Greetings and welcome to CoreSite Realty’s Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Greer Aviv. Thank you. You may begin.

Thank you. And thank you everyone for joining us today for our fourth quarter 2016 earnings conference call. I’m joined here today by Paul Szurek, our President and CEO; Steve Smith, our Senior Vice President, Sales and Marketing; and Jeff Finnin, our Chief Financial Officer. Before we begin, I would like to remind everyone that our remarks on today’s call include forward-looking statements within the meaning of applicable securities laws, including statements regarding projections, plans, or future expectations. These forward-looking statements reflect current views and expectations, which are based on currently available information and management’s judgment. We assume no obligation to update these forward-looking statements and we can give no assurance that the expectations will be obtained. Actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and uncertainties, including those set forth in our SEC filings. Also, on this conference call, we will 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 the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com. And now, I’ll turn the call over to Paul.

Good morning and thank you for taking the time to join us today. I’m glad to be here to share our fourth quarter financial and operational results with you as well as some highlights regarding our full-year 2016 performance. We finished the year strongly reporting record levels of fourth quarter revenues, FFO per share and cash flow while continuing to grow, expand and improve across the organization. We also executed well on our strategic priorities in Q4 completing the development of our largest multi-tenant data center, acquiring extensive capacity for future growth and attracting numerous key customers to our data center communities. Compared to Q4 2015, we reported 33% growth in FFO per share driven by 22% growth in revenue and 27% growth in adjusted EBITDA. Since CoreSite’s IPO in 2010, we have been on a journey to profitably expand and deepen our footprint in the essential data center markets we serve across the nation. We believe that this strategy and its execution, has enabled us to create sustainable value for our customers and shareholders. With that in mind, I want to share some highlights of our performance since our IPO. Based on Q4 annualized amounts, we have nearly tripled total operating revenues to a run rate of approximately $440 million exiting 2016. Both FFO per share and adjusted EBITDA have increased at a compound annual rate of 27% while our adjusted EBITDA margin has expanded nearly 1,600 basis points from 37% to 53%. We have increased our dividend annually and the current level reflects a compound annual growth rate of 35%. We have also increased the size of our operating data center portfolio at a 12% compound annual growth rate almost all of which has been organic growth. And we ended 2016 with almost 1,100 customers compared to approximately…

Thanks Paul. I will begin by reviewing our overall new and expansion sales activities during the fourth quarter, and then I discuss in more detail our vertical and geographic results. Our Q4 new and expansion sales totaled $7.4 million in annualized GAAP rent comprised of 35,000 net rentable square feet at an average GAAP rate of $212 per square foot. These results completed a record sales year of $49 million in annualized GAAP rents signed in new and expansion leases, comprised of 246,000 square feet at a weighted average GAAP rental rate of $198 per square foot. Regarding the composition of our new and expansion leasing by deployment size, leased signed of 5,000 square feet or less totaled $5.8 million in annualized GAAP rent and accounted for 126 of the 127 transactions signed in Q4. During the fourth quarter we signed one lease greater than 5,000 square feet, which was an expansion of the existing multi-site customer. For the full year, we signed 579 new and expansion leases, a record level and an increase of 10% compared to 2015. As we continue to refine our efforts to attract performances that require us to our data centers, we also continue to enhance the already thriving customer communities across our footprint. And therefore, our attractiveness to cloud, network and other service providers will collectively benefit from this diverse customer base. Further to that point, we had another successful quarter attracting new logos to our four largest data center campuses, where 91% of our new logos in Q4 distributed across these markets. As it relates to our vertical distribution, 64% of our new logos were in the enterprise vertical. This group of new enterprise customers includes a cutting edge technology company, specializing and designing and developing high-performance electric vehicles for large international law…

