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

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

Good morning and thank you for taking time to join us today. I'm glad to be here this morning to share our third quarter financial and operational results with you. Before we jump into those results, I wanted to take a few minutes to share some thoughts with you on my first CoreSite earnings call. First, let me start by thanking the CoreSite team for all of its dedication and hard work which is reflected in our solid third quarter performance. The continued execution and accomplishments of this organization are a tribute to the team and culture recruited and cultivated by Tom Ray during his 15 years at the helm of CoreSite and its predecessors. Our continued success will be driven by the strength of this team and the power of our strategy. CoreSite will continue to focus on being a differentiated hybrid provider of performance sensitive turnkey co-location in major markets with strong and diverse growth drivers and sustainable demand. We have the efficiency to accommodate high volumes of smaller deployments and the scalability for larger deployments that are performance or market sensitive. Our strategy takes advantage of our deep footprint in existing markets where we have scale and operating efficiencies which provide a template for incremental opportunities to deploy capital consistent with our strategic and economic value adding discipline. Additionally on behalf of the Board of Directors and the rest of the CoreSite team, I would like to warmly welcome Kelly Chambliss to our board. Kelly is currently the General Manager and Managing Partner of the distribution sector within IBM, Global Business Services, North America. And prior to that she served as the Global Chief Technology Officer to IBM Global Business Services with a focus on the development, marketing, sales, and delivery of cloud based solutions. We are…

Thanks, Paul. I will be reviewing our overall new and expansion sales activities during the third quarter, and then I discuss in more detail our vertical and geographic results. Our Q3 new and expansion sales totaled $11.2 million in annualized GAAP rent comprised of 60,000 net rentable square feet at an average GAAP rate of $187 per square foot. Regarding the composition of our new and expansion leasing our deployment size we have added incremental disclosures in the Q3 earnings supplemental to give you more insight into the performance of both the core retail co-location leasing as well as larger leases. We're looking at new and expansion leases signed of 5,000 square feet or less, total annualized GAAP rent was $9.1 million in Q3, a company record for this category and an increase of 60% compared to the trailing 12-month average. This category represents our core leasing activity which tends to be more consistent from quarter-to-quarter. The larger wholesale deals which we opportunistically pursue tend to be signed in volumes which vary more greatly from quarter-to-quarter. The detailed disclosure around leasing by deployment size can be seen in the third quarter earnings supplemental on Page 15. Transaction count for the quarter was 162 leases, 9% ahead of the trailing 12-months average. Q3 new and expansion signings were again weighted towards our core retail co-location business, with 148 leases executed at less than 1,000 square feet each. We also saw consistent pace of leasing amongst mid-sized customer requirements in Q3 when compared to Q2 with 12 new and expansion leases signed are between 1,000 and 5,000 square feet and two leases in excess of 5,000 square feet each. Our overarching strategy remains intact as we continue our efforts to attract customers that value high performance, low latency solutions, which can contribute…

Thanks, Steve, and hello everyone. I will begin by remarks today by reviewing our Q3 financial results. Second I will update you on our development CapEx and our balance sheet and liquidity capacity. And third, I will discuss our outlook for the remainder of the year. Q3 financial performance reflects total operating revenues of $101.3 million correlating to a 5.4% increase on a sequential quarter basis and a 17.2% increase over the prior year quarter. Q3 operating revenue consisted of $83.1 million in rental and power revenue from data center space, up 5.5% on a sequential quarter basis and 17.5% year-over-year. Interconnection contributed $13.3 million to operating revenues in Q3, an increase of 3.1% on a sequential quarter basis and 17.3% year-over-year. And tenant reimbursement and other revenues were $2.8 million including the $1 million lease termination fees Steve mentioned earlier. Office and light industrial revenue was $2 million. Q3 FFO was $0.90 per diluted share in unit an increase of 1.1% on a sequential quarter basis and 21.6% year-over-year. As it relates to FFO, in the third quarter we recorded two items that impacted FFO. One related to revenue and the other associated with expenses. On the revenue side, we received $1 million or $0.02 per share from the lease termination agreement executed in connection with the VA1 customer move-out. A majority of the revenue was offset by expenses associated with the CEO transition, including travel and introductory meetings with stakeholders, new director recruitment and related manners, as well as transaction and legal costs in Q3 amounting to approximately $0.015 per share during Q3. Adjusted EBITDA of $52.1 million increased 1.9% on a sequential quarter basis and 19.3% over the same quarter last year. Sales and marketing expenses in the third quarter totaled $4.5 million or 4.4% of total…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Thank you. Our first question comes from the line of Colby Synesael with Cowen. Please go ahead with your questions.

