seven it looks like you guys had.
Some retail and small scale demand in the third quarter prior to the large scale lease.
Kober.
Do you have a preferred mix going forward I know there was some back and forth on.
How you are looking to fill that capacity and in terms of the large scale lease are you reserving any additional space. So that they can expand if they choose to do so.
Okay.
Yes, I guess as far as overall SB seven is concerned.
We did see some good leasing I think I mentioned, we had $2 $9 million of leasing SB seven so that continues to be.
Good opportunity for us and as we repurpose the single tenant space to multi tenant.
We've seen good lease up there as well so as you look at that and the diversity that it provides as far as.
Hedging any large churn event, we like the idea of that and balancing that with how fast we leased that up as I mentioned just talk with Colby.
Trying to balance the pricing versus the size of the opportunity versus the pipeline and making sure that we get maximum utilization out of every floor and every data centers, what it's all about so.
That's just kind of an overall approach I guess as it relates to reserving space for customers.
Some cases, there is contractual obligations, but very few that we have out there.
Typically it's first come first serve and we're looking to maximize the density and every every floor.
Great.
A follow up you clearly have.
Tech advantage is in a lot of cloud on ramps.
I wonder how the value proposition of those cloud on ramps is evolving with customers' ability to.
Bring the cloud directly into the cabinet or even on Prem with the likes of an AWS outposts or a similar product.
Just having that availability rate in the cabinet, how does that change the value of it.
On ramp itself.
After the question and I'd love to get more of those.
We feel like that is a great value for why customers would want to deploy in our data center.
You mentioned outpost outpost is essentially a private cloud managed service that you can put into a data center that can be connected to AWS or other high speed on ramps and how the inter operate together is where you get the real value out of those type of appliances, but having it in a data center that is.
Removed from those native on ramps makes it less rich.
Rich than it otherwise would be and the performance is somewhat diminished. So the perfect design around having an outpost architecture is to have a customer deployment that is also inclusive of an outpost or of EMC and Dell type of environment that is an interconnected with.
AWS direct connect or Microsoft Express route or maybe both.
They can operate enter entered interactively.
Low latency to provide just the most seamless and high performance solution available, it's where you start removing those things and separating them via IP networks and other.
Remote type of interconnection that you start diminishing that performance so in order to get them. The best possible outcome out of those appliances, you really need to be in a data center like ours.
Great. Thanks for the color.
Okay.
Thank you. Our next question comes from the line of Michael Rollins with Citi. Please proceed with your question.
Thanks.
First question was.
Back you used to provide a chart and it would share your.
Your inventory in each major market your absorption and extrapolate the years or months of inventory that you had.
On hand, and I was just curious if you could provide an update overall in the portfolio, where you see that relationship and may be for some of the major markets, where that relationship is and where there could be some risks of bottlenecks or constraints and then just.
Just separately I want to go back to a question.
That.
Thank you.
Got it at a high level before and Thats segmenting retail versus scale performance and just curious it internally or you're just spending more time thinking through what that retail revenue growth rate is versus the scale growth rate than the total portfolio grew about 6% year over year, what would be the differential in.
Terms of how much better was retail versus slower for scale. Thank you.
Michael Let me start off with just a question on the inventory and then I'll hand, it off to Steve around the retail versus scale will come back to your last question.
So when you look at the portfolio today.
From an aggregate basis I think we've got 32 megawatts of capacity that has built and ready for move in.
We've got another 10 megawatts thats under construction that those two components one in la and one in New York.
If you look at our overall gross absorption I'm going to give you some high level numbers. This isn't don't take these as black and white every year, but high level, we leased somewhere around 25 megawatts per year on a gross basis.
With churn.
Net absorption is going to be somewhere around $18 21 in 18 to 22 megawatts per year that gives you some idea from a from a portfolio perspective.
When you look at the call it 42 megawatts.
Where is it today and the relevance to that and it's obviously, it's going to be in our top five markets. So you got about 7% to eight megawatts in both the bay area and in Chicago that we have from lease up today.
Got another four five megawatts some of which is in Los Angeles and then the other market of new.
In New York.