Thanks, Steve, and hello everyone. My remarks today will begin with a review of our Q4 financial results followed by an updated of our development CapEx and our leverage and liquidity capacity. I will then conclude my remarks with an overview of our 2017 guidance. Q4 financial results resulted in total operating revenues of $110.5 million, a 9.1% increase on a sequential quarter basis and a 21.5% increase over the prior year period. Q4 operating revenue consisted of $91.8 million in rental and power revenue from data center space, up 10.6% on a sequential quarter basis and 22.9% year-over-year. Interconnection services revenue contributed $14 million to operating revenues in Q4, an increase of 4.6% on a sequential quarter basis and 16.3% year-over-year. And tenant reimbursement and other revenues were $2.1 million. Office and light industrial revenue was $2.6 million, which includes revenue associated with our recently closed acquisition of the light industrial office park in Reston Virginia. Q4 FFO was $1.06 per diluted share in unit, an increase of 17.8% on a sequential quarter basis and 32.5% increase year-over-year. Adjusted EBITDA of $16.6 million increased 16.3% on a sequential quarter basis and 27.1% over the same quarter last year. Our adjusted EBITDA margin expanded 240 basis points year-over-year in the fourth quarter to a record level of 54.9% and expanded 200 basis points to 53% for the full-year 2016. Related, for the full-year, our revenue flow-through to adjusted EBITDA and FFO was 63% and 61% respectively. As it relates to our reported AFFO results in the quarter, we had a significant increase in straight-line rent which was $5.4 million in Q4. This increase relates to contractual rent relief adjustments resulting from the modestly delayed delivery of SV7. We expect straight-line rent to return to normalized levels in the first quarter.…

[Operator Instructions]. Our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Thank you, and good morning. Can you elaborate a little bit on I guess, Paul, your opening remarks you talked about strength you’re starting to see in financial services. But it sounded like the lead time was not exactly short. I’m just trying to get a sense of how that may have changed sequentially if these are new requirements that have popped up? And if lead times are consistent or if you’re saying that there is lengthening out?

Thanks for giving an opportunity to clarify. I don’t think and we’re specifically talking about the New York market. I don’t think that there has been any change in the lead times relates to these financial services types of deployments. They just continue to be longer than lead times for typical lease negotiations. I think what we’re seeing is consistent with what we’re seeing in other segments of the enterprise vertical which is an increased interest in outsourcing elements of the IT architectures for these organizations, specifically to improve cost performance and to provide more efficient access to cloud services. Steve, would you add anything to that?

No, I think exactly Paul. I think the one thing that I would add is that we have seen a bit of an uptick as far as overall interest from the financial services community. And the New York area obviously there is a large density of those types of customers there. And I think that they are getting more sophisticated and really reaching a critical point in their internal architecture that is having them look to alternatives, part of that is cloud, part of that is outsourcing to co-location providers and really segmenting how they divide that architecture across different co-location facilities in its own right, whether it’s high frequency trading or internal IT requirements, but we’re seeing a lot more I guess a measured amount of more interest from that sector.

Okay, that’s helpful. And then, I had a question regarding sort of expansion - capital expansion opportunity. I heard obviously of the $212 million to $228 million Jeff that you touched on, you’ve, got Reston campus expansion and some others in there. But I also figured based on prior discussions that you guys would continue to look to for opportunities in some of your core markets to court for, including Chicago, Santa Clara, as you’re running out of capacity in those? Can you maybe talk about the progress there or the plans?

Yes, let me just touch on what leads, what’s on our balance sheet and then Paul can touch on a little bit more broad in terms of where we’re looking to add incremental capacity. But in general, we’re looking at various components of our portfolio in terms of where we need to add incremental capacity. We don’t have a lot of it put into development as we ended the year and largely because of the amount of development we had being finalized and finishing up in Q4. Having said that, I think when you look across the portfolio beyond what we’ve talked about with Denver, Boston, and LA, in construction we’ve also mentioned the Reston campus. And there are a couple other markets that we’re closely looking at based on our visibility in terms of the sales funnel. And we’ll continue to evaluate those options and then ultimately put things into construction as we see fit. Beyond that maybe Paul can comment on just more broadly what we’re looking at in terms of other markets based on the need for just added capacity.

Jordan, I touched on this in my comments. We’re looking at additional capacity in the other big four markets. We’ve got Northern Virginia taken care of pretty well. Historically we follow the discipline of not announcing anything until we actually have a specific contract or similar development to announce. I think generally you can that we’re always making progress but we’ll announce it when we have something firm.

Jordan, the only other thing I was going to add just to give you some numbers, just a quantification standpoint. Our estimate for what we think we might spend in Reston for 2017, it’s about $100 million, that’s largely going to be dependent on when we take that under full construction. But that gives you some idea about where we’re thinking in terms of heading into the year.

That’s helpful. And then lastly if I may, just a point of clarification on the straight-line rent number in the quarter. So, was that an abatement that was given for the delay and can you quantify the amount of the abatement and then sequentially I guess we’d get the change from that?