Great. Paul I think you can give us a little bit of color on your view of the company's current capital structure and when I look at where I think your leverage is going to go over the next year may be 18 months, it seems like you will be under-levered relative to what your stated goal is around that fortune mark. Is there any way to potentially accelerate the capital return to shareholders and just how do you think about that perhaps now that you're obviously in the CEO spot? And then my second question has to do with expansions, relative to where you guys are seeing demand across your strongest markets, how comfortable are you right now with the land banks that you have and your ability to build-out fast and ultimately to sustain the level of growth that you would like to for the company? Thanks.

Colby, thanks for the questions. As it relates to our capital structure, I think we're tracking consistent with our strategy as you can see from our portfolio and the activities that we have ongoing, we have some very good opportunities to deploy capital in our markets. I think we are very careful and thoughtful with our dividend strategy. We announced that later on in this quarter but I think that you won't see us do anything with our balance sheet that is inconsistent with our historical practice.

Colby, let me just add a little bit of commentary on that as you think about our leverage obviously we've given you visibility the on CapEx through the end of this year and obviously we'll give you more visibility as it relates to 2017 in February. But the biggest lever they get told associated with that ultimate leverage is the pace in which we deploy capital. We'll obviously give you more visibility into that in our February call. On to the next one which relate to expansion in land bank.

We as you look across our market and you see in the supplemental we have significant capacity within our existing portfolio to expand not counting the new acquisition in Reston; we can expand within our existing footprint approximately 50% in terms of occupied data center space. Including the Reston land which we expect to close in the next couple of weeks that increases to about 76%. We do have some markets as I mentioned where we see our supply lasting for up to two years and in those markets we will continue to look for opportunities to expand beyond the that two-year period. I hope that helps with your question.

Great, thank you.

Hey, Colby one more thing to think about as you look at our land bank, we have provided some information, it's not in our supplemental but it is on our Investor Presentation it's on our website and we'll put in the updated information here soon before we head on the road to NAREIT and other conferences. But it does give you a very good idea based on the pace of our absorption over the last two or four years by market expected how much remaining capacity we have in each of those marketplaces. It's a very good reference point as you think about our expansion as we move forward by market.

Our next question is from the line of Jordan Sadler with KeyBanc Capital Markets. Please state your question.

Thank you for taking the question. Good morning.

Good morning.

So my first question relates to the company's strategic position Paul this is, our first call with you hosting and I'm curious as you look at across the company's product portfolio and/or markets, if you are comfortable with how the company is positioned and/or if there any changes or tweaks that you'd like to see?

Jordan, we are very comfortable. The strategy that we have been deploying and following of having scale in major markets with diverse drivers, data center demand, coupled with our teams ability to execute and meet the requirements of those customers and the effectiveness of our go-to-market team that Steve leads has generated very good results so far and we're optimistic about what it means going forward. We're in very good markets with the right product we are able to meet both retail co-location demand and the needs of those customers that need to scale in those markets, and is driven by that the population and the enterprise strength and the numbers in growth of both the universe of enterprises and growth within enterprises in those markets. And the leasing results for the quarter were really strong, forward-looking. We've got a great base to build from this quarter as Jeff mentioned we've got $29.4 million of lease revenues commencing in this quarter. We just finished SV7 and demand for the remaining space there seems very strong in that market. And in our other markets we continue to see very good strength and we gave you a good overview where we are with those. So I think the strategy of being in the right markets and having the scale to be meaningful and relevant to those -- to customers in those markets and having the ability to meet their needs is continuing to work and we'll continue to work.

Along as a follow-up along similar lines geographically the company has added markets over time and has contemplated international expansion now and again but has never really stepping to that domain. What are your thoughts on the need to be a global player?

I don't think we need that to be successful as a company. I think being in the right U.S. markets with the right scale and the right ability to produce is sufficient to be a very strong company for many, many years to come.

Our next question is from the line of Manny Korchman with Citigroup. Please go ahead with your questions.

Hi everyone. If we look at your -- the newest announcement of Reston or the prime announcement of Reston, it seems like you're doing a lot of development upfront, why retrofit is building and build another two buildings rather than sort of taking a step at a time, you already have tenant requirements that facilitate that or need that?

Well I think the way that we're planning out the new addition of the Reston campus is based on a long-term view of the most efficient way to build and deliver power and give us advantages in leasing where cost and distribution of power and cooling are very important. And that's the reason why we're at including this 92,000 square foot infrastructure building at the beginning of the project. We have to get that in place at the front end. We do see very good demand in that market. As you know we will get some leasing in place before we start commencement -- before we commence construction of this project and we're optimistic about that.

Great and then the customer you mentioned is probably moving out in 4Q, can you just give us an idea of what's going on in their business they have chosen not to renew with you?

