Cencora, Inc. (COR) Q1 2019 Earnings Report, Transcript and Summary

Greetings and welcome to CoreSite Realty's First Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Carole Jorgensen, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good morning and welcome to CoreSite's first quarter 2019 earnings conference call. I'm joined here 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 the 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 on our website at www.coresite.com. And now, I'll turn the call over to Paul.

Good morning and thank you for joining us. Today I will share our first quarter highlights, discuss our development pipeline and cover a couple of significant recent events. Steve will cover our sales results and discuss how we continue to evolve our customer offerings, and Jeff will take you through our financial results, including all recent financing activities. Let me start by summarizing our accomplishments in the first four months of the year. We're executing well in our 2019 imperatives to create the momentum necessary to accelerate growth in 2020. These include substantial progress on our development pipeline, additional financing to fund the new capacity, strong sales execution with the highest core retail co-location sales in 10 quarters, pre-leasing of two phases of our new SV8 purpose-built data center, and financial results consistent with where we are in the development cycle and in line with our expectations, all of which we believe position us well for achieving higher growth in 2020. Turning to our financial highlights for the quarter; we grew operating revenue 7.2% year-over-year, delivered a $1.25 of FFO per share and grew adjusted EBITDA 2.2% year-over-year. Consistent with our forecast for the first quarter, our results reflect higher than normal churn and interest in operating expenses associated with recently completed developments now in lease up. Moving to sales, we did a good job of achieving momentum this quarter. Our sales were driven by our core retail co-location and included $6.6 million of annualized GAAP rent compared to $4.2 million last quarter. Turning to our customer offerings; we launched our new CoreSite interconnect gateway, a fully-managed service designed to help enterprises achieve their digital strategies which Dave will talk more about. We also made substantial progress on our development pipeline. During this quarter we launched a 20,000 square foot data center expansion in Boston, and a 35,000 square foot data center expansion at NY2. We began construction on the first phase of CH2 in downtown Chicago, we advanced our ground-up developments at VA3 Phase 1B in Virginia and SV8 Phase 1 at Santa Clara as we expect to achieve our targeted completion dates for both datacenters. At LA3 we continue to work with the local power company and government, and expect to know more the permitting progress later this quarter. Turning to a few of our notable subsequent events in April; on April 12 we closed on the purchase of the Santa Clara property that we refer to as SB9 where we anticipate constructing an estimated 200,000 net rentable square foot data center in the future. On April 15, we pre-leased both Phases 1 and 2 at SV8 for 108,000 square feet. As a result, we're accelerating construction of Phases 2 and 3 and targeting completion in late Q4 of 2019 for Phase 2 and the first half of 2020 for Phase 3. On April 17, we've closed on $400 million of senior notes, $325 million of which were issued immediately, and we expect to issue the remaining $75 million by mid-July. As I discussed previously, 2019 is a transition year for us. We entered the year with leasable capacity at lower levels compared to our historical norms and we've planned to end 2019 with leasable capacity plus quickly developable incremental capacity at the higher levels we experienced in previous years. To ensure a successful transition, our 2019 priorities include translating new construction into more abundant sales, acquiring additional new customer logos, bringing new connectivity and customer service products online to drive sales into delivering great customer experience and operational efficiencies. I'm pleased that we are executing effectively on these priorities as evidenced by our year-to-date accomplishments. That said, we still have much work ahead of us including scale leasing at VA3, keeping construction on a good pace at CH2 and SV8, finalizing power and permits for LA3, and obtaining entitlements power into permits for SB9. I have confidence in our teams which are working diligently and effectively on all of these activities. With that, I'll turn the call over to Steve.