Yes, Jordan, you’re correct. The increase in that straight-line rent, on average in any given quarter our straight-line rent amounts usually somewhere between $1 million to $2 million. So you can take the delta of that mid-point of that number and you can see that the overall increase was about $4 million. And that was largely attributed to the delay in delivering SV7 and an abatement that we gave as a result of that delay.

Okay. Thank you.

Thank you. Our next question comes from Colby Synesael with Cowen. Please proceed with your question.

Okay, thank you. You mentioned you were going to, you’re intending to raise $150 million to $250 million in debt. I’m just curious what interest rate you assumed in the guidance that you’ve provided today. Obviously I think your revolver is something just above 2%, it’s going to be something higher than that. Anyway, to kind of frame out how we should think about that potential rate to kind of work into our model? And then secondly, when I look at your EBITDA guidance margin the 53.8%, excuse me - that’s up about 80 basis points I think versus the last two years it’s been up roughly 200 basis points. I’m just trying to get a sense, if there are any of the items that go into that that could be changing in terms of how you’re thinking about that. Is it sales or marketing or maybe we’ll see a bump relative to percentage of revenue? Is it something perhaps in the property of rent, just any color that helps us back into the slowdown in the contribution margin? Thanks.

Yes, Colby, let me address to your first question as it relates to interest rates. Today if you look at our pricing on our revolving credit facility we’re paying about 230 basis points on our debt. Based upon the debt we placed last year and based on where market sit today, I think largely we will expect to pay about 250 basis points higher than 230, call it somewhere around 475, 480 if you went with a pure fixed price instrument. I’d give a term somewhere around 7 or 8 eight years for that level of pricing. As it relates to the second question, as it relates to our EBITDA margins, I think if you look at over the last couple of years, I do think looking at a 12-year period of time in terms of what improvement we’re making in our EBITDA margins is a good way to look at it. We increase those spread by about 200 basis points, ‘16 over ‘15 and we’re guiding to about 80 basis points increase in ‘17 over ‘16. We’re trying to continue to manage as I mentioned in our comments around our expense growth and that’s something that Paul, Steve and I and the entire management work closely around just to manage and continue to scale the business. And hopefully we can outperform but that is largely driven by continuing to manage our expense growth and leverage as much as profitability as we can to the bottom line.

As it relates to sales and marketing in particular, any reason to think that, as a percentage of revenue, that might be different in 2017 versus 2016?

No, I think we’ve typically guided to right around 4% of revenue and I think that’s fairly consistent with where we think we’ll end up in 2017 as well.

Great. Thank you.

You bet.

Thank you. And our next question comes from the line of Jonathan Schildkraut with Guggenheim Securities. Please proceed with your question.

Great. Thanks for taking the questions this afternoon. So I just wanted to ask a couple on the enterprise side. Paul, Steve, you guys were talking about the strength there, and even in one of the earlier questions you came, sort of referenced back to that. And I just wanted to understand the dynamic of what these enterprises are doing inside your data center. And I guess it would be helpful maybe to layer in sort of two, sort of ideas as you go through that. One is when I look at the interconnect growth projection for the year, it’s actually slower than your top line growth projection for the year, so implies a mild reduction as a percent of revenue coming from interconnect. And I guess that would have sort of been intuitively the opposite of what I’d expect in accelerating enterprise cloud adoption scenario. And then secondly, you guys added PacketFabric to, I think, 11 of your data centers in the quarter, and I’m just wondering about how that helps in terms of driving that enterprise demand over time? Thanks.

Sure, hi Jonathan, this is Steve. I’ll start off and then let Paul fill in some color there. I guess, the first thing relative to the cross-connect growth and the pacing versus top-line, part of that I think is attributable to some of the larger leases that we closed over time. And as you look at the size of those leases and relative cross-connects that connect those spaces it gets a bit diluted there. So, I think that’s part of the driver. Overall, as far as the enterprise is concerned, we do see them, it’s connecting more and more to networks and clouds. And how they do that is a bit variable, whether they do it through physical cross connects or through Oracle cloud exchange and some of the other types of services that are available there. But overall I would say that that’s the primary contributor there, just the mix of leasing that we’ve seen over time. As you look at some of the other providers that have come into the building, you mentioned PacketFabric, we have a couple of others in the form of Megaport and a few others as well as some of the larger carriers that provide similar type of SDN services. Overall, we feel like that’s a positive thing for our customer base, it gives them better connectivity options. And frankly, we’ll attract more customers and more cloud and content providers to want to come to our data centers. So, on balance, yes, there may-be some interconnection services that use that SDN type of offering in order to connect to multiple other services whether its cloud or other networks. But on balance we feel like it’s overall a positive thing for us.