It's -- this happened in the data center business deployment people sign up for data center space for specific deployments frequently not all the time and when those deployments reach their end of life unless there is another purpose for that customer to use that space they move on and that's part of the churn that we have, we have periodically throughout our portfolio and more often than not and I think as Steve mentioned in this case, we see as presenting opportunities as supposed to problems.

And Manny, this is Steve. I will just add little bit of color there relative to the customer we've been working with them for quite some time and been a good customer over time but as they've matured and we've matured, we have seen opportunity to improve our situation and based off the market conditions and potentially improve our economics on that space and they also have all their alternatives as well. So it's no surprise, something we've been working at over time and we think it's in the best interest of both parties.

Steve, if you were to rent that space on a like-to-like basis, what would the change in rent be just not doing anything else not making smaller or bigger et cetera?

Yes I really can't get into the specifics around current leases or future leasing but we're optimistic on the outcome.

Our next question is from the line of Jonathan Atkin with RBC Capital Markets. Please go ahead with your question.

Yes I had a couple of kind of micro questions on a couple of markets and then a question on cross connects. So in Santa Clara the SV7 opening was delayed by just may be two to three weeks, I just wonder with some of the factors were there as it just spillover from late 3Q into 4Q. And then on VA3 I just wondered your thoughts do you look for a larger anchor or do you just sort of see as a continuation of VA1 and 2 and go with smaller deals? And then with respect to expansion in other markets, I was interested in Chicago for which there is obviously a lot of demand, what the sector at large is seeing and as you think about adding another locations would you be thinking about Downtown or Suburbs or any kind of pre-elections there. And then just a kind of turning to my last question which is around cross connects you mentioned ExpressRoute and direct connect and Open Cloud Exchanges and so forth and I just wondered can you remind us are you partnering with Megaport or Console or any of those types of companies, are they competitors would you potentially be a host or partner with one of them any thoughts around that I would appreciate? Thank you.

Thanks, John. As it relates to SV7 you are right there was a slight delay there I suspect that is the primary driver of a -- the miss on the consensus. Two reasons for that delay the best and good reason was that we had a significant change and scope due to extensive pre-leasing, so we had to change the construction plan in mid course which is hard to do without some delay. There was one also one municipal issue that we work through and that caused a couple weeks delay itself. So those were the reasons. Really pleased with that building I hope you have chance to come out and tour it sometime in the not too distant future.

I drove by it and it's bursting at the same, I can tell you. Thanks.

Good thanks for that endorsement. VA3 the source of the tenant for that will be a combination of spillover demand from tenants in our existing Virginia campus along with new tenants of various sizes and we will have space where we will continue to be able to push our core retail co-location business in that part of the campus. As it relates to Chicago a very good market for us. We've continued to grow in that space. We have some additional capacity to grow there. Beyond that we tend to not to get too much into future plans in specific markets and I think we're going to stick with that but we do like that market and it's a good market. In terms of the cross connection I'm going to turn that over to Jeff and Steve and let them give you the specifics regarding the dynamics there.

Hey Jonathan if you don't mind could you just repeat your question on cross connects. I think it was referenced to cross connects and cloud providers whether we're partnering with anyone?

Yes, I mean there is companies out there like what Megaport and Console that basically stitch together these sort of the interconnect platforms and I think some of your competitors are leveraging these tools to better position their own data centers for connectivity and I wasn't sure whether you also do that or view that as an opportunity or not?

Yes, we have Brian Warren SVP of Product take that.

Yes, Jonathan, let me just address that so number of those folks are here referencing our customers of CoreSite. And when you look at their service offering and frankly the service offering in many of the carriers they are deployed in our sites whether that be the global carriers national or regional, they are offering a sort of lack of Ethernet connectivity platform that's what kind of Megaport and Console are doing. I guess I'll do that as complementary in product line similar to like I say those other global and national carriers. They are deployed with CoreSite. We have our customer base that leverages them for secure connectivity into the cloud that's a component of offering of the multi-tenant data center. So I just think it's a very complimentary offering.

Next question is from the line of Barry McCarver with Stephens. Please state your question

Hey good morning guys and thanks for taking questions. I guess I want to focus little bit on just your guidance for the full year. If I take that the mid-point of your guidance range for revenue and EBITDA it certainly looks like you are expecting a pretty big 4Q in terms of sequential revenue growth in margins. Can you give us a little bit more color about what revenue segments might provide that? Thanks.

