American Tower Corporation (AMT) Q4 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the CoreSite Realty Fourth Quarter 2020 Earnings Call [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your Investor Relations host, Kate Ruppe. Please go ahead.

Thank you. Good morning, and welcome to CoreSite's Fourth Quarter 2020 Earnings Conference Call. I'm joined today by Paul Szurek, President and CEO; Steve Smith, Chief Revenue Officer; and Jeff Finnin, 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 Web site at coresite.com. With that, I'll turn the call over to Paul.

Good morning, and thank you for joining us for our fourth quarter earnings call. Today, I will cover our 2020 highlights and discuss our 2021 priorities. I'll be followed by Steve and Jeff's more in depth discussion of sales and financial matters. Our 2020 highlights include new and expansion sales of $37.6 million of annualized GAAP rent, which marks a record year for retail and small scale leasing. Operating revenues of $606.8 million, representing 6% year-over-year growth. FFO per share of $5.31, representing a year-over-year increase of $0.21 per share or 4.1%. Delivery of 192,000 net rentable square feet or 22 megawatts of total new capacity, including the opening of two new data centers and seven-nines of power and cooling uptime. These achievements enabled us to execute on our 2020 goals of developing more capacity and completing projects on time, translating new and vacant capacity into sales, attracting quality new logos that value our campus ecosystems, thoughtfully expanding our products to assist enterprises with their hybrid and multi cloud needs and maintaining high levels of facility performance and customer service. Overall, I am pleased with the team's ability to successfully execute these priorities amidst the backdrop of the global pandemic. We delivered SV8 Phase 3, NY2 Phase 3 and the first phases of new data centers at CH2 and LA3. As a result, we finished 2020 with 40 megawatts of available capacity to sell compared to 23 megawatts at the end of 2019. Examples of translating new capacity into higher sales included leasing 75% of SV8 Phase 3 and 80% of LA3 Phase 1 and accelerating leasing in Northern Virginia, our best year in terms of annualized GAAP rent in that market since 2015. While sales cycles for enterprises were elongated probably due to the economic and other uncertainties related to the virus, we continue to attract high quality new logos, especially in the financial services industry at NY2. We also expanded our connectivity options during the year, including adding Google Partner Interconnect and Oracle Cloud infrastructure to the CoreSite Open Cloud Exchange, increasing bandwidth for AWS hosted connections on the CoreSite Open Cloud Exchange in our Chicago campus; adding multimarket peering to our enhanced NE2 exchange; and as recently announced, adding access to Google Cloud using dedicated interconnect in Northern Virginia. In addition to these 2020 accomplishments, as we announced earlier this week, we appointed a new director to our Board, Mr. Michael Milligan. Mike brings us valuable telecommunications experience as well as noteworthy Board experience, which will be a tremendous asset to CoreSite as we continue our pattern of expanding our talent pool through increasing diversity. I also want to thank Jim Atwood and David Thompson for their Board service over the last 10 years. They have both served since the company's IPO in September 2010, and their contributions were many. Jim and David will continue to serve until our annual meeting in May. But as part of our periodic Board rotation, will voluntarily not seek reelection this year. We are very grateful for the service they have provided to CoreSite, its shareholders and its employees and customers and wish them the best in their future endeavors. As we move forward to 2021, our goals are similar to our 2020 goals as we build on last year's successes. Our ability to meet those goals is enhanced by greater available capacity to sell and the strong enterprise funnel that has been building up due to elongated sales cycles we saw for the enterprise vertical in 2020. One notable difference is that while we will continue being proactive for future developments, we do not need and do not have any new ground up data centers planned to come online in 2021. In closing, we are excited about the opportunities that lie ahead for us, and we believe our priorities and our other operating objectives will continue to drive long-term value to our customers, employees and shareholders. With that, I will turn the call over to Steve.

Thanks, Paul, and hello, everyone. I'll start by reviewing our fourth quarter sales results and then talk further about some of our key 2020 successes and drivers. Turning to our quarterly sales results. We delivered new and expansion sales of $9.7 million of annualized GAAP rent during the fourth quarter. Please note that as of this earnings report and going forward, we have modified our reporting of new and expansion leases signed by deployment size included on Page 14 of our supplemental information. This revision reports our signed leases per period based on leased kilowatts rather than net rentable square feet. The change more closely aligns with how we manage sales activity internally and it is intended to provide greater visibility. New and expansion sales for the quarter included $4.4 million of annualized GAAP rent from retail leases, $3.7 million of GAAP rent from small scale leases and $1.5 million of GAAP rent from large scale leases. Our new and expansion sales were comprised of 54,000 net rentable square feet, reflecting an average annual GAAP rate of $180 per square foot and included an impressive 45 new logos, all with opportunities for future growth, our highest count since the first quarter of 2018. Looking more closely at new logos, the 45 new logos represents $0.8 million of annualized GAAP rent or approximately 8.5% of our total annualized GAAP rents signed during the quarter and were strongest in the enterprise vertical. Enhancing the ecosystem while diversifying the customer base through attracting and winning new customers remains a key area of focus, and it's great to see 45 new brands become part of that story. Next, I'll share some highlights from our sales wins. As Paul mentioned, during 2020, we executed $37.6 million of new and expansion sales in annualized GAAP rent, which marks a record year for retail and small scale leasing. It also represents an 18% increase in retail and small scale leasing compared to 2019. Driving our new and expansion sales this year were several key factors, including more available contiguous capacity to meet a broader range of customer requirements, ongoing strength in attracting and winning high quality new logo sales, strategic expansions from existing customers and a robust sustainable sales pipeline that includes customers looking to accelerate their digital transformation by deploying high performance hybrid cloud architectures. Let me expand on these drivers. Our new logo annualized GAAP rent for the full year was $4.3 million, which demonstrates the progress made against our goal to attract high quality new customers that value our platform, which will help drive future growth. As to strategic expansions with existing customers, our existing customers accounted for approximately 89% of the full year 2020 annualized GAAP rent signed, including expansions into additional markets. In summary, we are pleased with our sales execution during the year. We exited 2020 with ample contiguous capacity to support future sales opportunities as illustrated by the new capacity graph at the top of Page 18 of our supplemental information. We're optimistic about the fundamental market drivers supporting our strategy. The increasing need for enterprises to leverage technology in a seamless, high performance, hybrid multi cloud environment bodes well for the unique position of our network dense, cloud enabled campuses located in top enterprise markets. These market drivers align well with our ongoing product and services development, which are targeted easing the transition of enterprise with becoming customers by making data integration and application interoperability seamless. Our focus going forward will be to continue improving our ability to help customers solve their IT challenges as they address the changing dynamic needs of their industries and their customers. With that, I will turn the call over to Jeff.

