Cencora, Inc. (COR) Q3 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the CoreSite Realty Corporation Third Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greer Aviv, Investor Relations and Corporate Communication. Thank you. You may begin.

Thank you. Good morning, and welcome to CoreSite's Third Quarter 2017 Earnings Conference Call. I'm joined here today by Paul Szurek, President and CEO; Steve Smith, Senior Vice President, Sales and Marketing; 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 2016 Form 10-K and other 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 the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com. And now, I'll turn the call over to Paul.

Good morning, and thank you for taking the time to join us today. I'm glad to share our third quarter results and to update you on our near-term plans and the current state of our market. CoreSite delivered strong third quarter results. Revenue, adjusted EBITDA and FFO grew 22%, 25% and 22% year-over-year, respectively, driven by continued customer expansion across the portfolio and a focus on good execution throughout the organization. Last month marked the seventh anniversary of our IPO on the New York Stock Exchange, and I couldn't be more pleased with the CoreSite team and its accomplishment since then. We have remained committed to a focused strategy and have distinguished our hybrid model, expanding our network and cloud-anchored campus model to a substantial majority of our market. We are generally best positioned to provide our customers with access to low latency interconnection-rich network node complemented by flexible and scalable purpose-built data centers that can accommodate both higher density workloads and the customer ecosystem emerging in major metro market. Since IPO, we have more than tripled revenues almost entirely through organic growth while prudently deploying capital at a pace and at return that have allowed us remain one of the lowest levered REIT. We continue to believe our business model will support future growth and create a compelling value proposition for our current and future customers. Moving on to third quarter sales performance. We signed new and expansion leases of $10.1 million in annualized GAAP rent. Q3 leasing volume included an incremental expansion of a strategic customer at LA2. This customer is utilizing its collocation space with us to support multiple applications that require low latency and interconnection density combined with a reasonable total cost of ownership. This deployment illustrates how the value of our campus model continues to drive strong expansion demand from existing customers both in their current CoreSite facilities and in our other market. These organic customer expansions accounted for approximately 94% of annualized GAAP rent signed in Q3 and 85% of GAAP rent signed since December 31, 2014. In addition to this organic growth, in the third quarter, we added 24 new logos to our customer base. We have been redirecting our new logo efforts consistent with the market turn towards hybrid cloud and multi-cloud architecture focusing on the enterprises and enablers most attracted to that model and most likely to contribute to the customer ecosystem. We are pleased with these efforts so far. These types of customers generally increase their requirements over time becoming additional contributors to our organic growth. I expect our new logo generation to increase as our modified sales and marketing efforts gain additional traction. We believe our markets are generally in balance or close to it in terms of supply and demand. We are therefore focused on ensuring we have adequate capacity in key markets to continue to meet customer needs for differentiated turnkey data center capacity. We currently have a solid pipeline of projects in planning, entitlement and construction with nearly 220,000 square feet of capacity in various stages of development across the portfolio. We look forward to 2018 during which we expect to set up our company for its next phase of growth, including expected construction commencement on SV8 and LA3 and our ongoing expansion in Reston. These 3 projects, cumulatively representing nearly 415,000 square feet of incremental TKD capacity, provides significant runway as we look to 2019 and beyond in 3 of our largest markets. In addition, we are opportunistically looking for additional land and/or capacity in Denver and Chicago. Looking more specifically at our individual markets. In Los Angeles, we are on track with our development projects at LA2 and expect to deliver 87,000 square feet of turnkey data center capacity in the first quarter of 2018. Due to existing customer growth and new customers, the total expansion capacity under construction at LA2 is now 43% preleased. We continue to work through entitlement, permitting and design work for LA3. Pending any unforeseen delays, we expect to commence construction in the first half of 2018. In terms of the market overall, pricing has softened slightly due to additional capacity created by churn at sites owned by others, but we view that as temporary. In the Bay Area, occupancy levels remain elevated across the market, while pricing is moderately down due to incremental supply from other developers but still ahead of historical norms. Across our Santa Clara campus, we have approximately 56,000 square feet available at the end of Q3. We are in the design process for SV8 and anticipate filing for permits in the coming weeks, which should enable us to start construction in the first half of 2018. Northern Virginia and DC still see strong demand though the market remains competitive with new supply primarily in Loudoun County and Manassas. Occupancy rates are high, but the amount of new supply has resulted in modestly more competitive pricing in this market. We anticipate delivering 3,000 square feet of turnkey data center capacity at VA1 in the fourth quarter as well as a 25,000 square foot first phase of turnkey capacity at VA3. We have begun site work at VA3 for an 80,000 square foot data center building, which, at full build out, will have capacity of 12 megawatts plus a 77,000 square foot centralized infrastructure building to serve the entire VA3 property. We will build out the first 50% of this new data center building as Phase 1B. Other site work ongoing will enable an ultimate VA3 capacity of 611,000 to 897,000 square feet of new data center space, depending on final zoning rules. We continue to have good discussions with current and prospective customers in this market regarding their growth needs and remain encouraged by the pipeline for pre-leasing opportunities at VA3. In Denver, we completed the first phase of expansion at DE1 and placed into service 8,200 square feet of turnkey capacity, which was 42% leased and 35% occupied. We continue to enhance the value of the ecosystem as our Denver campus is now the site of the first native on-ramp for a leading public cloud provider serving the U.S. Mountain region. With supply across the market still constrained, in Q3, we began construction of the final phase of expansion at DE1 with 15,600 square feet of turnkey capacity, which we estimate completing in the third quarter of 2018. In closing, we are pleased with our third quarter results, our development activities supporting future growth and our efforts to increase market share in the hybrid and multi-cloud space. We believe that our differentiated business model and ownership strategy focusing on scalable, flexible, network and cloud dense data centers in infill locations of large-edge markets where the data community has a high level of interaction and interdependence will enable us to continue to prosper on behalf of our shareholders. With that, I will turn the call over to Steve.