Thanks Paul. Today I'll start off with a summary of our quarterly sales and leasing results and then talk more about our new customer solutions and growing connectivity offerings. Moving to our sales, for the quarter we had sales of $6.6 million of annualized GAAP rent which included 32,000 net rentable square feet at an average rate of $207 per square foot and was comprised entirely of core retail co-location sales. A few highlights on our sales; our $6.6 million annualized GAAP rent represented the highest quarter of annualized GAAP rent for core retail co-location sales in 10 quarters. And our sales included 30 new logos compared to 32 last quarter, and while revenues from new logos were down from prior quarter, enterprise sales with quality brands that we expect to drive future growth remains strong. We also see a strong pipeline for future new logo wins as we're continuing our strategic effort to bring new growth engines to the platform. Turning to pricing; for the quarter pricing on new and expansion leases was consistent with the trailing 12-month average on a per kilowatt basis for core retail co-location sales. Renewals were also another key aspect of our leasing. During the first quarter, our customer renewals included annualized GAAP rent of $11.9 million with rent growth of 3.2% on a cash basis, and 5.9% on a GAAP basis. And as previously forecasted, rental churn of 2.7% was higher than normal for the quarter reflecting churn of two larger deployments. Moving to the next retail and scale co-location leasing. The first quarter leasing represented all retail co-location sales. However as Paul mentioned, in April, we pre-leased a majority of our SV8 data center through hyper-scale leasing of valuable ecosystem components at our Santa Clara campus. As our development pipeline turns of new capacity, we look forward to the opportunity to having greater contiguous space available for additional scale leasing. Next, I would like to turn our focus on evolving our offerings in order to deepen our customer value while providing additional forms of revenue to the company. Building on our new service and connectivity offerings delivered in 2018 through a few of our ongoing efforts to enrich our ecosystem and help attract new customers to our data centers. In March, we launched the CoreSite Interconnect Gateway for SIG. SIG is a true gateway product to initiate and smooth a new enterprises transition into our data centers by providing a more secure, reliable and higher performance connection between enterprise and our data centers which can serve as a pivot point for building hybrid cloud architecture at our campuses and migrate data there too, and be scalable to add connections to other CoreSite data centers as a basis to dramatically lower customer WAN costs. In April, we announced hybrid network connections to Google Cloud available in our Denver and Los Angeles markets. This service from Google Cloud enables enterprises and network service providers that are co-located with CoreSite to directly connect to the Google Cloud platform through a high speed fiber interconnect. In summary, we've had a solid start to sales for the year and we're looking to build on those results by executing well on leasing our available space, driving new data center capabilities, and providing exceptional customer service for our differentiated services. With that I'll turn the call over to Jeff.

Thanks, Steve and hello everyone. Today I will review our financial results for the quarter, provide an overview of our April financing, and discuss our financial guidance. Turning to our detailed results for the quarter. As expected, based on where we are in development and due to higher than normal churn, this was a relatively flat quarter. Our total operating revenues were a $138.9 million for the quarter which increased 7.2% year-over-year and were in-line sequentially. Operating revenues consisted of a $117.9 million of rental, power and related revenue, $18.4 million of interconnection revenue, and $2.6 million of office, light industrial and other revenue. Interconnection revenue increased 11.2% year-over-year, and 2.2% sequentially. FFO was $1.25 per diluted share which decreased $0.02 per share year-over-year, and $0.01 per share sequentially, largely due to property tax and interest rate increases and dilution from pre-stabilized developments. Adjusted EBITDA of $74.5 million grew 2.2% year-over-year, and was in line sequentially. Adjusted EBITDA margin was 53.6% for the quarter and we expect full year 2019 margins to be within our guidance range. Sales and marketing expense totaled $5.7 million for the quarter or 4.1% of total operating revenues, and in line with our expectations for the full year. General and administrative expenses totaled $10.2 million for the quarter or 7.3% of total operating revenues, in line with our expectations for the full year. For the quarter we commenced 24,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $242 per square foot which represented $5.8 million of annualized GAAP rent. Moving to backlog, as of March 31st, the projected annualized GAAP rent from signed but not yet commenced leases was $8.9 million or $13.6 million on a cash basis. We expect most of the GAAP backlog to commence in the next two quarters. Keep in mind, that this backlog excludes all sales activities that occurred in April. Turning to our property operations and development; first quarter same-store monthly recurring revenue per cabinet equivalent was $1,556, reflecting an increase of 6.7% year-over-year and 0.6% sequentially. Q1 same-store turnkey datacenter occupancy was 89.2%, an increase of 80 basis points year-over-year and a decrease of a 110 basis points sequentially. We have a total of 428,000 square feet of data center capacity in various stages of development across the portfolio. With $262 million of cost incurred to-date of an estimated total cost of $671 million or $409 million of cost to complete these projects. This includes all 3 phases of SV8 and two new data center expansions including one in Boston and the other at NY2 in the New York area. For more details on our development projects please see Page 19 of our supplemental information. Capitalized interest for the quarter of $2.6 million represented 21.7% of total interest in line with our full year estimates of 20% to 24%. Turning to our balance sheet; as we've shared previously we expected to access the capital markets this year for $350 million to $400 million in the form of additional debt and to term out the outstanding balance on a revolving credit facility which we just completed. On April 17, we entered into a note purchase agreement and agreed to issue and sell an aggregate principal amount of $200 million of Series A notes due April 2026 with the coupon of 4.11%, and $200 million of Series B notes due April 2029 yielding 4.31%. On April 17, we issued $200 million of the Series A notes and $125 million of the Series B notes and expect to issue the remaining $75 million of the Series B notes prior to July 17, 2019. The initial proceeds for the notes were used to pay down outstanding amounts on the revolving portion of our senior unsecured credit facilities. This provides us the ability to borrow $445 million under the revolving credit facility and along with the expected additional note proceeds of $75 million and $2 million in cash results in total liquidity of $522 million, which we plan to use primarily to fund the $409 million of remaining costs on our current development pipeline. Turning to our financial guidance, in terms of guidance changes, we've increased our annual churn expectations by 100-basis points due to a pending customer bankruptcy filing. As a result, we have arranged for the customer to vacate its deployment in the third quarter and expect to receive payments to utilize their current capacity and terminate their current license in August, 2019. Our annual guidance for 2019 churn is now 7% to 9%. As communicated previously, we continue to expect our second quarter churn to be in the range of 2% to 2.5%. We are also increasing the range of data center expansion capital expected for 2019 to $405 to $465 million and total capital expenditures now expected to be $425 to $500 million. This increase is primarily as a result of our pre-leasing at SV8 and the accelerated development of Phases 2 and 3. That concludes our prepared remarks. Operator, we would now like to open the call for questions.

