Greetings and welcome to CoreSite Realty's Third Quarter 2019 Earnings Call. [Operator Instructions] I would now like to turn the conference over to your host Carole Jorgensen Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good morning and welcome to CoreSite's Third Quarter 2019 Earnings Conference Call. I'm joined today by Paul Szurek President and CEO; Jeff Finnin Chief Financial Officer; and Steve Smith Chief Revenue Officer. Before we begin I'd like to remind everyone that our remarks on today's call may include forward-looking statements as defined by federal security laws including statements addressing projections plans and 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 simple information that is part of our full earnings release which can be found on the Investor Relations page of our website at coresite.com. With that I'll turn the call over to Paul.

Good morning and thank you for joining us. I'm going to briefly cover financial highlights and then focus most of my time on how our strategic initiatives are playing out in light of today's market and technological environment. Jeff and Steve will then follow with their respective discussions of financial matters and sales results and trends. financial results for the quarter included operating revenue growth 4.1% year over year, SFO of $1 28 per share an increase of 2.4% year over year, and another strong quarter of sales at $14.4 million of annualized gap brand signed, including strong new logo revenue. This puts on track to comfortably achieve a record year of sales. Moving on to our strategy fulfillment. Secular demand for data center space is strong and we forecast this strength to continue in the foreseeable future. Our strategy capitalizes on this trend by expanding our extensive customer communities of enterprises networks and clouds who interoperate with each other in our campuses to serve businesses and consumers in major U.S. metropolitan markets. We fulfill this mission by providing capacity and connectivity including numerous cloud on-ramps and reliability and the ease of use in serving our customers. Our strategy starts with data center capacity. We reinvigorated our construction and development activities beginning in like 2016. And these activities are now delivering plentiful sellable capacity at our campuses, while building a pipeline for sustainable and agile capacity additions in two to three years. With the delivery of FDA phase one at the beginning of September. We are on track to deliver 224,000 square feet of new capacity this year, including phase two of SB eight in the fourth quarter. We are also on track to deliver an additional hundred 96,000 square feet of new capacity next year. They some of the…

Thanks Paul and hello everyone. Turning to our financial results for the quarter. Total operating revenues increased 4.1% year-over-year and 1.4% sequentially primarily due to increased rental revenue related to new and expansion lease commencements and growth in interconnection revenue. We commenced 78000 square feet of new and expansion leases for $15.7 million of annualized GAAP rent at an annualized GAAP rate of $200 per square foot and our sales backlog as of September 30 included $25.3 million of annualized GAAP rent from signed but not yet commenced leases or $28.4 million on a cash basis. We expect a majority of the GAAP backlog to commence in the next 2 quarters and the remaining amount in Q4 2020 following completion of LA3 Phase 1. Total property operating expenses increased 2.9% year-over-year primarily as a result of increases in rent expense from recently completed developments in our L.A. and D.C. markets where we leased some of our facilities. These property operating expenses also increased 4.3% sequentially including the impact of increased rent expense I just mentioned and other increases resulting from seasonal power costs and other property operating expenses partially offset by a property tax refund. General and administrative costs for the quarter were relatively flat year-over-year and decreased sequentially. This included the impact of a successful outcome related to a trial in Q3 including a minimum expected legal expense recovery of approximately $3 million minimizing the negative impact from legal fees this quarter to $0.01 per share. Turning to adjusted EBITDA net income and FFO. Adjusted EBITDA was $77.9 million reflecting a year-over-year increase of 5.6% and a 53.8% adjusted EBITDA margin. Net income per diluted common share was $0.47 per share and FFO was $1.28 per diluted share a $0.03 increase year-over-year and a $0.01 increase sequentially. Moving to…