My accurate there.
Virginia, I'm, sorry, New York, and Virginia, So call. It four to five megawatts there and then you've got about three megawatts in New York. So you look at the top five markets that gives you an idea of where that capacity is.
And.
That capacity is important as Paul alluded to when he was addressing the question around the Bay area and overall, what is that annual absorption and <unk>.
We keep talking about hitting these high 80 percentile occupancy that's key from our perspective to ensure you've got the available capacity to meet market needs.
And ensuring you don't have too much capacity that we've invested capital and that's just not earning us a good return and won't be for some period of time. So that's the balance we're trying to strike.
But hopefully that gives you a little bit more color around the inventory.
Yes, as it relates to I'm sorry go ahead.
Okay.
As it relates to retail and scale.
I think it's important to look at those as it relates to especially as you move up the size top hyperscale and large scale because as I mentioned that we typically get better pricing, we get more interconnection per square foot.
And.
It also gives us more diversity across our base.
Collectively as you look at our performance over time retail has remained very consistent.
We continue to get more results out of kind of a scale environment.
And while size is important and we need to manage that it's also important to look at the customers that are actually deploying behind that and looking at really kind of that mid to large enterprise, but it's really kind of rolling out of their legacy data data centers.
Refreshing their it infrastructure adopting a hybrid multi cloud environment and those are the customers.
We're looking to target and the ones that we're actually winning.
So those deployments that can be very large customers that may come in a retail environment, but then grow to scale or even large scale environment over time as they complete that migration over time. So we look at the overall mix because it does drive profitability in the short term, but we also look at the growth opportunity long term and we are about.
It is likely to show up and that's where we're targeted.
And Mike just to remind you that 70% to 80% of our leasing is this organic growth.
These are primarily retail and smaller scale customers that continue to grow.
If I could just follow up with one other question Theres a comment that was made I think it was a couple of times on this call and there is a connection between the exiting of the single tenant lease and SBA seven.
Visibility into increasing occupancy.
Given you use the inventory was coming up can you just help frame like what was important about connecting those two things together.
Improving the visibility for future leasing.
Or is it just now that they are gone on here.
Yeah, you're closer to adding tenants walking through it just kind of curious.
Yes, I think if nothing else hopefully provides clarity and visibility for these calls because I know we've got on August <unk>.
Discussion around churn in whats, turning and as SB seven turning so hopefully thats behind us, which I think is where a lot of those comments came from we've been worked with working actively to.
Profitably Lisa Lisa floor over time, and I think as we sit here today, we're about 20% through that lease up so on a good pipeline that's behind them. So we'll continue to do that and then let me just again I think what you're alluding to is what we said earlier in the call about five to six megawatts of absorption for us.
<unk> and Santa Clara Silicon Valley over recent years.
Of the seven space is just part of our available leasable capacity.
Because of the tenant that's now gone it received a lot of attention, but the five years to six megawatts per year of absorption and.
In ways that strengthen our ecosystem is probably the right way to look at that market and our capacity in that market.
Thanks appreciate the help with that thank you.
Welcome.
Thank you. Our next question comes from the line of Nick del Deo with Moffett Nathanson. Please proceed with your question.
Hi, This is Michael <unk> on for Nick. Thank you for taking my question, there's been some optimism regarding the prospects for higher pricing from Hyperscale focused vendors, maybe just talking their books are you seeing anything to suggest that and if so might it open up new scale opportunities in northern Virginia.
And how would you characterize the gap between market and what Youre looking for as it relates to scale pricing in that market.
I think theres been firming of pricing over the last couple of years. It hasnt declined like it like it did three or four years ago.
<unk>.
Maybe it's come up a little bit but not discernably.
And thank you for this question because it.
Yes, we haven't really made it clear theres, a theres a quite a big a big leap.
When the pricing and the ecosystem value and all these incremental revenues that we get.
From the deployments that we're focused on compared to what is available with the undifferentiated hyperscale in these markets.
And it's not just about.
Getting the right returns, it's about building the right ecosystems, and frankly future proofing your ecosystems in your leasing significantly relative to churn and other events.