Thanks, Steve. Today, I will review our fourth quarter and full year financial results, discuss our balance sheet, including leverage and liquidity and conclude with our financial outlook and guidance for 2021. Looking at our financial results. For the full year, operating revenues grew to $606.8 million, a 6% year-over-year increase, including interconnection revenue of $84.1 million, an increase of 11% year-over-year. Adjusted EBITDA was $324.5 million, an increase of 5.3% year-over-year and adjusted EBITDA margin of 53.5%, consistent with the trailing 12 month average. FFO per share was $5.31, which represents 4.1% year-over-year growth. And we declared dividends of $4.89 per share, representing an increase of 2.7%. For the quarter, operating revenues were $154.9 million, which represents 6.1% growth year-over-year and consistent sequentially, including growth in interconnection revenue of 12.7% year-over-year, 3.8% sequentially. Customer lease renewals, equaling $15.8 million of annualized GAAP rent, which represents a cash rent mark-to-market of 1%, and we reported churn of 5.4%. Commencement of new and expansion leases of $20.4 million of annualized GAAP rent. Our revenue backlog as of December 31st consisted of $7.8 million of annualized GAAP rent or $21.4 million on a cash basis for leases signed but not yet commenced. We expect approximately 60% of the GAAP backlog to commence in the first quarter of 2021 and substantially all of the remaining GAAP backlog to commence in the second quarter of 2021. Adjusted EBITDA was $82.8 million for the quarter, an increase of 4.7% year-over-year and 1.6% sequentially. Net income was $0.46 per diluted share, a decrease of $0.05 year-over-year and $0.04 sequentially. FFO per share was $1.34, an increase of $0.04 or 3.1% year-over-year and $0.01 or 0.8% sequentially. Moving to our balance sheet. Our debt to annualized adjusted EBITDA was 5.2 times at year end, slightly lower-than-anticipated and inclusive of the current GAAP backlog mentioned earlier, our leverage ratio is 5.1 times. We ended the quarter with approximately $301 million of liquidity, providing us the ability to fully fund our 2021 business plan. In addition, we finished the year with 91% fixed rate debt. We expect our fixed rate debt percentage to decrease to approximately 80% by the end of 2021, absent any new debt or derivative instruments. I will now address our 2021 guidance. We ended the year at 81.9% occupancy in our data center portfolio and 40 megawatts of available capacity to sell. In addition, we have the ability to bring on consistent amounts of capacity through incremental computer rooms and infrastructure development within our existing data centers as needed and as anticipated absorption dictates. We reported elevated churn during 2020, slightly ahead of the high end of our guidance, with Q4 results slightly elevated due to a couple of customer move outs, accelerating their timing from Q1 2021. The following 2021 guidance is based on our outlook on current economic conditions, internal assumptions about our customer base and our view of supply and demand dynamics in our markets. It does not include the impact of any future financing, investment or disposition activities beyond what has already been disclosed. I will cover the highlights of our 2021 guidance, but I will refer you to our complete guidance on Page 22 of our fourth quarter supplemental information for further details. Operating revenue is estimated to be $642 million to $652 million, representing 6.6% year-over-year revenue growth at the midpoint. Our 2021 churn is estimated to be 6.5% to 8.5%, inclusive of the 200 basis points related to that specific Bay Area customer during the second half of the year. Additionally, we expect cash rent growth on data center renewals to be 0% to 2% growth for the year. Interconnection revenue is estimated to be $87 million to $93 million, representing 7% growth at the midpoint. Adjusted EBITDA is estimated to be $336 million to $346 million, which implies a 52.7% adjusted EBITDA margin and 5.1% year-over-year growth at the midpoint. FFO per diluted share and operating unit is estimated to be $5.42 to $5.52, reflecting 3% growth at the midpoint. Based on our expectations and estimates related to leasing, net absorption and timing of commencements, we anticipate the year-over-year growth rates to accelerate in the second half of 2021 for revenue adjusted EBITDA and FFO per share. Lastly, capital expenditures are consistent with our original guidance provided in October and estimated to be $185 million to $225 million. In closing, we are pleased with our execution in 2020 and we look forward to the opportunities ahead to further help our customers solve their it needs and challenges as they accelerate their digital transformation. With that, operator, we would now like to open the call for questions.

[Operator Instructions] Our first question comes from the line of Sami Badri with Crédit Suisse.

First question for Paul, maybe for Steve, I want to talk about the elongated sales cycles. And we know we could see and draw the connection between elongated sales cycles and the effects of the pandemic. But are you starting to see changes or any kind of behavioral movements that are happening that can better explain what you think might happen in 2021 as far as how enterprises age, the outsourced data center industry from where we are today?

I do think we're starting to see some movement and it's hard to generalize because it's idiosyncratic to so many customers and even some regions like, for example, I think in New York, in New Jersey, we would have had better performance if it were for the uncertainty about the proposed transaction tax and some other industries things were moving along and then suddenly some additional acquisitions were taking place. And so the opportunity had to be resized. But for a lot of the customers, it's just them working through what their economic future looks like. There are growth opportunities. For some, it's accelerated digital transformation. For others that's accelerated the process of outlining and planning for digital transformation, but not quite gotten to the point where they're ready to pull the trigger. I do think with 2021, started off a little bit -- it wasn't exactly like the calendar turned and everything turned rosy and there were some bumps nationally and economically in the first month or so. But there appears to be some strong economic optimism going forward. And I think that, that will have a positive impact on sales cycles. Steve, anything you'd add?