[Operator Instructions] Our first question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Thank you. Good morning out there. So, first I wanted to just touch base on the scale leasing you guys accomplished first quarter-end if I could. Can you talk a little bit about the type of tenant, if it was one tenant and maybe any terms of lease that you could share?

Hi, Jordan, this is Steve. I think we've kind of shared as much as we possibly can around the lease. Obviously, most of our customers in general, but especially those larger hyperscale lease have a lot of confidentiality surrounding the lease itself. So, I think we've shared about what we can there.

Okay. And will you guys -- I mean, is it safe to assume that you guys will be able to achieve the typical 12% return hurdle?

Yes, I think it's safe to assume that we will maintain that expectation for SV8.

Okay. And is it possible that the Phase 3 could see a similar type of lease? In other words, maybe same -- is this one tenant?

It's one lease. Yes.

Okay. And is it possible that SV Phase 3 could go to the same tenant as well? They have an option on it or not?

I'm not sure that we can disclose any of those details. As we mentioned in a prior remarks, we are in construction planning to kick that off here soon. So that will be available.

Okay. And then maybe just moving to the bankruptcy that's pending, anything, Jeff, that you could share as it relates to that tenant exposure or that churn event? So, is that -- will churn just be an average or a lower number in 3Q versus 1Q and 2Q still or is that going to be elevated and is there anything else you can kind of share about this tenant maybe? Thank you.

Yes, you bet. I think in general, as you think about churn for the third quarter, based on what we expect today, inclusive of the customer, I would expect churn in the third quarter to be up in that same range as we've given for the first half, which would be somewhere 2% to 2.5%. So, keep that in mind as you think through it. Again, that would be inclusive of this particular customer. I think just some other color on commentary, we've obviously had received some questions prior to the call regarding the customer name and can we give visibility or not, I just think in general, we're really not in a position to comment on who the customer is. We just don't think that that's our position to do so. I would say however, that the particular customer will be vacating an entire computer room in our data center. And as we think about it, there's very little, if any capital that Steve did to get that room ready to release it to the market. It isn't a market where we've had some good results over the past 18 months and Steve and his team have a strong funnel currently in that particular market. And obviously, we hate to see any customers going into bankruptcy, but we wish them well, they've been a good customer for us and that we wish them well as they continue their future business plan. The other last thing I'd add is just due to the customer vacating the space, that obviously adds some turmoil in terms of their operations. And we've been working with them to the extent any of those customers didn't want to leave that particular location. We have accommodated them and have taken them some of those customers on directly and made them just direct customers of CoreSite. So, we're currently working closely with the customer, helping them out where we can and we're helping them out and vice versa, wherever we can make ends meet.

The service provider or third-party reseller of sorts then.

Yes. I think that's a fair description absolutely.

I think I just had a little more color from Jeff's comments there. We continue to have further conversations with some of their client base there to make sure there's a smooth transition and if there's an opportunity to have them remain in the building, those are active conversations.