Thanks Jeff. Today I'll start off with a summary of our quarterly sales results and then talk more about some sales wins and the business drivers behind them. Moving to our sales. We executed another very strong quarter of sales which is back-to-back with last quarter's highest sales quarter of the company. We delivered $14.4 million of annualized GAAP rent for new and expansion sales including $4.5 million of core retail colocation sales $9.9 million of scale leasing including a large pre-lease at LA3 as well as other scale leasing and some impressive new logo wins with opportunities for future growth. Turning to a few highlights of our sales. They included 73000 net rentable square feet reflecting an average annualized GAAP rate of $197 per square foot and core retail colocation sales included pricing on a per kilowatt basis in line with our trailing 12-month average. Looking at new logos we won 36 new logos that reflect total annualized GAAP rent approaching 3x our trailing 12-month average and include a weighted average contract term of 77 months versus the trailing 12-month average of 46 months. We're excited about the quality of these new logos and believe they will help drive future growth as their IT needs evolve. Attracting and winning new customers that value our platform remains a key area of focus and it's great to see it continuing to bear fruit. Renewals are another key aspect of our leasing focus. During the third quarter our customer renewals included annualized GAAP rent of $20.4 million reflecting growing base of business and strong customer relationships. Our renewals represented rent growth of 4.2% on a GAAP basis and a decrease of 2.2% on a cash basis which was impacted by the renewal of 3 long-term scale customers and excluding these 3 customers…

[Operator Instructions] Our first question is from Jonathan Atkin RBC. Please proceed with your question.

Thank you. So had a question about Jeff's comments with regard to Santa Clara. So the sublease capacity that's being marketed now at SV7 for 9 megawatts you refer to that as a relocation but is that going to be a customer that leaves your roles entirely? Or are they relocating to a different core site market? I'm assuming it's the former.

Jonathan let me answer that. First of all there's -- I don't think there's really any sublease capacity out there. There may be some misunderstanding in the local market. But as Jeff mentioned it is a tenant that is moving their operations to different areas not to our facilities. That lease expires partly toward the end of 2020 a little over half toward the end of 2020 and the rest toward the end of 2021. And as we've seen in similar situations in that market in prior years we like having the ramp to go and release that space and hopefully help the tenant out a little bit and get somebody in there earlier. But in that market we're glad to have that capacity.

Well the tenant is marketing at a subleased space. And so I guess maybe just semantics but this would be elevated churn for next year at least in that market.

So Jonathan I don't want to get into any misunderstandings out there but there is no right to remarket that space as sublease space.

Okay. But you mentioned the expirations some in '20 and some in '21 and I hear you about Santa Clara being a very strong market tight supply very strong pricing trends. But is it fair to say that you could see churn in the market over those two years? But your expectation is that you refill it and perhaps accretively. Is that a fair way to characterize it?

I think it's fair. Again pricing and the ultimate replacement deployments will need to be worked out and whether that is slightly accretive or not we'll work out. But you've got the gist of my comments correct which is it's a good data center it's good space. We believe there's good demand in the market for it. And we are working proactively to retenant that.

Two more questions then or a question related to kind of new markets. So Council Bluffs is a market that CyrusOne just indicated that they want to build capacity for enterprise sort of hybrid cloud applications. And I was interested in kind of that how you continue to look at growth opportunities domestically into new markets and whether those types of opportunities are interesting to you. And then secondly there's been very strong leasing in Europe and then there's been a recent M&A transaction announced there. And I know you've addressed this in many meetings as has your predecessor but just an update on your thoughts on international expansion.

So we do continually look for new markets. And I'm guessing at some point down the road we will enter new markets. But so far we just haven't found the right mix. We do very very strongly prefer and I'd be surprised if we did anything outside of a major metropolitan market. And we want to be able to deploy our business model which as you know depends very much on network density. So it's a high bar to jump but we keep looking for it. Our views on international haven't changed and we believe that the model that we pursued of going deeper and building larger communities and greater scale in major U.S. metro markets relative to the size of our company continues to provide us with as much percentage growth opportunity as I think is appropriate or needed for this property category.

Thank you very much.

Our next question is from Jordan Sadler KeyBanc Capital Markets. Please proceed with your question.

Hi, good morning. This is Katie on for Jordan. You kind of touched upon this in your prepared remarks a little bit. Just want to go back to churn. It was 3% in the quarter 10% at the midpoint for the year. Then you talked about this space to release in SV7. How should we think about churn on a go-forward basis for next year? Do you anticipate churn coming back down to your historical 6% to 8% levels?

Yes. As I said a little bit in my prepared remarks based on the analysis we did and the items that led to our churn we expect some of those items to abate if not -- most of those items to abate as we go through 2020. However some portion of that decrease is going to be offset with the item Paul just alluded to some of the churn that will take place in Q4 2020. As Paul alluded we've got time to work on backfilling that space which is what we're planning on doing. But that's where we're headed for 2020.