Thanks, Paul. I'll begin by reviewing our overall new and expansion sales activity during the third quarter and then discuss in more detail our vertical and geographic results. During the quarter, we signed 103 new and expansion leases, totaling $10.1 million in annualized GAAP rent comprised of 41,000 net rentable square feet and average GAAP rate of $247 per square foot. There are a few dynamics impacting the Q3 rate, including higher average density, which was almost 40% above the trailing 12-month average. Related, we had somewhat of a unique situation with a full room enterprise customer in Santa Clara that contracted for additional power without adding incremental square footage, resulting in the above average density. We saw good traction this quarter as it relates to new logo signed with enterprise customers accounting for 75% of annualized GAAP rent signed for new logos. These customers included a regional credit union, which deployed with us in 2 markets; a network pop with the largest social media provider in China; a Fortune Global 500 Japanese information technology equipment and services company; and a provider of hardware and cloud-based CDN and caching solutions. As Paul mentioned, Q3 leasing was again heavily weighted towards expansions of existing customers, which continues to be a strong source of organic growth for us in existing deployments and in new markets or facilities. During the third quarter, a large public cloud provider expanded with us in New York supporting its dipole node and access to its cloud onramp. Second, a large cloud application and platform services company expanded with us in Chicago with a new backbone pop deployed to support its cloud computing services. Lastly, a leading enterprise cloud -- private cloud and backup infrastructure provider expanded with us in Northern Virginia to support multi-cloud service offerings to its customers. Both the organic growth from our embedded base and the incremental growth from our new logos that are attracted to the high level of interaction with our ecosystem continue to drive better-than-expected performance for our interconnection products and services. In Q3, interconnection revenue grew 21% year-over-year, reflecting total volume growth of 13%, including 70% from fiber cross connects. Year-to-date, interconnection revenue increased 18%. With respect to the vertical mix within our ecosystem, during Q3, network and cloud customers accounted for 12% and 14%, respectively, of annualized GAAP rent sign. The network vertical continued to perform well in Q3 with solid growth from existing customers driving activity in the quarter. We signed 4 new network logos in Q3, including a global satellite connectivity solutions provider and an international fiber to the home network developer. Network demand from existing customers remains healthy with a number of expansions across nearly all of our markets, including the sizable expansion of a subsidiary of an international telecom provider in the Bay Area to support its end customers growth in the U.S. Turning to the cloud vertical. As I mentioned previously, we saw good growth from existing cloud customers that are expanding with us in Q3 to support growth in their respective products and services. We signed 5 new logos, including a global cloud hosting provider, a leader in software defined infrastructure and a network visibility and traffic monitoring technology provider. As it relates to our enterprise vertical, this vertical accounted for 74% of annualized GAAP rent signed in the third quarter. Looking more specifically at Q3. In addition to the expansion with our strategic digital content enterprise customer in Los Angeles, we signed expansions with a leading e-commerce retail of home goods, a leading e-health care provider, a multinational mass media and entertainment conglomerate and a sports broadcasting organization. We continue to believe our highly interconnected network-dense data center campuses provide the optimal mix of connectivity, low latency and scalability to attract this key customer demographic. From a geographic perspective, our strongest markets in terms of annualized GAAP rent signed in new and expansion leases during Q3 were Silicon Valley, Los Angeles and New York, New Jersey, collectively representing 85% of annualized GAAP rent signed in the quarter. Strength in Bay Area leasing was led by the power expansion in Santa Clara, which I discussed earlier. Above and beyond that specific lease, performance was driven by the cloud and enterprise verticals followed by network service providers. We have also seen increasing interest from the autonomous vehicle sector in the Bay Area market and continue to see the enterprise vertical representing the demand for larger requirements. Demand in Los Angeles was again impact by the expansion of a strategic content customer, which Paul highlighted earlier. Apart from that specific lease, digital media entertainment continues to be a reliable source of demand for us, where we continue to see steady network growth with 3 new networks added to the Los Angeles ecosystem. The positive trajectory continued in the New York, New Jersey market in Q3 with performance led by cloud growth. In addition, we see increasing activity among the financial services vertical while the health care vertical is also increasingly common in the funnel. Sales of square footage sold both increased again this quarter with leasing at NY1 the main driver. New logo growth was weighted towards the enterprise vertical at both NY1 and NY2. In October, we received notification from the Virginia Economic Development Partnership authority that CoreSite successfully achieved the targets set forth for capital investment and new jobs creation in order to qualify for the sales and use tax exemption for the purchase or lease of qualifying computer equipment and enabling software by data centers and their customers. CoreSite is the first and only data center provider to qualify in Fairfax County, and we believe this is an important differentiator and benefit to our customers. We can continue to include additional current and future CoreSite data center customers as participants in the programs, sales and use tax savings program through June 30, 2035. Over the last 6 quarters, a significant amount of our leasing activity has been focused on the necessary building blocks to support our customer ecosystem and future growth by attracting key networks, cloud service providers and enterprises with similar anchor tenant characteristics, which promote the robust exchange of traffic within our facilities and interdependence among our customers. As we build critical mass of such customers, we will focus more sales resources towards attracting new logos that complement and exchange data with these core customers. In summary, the third quarter sales results demonstrate the effectiveness of our strategy and business model, and we will continue to work to attract valuable new customers and applications to our data centers. I will now turn the call over to Jeff.