No, I think you covered it well, Paul. I think, as I mentioned in my prepared remarks, I mean, we feel like we're well positioned for the overall market trends, and that is really, any enterprise out there has become more interested in how they leverage technology to run their business. And the hybrid multi cloud environment is becoming more and more commonplace for a lot of enterprises. It is complex as to how they navigate that and we're working to try to make that as simple for them as possible, but that's part of what drives that elongated cycle. So it's all the things that Paul mentioned as well as just the overall complexity of how they manage that migration. So overall, I think customers are getting used to whatever the new normal is and working through those complications, but we feel like we're well positioned to support that.

I want to just shift to Jeff. Jeff, you talked about the backlog and the backlog commencement. I think if I heard you right, 1Q and 2Q 2021 should see the current backlog to commence. Now just to kind of triangulate the commencement schedule with the full year guidance. Does the full year guidance also called for relatively strong productivity in the sales force to bring in deals and do inter-quarter execution and deployment, or the full year guidance says very little on incremental execution and sales with productivity as we go through the year?

Sami, yes, just to confirm, you heard correctly in regards to the commencement of the backlog. So again, 60% Q1, about 40% in Q2. And in terms of sales execution, I think is what you were gearing your question around. We would clearly believe that kind of, as Paul alluded to, that we would have good execution throughout the year. The only thing that I would add is we'll see some benefits from an expense perspective. If you just see the percentages we're guiding to, I think we'll see some decreases in our overall sales as a percentage of revenue during the year. I don't know if that's directly addressing your question, Sami or was there something else we could add?

Just if you think about how much incremental leasing that you guys imagine you need to make that guidance. Are you guys expecting meaningful incremental leasing activity to take place to make that guidance number, or are you relatively well rounded out as existing [Indiscernible] backlog?

No, it's going to require some meaningful sales execution just as every year requires it. And I think when you look at where we ended the year this past year at just below $40 million, I think realistically, we would expect and anticipate somewhere being north of that $40 million as we think about this year, just to give you some idea. Obviously, I don't want to get into too many specifics because we don't generally guide to that. But that gives you some sense for what we're thinking about as we head into 2021.

Our next question comes from the line of Jonathan Atkin with RBC Capital Markets.

I was interested in the interconnect business, and if you don't mind drilling down a little bit on the drivers or pressures you're seeing in that segment. You've got a lot of different products that you offer. There's bilateral cross connects as well and then you've got the cloud operators and the on ramps and the carriers and the enterprises and then partners as well on the SDN side. And I just wondered, is there anything that kind of jumps out in terms of what's going particularly well, or where the growth rate might be slowing a little bit in that area?

Let me give you a little bit of color, Jon, and then I'll ask Steve just to add any incremental color he sees obviously on the front lines. But when you look at 2020 and from a volume perspective, overall volume increases was about 7.7% for 2020. And as you saw on the revenue, overall revenue increases year-over-year was 11%. So those percentages are fairly consistent with generally what drives that revenue increases, which is about two thirds coming from volume increases, about another third of it coming from customers migrating from lower priced to higher-priced products and some price increases as customers roll or just general price increases. So that relationship has stayed fairly consistent in 2020. We saw really good growth in the fiber cross connects last year as well as our Open Cloud Exchange. And I think some of that may have been spawned on by the pandemic that we walked through and lived through in 2020. Obviously, when you look at our guide for this year, we're guiding to growth of about 7%. And so I think it's unclear at this point whether we're going to see that continued level of volume increases for 2021, it's something we're going to watch closely. But at this point, we think it will moderate slightly just given where we've guided the street to at this point in time. Steve, anything else?

I guess, I'd just add as far as trending and where we're seeing customer adoption and so forth. I mean, we're fortunate in that we were one of the -- in fact, I think, the first public data center provider to offer an OCX type of offering and Open Cloud Exchange, where it's basically an Ethernet backbone that allows customers to virtually connect to many different services on that backbone. We've made significant enhancements to that over the last several years. That's positioned us well for really where we see the trend going in the future, which is really kind of that end to end serviceability over SDN like network. So I think you'll continue to see more adoption of that and more services come available on that same platform, and that's part of what we're driving towards our product development.

And then secondly, on M&A and just noticed that there's a lot of activity kind of at the asset level in this sector, including in markets where you don't really have a presence. And I wonder to what extent -- if you can maybe just remind us of the sorts of things that you look at when you think about maybe entering a new kind of core data center, Internet gateway type market that you're not in because there were recently some opportunities. And I just wondered, are you looking to partner with people as you enter those markets? Is that entirely on balance sheet? Is it just not of interest, relative to maybe deploying capital where you already are? Maybe just kind of refresh us on your thinking there.

We look at a lot of things, as we've said in the past, and our guidance is strategic fit, which really means what type of revenue synergies can we generate an above standard growth, if we do make the investment and then return on invested capital. Does it benefit our shareholders in the intermediate and long term, and hopefully, the short-term as well or does it not? We're not averse to partnering if that makes sense and the opportunity is there. But generally, that can be more complicated than it sounds at first glance. Again, we've looked at a lot of things. And when those criteria are met, we'll do something. When they're not, we won't.

And then lastly, is there any kind of an update on the Stender campus in Santa Clara, SV9 seems like that's ready to break ground, and there's been obviously some increased occupancy at SV8. And maybe just kind of give us some color on the demand pipeline that you think the market is seeing and what's happening with kind of overall absorption. There's been, I think, a lot of activity in that market away from you. And I wondered to what extent you might think Santa Clara might drive some of your growth this year?