Yes, good morning Barry, it's Jeff and yes, I think key to Q4 I think you just look at the guidance and our results year-to-date taking the mid-point from a FFO perspective I think gives an implied FFO per share of $0.98. If most importantly related to the growth in our revenues and ultimately our earnings is the backlog that we currently have of which $29.4 million on an annualized basis will be commencing in the fourth quarter. Keep in mind on my prepared remarks I did say of that amount about it will be back in order in the quarter, so assuming it's got about the last two-thirds of the quarter in terms of its commencement timing. But that is largely attributable to the leases and customers we've signed up at SV7 which ultimately the completion was obviously, the commencement was dependent upon the completion of the building. So that gives you some idea in terms of what that is unless Steve will add any incremental color to the customers.

I think you said it well Jeff and while we had just come out of commencements and we had strong sales results for the last quarter as well as the prior quarter but really opening up SV7 and getting those leases commenced as well and some other leases is really what's attributing to the difference.

Would you think this rental revenue bucket is where most of that fall or would you see any kind of change in cloud revenue or interconnection as well?

Well the numbers we give you in terms of the backlog that $29.4 million that is all rental revenue. So annualize that and take, I'm sorry that's an annualized amount, so just take a pro rate share for the last two of -- two months out of that quarter. Obviously to the extent they do deploy and get their gearing, there will be some incremental revenue associated with power draws on those deployments. Most of that is a metered model and so you will see some revenue associated with that but most of that power revenue won't be dropped into the bottom-line.

[Operator Instructions]. Our next question is from the line of Frank Louthan with Raymond James. Please proceed with your question.

Great, thank you. You mentioned that 50% growth in cross connect and your cloud customers where do you think that has room to grow and going forward and how long should we continue to see growth like that with cross connect?

Hi Frank I think it's a little bit choppy but I think you're asking about our 12.5% volume growth on cross connects, it is that accurate? I will assume it is. As it relates to the quarter we did have volume growth of 12.5%. Our overall revenue growth Q3 over the Q3 of the previous year were 17.3%. If you look at where we've been historically, if you take full year of 2015 over 2014 that volume growth was 12.9%. So that the volume growth we had this quarter is consistent with where it was full year 2015 over 2014 and that growth in the third quarter is lower than what it was in Q1 and Q2 of this year but the first half of this year we had, I think outperformed based upon where we thought it was going to be. So how much longer does it have to go? We hope for a while but a lot of that is dependent upon Steve and his team are continuing to attract and address those deployments to drive that cross connect entity which obviously relates back to the strategy Paul alluded to earlier.

And Frank if I'm not sure if you dropped or not but I think part of your question was related to Cloud, cross connect growth and 50% is that sustainable? I think that depends well and a couple of factors are playing into that. One is that from a overall cloud maturity perspective that market is still fairly early in the innings. So we're seeing strong growth there and we're also seeing it on a fairly low number, so as that number gets bigger maintaining that growth rate gets more challenging. However we are seeing pretty significant growth overall in the cloud space as you've seen across the market and we're encouraged with the growth in that setting. So early innings but we're optimistic and we don't see diminishing in the near-term.

Our next question is from the line of Lukas Hartwich, Green Street Advisors. Please proceed with your question.

Hey I just have a quick one, the OpEx line was up fair amount this quarter was that related to the SV7 or was there anything else going on there was driving that?

Yes, if we did have some of the some repair and maintenance expense during the quarter related to a couple items we had to care of. If you just look at some of the disclosures in our supplemental you can see was up about $700,000 or about 25% over the trailing 12-months so that largely contributed to some of that. In addition you also get in that third quarter you get typically get a little bit higher power expense because it's got the seasonality in the rates in the third quarter.

Our next question is from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your questions.

Hi just circling back on Reston for a second if I may, what is the nature of the targeted tenancy for campus of that scale and the targeted return?

Jordan, as of latter, we kind of typically expressed a target of a exceeding 12% return on cost on an adjusted EBITDA basis once we get to stabilization of assets. We tended to better than that but that's our target. In terms of the tenant mix I think you will see a mix very similar to what you're seeing throughout our major markets both in California and Chicago and Northern Virginia and that will be primarily driven by smaller deployments and retail co-location overtime but it will include a fair amount of leasing to customers that have the need to scale and is driven by all the demand factors in that market and as you know that is a fantastic market for data center demand both in terms of volume and in terms of the diversity of the demand.

Okay. And what is the proximity of this campus relative to your existing holdings?

Three or four 500 yards down the street will be connected by diverse redundant fiber and so we'll essentially be the same campuses what we currently have.

Thank you. At this time I would turn the floor back to Paul Szurek for closing remarks.

Thank you for listening to us this quarter and thanks for all those questions. As you can see we are fortunate to enjoy some very supportive elements going forward, a healthy market, a strongly performing team, a great new asset that's just come online, and a very strong volume of new leases and revenues. We really look forward to continuing to execute well on behalf of our customers and our shareholders and we look forward to speaking with you again next quarter. Thanks very much and have a great day.

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