Thanks, Steve, and hello, everyone. My remarks today will begin with a review of our Q3 financial results followed by an update of our development CapEx and our leverage and liquidity capacity. Q3 financial performance resulted in total operating revenues of $123.1 million, a 4.4% increase on a sequential quarter basis and a 21.5% increase year-over-year. Operating revenue consisted of $101.8 million in rental and power revenue from data center operations, up 4.6% on a sequential quarter basis and 22.5% year-over-year. Interconnection services revenue contributed $16.2 million to operating revenues, an increase of 5.7% on a sequential quarter basis and 21.1% year-over-year. And tenant reimbursement and other revenues were $2.2 million. Office and light industrial revenue was $2.9 million. Q3 FFO was $1.10 per diluted share and unit, flat on a sequential quarter basis and an increase of 22.2% year-over-year. The quarter included a couple of items worth highlighting and the first is a benefit of approximately $0.03 per share related to real estate tax true-ups at some of our facilities in the Bay Area. In addition, during the third quarter, we saw elevated repairs and maintenance expense across the portfolio primarily for chiller repairs and upgrades which amounted to approximately $0.02 per share. We also experienced increased expenses in Miami related to Hurricane Irma, which amounted to approximately $0.01 per share. Related to Hurricane Irma, we want to personally thank our team for their efforts in serving our customers and keeping our Miami data center up and running throughout the storm and its aftermath. Looking forward into Q4. I want to emphasize that we expect to invest approximately $8 million to $10 million of recurring capital associated with the chiller plant replacement and upgrade at LA2 and, therefore, we expect AFFO to decrease sequentially. Please remember that we expect a strong return subsequent to this investment with increased energy efficiency. Returning to Q3. Adjusted EBITDA of $65.3 million increased 0.7% on a sequential quarter basis and 25.2% over the same quarter last year. We continued to expand our margins with our adjusted EBITDA margin expanding to 54.7% as measured over the trailing 4 quarters ending with and including Q3 2017. This represents an increase of 230 basis points over the comparable year ago period. Related, trailing 12-month revenue flow through to adjusted EBITDA and FFO was 65% and 54%, respectively. Sales and marketing expenses in Q3 totaled $4.6 million or 3.8% of total operating revenues, down 60 basis points year-over-year. General and administrative expenses were $9.8 million or 7.9% of total operating revenues, a decrease of 140 basis points year-over-year. For the full year, we expect G&A expense to be approximately 7.5% of total operating revenues, in line with the year-to-date level. Now turning to our same-store metrics. Q3 same-store turnkey data center occupancy decreased 20 basis points to 90.3% compared to Q3 2016. Additionally, same store monthly recurring revenue per cabinet equivalent increased 6.1% year-over-year and 2.2% sequentially to $1,503. Turning to renewals. In Q3, we renewed approximately 81,000 total square feet at an annualized GAAP rate of $178 per square foot. Our renewal pricing reflects mark-to-market growth of 5.5% on a cash basis and 10.9% on a GAAP basis. Churn in the third quarter was 1.4%. We commenced 22,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $410 per square foot, which represents $8.9 million of annualized GAAP rent. As previously mentioned, the density increase in the Bay Area elevated the commencement rate in Q3. We ended the quarter with our stabilized data center occupancy at 93.4%, a decrease of 40 basis points compared to the prior quarter. We completed 