Awesome. If I could ask just one more follow-up. I was just wondering what the impact from the Reston acquisition was to the top line in the fourth quarter and whether we should think about that revenue as we look into ‘17 sort of going away as you guys re-purpose the asset for data center space and maybe away from office? Thanks.

Jonathan, as it relates to the fourth quarter, just based on the timing on which we acquire that, you can see on the property table. The annualized rent associated with that particular development at 12/31 is $4 million, we closed it mid-November. So the top-line growth was about $600,000. Important, as you look at your models going forward, there is a certain element of that particular rent that will be terminating at March 31, it’s about $800,000. I mean, that’s going to be terminating so that we can commence development on the first phase of that particular development.

Awesome. Thanks, Jeff.

Hi Jonathan, this is Paul. You did raise a couple of questions in your research note a day or two ago that, if you don’t mind I thought I’d clarify so that you can go away from this call with that answered.

Thank you.

You quoted Jones Lang LaSalle report about One Wilshire. And I can only surmise that that report related to the landlord’s ability to develop and lease new data center space in the building and provide conduit and fiber to our meet-me room. I do want to make sure that you’re aware however that once the fiber gets to our meet-me room, we have the ability to economically benefit from any connection by charging fees for cross-connects. More precisely, in order to access the meet-me, room ecosystem, the landlord’s tenants must enter into a separate agreement with CoreSite governing our provision of, meet-me room services to that tenant. We also have the ability to protect ourselves against any free riding or other behavior that would be detrimental to the value we created in that interconnection node in the meet-me room. And furthermore we also have right to first offer on much of the space, in fact probably most of the space that the landlord could potentially develop to supply additional power and cooling. I just want to finish the same, we have a great relationship with both the owner and the management company at One Wilshire. We worked together really well over the years to create an outstanding data center ecosystem there. And we feel very good about our ability to continue to enjoy the mutual benefits of that relationship while providing a very valuable co-location and interconnection platform for our customers there. And I hope that kind of covers all the questions you had on that subject?

Thanks a lot, Paul. That’s super helpful. I didn’t think I could ask four questions, so that was really good.

I think Jeff’s kind of already covered the question you raised with the dividend. REITs have historically financed expansion opportunities with outside financing. The tax structure we have requires us and investor expectations encourage us to dividend out as much as we safely can, what is defined as kind of true operating cash flow. And I know people take different measures. But we kind of look at something we call cash available for distribution to common equity which is basically AFFO minus non-recurring capital expenditures. We have raised our dividend payout ratio to kind of catch up with the growth in our performance over the years. But we still retain a cash cushion between that measure of operating cash flow and what our dividend is. So, technically we will not be borrowing to pay the dividend as you questioned in your report. I know that there are different ways that different analysts look at it, I just wanted to clarify the math.

Thanks, Paul.

Thank you. Our next question comes from the line of Jonathan Atkin with RBC Capital Markets. Please proceed with your question.

Thank you. So, a couple of quick ones. I wanted to find out about your interconnect growth expectations for 2017, and of that growth, if you can describe how much in your guidance is predicated on bilateral fiber cross-connects versus exchange port type connections - the logical connections, kind of the composition of that or how much each of those accelerates. And then related to that, on Slide 14 the MRR per cabinet - I wondered if you could provide a little bit more detail. You have a little bit in the script, but maybe quantify how much of the growth that you saw in 4Q was from interconnect versus tower versus escalator? Thanks.

Hello Jonathan, let me see if I can hit both of those for you. As it relates to the interconnection business, if you just look at full-year ‘16 over ‘15, I think Steve commented on his script that our overall volume growth was just shy of 12% for the full-year. And as I said in my script, our guidance is somewhere between 13% to 16% of overall revenue but we’d expect volume to be on the lower end of that. So, just call it an implied volume growth of about 13%. As it relates to fiber versus other, fiber generated overall increases in ‘16 over ‘15 of 16.4%. And we would expect that number to be fairly consistent as we go into ‘17 as well. So maybe give up just a little bit but overall we would expect it to be right around that 16% maybe just north of 16%. As it relates to your second question on the MRR per cab-E. If you look at the overall year-over-year growth of 7.5% and the components, the overall increase from an, interconnect and power is really what drove the increases. And my recollection is on interconnection that year-over-year growth is about 11%, maybe just slightly ahead of 11%. And the power increases were about 9%. And then the remainder was the rent component.