Okay. Last one to Jeff on financing sources of capital. I know you took your CapEx guidance step a little bit here. What would you estimate leverage would be at year-end on a net debt to EBITDA basis?

Great question, Jordan. Obviously, we executed on the financing in April and I think as we had said, we assumed we would accomplish a majority of that financing for the year here in the first half. I think we probably went a little bit more than expected just due to pricing and the economics in the private placement. Having said that, I think from a leverage perspective, today, our stated policies to be somewhere around 4.5 times debt to EBITDA, we ended the quarter at 4.1 debt EBITDA. And I think as you look at the capital expectations for the rest of the year, it's likely we will exceed 4.5 times. Obviously, it's dependent on the adjusted EBITDA growth. We are comfortable taking that leverage an excess of 4.5, probably up to 5 times. However, just keep in mind, as we've said previously, that's ultimately a board decision and we'll continue to have those conversations with our board and to the extent that that formal policy changes, we'll get that communicated. But I would expect it to increase over 4.5 times throughout the year and we'll continue to have that conversation with our board in terms of the formal policy itself.

Thank you. Our next question comes from Sami Badri with Credit Suisse. Please go ahead.

Thank you. My question actually pertains to the interconnection revenue growth that we saw in the quarter and could you help us understand the dynamics here regarding why interconnection revenue has grown so much faster than rental revenue in the quarter? And it's almost a multiplier of two times as far as growth rates specifically in this quarter. And this dynamic hasn't really occurred in your model for about eight quarters and I just want to understand why it's happening specifically now and then I have a follow-up.

Good morning, Sami. Let me try and address that as best I can for you and just something to think about for modeling. But in general, the interconnection revenue growth is from a pure quantity perspective, is dependent upon the types of deployments we sell in quarters probably, I'd say anywhere between one to two years preceding that particular quarter. And the reason for that is you typically get a trail of increase in interconnections as that customers deploying. And so, it's always follows the ultimate deployment of the customer's particular gear. So, it's important to just understand the composition of the type of deployments and ultimately what that means in terms of interconnection revenue growth. When we have higher retail coal co-location leasing, it will lead to a higher density of cross-connects for every kilowatt we sell as compared to the scale leasing. So, just keep that in mind as you think about it. And in terms of revenue growth, keep in mind when you look at the numbers, as we've said publicly, about two-thirds of that revenue growth comes from growth, impure quantity of our cross-connects. The other one-third of revenue comes from customers who are shifting due to volume needs on our open cloud exchange or possibly [indiscernible] exchange where they just need higher bandwidth. And those pricing step -- it steps up pricing without increasing quantities just to the higher volumes needed in those particular summit. So, you get about two-third coming from Peter Quantities, about a third of our revenue growth comes from a composition or a higher price product mix.

Yes. Sami, and I guess the final piece of that is in Q4, as you think about 2018 in general, there was quite a bit of disconnects relative to M&A activity and consolidation there, of what you saw a fair amount of that in Q4 of which we did see some leveling off. And actually, the less of as we came out of Q1, so that obviously had a positive impact.

Got it. Thank you. And then the follow-up related kind of to this is I'm assuming that a lot of your tenants are transitioning their switches from 10-gig speeds to 100-gig speeds. Can you give us an idea on where we are in this entire transition or this process? And then are you seeing any foreign a gig deployments given your customer compositions?

Yes. I mean, as far as the interconnection product itself is concerned, the 100-gig migration has been going on for quite some time and we haven't seen a material impact of that as far as the overall number of cross-connects. As you know, the growth in overall IP traffic and data traffic in general has continued to ramp up and we hope the foreseeable future. So, that continues to offset any kind of efficiencies, but you start getting out of 10 gig to 100 gig or even greater than that. As far as the traffic that we see on those interconnections, we really don't see the traffic. Those are fiber connections that we pass between our customers and the traffic that they move on that whether it's 1, 10, 100 or more, is really dependent upon the gear that they put on either end of that light. So, we do see some higher speeds than that and some gear that's coming out to support that, but nothing material at this point.

Got it. Thank you for the color. And then as just a model clarification question for you regarding real estate taxes and insurance, the percentage of revenues of that expense went up to 4.5% of revenues versus prior quarters. It just kind of stood out. Is that because of the new facilities or anything else? And this is pertaining mainly to real estate insurance. Maybe you could just help me understand what is going on regarding this step up.