And I would just add Katie that we're already actively discussing that space with potential prospects right now. So activity is strong. And as you know that market is pretty tight right now so that's a good thing for us.

Thank you.

Our next question is from Colby Synesael Cowen & Company. Please proceed with your question.

Great, thank you Two if I may. Jeff in the past you guys had talked about getting to potentially double-digit growth in 2020. And it feels like in the last few quarters you guys may have walked that back and some of the comments you just mentioned now in terms of timing delays and then also the full impact of churn in '20 versus what kind of rolled through in 2019. Just curious if you can give us an update on whether or not that double digits is achievable. And then secondly just going back to the California. This is one of the first times I think at least that I'm aware of a large 9-megawatt customer looking to vacate a third-party data center. And I'm just curious what your observations are around this trend and whether you think it's very specific to this customer or it's part of something broader going on. And maybe as it relates to California with the rolling blackouts with the fires do you think that that market's going to sustain the strategic value that it has had for now many years?

Let me address your first question and then I'll have Paul provide some commentary on the second. But as you mentioned I did provide some items of reference in my prepared remarks as you guys look at updating models for 2020 and beyond. And as I noticed or as I mentioned primarily related to development completions that are further outlined in our supplemental and then as you guys think about the timing of leasing and commencements. In addition we've highlighted some of the Northern Virginia market challenges as well as some of the 2019 churn. So we still have a lot to accomplish before year-end and that will provide us some better visibility into 2020. But I think it is fair to say when we provided that guidance one year ago a lot has changed. And we do not expect to hit double-digit growth for 2020. And so hopefully that helps clear up that question from that perspective.

Colby this is actually the second time we've had a customer of this relative magnitude move out of that very same market. The last time was five, six, seven years ago and the circumstances were very similar. And I think we and all of our peers have seen this to some extent that the so-called unicorns in their early stages ramp up very quickly in markets like this. And then as they become more mature they start rationalizing things and moving things out as they discover more precisely what their latency needs are. Meanwhile that market has continued to grow with much more mature and established business models and operations that are however leveraging new technology products especially cloud-type products. And we see that continuing notwithstanding the factors that you've mentioned which as you know haven't really affected this particular area as much of us. Unfortunately some outlying areas are. And I know we all feel for the people in those areas. But so far we continue to see very strong demand and need for space in this market and expect that to continue.

Thank you.

Our next question is from Frank Louthan Raymond James. please proceed with your question.

Great, thank you. Just wanted to touch on the churn in Boston. I assume that was similar to the churn that you discussed last quarter it was kind of expected. Any thoughts on that being released? And then to the commentary about at the steady pricing for KW. In your conversations you're having with clients now do you expect that to persist? How does sort of the next few quarters of pricing look on that basis?

Let me address the first one and then I'll hand it off to Steve for the second question. But you're correct the decrease in occupancy in Boston is directly attributable to that churn an event that we've been mentioning the last couple of quarters. And so that occurred as we anticipated. They vacated that space in August. And that computer room is ready to be released with very little if any additional capital needed to get that ready for lease. Steve on the second?

Yes just to carry on with the Boston conversation. While it does give us more space back there we are pleased with the market dynamics in Boston and have shown some good sales results and also see some pipeline there. So we're encouraged with what we see in Boston. As far as pricing on a per kilowatt basis as we mentioned in the comments earlier if they -- on balance they remain in check for most of our markets. And as we mentioned on prior calls probably the only market that we've seen any material erosion has been the Virginia market. And even that we feel like it's pretty much stabilized and look to see some of that come back. And given our retail and enterprise sectors there it's been pretty consistent over time. So overall things seem to be holding pretty well.

Right, great. Thank you very much.

Our next question is from Erik Rasmussen Stifel. please proceed with your question.

Yes, thanks. On the leasing that again was quite healthy. And over the last 12 -- you've now outperformed your 12-month average. Scale was the -- sort of the primary driver there with steady sort of retail color we'll call it. But are you seeing a sort of a change in your business that would suggest that you may continue to see sort of larger deals come through?