Okay. And then interested, you talk a lot about enterprise, and I’m interested in the indirect channel and the contribution of that to your new leasing, because you have a lot of retail big prototype leases. And how much of that funnel is coming from indirect, and is that changing at all?

Yes, I can probably take that for you, this is Steve. From an overall transaction perspective, it ranges anywhere from about 13% to about 20% as far as the overall indirect channel and the amount of contributions they bring to us. So that’s remained fairly consistent over time and we haven’t seen a dramatic change in that over the 12 months I would say.

Okay. And then finally, of your incremental leases, how much involve metered power versus circuit-based? I’m assuming it’s mostly the latter, but just wanted to make sure I’m, understanding that correctly.

Hi, Jon, I apologize, I was writing something can you repeat what the question was?

Right. So, the incremental leases that you saw during the quarter, how much of that involved - I’m asking about the power pricing model, right? So how much of the incremental leasing is involving metered power versus circuit-based power?

Yes, I’m sorry, I got you. I would say overall a majority of the leases will contain a breaker powered model and less than majority would be on a metered basis. To give you some idea, if you look at just our overall power revenue we’ve been anywhere between 55% and 60% of our power revenue is earned on a breaker basis. And therefore the remaining portion is earned on a metered basis. And that is consistent with where we ended 2016 as well.

Thank you.

Thank you. Our next question comes from the line of Matt Heinz with Stifel. Please proceed with your question.

Thanks. Good afternoon. Just wanted to hit on a couple of the guidance items. I think Jonathan hit a little bit on this with the Reston question. But how much of the incremental of $75 million of implied revenue growth is attributable to existing rents on the Reston campus? It sounds like you’re terminating some of that OLI revenue in the first quarter, but if you could just provide kind of the magnitude of rents on the existing leases that’s in the guidance.

Yes, I think it’s about, we got like I said it was an annualized amount of $4 million resulting from that new campus. And that will be in place through $3.31 million and then it will drop down to $3.2 million for the last nine months ballpark.

Okay. That’s perfect. Thanks. And then any color you could provide on leasing assumptions that are baked into the revenue in terms of volumes you’re expecting relative to last year and the mix of leasing by deal size?

Great question Matt. I think as Paul alluded to and I think Steve might have alluded to this a little bit as it relates to our commencements for 2016. We had the largest amount of commencements we’ve had as an organization, I think that total $59 million ballpark for the full year of 2016, which as you know, largely led to the 50% cash growth ‘16 over ‘15. I think if you look at where we have been historically and if you look at over the last 4 to 5 years, taking out a couple of large wholesale deals that we’ve done over that period of time, I would say on average, our lease commencements in any given has averaged over that 4-year period, about $26 million in total. We believe we can exceed that in 2017. And we’re estimating somewhere around $30 million of annualized commencements for rent in 2017 to give you an idea.

That’s awesome. Thank you. And then just as a follow-up on the - your relationship with the switch fabric, kind of cloud fabric providers, I’m just wondering kind of what’s the economic relationship there? Are you charging them rent or do you see them as a magnet that is bringing in, is helping to bring in incremental customers? And you talked about the value proposition of how you see that as being net accretive of to your business, but with a lot of those cloud providers already in the buildings and on many of your campuses, I’m just wondering why isn’t that a solution that you can provide directly for your customers, and where does a Megaport kind of fit into that equation?

So, I guess, I can kind of start with - answer that question and then I’ll let Paul or Jeff kind of fill-in there. Overall as far as the likes of SDN providers in our buildings and the value that they bring there, I guess first question I guess is, relatively economic relationship we have there. I don’t think I can really get into too much detail there other than just letting you know that’s similar to other providers and carriers that are in our facilities. And we’re continuing to evolve that relationship. But it’s very important to us to maintain the strategy that we’ve had going forward which is really to provide a carrier neutral type of facility that provides our customers choice and flexibility as to how they interconnect to other networks as well as other cloud providers. And we look at those SDN providers as an extension of that. As to the value that they provide in our data centers, while we do have many of our direct on-ramps from many of the big cloud providers made up in our data centers feel like that brings significant value and differentiation in the marketplace. Having other connectivity options, we feel like it also benefits not only in providing access to those clouds and other networks but from campus to campus and just to other facilities around the world. So, it really just gives them more choice and more flexibility. And we feel like that’s a positive thing in just providing them more attractive options for those customers.