Yes. Sami, just really two things. We've talked a couple of times over the last probably year or so, just some commentary related to taxes. And I think in general, we've seen a general increase in real estate taxes through our portfolio that's largely driven by each of those municipalities as they're looking at and estimating overall assessed values. And so, I think that's going to continue. The other item is as we complete development of certain computer rooms and in the fourth quarter we completed DC2, any taxes associated with properties that come out of development, obviously we started absorbing that into our income on our operating results as it was being capitalized during the development, should it be in those results. So, just keep that in mind. Insurance is up a little bit, but the majority of that increase is really being driven by the property tax increases.

Our next question comes from Colby Synesael with Cowen & Company. Please go ahead.

That's great. Three quick ones. One is I'm wondering if you can disclose the GAAP rental revenue that you got from your customers since that's something you do typically. Obviously, give us each quarter just if you're giving us the megawatts was hoping you can give us the GAAP rental revenue. And then secondly, as relates to that customer churn, I was wondering what the termination fees are that you're anticipating getting from that customer. And I assume you will recognize those as is rental revenue, but just confirming that. And then, lastly on SB9, can you just tell us what's on that land right now and how long in broad brush strokes you think you could take before you could actually get a facility up and running there? Thanks.

Colby, I guess I'll take those. When we report our second quarter sales results will include all the GAAP revenue from the April lease three lease in those results. But as Steve mentioned, we can't disclose that on an individual basis. The same kind of confidentiality provision applies to the termination fees we've negotiated with the tenant that's going into bankruptcy. So, I apologize, but we can't disclose those items of information. SB9, similar to SV8, currently has a building on it. It's a single story, a multi-tenant office building, service office type of building. All the leases will expire before or be terminated pursuant to the terms before we have to develop. Our critical path really starts with the entitlements process and then power process and then the specific permitting process. On SV8 that took about 12 months to get through. I would estimate it's going to be about 10 to 14 months in the case of SB9 because as you probably are aware, there are new power provisioning practices in California that add a little bit more time to your design before you can get into environmental reviews. And then once we start demolition and site work, it typically takes about 12 months from that point to deliver the datacenter. Obviously, there's a lot we can't predict or control in these processes, but our team has been very proactive and doing a good job trying to line up everything for as seamless process as we can have. But I think that's kind of the right range to put soft expectations run.

It sounds like broad brush strokes maybe mid-2021 we can get something there. And then just that you answer these first two questions so quickly, the VA3, I think there's been expectations first for several quarters now to be honest, that that would've gotten pre-leased by now and we still just haven't seen that. And you mentioned in your own prepared remarks that that's being a focus. Why do you think that that has taken so long and just kind of give us a little bit more color on what the pipeline for that potential opportunity is right now? Thank you.

Thanks, Colby. I'll take that one. As far as VA3 is concerned, we've actually had some good retail leasing in V8. We're already in our initial phase there. So, that continues to show good traction and great quality brands that we brought into that building. So, the VA3 campus itself is often running and to a good start. So, it's 1B which I think you're referring to, we're nearing completion, but I think as you look at that overall market, as you know, there's more inventory in that market and I think as you look at pre-leasing, any market that has more available inventory is going to have a shorter window of time to pre-release. We continue to see a robust pipeline there and are on active conversations with customers. But as we've mentioned on other calls, we are disciplined on how we approached these larger leases to ensure that they either contribute to or value our ecosystem and are also a good return for our investors. So, it's a balance of all those things too ensure it's a good fit.

So, you still are pursuing a hyperscale least for Phase 1B. And I guess based on what you're seeing, you think there's a good chat, we can get that done once that facility opens?

Again, we balance those things between the scale of a hyperscale lease with the return that we expect to drive for the overall campus. So, it's both of those things and scale leasing and hyperscale leasing comes in all forms and fashions and as well as size. And we continue to evaluate those and work with our pipeline of customers to try to drive a good fit there. So, it is important to us. We know we need to drive greater traction there and that's the focus from me and the team.

Our next question comes from Aryeh Klein with BMO Capital Markets. Please go ahead.

Thank you. Maybe just following-up on that last question within VA3, do you still expect to deliver the 12% returns or do you think it might go lower from here?

As Steve mentioned and as we've mentioned on quarterly calls for some time, from a pricing standpoint is our most competitive market. And while we still think it's achievable to hit our targeted returns on VA3 as a whole, it is going to be a bigger push at VA3 than it is in our other markets.

Okay. Maybe turning to Chicago, it looks like occupancy dropped a little bit in the quarter. Can you talk about what's happening there? And then you have -- sorry.