So I'll let Steve address supply and demand in that market. Although I will tell you, I feel good about it. SV9, as we said last quarter, we are targeting having our permits and everything by the end of the first quarter. So far, the processes are trending that way. But in that market, and Jon, you probably know the dynamics of permitting and power there as well as anybody. You can't really say it's done until it's done. So we still have a couple more things we've got to finish up. And hopefully, we'll get those finished up and have it shovel ready by the end of this quarter.

And I would just add, as far as the overall supply demand dynamics are concerned, we continue to see strong demand in the market. And so we're bullish on where we're heading with those investments, where we sit with our overall capacity and pipeline in that space. So overall, we're confident with where we sit today.

Our next question comes from the line of Nate Crossett with Berenberg.

More of a big picture question. How are you guys thinking about the edge, is it a risk to your business at all? And have you guys done any analysis in terms of whether workloads that are currently in your campuses could move closer to the edge over time?

We have. I don't think anyone can say right now that with certainty, they know exactly what's going to evolve. But our expectation is that there's minimal exposure for us of workloads that are currently in our data centers going to the edge exclusively. And there's probably a good opportunity for our data centers as core peering places in the central markets to benefit it through the increased products and services that are offered at the further edge through 5G, IoT, things like that, just because of -- the beautiful thing about data is that it works when there's a lot of it pooled together, and you'll see a lot of that necessary for those applications. So that's our high-level view of it. We continue to monitor it closely and evaluate potential product help in those areas and partners to work with. But at a high level, we think it will be ultimately beneficial.

And I guess the last thing I would just add there is the edge can be defined by a lot of different people in a lot of different ways. And we feel like we're well positioned in a lot of edge markets. I mean, if you look at the key metro areas that we're in, where there's a lot of eyeballs, a lot of enterprises that are in very low latency proximity to our data center campuses. In many definitions, that is edge because we're right next to where those eyeballs and enterprises locate.

And then I just had one question on pricing. The renewal guidance is 0% to 2% and if you're looking forward, kind of the next four years, it looks like the lease expirations are at a higher rate than what you did in 2020. So I'm just kind of wondering, should we expect kind of pressure on pricing going forward? Can that 0% to 2% range, even go negative?

Nate, I'll just offer a little bit there. Obviously, the pricing in full you're looking at is on a per square foot basis. And on the renewal pricing, when you look at what we did this year, the dollars per square foot were compressed largely due to the density inside those deployments. So the density really plays into the fact and when we're obviously competing and having those conversations with customers, pricing is going to be on a kilowatt basis. And so I wouldn't read too much into that on a per square foot basis. There's just a lot of variables, density being the largest in terms of what's going to ultimately resolve in that pricing. But obviously, as we head into 2021, you saw where we ended 2020 right about in the middle of our guidance for our mark to market at 0.8%, and we expect to be somewhere in between that 0% and 2% as we work our way through this year. And then obviously, we'll continue to watch it beyond that and give you additional color as needed.

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

So I wanted to just follow-up on sort of the pipeline and Santa Clara. It felt previously like you guys were pretty constructive and optimistic about the ability to backfill the outbound tenant there. What are your sort of most current thoughts there?

Jordan, current thoughts haven't changed. We're still optimistic about backfilling that space in SV7.

Is that kind of to do list for the front half of '21 or could that take longer?

I mean, we typically don't give previews of when like something might be signed. But when it is signed, we'll announce it.

And then in terms of the churn, Jeff, you did talk about maybe pull forward from 1Q. Can you maybe talk about what the source, the types of tenants that you would drop the reacceleration of churn up to? And did they have anything to do with the decisions around what you're doing with the US colo space in LA1, LA4?

As it relates to the churn in the fourth quarter, we had about 60 to 70 basis points incremental churn in the fourth quarter that really moved essentially from January of '21 when we anticipated up to December here in the fourth quarter of this last year. So not a real big economic impact. It really is just a shift in the timing. Again, that was about 60 to 70 basis points. And it was really with three customers, one of them happened to be in probably the largest percentage. It was just another reseller that was in our portfolio that we had anticipated to move out and did it roughly 30 days prior to when we anticipated. And so hopefully, that gives you some additional color. And then what was the second half of the question, Jordan?

Whether LA4…

No, it's as it relates to LA4, I appreciate you picking up on that in some of the disclosures there. Obviously, that LA4 is a location that's in close proximity to LA1 and LA2 and LA3. And obviously, our objective is to drive business into our owned assets and there's just much better longer term, better assets to drive business to. And we're currently in process migrating over all those businesses that we can from LA4 into LA2. And so we've already done some of that. And our team in LA is working on getting the lion's share of that completed here this year. But that churn that I commented earlier had nothing to do with LA4. At this point, that's still in process and we'll work through that in 2021.

And then as you look through to the 2021 guide on churn, I noticed that came down 50 basis points or so at the midpoint, 100 at the low end, I assume due to this pull forward. Is there anything else to potentially be worried about, and what are you guys doing to sort of get your arms around this guide?

Well, as you think about it, obviously, as we've pointed out, we've got about 200 of that coming from the single customer at SV7, that will occur in the second half of this year. And in terms of what are we doing to get our arms around it, I can tell you that between my team and Steve's team, it's something that we address on a weekly basis, trying to continue to look as far forward as we can, both through conversations and relationships we're having as well as looking at incremental data around each of those deployments to better understand ultimately what that information is telling us on customer behavior to help give us a point on which direction those are ultimately going to go. And from a customer service perspective, it's always been a very high part of our business, and I would say we're continuing to even elevate it to a higher level under the guide of our operations team, and it's something we're continuing to get out in front of. We want to make sure we retain those customers every time we can and when it makes sense. And hopefully, avoid any of the surprises like we had in the past. But based on where we sit today and what we know today, we think that 6.5% to 8.5% for 2021 is a good number and is in right in line with what we anticipated.

Jordan, the only thing I'd add to what Jeff said is that the categories of customers that drove churn over the last couple of years are now a very, very small percentage of our portfolio, and those are business models that have been especially disrupted by cloud.