8,300 square feet at DE1 and this capacity was placed into the pre-stabilized pool at 35.2% occupancy. Turning now to backlog. Projected annualized GAAP rent from signed but not yet commenced leases was $13.7 million as of September 30, 2017. On a cash basis, our backlog was $20.1 million. We expect approximately 35% of the GAAP backlog to commence during the remainder of 2017 with the balance expected to commence during the first half of 2018. As Paul mentioned, we have a total of nearly 220,000 square feet of turnkey data center capacity in various stages of development. This includes new construction and expansion projects in Northern Virginia; Washington, D.C.; Los Angeles; Denver; and Boston. As of the end of the third quarter, we had invested $62.3 million of the estimated $217.1 million required to complete these projects. We have now included the expansion opportunities associated with the future development of both SV8 and LA3 to our held for development summary, which is reflected on Page 19 of the earnings supplemental. The percentage of interest capitalized in Q3 was 11.5% and the year-to-date amount is 11.3%. For 2017, we continue to expect the percentage of interest capitalized to be in the range of 10% to 15%. Turning to our balance sheet. As of September 30, 2017, our ratio of net principle debt to Q3 annualized adjusted EBITDA was 3.0x. Including preferred stock, the ratio was 3.5x. As of the end of the third quarter, we had $332 million of total liquidity consisting of available cash and capacity on our revolving credit facility. As we announced on October 16, we intend to redeem all 4.6 million outstanding shares of our 7.25% Series A cumulative redeemable preferred stock with a redemption date on December 12, 2017, for a total of $116.3 million, including accrued dividends. We believe this transaction will result in significant savings and earnings accretion for shareholders of approximately $0.06 to $0.08 per share in 2018. We expect to utilize the credit facility to redeem the preferred shares and we anticipate the need for additional debt financing during the first half of 2018 to further increase our liquidity. Timing, pricing and the type of debt instrument are dependent on market conditions, and we've targeted a total issuance amount of $225 million to $300 million while maintaining a healthy balance between our fixed and variable price debt. This additional liquidity can be utilized to fund continued development across the portfolio. And looking into 2018, we currently expect our total capital investment to be between $250 million and $300 million. Finally, as you begin thinking about your models and 2018 estimates, keep in mind that we are planning to adopt 2 new accounting standards, revenue recognition and lease accounting, effective January 1, 2018. The adoption of these new standards predominantly impacts us in 3 ways, all of which have been disclosed in our previously filed financial statements in 2017. First, related to the balance sheet, it will require us to gross up our balance sheet by $100 million to $300 million to reflect the estimated lease liability for the properties we lease from third parties. Second, depending upon the quantification of the balance sheet impact, it may increase our rental expense to reflect increased levels of lease expense included in current lease terms. This will likely range from $0.00 to $0.07 per share. Third, we will no longer capitalize indirect sales and marketing payroll cost associated with successful leasing. This has a negative impact of $0.03 per share. All in, we anticipate this will have an impact of $0.03 to $0.10 per share and is more fully explained on our public filings with our Q3 Form 10-Q expected to be filed tomorrow. Now we'd like to open the call to questions. Operator?