It was just one of those churn events.

Okay. But with CH2 coming online in the first half of next year, do you feel any differently about the opportunity in Chicago than maybe you did a few quarters ago?

No, I think we feel the same and maybe probably a little bit better. What do you say, Steve?

Yes, I think so too. I mean, we did have a couple of customers that we expected to turn and have, but the overall pipeline still remains strong even before CH1 for that matter. So, I think Chicago is one of those markets where it will be especially our position there, which is downtown and providing a modernize scalable facility that's connected to a heavily interconnected side of CH1. We think we got to a very unique value proposition in a great market.

Next question comes from Jonathan Atkin with RBC Capital Markets. Please go ahead.

Thanks. So, I'm interested just real quick as a point of clarification on the, of course, the interconnected gateway. To what extent does that leverage third-party partners versus being an entirely homegrown product?

Sure. Thanks for the question. It's difficult to try to give the full color of that in our prepared remarks, but it really is a service that we've worked with our partners on to provide essentially a rack of equipment that the customer would have fully managed from one of our partners there would reside in our data center. So, that starts their co-location experience with CoreSite and that can then support the customer in multiple ways. The first is providing a secure high-performance connection between our data center and their enterprise location that then provides an efficient and secure and high-performance way for them to connect to all the native on-ramps that we've worked very hard to establish where they are in our data centers. So, it gets them onto those cloud on-ramp very quickly and securely, which they otherwise wouldn't have from their enterprise location. And then from there they can either access to other data centers that we may have in order to diversify their cloud ramp experience and give them access to other availability zones or act as we expect it to, as to be really kind of a stepping stone for them to expand their co-location footprint within our data center into more of the hybrid enterprise deployment that we have seen more of.

But you wouldn't leverage other parties [indiscernible] offering. It's really your own homegrown products from a connectivity standpoint it sounds like.

As far as the data center itself, it's obviously our data center, but as far as the equipment and the management of that equipment, we are working with our partners to provide that service. So we're not providing a managed service directly to our customer that's through one of our partners.

Okay. And then on SV8, any kind of color you can share around the commencement schedule around that commitment and kind of over multiple years or multiple quarters?

Yes. I think I can give you a little bit of color there without any issue with the confidentiality components that we mentioned earlier. So, as you think about the two phases that this customer signed up for we expect the first phase of that to commence late Q3 and the second phase of that to commence late Q4 of this year.

Very consistent with our construction completion [indiscernible].

But presumably, there will be a moving ramp. And so, would there be further kind of additive commencements that take place in subsequent quarters associated with that? Or is it pretty much once it's completed you're getting full rent contract condition?

I don't know that I can give you any more color than what I just gave you.

Okay. And then lastly, I was just interested in kind of more of a broad question because we've kind of touched on Virginia and Chicago and a little bit LA, but just as you see the pipeline overall demand profile across the company, what are some of the markets going forward where you see potential for scale at leasing?

Well, I think as you looked at where we are investing in capital and building new facilities as well as expanding in place capacity, we have a lot of opportunity ahead of us. The top four markets as we've historically provided and displayed growth in I think will remain strong. So, when we think about LA, the Bay Area, Virginia, as well as New York, and we've even seen some growth in Boston as well. Chicago really has been hampered by not having a modernized facility that can support it. And we look to have some of that growth come out of Chicago as well. So, we look to see more diversity across the platform as more of that capacity comes online. But in each of those cases we do expect some scale type of leasing.

Next question comes from Erik Rasmussen with Stifel. Please go ahead.

Tanks for taking the questions. First, the outlook for next year, based on your comments maybe trending a somewhat higher revenue growth, can you just help us reconcile what that means and how it compares to your previous expectations for low double-digit growth?

Yes. Good morning, Erik. Obviously, consistent with what we've outlined for 2019, we got a lot of things ahead of us in terms of trying to work through and obviously through the first four months of the year we've made a lot of good progress. I think Paul touched on that and probably we will try and summarize a little bit more. So, I don't want to get too far out ahead of our skis [ph] in terms of declaring victory on 2020 guidance at this point in time. I would just say that obviously in our forecast and ultimately embedded into that guidance we gave is for us to execute on some portion of scale leasing, which Steve and his team are focused on. And I'm not sure today as we sit here today, I would just confirm where we are marching towards in 2020 and that is to hit low double-digit revenue adjusted EBITDA and FFO per share growth. I wouldn't modify anything from what we've said today.