Yes, I mean the reason I ask, obviously, this has been a little bit of a sort of a thorn on your side. I think the churn number over the past couple of years, and you've got 29% of your annual rent expiring in '21, and 1,277 different leases a lot. And so I kind of -- I guess it doesn't seem outside of the one known move out, the larger move out, you have a ton of wiggle room in the 7.5%, because that's the nonmove out, you're basically looking at, I don't know, 1.25% churn on a normalized basis. So outside of the nonmove out, that seems like a low number relative to at least the last four quarters. And I don't know why it would be particularly low next year or this year?

I mean, we've had numbers that low or even lower in prior years. And again, it relates to the cyclicality of some of these business models or actually, I should say, the secular changes that affect some of these business models. Again, that's our guidance. We wouldn't put it out there if we didn't feel that it was the right range to put out there.

And the other thing, I guess, I would just add is roughly 30% of our base renewing in the year is not a normal. It's very typical for us actually. And if you look at the average length of our leases of roughly three to four years, that's what you can expect, I think.

No, and I appreciate that. I didn't mean to insinuate that it was sort of outside of the ordinary. I just feel like it's a big number and maybe the churn number of 5.5 outside of the nonmove out was a little bit low relative to history. Is that unfair?

Well, I mean, it depends on which history. And as I said, we certainly have numbers that low in previous years.

Our next question comes from the line of Dave Rodgers with Baird.

I think Jordan hit the renewal side of the equation. Maybe I wanted to go back to the idea of sales cycle elongated. But Jeff, in your comments, you also said you expect leasing to accelerate. So maybe I'd ask you, Steve, to talk more about what's in the funnel. Last year, you guys were pretty positive about the funnel as well. Can you talk about lease touring activity, any of those kind of early indicators that are going to give us that confidence that we'll see this acceleration in leasing this year that's behind the themes that you have already mentioned?

Well, I think it starts with kind of the fundamentals of our platform really, as Paul mentioned in his prepared remarks around available capacity. And it's not just the amount of capacity, it's the fact that we have it consistently across really all of our top markets. So historically, we've had some capacity, but it's really been in a couple of markets and to make sure that we're really accelerating were in that specific market. So now we have more opportunity, I think, across the portfolio to have better sales. And then as I look at the pipeline, the pipeline has been consistently strong, heading into the pandemic, but holding that strength and continuing even through the end of the year. So it's hard to foretell exactly what that pipeline will result in. Jeff has mentioned our guidance already. So I think I'll let that speak for itself. But we feel like between the volume of the pipeline, customers getting more, I think familiar, as I mentioned earlier with how they make these business decisions and navigate the complexities of hybrid multi cloud that the combination of all those things bodes well for the overall sales forecast for the year.

Is there any evidence in there that you're losing more customers or winning more of those deals that you're pursuing? It sounds like the funnel is bigger, which is great. But some of those win versus loss metrics that you might track?

We track the win loss ratios very closely and try to manage beneath the numbers to find out where we can improve on that. There's a balance between, in some cases, winning too many versus obviously losing too many. If you're winning too many then maybe you're giving away pricing or doing something wrong. But we try to make sure we are targeting, first of all, the right customers to value our platform and then ensure that we are getting the most return for our shareholders at the same time, providing valuable service to our customers. So it's that balance of all three of those things that we're working towards. And overall, I would say that the sales team has gotten better and better over time as they've now got better in their skill set, but we've continued to try to, as I call it, deepen the moat on our competitiveness and what makes us unique compared to our peers out there. So I think that all adds up into us being more competitive and being able to win the right opportunities that truly do value our ecosystem. I don't know if that answers your question, but I guess the short answer is yes.

Jeff, maybe on you. I think 12 of your leases make up is 26% of the revenues and 15% of square feet, that's kind of what you call that hyperscale. As we look out, either this year as part of the larger expirations or into the next year or two, do we see any of those at risk or any of those expiring?

Yes. Obviously, it's a big percentage from a square foot perspective as you look at the number of leases there being the 12, as you pointed out. And as I sit here today, I don't think there's a significant risk given where they are on each of those. And it's just something we're going to have to watch closely as we work our way through the year. Obviously, one of those is included in our churn guidance for this year. So take that one out of the equation, the remaining 11 are the ones that I would refer to. And obviously, something that we'll continue to watch closely. I think we've always had a history of any time we see something on the horizon that is sizable like one of those, we'll try and give you guys some heads up on that if and when that becomes clearer. But at this point in time, we don't see anything that we need to raise at this point in time.

Our next question comes from the line of Colby Synesael with Cowen.

As it relates to SV7, do you feel that you can backfill that with just one or two customers, or is your current expectation to use that space more for retail deployments? And then as part of that, what have you actually assumed in your guidance as it relates to the potential backfill opportunity with SV7? In other words, does guidance assume zero revenue from that through the course of the year? Have you assumed that maybe by the midpoint of the year, you backfilled it? Just any color so we can get a sense of what the baseline assumption is in the guidance would be helpful. And then my second question has to do with margins. Margins are expected to be down about 80 basis points year-over-year 2021 versus 2020. Can you just give us a little bit of color of what's the primary driver of that and whether or not that might start to reverse as we move to the back half of this year and then into next year? Thank you.

Our current plan is to backfill SV7 with one or two customers, and Jeff can confirm. But I believe there is some revenue from that in the guidance, but I know we don't give specifics about individual leases, and Jeff can confirm this as well. But margins are simply -- the good news is we got 40 megawatts of capacity that we can lease. But that has a margin impact, because with baking capacity, you're still paying all the expenses but without offsetting revenue. So there is definitely an opportunity to expand margins as we lease up that 40 megawatts.

Colby, just to confirm, Paul has confirmed, we do have some level of revenue associated with SV7 in our guidance. And I would point you to it, it's probably in the back half of this year versus the first half. And then in terms of those margins, we do have some drag, especially here in the first half as we go through the lease-up of, for instance, CH2 where we're obviously incurring those expenses and not only operating expenses, but the additional property tax insurance expenses associated with bringing those on. And until we get those two, call it, roughly 35% lease is probably about the breakeven point for us. There's going to be some drag as we work through the bottom level of that J curve. And so we would expect those to improve over time as that asset and others lease up.