Well as Paul mentioned in his remarks as we bring on more capacity that does open up the market for us to sell larger opportunities. So that's a good thing for us and we've seen some of the results of that already. And I think as you look at the average size deal and that -- more contribution from new logos and just the overall maturity of the market where you see more mid- to large enterprises now maturing to the point where they're adopting more multi-cloud and hybrid cloud-type of environments that opens it up to on average larger opportunities for us. So we feel like with our expansions in different markets that well positions us for that opportunity.

And maybe just then a follow-on with that then. So in terms of -- what does this mean for like for pricing and cash rent growth? Obviously the scale and depending on who that customer base is that could have different dynamics. How do you plan to balance this?

Well we're pretty judicious about how we approach each opportunity and especially as they get larger we do a lot of diligence around pricing and the yields that they deliver to that market and that specific facility. So we work through both timing as well as size and pricing and try to make sure that we make the right decisions to deliver the yields that we expect for ourselves and our shareholders are expecting of us. So we continue to balance that.

Hey, thank you.

Our next question is from Nick Del Deo MoffettNathanson. please proceed with your question.

Hey, Maybe first 1 for Steve. You've had a lot of success landing on-ramps for call it Tier 1 CSPs like AWS and Microsoft. You oftentimes highlight that in your presentations. How would you characterize your degree of success with call it Tier 2 or more specialized on-ramps? And do you feel like there are opportunities to grow that part of the business?

Yes we have seen good success there. We don't necessarily publicly state those very often and maybe we should do more of that. Obviously most of the cloud business that happens there especially public cloud probably 80% of it happens among 4 players. So that's where the real focus is and that's where I think a lot of our customers are focused. But there is a lot of other services that are delivering those same type of on-ramps and we'll -- I expect to see more of those in the future as connectivity and low latency demands are driving better performance out of those platforms and customers are looking for better performance out of them that those on-ramps that deliver that performance will become even more important. So we pursue all of those and adding those to our platform and to our Open Cloud Exchange continues to be a focus and we've been successful but I always like to see more.

Okay good. And I guess sort of back to the Bay Area you guys seem pretty confident you'll be able to release any space that you need to at attractive rents. Can you comment on that in the context of the number of projects that are currently under way by other market participants in the Bay Area and likely to come online in the coming years?

So predicting when any or all of those projects will come online is kind of a perfect science in that market. But we don't believe any meaningful capacity is going to come online before this space is going to be released.

Okay, got it. Thanks, guys.

Our next question is from Michael Rollins Citi. Please proceed with your question.

I Good morning. So just as a follow-up to some of the hyperscale leases that you repriced downward in the quarter. Do you have a sense for what percent of leases or the rent today might be subject to reductions in the future either because of the deployment size or the customer size just to try to ring-fence the future risk over time on pricing within the portfolio?

Hey Michael were you -- let me just clarify were you asking on the entire portfolio or a market specifically?

Just the broader portfolio please?

Yes. So first of all the 3 leases where we had the significant mark-to-market I'm not sure they would -- they'd classify more of scale not hyperscale. And as we look at our portfolio and Jeff can correct me if I'm wrong we don't see a meaningful amount of that -- of customers in those circumstances. There's always going to be some. Every quarter we have some mark-to-markets that are negative and most of them are positive. And so most quarters that result is positive. And we don't see anything in our portfolio that would significantly change that.

Michael just 2 other things to think about as you're looking forward related to that. But if I just look at 2020 and had to give you an estimate on where I think that mark-to-market would go I think it's going to be fairly consistent with maybe a little less than where we're going to finish this year. As you probably saw we're taking that -- we took it down to 1% to 2% mark-to-market for the full year. So keep that in mind as you think about 2020. And then the only other thing I'd have you look at is our lease expiration table which you're familiar with on 15. I think it's important to just look at the pricing that we provide. When those leases expire on a per square foot basis at least gives you some idea where those are as compared to where we're signing renewals at new and expansion leases. Just to give -- another data point to think about.

Yes. And I would just -- I'll also just offer a little bit of color which is as we become more mature as an organization and our customer base becomes more mature we just evaluate each customer as they become up for renewal and ensure that we are market that we look to retain them and look at what our other alternatives are in that market based on available capacity and overall strength in demand and so forth. So overall we don't see a major risk there but we look at all those independently.