Okay, great. And then maybe you do talk a lot about your new logos and new logo wins, but I think last quarter you talked about existing customers and what you could be doing. Can you give us an update there and any initiative that you're planning to kind of really accelerate growth from this segment and some of the things you can comment on the quarter and maybe upcoming for Q2?

So, one of the things I think you saw even coming into this quarter was a bit of a resurgence and our basic spending with us, which is good to see. That was a little bit lighter in Q4. But we continue to make that a focus not only in having them grow their space with us but serve them in new ways, either through interconnection to the Open Cloud Exchange, for example and enhancing that. We announced our upgrade of our Open Cloud Exchange and some of the capabilities there on the last call. But also, intersite [ph] connect connectivity between our various campuses and we see more adoption there. And then the other things like I mentioned earlier on the call relative to our CoreSite interconnect gateway and those types of things. So, part of it is having them go expand their footprint, go into new markets, but also deepen those services and, therefore, the revenue that goes along with them. So, we're [indiscernible] as far as those enhanced services, but we're trying to be diligent about what we roll out and ensure that it actually does provide value and is represented by demand in the market and we'll execute accordingly.

Next question comes from Nate Crossett with Berenberg. Please go ahead.

Hi. Thanks for taking my question. I just wanted to get your comments on a potential investment grade rating down the road and I know you just priced that at some attractive rates, but my question is have the conversations with the agencies changed recently now that Equinox has an investment grade rating? And is this something you are even pursuing?

Good Morning Nate. Let me just give you some color and maybe some observations related to that but, just in general, we’ve always operated our company and managed our capital in a manner for us to try and achieve investment grade rating, and in an appropriate time. Instead of that something we’ve been focused on and continued to be focused on. However, in addition I should say we meet with the litigations is on a very regular basics, at least once in a year with each of the agencies, just to continue to have those conversations and discussions. I will say that, it’s been good to see some of the movements from the rating agency, specifically to our pear side I think that that’s been a good sign. I know they and we have all been working hard to educate and to help keep them informed on the industry and I think they’ve been making some movements and I think that’s all headed to the right direction. We were totally an objective of ours and something we keep focused on but today, it hasn’t been needed at least in the public realms, but at some point as we continue to scale our company that’s purely something we focused on.

I would only add, the investment grade rating for private bonds.

Okay. So, have you investment grades. What did you even change the grade -- that you could pursue at?

That's really driven more by our capital allocation decisions and where we have opportunities and I don’t think it’s essential for us to be able to fund and good rate of opportunities, that we’ve have been pursuing is to work with.

Next question comes from Richard Choe with JP Morgan. Please go ahead.

I just wanted to go kind of go into the higher turn rate, but overall revenue kind of holding same. Can you give us some puts and takes on what’s going better, despite the increase in return that makes you uncomfortable or keeping the revenue down to till the year?

Good morning, Richard. I would just say in general, as we look at our forecast through the rest of the year and obviously updated for Q1 results. You always have a lot of puts and takes throughout the operations of the company and obviously those have been updated. We’ve updated the guidance’s you have touched on, some of it related to return and some of it related to our CapEx spent. Obviously, it’s early in the year, but as we sit here today, the wiz that we going to have, we still are affirming the guidance from a revenue perspective and expect to be somewhere in that range but, it’s early in the year, we need to keep you updated and prices as we move forward. But nothing specific I can point to as we sit here today, other than today we are still comfortable with the guidance we have out there today.

I don't know if you can answer this. Given the market that the -- previously done, is it fair to say that, it’s kind of your normal greater return for a whole sale dealer or could it be higher to relatively tighter market?

Again, we will talk about expect returns on property as a whole but not as to individual transactions.

Next question comes from Frank Louthan with Raymond James. Please go ahead.

Can you comment little bit about pricing across various markets? Where are you seeing some strengths in the markets and what markets facing a little weaker and then if you can give us a general comment about how you view M&A? What assets are there in the market currently? How do you view assets that, may be where the owner owns all the underlying [indiscernible] and building and so forth and that they don’t and how that factor into your process and as you look at that? Thanks.

I will jump in where Steve normally converges to make it quick but, as you can see from our results, pricing is trending to be pretty stable through all of our markets with the same thing we’ve have been saying lot of Virginia last few quarters that has been a decline and scale and under-pricing over the last eighteen months, seems to be kind of [indiscernible] down there, but that dynamic is still there for Virginia. As we also set up previous calls, we do evaluate MNA opportunities. We have pretty tight criteria on that, what makes sense and it haven’t seen it and obviously yet other than that two very small one’s we’ve have in our history. I think everybody would value at our owned properties differently, then least properties with that certainly be their view then, and we welcome you to look what’s their out then.