[Operator Instructions]. Our first question comes from the line of Dave Rodgers with Baird.

Maybe, Steve, just wanted to start with the leasing activity in the quarter. It seems like it was maybe just a little bit slower than the pace you've been moving at, and I wanted to know if that ties in all your comments that you had made about setting the groundwork for the right tenants to come in. So I guess the 2 questions, to shorten it up, would be, did you see any kind of pull back in leasing in the quarter that worried you at all? And the second would be, do we expect leasing to accelerate now that the building blocks are in place or just kind of stay where it's at?

Yes. Thanks, Dave. I guess the short answer is it doesn't provide any concern as to where we are with any slowdown. I think we are being, and continue to be, disciplined about how we're first to marketplace in pricing. So that's a key aspect of this. But as we mentioned in the prerecorded remarks there, it's really around how do we target the right tenants, those that are going to value low latency and interconnection. And as we establish those building blocks, to your point, we continue to look to those right logos that will complement that as well as value that, and that continues to be our strategy. So as far as overall volume is concerned, we continue to drive more focus there, and we expect to see those results to increase.

Okay, great. And then, Jeff, you did mention on the balance sheet up to maybe $300 million of issuance in the first half of next year. Have you thought more about the public fund market in terms of that being an new option for you given the sizing of the transaction you talked about?

Obviously, the public bond market is always an option, and we watch that market and that pricing closely. Having said that, you saw the recent execution actually that was just priced yesterday by one of our peers in the public bond market. And I think that data point, together with some of the other data we see in terms of trading pricing of some of the other public bond issuers, is something we'll take into consideration. But I think we're able to get better pricing in the private market today. At least we were -- last April when we went out, last test of the market, we hope that's the same as we again look at trying to do something again the first half of '18 but is something we'll have to watch closely.

Lastly for me, you talked about added power revenues or added power density at existing leases in the quarter. One, do we see more of that coming in the future; but two, also, how much of an impact did that have in the third quarter, and is there any additional carryover into the fourth quarter as well?

Yes, as far as power densities are concerned, we do see some applications that are requiring higher density overall. We feel that that's fairly consistent quarter-over-quarter, though. So I think as equipment and customers get better utilizing their power as well as gear gets more efficient in using that power, you'll see that climb up a bit over time. But nothing dramatic that we've seen, just a continued march towards that better utilization.

And Dave, the only other data point I'd give you if you just take a longer look at what's happened to density, just call it, over maybe the last 2 years, you have seen an increase in overall power densities across at least our portfolio. But this quarter was even higher than what we've seen there. That's obviously why Steve wanted to point it out in the prepared remarks.

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

I wanted to follow up on the development and sort of the positioning again for '18 and the sort of next phase of growth. So you've added LA3 and SV8 to the new development schedule and, obviously, Reston is underway. Can you just talk a little bit about the return expectations there vis-à-vis sort of maybe commodity space versus what you've historically been able to generate on sort of more network dense facilities?

Jordan, this is Paul. We view these investments as having the same potential returns that we have always historically targeted. And as you know, that is based upon the fact that our space is not commodity space but leverages off our network nodes and our model of providing scalable higher density capacity, more efficient capacity close to, i.e., interconnected to our network nodes. So I view these as continuations of our historical development strategy and return targets.

That's helpful. But I was also kind of -- I can't help but notice that the scale of some of these new investments, obviously, the function of you guys kind of leasing up a lot of the existing portfolio. You and I have talked about sort of avoiding the J curve a little bit and maybe signing big leases up front. And it seems to me that there is some real competition around courting those larger customers, those anchor customers that you guys have historically targeted. Is -- will you be able to maintain sort of price on those larger requirements still?

Consistent with historical practice, I believe so. The preleasing activity really heats up right around the time that you break ground for your vertical buildings. We expect the same here. And historically, a lot of our pre-leasing is to just coming from customers who need to expand in place in our existing campuses, and we see a lot of those same trends continuing with these projects which is why we're excited about moving forward with them.

The only other thing I would add there, Jordan, is that as we've put together these projects not only to -- as we determine the scale of each individual project but also the underwriting of it, we factored in some of the pricing that's needed in order to get those off the ground in order to get the ultimate returns out of that project. So we feel like we're well positioned in order to compete and still drive the returns that we need to.

Last one. As we ramp these developments a little bit more, especially the initial phases, I think you talked about first half of '18 for SV8 and LA3, should we anticipate that the CapEx spend for next year would ramp up a bit above the levels we're seeing this year?