Thank you.

Our next question is from Mike Funk Bank of America. Please proceed with your question.

Yes, thank you for taking the question a couple if I may. You mentioned before that the churn and kind of throwing some resources out that to analyze the portfolio. Hope you can give some more detail kind of on what your findings were maybe ways that you found you can better manage clients. I think you also mentioned that it's part of the analysis that you maybe saw some opportunity to actually expand the business you're doing with existing customers in addition to predicting when they might churn.

Sure. Just to give you a little bit of color on what we did in conjunction with a pretty broad team here within CoreSite we took a look at the last five years of data in our customers and just the behavior of those customers and work through any kind of correlation of growth as well as risk of churn and identified a small segment that might have some additional risk there. It didn't appear to be material as Jeff mentioned in his remarks but we did identify it. It allowed us to also just build a better view as to which customers are likely to grow with us as well and establish a bit of a more formal and deeper process around how we engage with those customers to give them a better experience give us better visibility into the likelihood of them growing or churning and make sure that we have the right resources around them to maximize that opportunity.

Great. And then one more quick one if I could. You mentioned -- and thank you for the update that you don't expect to hit the double-digit growth in 2020. I think your comment worth a lot of change. Maybe just expand on that a bit on the different factors that have changed over the course of the past 12 months that are affecting your shift in view.

Yes Mike. I think the churn that we've talked about obviously contributed to that. Northern Virginia contributed to that. And then a large part of what contributed to that is the timing associated with our development completions. As we thought about one year ago from where we are -- a year ago from where we are today we are obviously making a lot of estimates and assumptions related to that. And the timing has really been modified due to working through that development process which as Paul has alluded to this year it can be challenging. You manage it as best you can but you just don't know the ultimate outcome. So that's contributing to a lot of it. I think from our perspective as you think about 2020 the back half of 2020 where you're seeing a lot of our development being completed some of which has been pre-leased a lot which we will still work on to lease is where we're focused on trying to exit 2020 at a higher growth rate given what we think we can accomplish in the next 12 to 15 months. And that's our objective as we look out forward from here.

Yes Mike I'd only add briefly that as we transition out of this phase of a lot of ground-up development by the end of next year almost all of our new development the vast majority of it will be just building out in new buildings which is much easier to predict from a timing standpoint.

Thank you guys very much for the questions and see you guys in a few weeks at a rate.

Thanks right. Our next question is from Jon Petersen Jefferies. Please proceed with your question.

Great, thanks. Just maybe 1 more question on the Bay Area. I know you mentioned it's hard to predict what your competitors are going to do in terms of delivering product but how are you guys thinking about the SV9 development and starting that in light of the upcoming space you're going to have over the next couple of years?

So the important thing is to get it shovel-ready and we're vigorously in the process of that. And as we've said it typically takes about 12 months give or take a couple of months to go from acquisition to entitlement and permitting. And by the way that's for a data center the size of SV9. For larger campuses there's a much longer process to get all of the necessary environmental and power approvals. We feel good about where we are in that process so far. It is going as we expected. And therefore after about 12 months we should be able to start construction. And typically construction in that market takes about 12 months. And we'll be able to make that decision on starting construction based on what we see in the market and what we see in the SV7 retenanting. But from what -- the view we have of it today is we're likely to start that construction when we have the permits.

Okay. That's good color. And then a couple of your peers have achieved investment-grade ratings this year. I don't think that's something that you guys have aggressively pursued so far. But I'm curious what your thoughts are there. Obviously there's some interest expense savings but I think CyrusOne on their call just now was talking about some customers and how that was an important aspect in their underwriting of who to choose as a provider. So just curious any context or comments you might have around the possibility of getting an investment-grade rating how that might position you?

Yes Jon. I would just offer that as you know and have seen over the last three years or so we've accessed the private placement debt markets and those go through a different ratings process. But as we sit here today and when we issued each of those instruments those were rated as investment-grade. And so we feel comfortable with the access to the capital we have and how it's been priced. Pricing on those instruments has been probably tighter than what we would have seen without the public markets just given the lending and the investor group in those instruments. So we're comfortable with where we are related to that. Obviously we continue to operate the business in a manner to get that investment-grade at more of a public level to the extent we ever go out in the public bond market. But that's probably not going to happen here in the near term but it's something we continue to watch and manage the business around.