It gives us an opportunity to accelerate our growth rate in the back half of the year if we're successful with our sales.

Would the margins also then subsequently go up in the back half of the year?

Yes.

Our next question comes from the line of Michael Rollins with Citigroup.

So just to follow-on that. Are those extra carrying expenses partly in the G&A line? Because I noticed in the guidance that the growth, I believe, of G&A was like 11%, I think at the midpoint. And just separately, different topic on the balance sheet, was curious if you could just provide a little bit more color of what the guidance infers for net debt leverage over the course of the year? Are you still trying to get below 5 times leverage net debt to EBITDA over time and over what time frame do you see that happening? Thanks.

Mike, in terms of the carry cost that are impacting those margins, most of those carry costs are going to be up in our operating expenses line item, that's where our data center teams get aggregated in terms of the expense recognition. In terms of the G&A growth of 11%, basically, most of that is being driven by some noncash compensation increases. And then some of that's being driven by expected increases in our travel and entertainment, as we expect to get back to, I guess, some normal sense of the level of whatever that looks like in 2021. And just to give you some sense, we anticipate the first quarter to continue to be at some very low levels of travel. But as we work our way through the year, anticipating some of that to start coming back and being introduced into the business, and we'll just see how things perform is and whether or not things open up to that extent. But that gives you some idea of what's driving the G&A. In terms of leverage, we finished the year at 5.2 times. And if you think about 2021, based on our anticipated capital needs and the timing of that capital deployment, I would imagine we would oscillate somewhere between 5.2 and 5.4 times during 2021, as we work our way through the year. And so obviously, a topic we always talk with our Board about and us here at the management team as well as our Board, we're comfortable continuing to let that reside in those levels here in the near term. So that's kind of what we expect for 2021.

If you wrap these kind of two questions together on the margin front with the balance sheet front, and you're looking at the FFO per share growth rate that's been below revenue for the last couple of years. When does that reverse in total? When you take into account what you're trying to do with the balance sheet with the operating business? When can FFO per share show the underlying operating and financial leverage that's typically built into the data center business model?

I may be wrong about this, and Jeff can correct me. But I think because of the capital intensity of the data center business and you either have to issue shares or stock, that once you get to a certain level of maturity and occupancy, you're always going to see lower FFO per share growth, then you see an FFO growth, then you see revenue growth, because you've got to cover the cost of financing the capital expansion. We've certainly seen that as we've looked across the industry generally. But I do think, I mean, getting back to your point, Mike, it's a good one. And I'd circle back to the 40 megawatts versus 23 megawatts. We've just got more occupancy that we have the opportunity to fulfill. As we do that will have a positive impact on our margins and our growth rate and our flow through to FFO.

Our next question comes from the line of Nick Del Deo with MoffettNathanson.

First, just a follow-up on that leverage question. It sounds like you expect the leverage ratio to kind of remain in the same zone as it is today over the course of 2021. Now as we look out a little further and kind of bake in the potential cost of SV9, is there any potential for equity issuances or do you feel comfortable that, that would not be required?

Nick, obviously, in 2021, it's not currently in our business plan just based upon capital needs and where our leverage is. Obviously, beyond that, it remains to be seen. But as Paul alluded to, we sit at 81.9% occupancy here at year end. And as we work to drive that north, call it, to somewhere in the mid to upper 80%, that EBITDA growth can drive not only a lot of value inside this organization but obviously, will help us with that leverage. And then as we continue to look out in terms of when we're going to need capital, whether it's for SV9 or some incremental computer rooms. But near term, most of our capital is going to be directed towards those second and third phases of some of the new builds we've just completed and the EBITDA growth relative to capital deployed in those scenarios are much, much higher EBITDA growth, resulting just because of the low levels of capital needed to bring that capacity to the market, since we've spent roughly 50% of it already. So I think that's where we are in the cycle. And we'll continue to disclose what we can as we get closer to the need for bringing on more capacity. So that's kind of how we're viewing things near term.

And then maybe one more on Northern Virginia. I think you guys mentioned that leasing in that market was the best since -- I believe you said 2015. Can you comment on how you feel about the sustainability of that performance and how the return attributes of the deals you've been signing there have been trending since that's something you've noted has presented some challenges in the past?

Nick, yes, we're pleased with how 2020 ended up in Virginia. We had some strong leasing there. And if you look at the leasing, none of it is hyperscale. It's all retail and scale leasing, which is really the core of our business and where we've been focused over time. So really to execute well against that core piece of the business is great to see, given that that market is very much measured and oftentimes by hyperscale leasing. So we still have the ability to take down some of those larger leases if they fit the profile that we've discussed earlier, as far as those that add to the ecosystem and value the ecosystem. But overall, it seems like that market is stabilizing and we feel like we're in a good position to continue to execute on that retail scale, but also well positioned for the right types of larger leases that may come along.

Our next question comes from the line of Tim Long with Barclays.

Two, if I could. First one is a quick one. Just talk a little bit about the maintenance CapEx. It looks like it's spiking next year. Is that just some catch up or is there something else going on there? And then second, I just want to touch again on the connectivity focus. You mentioned a lot of initiatives that you guys have gone through. Could you just let us know kind of what other type of areas are there opportunities for CoreSite to expand those offerings? And in the areas where you have invested in better connectivity, what has that meant for you as far as churns, or churn, or win rates, or pricing, or anything -- any color you can give us on the benefits of that, that would be great. Thank you.