Yes, Jordan. I think today, we've got guidance out there for this year to be, I think, it's $250 million to $290 million range, so midpoint of 3 -- I'm sorry, midpoint of $270 million. In the prepared remarks, I actually highlighted that we would expect CapEx for 2018 to be about $250 million to $300 million. So at the midpoint, right on top of what we expect to ultimately spend in 2017.

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

So I was interested in the renewal spreads and maybe talk a little bit more about the positive spreads that you're seeing. Is that fairly broad-based? Does it vary? Is it shorter-term contracts? Are you also seeing a step up on the law of the longer-term full sale deals that come up for renewal? And then my second question is on interconnection and -- what types of scenarios are you seeing that's driving the growth there? Is it just more businesses connecting to each other within the same campus or data hall? Or is it cloud? Or more carriers popping your sites?

Jonathan, it's Jeff. I'm just going to add some commentary and I'll then turn it over to Steve to give you a little bit more details. But one thing I just wanted to make sure we recalled is when we gave guidance at the beginning of this year, we tried to highlight that we expected our cash mark-to-market to be fairly flat or at the lower end of our range in the first half and then to be elevated in the second half. And so based on the third quarter results, it's right in line with what we expected, and so we weren't surprised by it. But that's -- I just wanted to highlight that to make sure you guys were aware of what we expected to happen during the year. Steve can give you some additional commentary related to your other questions.

Yes, Jonathan. As far as renewal spreads are concerned, it is a cause and focus for us to ensure that we are maximizing the opportunity there but also being fair to our customers, and we feel like we strike that balance. We do have a fair amount of customers that came due this year that we were successful in marking to market, so we continue to look at those individually. And as we also have constrained space to make sure that we're getting the most return out of the space available. So that continues to be a focus for us. But overall, we seem to be in balance with where market conditions are. And also, as you look at the churn, we seem to be striking that balance fairly well. As far as interconnection growth is concerned, the primary factor that we've seen is really in the connection to cloud so we've highlighted that on prior calls and that continues to be the trajectory that we're seeing right now and we look to see that continue in the foreseeable future.

Okay. And then Chicago, you mentioned that, I think, alongside Denver, is a place amongst you're looking for additional location. So in Chicago, is that kind of a campus situation or an additional site downtown? What are you thinking there?

Like most of our peers, when it comes to that type of activity, it's better to talk less until you actually execute something. But I think we've been fairly clear that our business model is based on the campus model, and whatever we do in any city like Chicago or Denver will be consistent with that model.

Okay. And then finally, I'm just interested that you called out the chiller plant investments at LA2. And just at a broader level, can you talk about how frequently one would see the sort of lumpier and more expensive maintenance activities going forward?

I think that they're fairly rare. I mean this one came about because we were expanding LA2 anyway and needed to add additional chiller capacity, and that gave us the opportunity to actually upgrade all the chillers at the same time and achieve a much higher energy efficiency and significant savings. And so really -- it really is a great return on investment. So that doesn't happen very often where replacement calendars can be accelerated in conjunction with a new build. But in this case, it's very attractive.

Our next question comes from the line of Robert Gutman with Guggenheim.

So given year-to-date commencements and what's scheduled to commence in the fourth quarter from the backlog, I think we get pretty close to the $30 million that you estimated to be close to the year. So if we assume another consistent quarter of incremental deals signed and commenced, and without any meaningful change in power revenue and churn, is it a valid assumption to say that you're -- we're looking towards the high end of the revenue range?

Yes. Yes, let me talk a little bit about -- I think what you're looking at is probably guidance for 2017 that we have provided. I think as you think about the fourth quarter, we -- obviously, we chose not to change our guidance for the fourth quarter for the remainder of 2017 just given where we were in the year. Having said that, I think it's important to think about as you look at it for operating revenues, adjusted EBITDA and FFO per share that we would likely be at the upper end of our current guidance ranges. I just wanted to add that additional commentary just as you guys think about the fourth quarter.

And just a quick follow-up. So I guess the same thought process applies to the interconnection guidance because it's 13% to 16% and you're already about 18% year-to-date.

Yes. I mean, I think we're just under 18% year-to-date, so we would agree we would be probably at the upper end, probably exceeding the upper end of our guidance range given what we've got out there today.

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

You've historically reviewed your dividend towards the end of the year. I realize you raised it, I guess, out of order in the second quarter. Is it fair to assume that you're going to still look at it again at year-end this time around? Or are you now in a new schedule for that? And then as it relates to the stabilized square feet, it looks like it was down quarter-over-quarter, I think, for the first time if not ever. I'm just trying to understand what would have been behind that.