So to what part is that a conversation with potential customers? I'm looking at your balance sheet and financial strength.

Sure. Yes Jon I'll just tell you that it's -- I've never seen it be an issue in my customer interactions. I mean if you look at our balance sheet and how we're levered we're one of the least levered data center providers in the market. So our financial strength has actually been an asset to us not a hindrance.

Yes. Okay. Makes sense. Thank you.

Thanks, john.

Our next question is from Robert Gutman Guggenheim Securities. Please proceed with your question.

Yes. Thanks for taking the questions. First last quarter you mentioned slowing customer commencements. I was wondering if you've seen that stabilize. Secondly on the legal expense which I think you gave guidance of $0.09 for the year last time around I think $0.04 had been incurred and I'm not sure did you say in this call another $0.01 had been incurred? And could that at all extend into next year? Or is that kind of -- that's all there is to it $0.09? And lastly although it's too early for guidance for next year given the expansion table and the elevated CapEx this year would you expect CapEx to be in a relatively similar level next year? Or as you mentioned second phase and second-tier developments are less expensive. Should that bring CapEx down next year?

Rob it's Jeff. Let me answer 2 of those and then I'll pass it off to either Paul or Steve to address the commencements. As it relates to legal I did reference that we went through the third quarter as we expected and resolved our dispute through the trial that we unfortunately had to go through. The $0.01 of negative contribution to FFO keep in mind that was net of about a -- of the refund that we mentioned which we believe today is a minimum of $3.1 million. So just keep that in mind. So for the year it's probably somewhere in the neighborhood of $0.05 to $0.06 is where we'll expect it to be for 2019. Maybe some -- more of that noise as we go through '20. As most companies have there's always some legal issues out there that we're dealing with but at not nearly to the magnitude we had it for this year. As it relates to CapEx yes I would not expect our CapEx next year to be elevated like it is this year. Paul alluded to some of the reasons why. But if you think about us we've got about $265 million still to spend on everything that's under construction today. Some of that will be spent in the fourth quarter. And if I had to give you a range today I'd say somewhere around $275 million $300 million maybe by next year. Or I should say for next year that's going to be largely dependent upon leasing absorption etc. in the markets. But that gives you some idea where we think it would be going into next year. And then commencements?

Yes. As far as commencements are concerned we did see a little bit of slowdown there from last year as far as commencements are concerned. And we have seen that moderate but then we've also seen the deal sizes I mentioned earlier. And the complexity within enterprises as they roll out their deployments to take a little bit longer. So that's part of the calculus on those commitments and when they actually happened and how they turn up their environment. So -- but overall we've seen that kind of stabilize.

Thank you.

[Operator Instructions] Our next question is from Lukas Hartwich Green Street Advisors. Please proceed with your question.

Hey guys, This is actually David on for Lukas. I wanted to ask about the pre-leasing at LA3 and what drove that tenant to sign the lease so far in advance of delivery. And maybe if there are more attractive terms attached with that deal. And then if you could just also talk about your yield expectations on that project. Obviously when you bring LA2 and 3 online they're going to improve. Just want to know if there's been any change in expectations there?

Yes David I could just give you a little bit of color I guess on the pre-lease. Obviously we have nondisclosures with the customer and can't give you a whole lot of detail around the lease itself. I would just probably just offer more color around the value of our position in that market which is pretty consistent with our position in other markets which is large-scale capacity that's right next to 1 of the most connected buildings on the planet. And that is a unique offering a unique value that as I mentioned in my earlier comments is becoming more and more valued by more and more customers out there. So that is -- I would just say that that low latency scalable type of environment has proven to be invaluable to a lot of customers in this case a pretty large customer that was willing and could plan for the need of that capacity in the future. So I'm not sure I can give you a whole lot more color beyond that but that just gives you a little bit.

That's -- I understand. And then I guess just maybe with pre-leasing in general. Obviously the window has been shortened dramatically over the past few quarters but is there any indication that maybe that's lengthening again or was LA3 just a unique situation?