I would only add to what Steve said, reiterate our strategy of having ecosystems that provide all the options, all the business partners, all the various ways of interconnecting and getting around the world that our customers might conceivably need that openness has benefited us strategically. And we believe it will continue to do so going forward.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Frank Louthan with Raymond James. Please proceed with your question.

Great. Thank you. Some of your peers have discussed some business opportunities they continue to see in Europe and potentially there. What is your thinking as far as outside of the U.S. or see geographical needs, and at what point do you think that becomes more of a necessity for you?

To the extent we’re involved in international activities already, we’ve seen a large number of non-U.S. companies coming into our data centers. We do have a small percentage of our customers that like our platform, like our service levels and agreements and have asked us to look outside the U.S. But they also have a very cost conscious approach to it. So, we tried to address that with a curetted referral program and we continue to evolve and improve that. And that seems to be going well and seems to have an opportunity for improvement going forward. Perhaps more importantly we’re seeing an increasing volume of our customers who are going global via cloud or content providers or similar companies that are in our data centers that already have a global platform. And so we focus tremendously on making sure that they have the facilities and business partners they need in our data centers to go global, do that methodology.

Okay. Great. Thank you. And then just quick follow-up. You mentioned the enterprise demand. When you’re looking at your pipeline, any particular verticals that you’re seeing more or less activity that we would expect if we look a year from now on this call that might have expanded as far as your exposure to any particular industries?

Hi Frank, this is Steve, I’ll try to answer that for you. Just to kind of piggy-back on what Paul had just mentioned regarding whether it’s international expansion, or even domestic expansion. I think what we’re seeing is that customers are getting more and more sophisticated on how they evaluate and select a data center provider. And as such, as long as they’re looking for a deployment in our markets, we feel like we stand a very competitive opportunity to win that business and not being in more markets where even international business seems to be slowing us down winning those deployments. So just to give you a little bit of color there. Relative to industries and vertical strength across the board, I would say it’s very market-driven. As you look at industries that are most interested in New York are very different than they might be in LA versus the Bay Area versus even Virginia. So, we try to take a very pointed approach to ensure that we have a geographical focus into those markets trying to ensure that our data center as well as our operating there resonates well with the key industries that happen to be present there. And we continue to refine those efforts. But it’s just different from market to market.

Got it. Okay. Thank you very much.

Thank you. Our next question comes from the line of Michael Rollins with Citi. Please proceed with your question.

Hi, good morning, and thanks. A couple if I could. First, as you’re looking at the development activity particularly in the newer campuses like Reston, how are you thinking about the interest to push in another strategic anchor tenant versus just building around the communities that you already have in the market? And then secondly, just from an M&A context, with the activity that’s been in the marketplace globally over the last year, are there any new thoughts in terms of what your aspirations are to participate in M&A to accelerate scale or accelerate the strategy, either as a buyer or a seller? Thanks.

Thanks. Let me try to address those. The first question, I think as you saw both our VA2 expansion and our SV7 expansion, we have moved to a model of pre-leasing of new developments and new construction. And our preference for that type of pre-leasing is to find and sign out strategic anchors for those new developments, it’s worked very well in both of those cases. And we expect to continue to follow that model going forward including for the Reston expansion. As it relates to M&A, we believe we have a business model and a platform that has consistently delivered opportunities for attractive organic growth. And that’s how we design the company. And I think that’s consistent with how most studies have companies have guided for the best long-term shareholder value. I think this approach also enables us to provide more value to our customers because we deploy our capital where there are, growth and expansion needs are consistent with the scale that we have. Having said that we recognize that there are occasionally opportunities when M&A or other inorganic growth avenues can be very attractive. So, we study the vast majority of the opportunities that are out there with an open mind. We’re trying to discover opportunities to accelerate our ability to deliver value to customers and shareholders. Any transaction however would have to make sense strategically, culturally and mathematically, meaning, it would be good for our customers and would most likely be accretive to share value on a risk adjusted basis. I think I’ve kind of just restated what we’ve said at every quarterly call for the last couple of years. So I don’t think that indicates any real change in our approach. But I did want to make sure the philosophy behind it was well understood. And assure you that we don’t, we do look at this stuff and if good opportunities out there, we wouldn’t be averse to taking advantage of it.

Is, there any expectations that with some of the activity to date that that might help or hurt your sales funnel and ability to close deals?