Tim, let me just address the question on the maintenance CapEx, first of all. Yes, we are anticipating elevated maintenance CapEx for 2021. And what's really driving that inside the data center business is we're replacing a chiller facility in Boston that has hit the end of life. And so we're replacing and then enhancing that to handle the entire facility there, which should drive us some very good savings as we bring that on. And that will all occur here in the first half of 2021. Secondly, I just want to point out, there is some additional recurring CapEx that we've anticipated in our office business. Not something we talk about often here at CoreSite, but we have signed an office lease at SV1 in Downtown San Jose, which we are going to spend some dollars to bring that space up to what's needed before that tenant commences its lease here in the first half of 2021 as well. Steve?

As far as the connectivity solutions are concerned, Paul mentioned a little bit about this in his opening remarks as to some of the, I think, milestones that we've made during 2020 in attracting additional cloud providers, some of the enhancements to our peering exchange, higher speeds that we're able to accommodate customers, for example, on AWS Direct Connect in Chicago. Those are just some examples of what we've done already but I mean, as you mentioned, your question around win rates or churn and those kind of things. Last year, we announced that we implemented our Inter-Site Connectivity, which really connects all of our markets together. And we've seen some strong uptake from that, in some cases where we won opportunities because we had that service. So we continue to look at those types of services and how we can continue to enhance the OCX, for example, to provide more end to end provisioning of customers and the trade-offs of demand versus the cost to enhance some of those features. Those type of things, I think, are continuing to be top of mind for us and our customers. We announced earlier this year that we rolled out our DCI visibility to give customers visibility on as to what's going on in their environment over the portal, and that's been very well received. So it's all of those kind of things. It's really kind of easing the path for customers to become customers and making that interoperability a lot more seamless for them.

Our next question comes from the line of Ari Klein with BMO Capital Markets.

And maybe just going back to the churn and [indiscernible], it seems like if we adjust for some of the moving parts this year, it will be somewhere in the range of 5% to 7%. Is that kind of the right way to think about it moving forward beyond this year as far as churn?

Ari, I think as you look at several of the years, since we basically come public in 2010, I mean, you saw churn ranging from, I think, one year, we were down at 5.5% and then, obviously, this year would have been high at 11.6%. But when you look at and take away some of the highs and lows, on average, we were somewhere right around 7.5% to 8% on a regular basis. And so that's the way I'd probably think of it, somewhere around 1% to 2% per quarter is really what we would classify as fairly typical for us. As you think about 2021, to give you some sense for where we see that, I would anticipate our churn being somewhere between 1% and 1.5% in each of the first and second quarters, and then it would be a little bit elevated in the back half, probably 2% to 2.5% in the back half of the year, as we have the one customer moving out and some in September and some in October. Just to give you some sense for how we think the year will shape up for 2021.

And then maybe just on the capacity front, you seem to be in a much better position today than you were maybe last year. But how are you thinking about the need, or how much capacity kind of do you want to have on hand moving forward? A lot of it will obviously be dictated by the leasing that's done, but is there a right amount of capacity that you consistently want to have on hand and available?

It's a good question, Ari. I think it's more looked at by market but I would say we're a little bit over what we would ideally want right now. And primarily, that's because we haven't been as successful out of the gate with CH2 as we would have liked to. We've gone into the reasons for that in the past. But we're still very happy with that asset and we think it's going to perform well, and it has a good enterprise pipeline. But so far it's been a little bit slower than we expected. Ideally, we'd lease up at a faster pace this year. And I think somewhere in the 25 to 30 megawatts of capacity plus the ability to expand in existing data centers with new computer rooms and ready to develop land so that we have the optionality to expand capacity, that's probably the right way to think about the business model for our current size.

Our next question comes from the line of Richard Choe with JP Morgan.

A lot of the business last year came from existing customers. For guidance this year, are you still expecting most of the business to come from existing, or is that mix going to change a little bit and how should we think about it going through the year?

As we mentioned on the call, I think we had 89% come from existing customers in the last Q. And that's not unnatural for us, I mean, which is really part of the reason why there's such a focus for me and my team on driving new logos, because as we win those new logos and they come in, the likelihood of them landing and expanding becomes much greater. So not relying on just the base to continue to expand over and over and over again. So the ratios are probably fairly consistent, although, we look to try to overweight more in that new logo category. But as you look over time, I think anywhere from 70% to 90% in expansion is not uncommon.

And then in terms of the small scale and retail, is there any difference on how quickly those signings turn to revenue, or are they both about the same time frame?

I would say they're both pretty similar, as you get to the higher end of the scale, those can be a bit more complex in private cages that take a little bit more time to deploy. But they're all relatively in the same time period.

Our next question comes from the line of Frank Louthan with Raymond James.

I wanted to circle back again on the sales cycle a little bit. Can you give us a little more insight here. Is it a function of customers and how they're reacting broadly, or do you think it's something more specific to how you're trying to sell them? Are you trying to engage with larger initial deals, or workloads, or applications that are generally taking longer than the traditional mix that you've had with enterprise customers? Or is it just something about the market in general, are you seeing the sales cycles lengthen?

I'll just start, I guess, with the simple answer of yes. It's all of that. I will tell you that we are trying to get into sales cycles earlier, which is part of the reason they become protractive because we're in earlier. So therefore, we're in them longer. But they're also more complex, as I mentioned earlier. So as we look to really try to communicate our overall value and messaging to the marketplace around not just the nuts and bolts of the data center but the value that they can extract from the data center and the ecosystem that is embedded within it, that will hopefully allow us to position ourselves better with those enterprises earlier that may actually elongate those sales cycles as we've seen but hopefully, better position us for more opportunities and give us a better position at the table as they make those decisions.

I mean had you identified where maybe you were missing out on this in the past, and at what point does this sort of normalize and result in maybe higher growth going forward?

Well, I think it continues to normalize. I mean, it's hard to know what normal is in today's environment. But I think the process, as I mentioned earlier, has become more normalized. It's still a long process. And frankly, we still have more work to do with our sales team to get better and better at this and get better at our messaging. And as I mentioned earlier, try to deepen our moat on our value. So I don't think it's a static thing that we ever say mission accomplished. It's always trying to get better at trying to get in more deals and work them more efficiently. So it's hard to say that you can expect the status quo going forward because I don't think there ever will be in the high tech sector.