Well I think it's market by market right? As there's more capacity in a given market like Virginia there's less need for customers to sign to longer pre-leases ahead of time. In markets like L.A. and the Bay they do. So it's really market-by-market and also application by application or even customer by customer. But obviously with tight inventory that always lengthens that behavior.

Yes.

Our next question is from Richard Choe JPMorgan. please proceed with your question.

Hi, I wanted to follow up on your analysis of your customers in terms of if they might churn or grow with you. With the ones that you identified with that might churn how do you plan on addressing them? Do you expect them to -- or kind of keep them or focus on growing customers in that same deployment to take over the space as they turn out?

Well of course my preference is always to keep a customer. So that's job 1. As Jeff mentioned the numbers of those customers is very small. I think we identified it as roughly 2% overall. And within that 2% we expect to maintain hopefully all of them but many of those are still under term. And as we engage with them and get deeper into their business models and how they operate then hopefully we'll retain as much or all of them as possible. But the process just allowed us to identify them get a better operating model around how we engage with them and hopefully that will bear some fruit as the final outcome.

And then regarding the Bay Area move-out is that going to keep the churn elevated this 9% to 11%? Or is that part of the envelope of 7.5% to 8% of normal or just part of that or is it too hard to say this far out?

Yes. No Richard I think if you think about our annual churn when we -- you go back over to several years on average the range -- or it has ranged anywhere from roughly 7.5% to 8%. We expect as I mentioned some of those items that were elevating at this year to decrease for next year and if you back into that normal range. The offset that might drive that a little bit higher is related to this Bay Area customer and that's probably going to add somewhere between 225 to 240 basis points in late 2020 and in late 2021.

I'd only add to what Jeff has said that churn of this type in a market like that is generally a different quality of churn than the more widespread churn that is typically within our 7.5% to 8%. And again alluding to what we've mentioned earlier about having a lot of lead time to retenant that space before maturity and also having a lot of contiguous space to accommodate a wider range of customers.

Great, thank you.

Our next question is from Jonathan Atkin RBC. Please proceed with your question.

Yes 2 follow-ups. One if you can maybe talk about the trajectory of channel mix as a portion of new logos in the most recent quarter and going forward. And then on LA3 are you anticipating that that new -- that pre-lease is going to generate a lot of direct cross-connect demand because of the nature of the customer's deployment? Or is it more likely to be indirect over time as perhaps there's enterprise hybrid attachments to that initial deployment?

Sure. Jonathan this is Steve. As far as the channel mix is concerned we've been really pleased with the channel growth over the year. As of last quarter we saw that pick up even further. If you look at the collective mix it ended up being about 16% of our total. And if you back out the larger-scale lease that we mentioned earlier it ends up being about 32% just in rough math. So that's a pretty good chunk and higher than what we've seen in prior years and that's been ramping throughout the year. So that's good to see. As far as the LA3 pre-lease is concerned again not getting into too much of the details around that but I think your final comments are around not only that deployment connecting to a network that's going to drive some interconnection but also customers that will be connecting to that will also drive in their hybrid use cases will drive further interconnection is accurate.

And when a customer takes advantage of dark fiber between LA1 and LA2 for instance does that count as a cross-connect that you monetize? Or do you sometimes just let them buy the fiber and then you're just collecting rent?

We typically count that as a cross-connect. In some cases we've worked out specific arrangements for them to have dark fiber between the 2 but in 99% of the cases it's through our cross-connect.

Thanks very much.

I will turn the call back to Paul Szurek for a few closing comments. Please go ahead.

Thanks. Appreciate all the good questions. Before I move to my final comments I do want to invite you to our L.A. campus data center tour and networking event on November 11 at the beginning of REITworld. Come join both our local and headquarters teams who will be hosting the activities. You can sign up with the link in our earnings press release or you can go directly to CoreSite's website to do that. And let me just close by reiterating we believe the market trends we discuss today will continue to reward us for creating a more proactive development and construction program. And going forward our job is to keep meeting campus expansion needs and to continue growing the customer communities in our campuses. I feel very confident in the team that we have here that are doing all the various aspects of that of those activities and feel very good working with them going forward. Thanks to everyone for joining us today and thank you for your interest in CoreSite.

And this concludes today's teleconference, you may disconnect your lines at this time and thank you for your participation.