So thank you for the question. I believe we mentioned after the last dividend raise that we expected to review the dividend biannually, and I expect that our board will continue to follow that approach.

And if that's the case, is it fair to -- we should still kind of think of the payout ratio being somewhat similar? So whatever we kind of all assume for our growth assumptions, it is what it is, but the payout should be most likely fairly similar?

I mean, I guess that's a good way to look at it. It's ultimately a board decision, so I can't say any more than that.

And Colby, just related to your second question around the stabilized square feet, that decrease of about 9,000 square feet really just relates to some of the churn that we experienced in the quarter. And the churn that we experienced in that decrease was largely a result of some move-outs we had at Chicago.

Okay. And did I also hear -- just as a quick follow-up, as relates to the guide, I appreciate that the recurring CapEx investment will impact AFFO, and I think you may have said you expect, I think, AFFO to be down quarter-over-quarter. Did you also say that because of that, it's going to impact FFO? And if so, what line item does that ultimately show up and to drive that since that's -- I think that excludes recurring CapEx.

Yes. No, Colby, the recurring CapEx that we expect to invest in the fourth quarter specifically related to that chiller plant is about, we said, $8 million to $10 million in the fourth quarter. And so that will only impact AFFO. That does not impact our -- I'm sorry, does not impact our FFO, just AFFO.

Great. So AFFO down quarter-over-quarter but not necessarily the case with FFO?

That's correct.

Our next question comes from the line of Sami Badri with Crédit Suisse.

Regarding the updated disclosed number of interconnections, the 25,000-plus in the supplemental disclosures, could you give us some color on the driving force behind the new cross-connects? And how come things like Megaport, PacketFabric and other software defined network companies are helping drive interconnection revenue for your company?

Yes, sure. As I mentioned earlier, the primary driver that we see, so far anyway and has been on the trail, has been related to those enterprises that are connecting the cloud as well as network to network. So a lot of enterprises that are connected to both networks and to cloud customers. We do have several SDN providers that are built out within our buildings. One of those is PacketFabric, another is Megaport, as you mentioned. And they are driving some of that interconnection as well. But so far, not a material amount.

And Sami, the only other commentary I would add, and we mentioned this on the last call, and it's fairly consistent again this quarter, Steve touched on this earlier in regards to the interconnections being driven by our cloud providers. That growth rate of those companies connected to cloud providers is probably 2 to 3 times higher than what we're seeing in the fiber cross connect volume, just from a volume perspective, just to give you some perspective on what we're seeing inside the vertical mix.

Got it, got it. And then on the 24 new logos added in the quarter, are these customers coming to collocation as a solution for the first time? Or are they -- do they already have collocation solutions deployed and we're just looking to expand with CoreSite?

It's really a mix of that. It is difficult, which is one of the great things about our model, to pull somebody out of an existing collocation provider. So winning those new logos especially as they transition to an outsourced model is a great opportunity for us, which seems to be the primary driver for those new logos but there is some that we win from other providers as well. But I would say, without having the exact numbers in front of me, the majority of those new logos are moving from an existing space that they may already operate to outsourcing to a collo provider for the first time.

Got it. And then I just have one more question regarding the Miami market. Can we just get an update on what's going on in specifically that part of the U.S.? And have Phoenix, Dallas or Oregon come up with opportunities that you guys are evaluating? Or you're just sticking to the same campus model that was already in place?

The answer to your second question, we continue to look at other markets where we can deploy a campus model, but we're not looking to enter the race for undifferentiated collo in any other market. But we do continue to look for new market opportunities.

Yes. With respect to Miami, I do think that provides us an opportunity there. As we've mentioned in prior calls, we had some space that came back to us that gives us the opportunity to lease up again. And with some of the changes in the competitive landscape there, I think it actually gives us a greater opportunity to lease up there as well as access to Latin America and so forth. So we continue to drive more focus there. We're also looking to make some slight improvements to the site there that I think will make it more appealing for customers, so it is a focus for us.

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

You were mentioning when you were discussing the Virginia Ashburn market just that there was some deployment and pricing may have gotten a little more competitive there. I was curious if you can just unpack you comment a bit more as to what you're seeing specifically in the competitive environment in that market. And are you starting to see any signals of incremental competition in some of the other major markets in which you operate?