In our past history.
Our our unpleasant churn related to undifferentiated hyperscale type activities.
Yes.
Yes, maybe it takes a couple of quarters or.
Or less sometimes but sometimes around that time to get to the right.
Right the levels, but Meanwhile, you are making up for it with better margins and incremental revenue and building a much more valuable campus ecosystem for the long term does that makes sense.
Yes, yes that definitely makes sense.
One follow up unrelated if I may you increased your tenant improvement in recurring Capex forecast can you talk about the reasons there.
Yes, Michael.
Two things on the on the <unk>.
Do you already have or tenant improvement costs really come from.
The building out the customer deployments as we're as we're getting those customers deployed and ready and set up for their gear. So that's just a factor of the volume of infrastructure needed for those customer deployment nothing unusual there to be honest. It's just some of those take a little bit higher cost upfront depending on complexity.
<unk> and the power needs.
As it relates to the recurring Capex is really two things going on.
We have as you know we were building out this chiller plant in Boston earlier this year some of those dollars ultimately.
Came in the final parts of it came into Q3 and so some of Thats impacting those numbers and then secondly, we accelerated some recurring capex from future periods into the third quarter as we were looking around.
Trying to.
Take care of a few areas that needed to be addressed and so thats really what the elevated that a little bit. This year as you think about Q4 and more importantly, even 2022, we would expect our recurring capex to come back down to those levels that we've seen historically, which over the past 10 to 20 years has been 2% to 4% of revenue and that's what we expect to see.
This year was unusual just given the investment we made with very good returns on that Boston Chiller facility.
Office leasing the office build out that we did in the Bay area.
Got it great. Thank you.
You bet.
Thank you. Our final question. This morning comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Yes, good morning out there thanks for taking the time, Jeff just a couple of questions for you I wanted to cover a couple of things you said earlier to make sure I didn't miss them.
I think you said you had about $235 million of availability and I think you said something about $40 million of Capex, probably in the fourth quarter and 200 next year for development and outlays is that what you did say I don't want to put words in your mouth.
No problem, you're right, we've got about $235 million of liquidity.
And if you look at the midpoint of the Capex guidance. We gave for this year it would be about an incremental $40 million for 2021.
High level, what we gave for 2022 as you think about US obviously, excluding SB nine a regular year for us building out inside existing core sales around $200 million.
So I guess I just wanted to follow that thought up with the idea of if youre going to kind of tap into that the remaining availability as you look out over the next say 15 months or so and your current leasing pace, you're probably adding another $80 million of availability I guess the question. There is with a $300 million development like SB nine sitting out there.
Using up most of the remaining availability and getting really thin on whats left what is your view on how thin on availability are willing to go and leverage specifically.
When youll look to kind of raise some equity either through asset sales joint venture or straight up equity to kind of provide some cushion ahead of SB nine.
Well I think.
High level from a leverage perspective, Dave we're comfortable in those low ranges within those ranges we've been talking about this year, where we expect to be somewhere between 5% and $5 four by the end of the year. If you think about US five five times leverage I think we're comfortable taking it to that level. So that gives you some perspective from a leverage from a liquidity perspective I would tell you.
Yet.
Anytime we embark on a development we want to make sure. We've got complete liquidity to ensure that that development has built out in its entirety and so we're not going to embark on development until we've got that liquidity to see it fully through so as a result of that we would anticipate.
Waiting needing some additional liquidity before we go vertical on SB nine and Thats something were thinking about and looking at options to ensure we saw for that product at the time that that will be needed.
Okay. Thanks, Jeff.
You bet.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. <unk> for any final comments.
Thank you excellent questions as usual.
Before we wrap up I'd like to thank all my core side colleagues I've mentioned earlier in the call that they've been working very hard the last few years to build a better mousetrap.
Our cloud and network and enterprise dense ecosystems are more valuable and Stu.
Sticky and magnetic than ever and that is the result of tremendous effort all across the company from operations to technology to network engineering to sales.
And to construction to keep up with and provide the capacity to sell.
So I'd like to thank all my colleagues and thank all of you for your interest and we look forward to future future discussions.
Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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