Nothing that we have seen so far appears to be any threat to our sales funnel or our ability to close deals. Please remember we are focused our scale and our strength in these eight very strong markets. And we provide a fairly unique value proposition as well as kind of the hybrid flexibility for customers that need to scale in those markets. And we don’t see that changing with the M&A activity we’ve seen out there.

Thanks very much.

Thank you. Our next question comes from the line of Lukas Hartwich with Green Street. Please proceed with your question.

My first question relates to the same-property results. I’m just looking at sequential MRR and occupancy growth, and it looked like it slowed down a little bit from the recent pace. And I’m just curious, is that noise, or are you running into a ceiling, particularly on the occupancy side of things, or what’s going on there?

Hi Lukas, it’s Jeff. I would say that I don’t think we see anything that would prohibit us from continuing to lease up our same-store to beyond the 90% that we’re at today. There is nothing that physically limits us, the space is still there power and cooling capabilities are still there. So, there is nothing there that limits us from an infrastructure standpoint to continue to increase that leasing. As it relates to the overall growth on call it MRR per cab-E basis, you can see that overall based on the same-store pool we had an effect for 2016, produced very good results, increasing call it, 6% to 8% on average year-over-year. I think as you look forward, we would expect that MRR per cab-E growth to moderate a little bit just based upon the type of sales activity we had in the previous 12 months. But still healthy somewhere between 5% to 7% year-over-year, growth as we look forward just to give you some idea where we think it’s headed.

That’s really helpful. And then secondly, the development funding, the roughly $200 million there, is that going to come from additional debt issuance or how do you plan on funding that development?

Yes, it’s just right in line with our prepared remarks. We’ve had about $165 million of debt capacity today and about $150 million of liquidity as we sit here at year-end. And so, obviously it will fund the development needed in the near term but we’re going to have to term-out some level of our credit facility. And we’ve guided to $150 million to $250 million of additional debt sometime here in the first half of 2017.

Right. So there’s like roughly a $200 million balance in the line right now. So the future debt issuance, I was thinking, was terming out that, and then you would add an additional $200 million. So is it basically there will still be I guess, yearend 2017 there will be a $200 million roughly balance on the line?

Yes, ballpark just depending upon the pace of development. And you could see our CapEx that would give you some idea about where we would end up, that’s correct.

Great. Thanks a lot, guys.

Thank you. Your next question comes from the line of Jon Petersen with Jefferies. Please proceed with your question.

Great. Thanks. A lot of people asked about M&A and your acquisition appetite. But I’m just kind of curious, whether it’s big deals or whether it’s just growing organically, your thoughts on being in Tier 2 markets versus Tier 1 markets. I think you’re generally kind of in the major markets. You are in Denver and Boston, you’ve had success there, and those are probably characterized as Tier 2 markets. How do you guys think about those markets within your portfolio and your appetite to further expand into other markets similar to like Denver and Boston?

I don’t know that I can add much to what I said earlier. The size of the market is important because of the scale that you can achieve. And also the resilience that you have going forward via diversity of customer base and kind of how tech reliant and data reliant the economy in a particular market is. Boston and Denver are both very strong tech and data economies. And because of their proximity to headquarters, in one case and our northeastern operations in the other case, we’re able to have a chief scale about the sales and the operating organizations in those markets. And we expect good growth in them in the future. Probably as important we were able to enter those markets at very attractive price points and begin the scale accordingly. So, when you think about scale and data dependence in the economy and the ability to have economies of scale in a market, Tier 2 markets are just harder to make the numbers work. And as you go down in the tiers, it gets progressively harder.

Okay, all right. Thank you.

I would just add Jon is, if you look at our strategy around really the three pillars of enterprise, cloud and network, having a heavy density of all three of those factors is important. And as Paul mentioned in Denver and Boston, those are hi-tech centric and fast growing markets already. So, we see good growth there. But also interconnection is critical too and Denver specifically being the intersection of fiber back-bone that crisscrosses the country speaks to that well as far as the attractiveness to cloud and network providers providing services here as well as Boston. So, they’re a bit unique in that regard.

Okay. And I don’t think I’ve heard you guys talk about this, but your recurring CapEx mid-point is $15 million this year. That’s more than double what it was in 2016 or kind of higher than it’s ever been. What’s the driver for that in 2017?