As I said in my remarks, we don't see any serious degradation in pricing. But it has been moderately impacted by the competition, the new development that's out there, I think, probably in the range of 5% to 10%. Although that's hard to estimate because products and solutions differ significantly. Having said that, it -- in line with right now the way Steve describe that we underwrite our new investments and our preleased economics. So we feel good about that. And a lot of the -- being the only network node in Reston, which provides diversity to the Ashburn route and Ashburn network node, we don't see quite as much of that. And so probably can't provide as much color as to what's going on in Ashburn and Manassas as some of the other companies can.

Yes. And Michael, this is Steve. I would just kind of reiterate that point that Virginia has always been very competitive. There's always been a lot of competitors in that market as well as inventory that comes online. The absorption still seems to be holding strong there. But as Paul mentioned, I do think we have a good story to tell there, being a strong interconnection story that's not in Ashburn but still within that net market that provides low latency, scalability but an alternative to Ashburn being in Reston. So we do see even some of the bigger cloud providers that have deployed in the Ashburn market that are looking for an alternative to provide redundancy and other on-ramps, and that's been a good story so far for us.

And one other question. If you total up the development that's in your pipeline right now and measure that historically, how would the size of this development pipeline compare? And are there opportunities to get more aggressive and accelerate the pace of build over the next 12 to 18 months?

I believe that we are significantly above average in total dollars in our development pipeline. But as a percentage of our total assets, probably similar or maybe even...

Slightly ahead than where we've been.

Yes. But in terms of accelerating it, we've always been glad to accelerate when the market allowed that, and there is some possibility for that in all of these developments, but it's hard to predict the certainty at this time.

[Operator Instructions]. Our next question comes from the line of Richard Choe with JPMorgan.

Following up on that, how should we think about the timing of the SV8 and L.A. developments along with Reston in terms of next year and the year after?

So one of the difficulties in predicting precise timing relates to the advantages of developing in these markets. They're not easy to develop in, which creates natural barriers to entry. The regulatory scheme is part of that and it sometimes -- or always difficult to predict exactly when you will receive permits. In my comments, I gave you, and in our other materials, we've given you guidance as to when we think these projects will commence. Typically, once they are commenced and in our current construction model, it will take 9 to 12 months to completion and the commencement of revenue generation. And that's the best we can do in terms of predicting timing right now.

Great. And I guess to follow up on the pricing question earlier. It seems like there was a little bit more available space because of churn from competitors in L.A. and it seemed like you kind of held the line on price. Can you give us an idea of how the company thinks about what drives wanting to drive a higher deal versus a lower one versus, I guess, the space you have? Just kind of getting an update on that would be great.

Typically, especially in markets where we -- are space constrained until new developments come up, we adhere to a very good discipline on pricing and also a customer discipline. So we target that space to those customers that we perceive as being healthier, long run for the ecosystem, stickier, more likely to grow, generate more cross connects and attract other customers to the ecosystem.

And the only other thing I would add is as we look at the overall absorption rate as well as the competitive dynamics in the market, just trying to align those things to obviously maximize return but also look at, as Paul mentioned, the overall value to the ecosystem, both in terms of rent and power margin but also interconnection and the overall attractiveness that they might bring to other entities that we would want to sell to.

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

Just wanted to unpack a little bit of the pricing commentary in this market. What do you think is sort of behind to the competitor pricing? Is it irrational behavior in your view? Or is it maybe just the benefit of some lower cost construction? Or how should we -- how do you view that in this market?

I don't think it's irrational behavior so much. I think that people perceive these as good markets with good, long-term supply and demand characteristics. Demand is still growing right now. But there is a lot that's been started recently, maybe a slightly greater supply than demand growth relative to historical. And so -- and there are more participants doing that in some of these markets, and so that usually leads to more competitive pricing.

Just to give you a little bit more color there as well. I think it really depends on the market as to whether there's additional inventory that's being built there or in some cases, there's been some customer churn from some of our competitors that drives them to be more aggressive and try and back fill that space. So overall, to Paul's point, I think it's been very balanced. I don't see anything irrational in the market at this point. It just -- we just want to make sure that we stay to our strategy. We're disciplined about it and so far, that seems to be holding.

Mr. Szurek, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you. Thanks to everybody on the call for their interest in the company and for the opportunity to answer your questions. I just like to close by thanking my colleagues throughout the company for their excellent efforts, another good quarter. And we very much look forward to the future. We love our business model. We love our team. Our customer communities are understanding and growing in the right way. And the future for us looks very promising.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.