I would only add that some of our most valuable customers that Steve and his team have brought in and added, which have these some of the longer sales cycles are the ones who are going to come in, and they're going to use multiple clouds, multiple networks, probably some of the cloud adjacent storage and other cloud adjacent utilities and they're moving typically out of a traditional kind of on premises environment. So there's just a lot more moving parts for them and a lot more work with solution partners and our solution architects to make sure we get their initial deployment and setup right, so that they can have the ability to expand and add new features as they grow into their hybrid multi cloud architecture.

And have you seen any incremental activity or interest from any of the Chinese hyperscalers since November?

Nothing that's abnormal, I would say, pretty consistent.

Our next question comes from the line of David Guarino with Green Street.

I noticed CoreSite stopped providing property level disclosure, and they now show market level disclosure in the supplemental. Can you just talk about why the company thinks providing investors with less disclosures is fine in the portfolio? Is it the best way to communicate the story?

Every year we go through a process of looking at the information we disclose and how it's being received and how it's being utilized. And we're always looking for ways to enhance the message by giving good and many times more transparency in certain situations like this one. We felt summarizing the information just felt and gave, and tried to simplify the message. We did the same thing in our debt disclosure table. But the debt, you can go to our 10-K and get all the nitty gritty details that you need. And as Steve pointed out, adding some additional disclosures around how we're managing the business from a sales perspective, we think helps with transparency and aligns it much better. So we're always looking for ways to improve upon it. Specific to your question, trying to simplify it, David. And if there's something in there that's meaningful and is causing some real issues, let me know what it is, and we'll see if we can help you out.

Okay, that's great. And maybe we can talk offline about that. And just a second question on the Chicago market, we didn't touch a lot on that, but still limited activity there again this quarter. But it looks like there were two pretty large leases signed by some private data center operators during Q4. So could you maybe give us an idea, I guess, of how you view the supply and demand dynamics in that market and then just kind of your expectations surrounding when that space might be leased in CH2?

So we're positive on the market. It was in 2020, much more almost entirely a hyperscaler market. In fact, if I'm not mistaken, both of those two leases you mentioned were with one hyperscale customer. But it's traditionally been a very strong enterprise market. We actually had good leasing in that market. Our leasing in Chicago was our best since 2016. It was 19% ahead of 2019 levels. We brought our occupancy in CH1 up from 81% to 87%. And we have a good funnel of enterprises with larger scale requirements that hopefully will start bearing fruit this year in 2021. Steve, anything you'd add?

No, just minor correction. It was 13% over 2019, but in the ballpark, to be accurate. But yes, it was a good year. We'd like to do more. I mean, I would like to see more. We've got a beautiful building there that now we can extend all the value that we've had, our 427 LaSalle location and we're optimistic about the opportunity there. But as Paul mentioned, we did have good leasing and we expect that to accelerate as we go into 2021.

Our next question comes from the line of Omotayo Okusanya with Mizuho Securities.

In your earlier comments, you discussed the proposed New Jersey tax on financial service transactions kind of causing some delay or some uncertainty in the New Jersey, New York market. Could you talk a little bit about, one, what the latest is with that proposed tax? And then two, if you've seen any other kind of major markets thinking of doing something like that as all these municipalities are all trying to shore up their revenues post the pandemic?

So we don't have any real updated information. It almost seems like there's a little bit of pause. The proposal has been reduced but hasn't gone away completely and who knows it may be tied to bigger fiscal things going on relative to Washington and the COVID Relief/Stimulus Bill, but honestly I don't have very good tea leaves into the political situation tale. So I can't really address that. We haven't seen anything similar in other markets. I recall vaguely three, four years ago, Chicago floated something like that. And then when they saw what the impact would be on business in their state and their community, they shut it down. So I mean, I think all these municipalities are focused on the fact that, that business and that activity is portable to other jurisdictions. And so they have to make a judgment as to whether they're cutting off the nose to spite their face, if they implement a tax like that.

Ladies and gentlemen, our final question this morning comes from the line of Michael Funk with Bank of America.

Quickly, circling back interconnection of your comments earlier, hoping you can pull apart on what's in your guidance for 2021. You mentioned that a number of moving pieces there, volume growth helped in 2020, migration to higher capacity, price increases. So does your '21 guidance, does that assume lower volume growth, lower level of migration, pruning by customers or less ability to increase pricing?

Michael, in terms of 2021 guidance, as I mentioned earlier, our overall volume increases in 2020 were 7.7%. We actually expect volume increases for 2021 to be around 7%, which is right in line with where our revenue growth is guided to at this point in time. So what we're not certain of and haven't baked into the guidance is how much incremental revenue growth we would receive from customers as they're rolling over on their new lease terms or any migration to those higher priced products. We saw a lot of that activity in 2020 and at this point, have expected that to be fairly muted for 2021. And we'll just see how that rolls out as we go through the year.

And then one more, if I could, on capital allocation. You slowed the dividend growth recently. You gave a target for leverage for 2021. What does it take to get back to the historic level of dividend growth?

Well, I would simply say we continue to target that AFFO payout ratio of somewhere around 90%, 92%. And you can see we're just a little bit higher than that currently over the last trailing 12 months. But I don't anticipate that payout ratio increasing, that's the level we're comfortable with at this point in time. And so dividend increases are going to be very highly correlated to cash flow growth. So I would say look closely at the AFFO growth and that's really going to give you a better indication on what that dividend growth is going to look like longer term.

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Paul Szurek for any closing comments.

Thank you. Thank you all for your interest and your time and learning more about CoreSite today. I'll tell you I learned many good things about our team during the challenges of 2021. My colleagues have an increased appreciation for how conscientious, agile and innovative they are, not only to make the adjustments necessary to succeed in 2020, but to continue to build a better platform for how we go forward. They make me very optimistic that we can perform well with our strong business model and the abundant capacity that we have coming into this year. So I look forward to 2021 and hope you all have a great rest of your day. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.