Yes, Jon this is Jeff. It’s one of those areas where we just believe as the number of kilowatts that we have in our portfolio increase, it is going to drive an increased level of recurring CapEx, that’s just the expectation that we have. And that’s kind of how we manage and model it. But it’s slowly driven on the number of kilowatts we have deployed out through our portfolio. When you look at how much of those kilowatts commenced during 2016, we’re just expecting to have some recurring CapEx increase over prior years.

Okay. And then just one more. I think you guys talked about this, but I just want to make sure I understand it. So, last quarter on the call you talked about how there would be 125 basis points of churn in the fourth quarter. I think in your prepared remarks you talked about how there would be some in early 2017. I’m trying to figure out, did the 125 basis points you talked about last quarter - did that actually occur this quarter? Is it part of the 1.9%, or did it get pushed to next year?

It did occur and Steve alluded to it in his prepared remarks. We actually ended up having a total on that particular customer of 135 basis points. So just slightly higher than what we had anticipated. But that did actually occur in Q4. So absent that customer, actually churn results were fairly good in Q4 when you look at our long-term average to somewhere between 1% to 2%. The other component that you’re probably referring to and I alluded to, it some elevated churn in Q2, which is about an incremental 180 basis points which is the last component of our original customer at SV3 that will burn off. And that is about $4.2 million of annualized rent that will terminate in the second quarter of ‘17.

And that’s not new churn. We preannounced that churn in other calls.

Yes.

Right, okay. Got it. All right, thank you, guys. Appreciate it.

You bet.

Thank you. Our last question is a follow-up from Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Hi Jordan, we can’t hear you. If you’re talking you might check your mute button.

Sorry about that. I tried to queue out. But while I’m here, you guys mentioned, I think, $30 million of commencements are basically what’s budgeted into the guidance for next year. Is that the right number?

That’s accurate.

And so I guess the right way to think about that from a modeling perspective is a ratable commencement schedule throughout the year with that 40% flow-through that you guys mentioned to FFO?

Yes, I think that’s fair Jordan. The only real visibility we have as we sit here today, as we mentioned. When we look at our backlog, GAAP backlog of $5 million at the end of the year, and we expect substantially all of that to commence in the first half - the first quarter of the year. So, then everything else would commence subsequent to that.

Okay. I guess the one I was curious about the delta between the cash and the GAAP this quarter. It seems pretty significant. The cash is an extra $10 million. And then separately I thought it was a little bit striking, $35 million of commencements this quarter alone, and for the full year next year you’re modeling $30 million in commencements. I know SV7 was a huge part of that. You don’t have another one of those in the till. But I guess the question really is, is there another CSP out there potentially that you’re not baking into the number but certainly could hit this year?

Yes, I think the number, the decrease in the number, just look back at our backlog and just go back to where we started 2016. And as we migrated through the year those backlog numbers were very substantial and that’s largely due to the fact of the preleasing that occurred at SV7 and some of our other developments and as Paul alluded to earlier. As we sit here today, you just look at what we have under development. We just don’t have enormous amount of space under development right now. We’re obviously planning things as it relates to Reston and as Paul and Steve both, alluded to we would look to try and drive some anchor customer there to help kick-start the cash flow soon upon completion of that construction. So, I just think as we sit here today I can’t give you that golden, we’re looking forward but we hope to find it somewhere as we migrate through the year and we’ll see how we operate here.

Jordan I’m glad you asked that question because it’s probably worth reminding everybody. I know that it’s real important the way most of you look at companies and do your job. And we, as we see reporting we all have to report quarter-by-quarter. And in those results are important. But this business doesn’t really run on a quarter-to-quarter cycle. I mean the transaction engine does and that stays pretty consistent from quarter-to-quarter and it’s generally been on an upward trend for the last three years. But other parts of the business, the hybrid part of our business where we take on larger deployments is lumpy and also less predictable. So as you look at the business going forward, I think Jeff’s given you the best guidance we can give. And we continue to believe that there will be good opportunities that may enable us to outperform. But we can’t predict those.

That’s helpful. Thank you.

Thanks Jordan.

Ladies and gentlemen that does conclude our question-and-answer session. At this time I will now turn the floor back to Mr. Paul Szurek for closing comments.

First I’d like to thank all of you for your interest in the company and participating in this call. And we appreciate it very much. Steve and Jeff and I would like to thank our colleague for a great 2016 and congratulate them on an excellent year. We’re looking forward to the rest of 2017. We have many opportunities and a lot of work ahead of us. And again, thank you for your interest. And have a great rest of your day.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Have a wonderful day.