Next question comes from Nick Del Deo with MoffettNathanson. Please go ahead.

Number of you appears of discussing JV’s or selling more matured facilities like cycle cap project development and Can you vision sense for foresight nature of your campuses and business plans, makes a lot sustainable.

I think that it's not likely, probably a higher cost of capital that we are able to achieve. Following our historic strategy and the ways of modern value in our connective campuses and remember we also include a lot of much around scale and intensity around campuses ant there is value for everyone to have experience to get [ph] ownership and so for those reasons, I would say there is probably and likely for us. But again, we all evaluate opportunities, just keep an open mind.

Got it. I want a county one for Jeff. Which one would straight assumption break in between [indiscernible]. And so, we think that the FBS was starting moving just impact with more at normal levels?

Good Morning Nick. We’ve would expect as you sought coming something around $1.2 million for actual add back for AFFO purposes for this quarter and that’s largely been driven by the leases which were actually the lessee, what we have got some straight line expands up in our operations. I would just say that, typically on larger scale and hyper scale leases, we technically see some straight line affects, especially once the leases commence and so as you see some of those occurring later this year, you could see that straight line impact start to moderate and crossly reverse back to the other scenario, in the income state. So, I would say, expected to moderate this year and possibly as you get to 2020.

Our next question comes from Dave Rodgers with Robert W. Baird. Please go ahead.

Just wanted to ask a little bit of color on Boston and NY2. Those were two visible markets heating up and already we have some of space available at NY2. So, may be a little color on, just kind of what do you expect and kind how do you look few markets and in aside to that, it looks like that, this next phase that NY2 talked about as much as on since the last phase. So could have a little color on that as well.

Sure. I’ll just give you a little bit of color as far as the sales pipeline and the approach and those two markets and just can talk more about the precaution and the financing. As far as the overall market circumstance, we’re actually very bullish in both of those markets. In fact, if you look at back to last couple of quarters, Boston has been one of our stronger market sales that relates to sales execution area and so that the growth and the buildout that we are doing there is based on some of the distraction we have seen on customers from coming in. So, we’ve staffed a little bit higher there, as well to support their demand and we are excited about the opportunity at Boston. New York. We have continued to see new logos come through the door, the activity actually is very strong there and the pipeline looks very strong. So, again we're trying to align our capital based off of where we see the demand and we need to execute against that demand but we're bullish about where that heads.

Good Morning, Dave. The only thing I'll like to add to Steve and just specifically related to the cost question is, in -- at NY2 in this particular buildout it was more efficient and much more price effective to build out some more of our back -- what we've referred to -- I guess, just our back plain infrastructure related to a future phase. And so we're just adding some infrastructure earlier to support another room buildup that will come later down the line and it was just more effective and efficient for us to do at this point in time.

And then maybe just a border question on -- you've got about 40 megawatts, I think set to complete between now and in the middle of 2020. And there has been a lot of questions about different development yields by projects or even by lease but can you kind of talk about where you expect that to shake out in the next 40 megawatts kind of -- from an earnings power perspective? How should we think about kind of that set at development yield in the aggregate in terms of what that can contribute given how you're thinking about whether it's hyper-scale or co-low leasing?

I think when you look at the chart we've got on Page 19 and we're supplement on that out really by particular expansion. I think the way to think of it is as follows: any time we're doing a ground-up construction, you're going to see generally lower yields in those first phases, and the yields will increase as we build up [indiscernible] phases just due to the investment we're having to make in the first phase where we're basically investing about 50% of our overall cost of that project. So that's -- so as you think about it to the extent we have pre-releasing like what we did at SV8, you'll see that come on much quicker than you might otherwise where we're leasing it up over a longer period of time. Where you've got those computer rooms just being built out inside an existing shell, obviously those are going to deliver -- those returns on that incremental capital are going to be substantially higher. And so just think about maybe taking those two components and putting some blend in there, I don't know what it would come out on a blended basis, I haven't done the math myself but I have better idea of where it is on a particular projects but just keep that in your mind as you work through in your estimates.

Next question comes from Robert Gutman with Guggenheim Securities. Please go ahead.

Thanks for taking the question. So, maybe I'll ask you something that you will touch from a different angle. With the near-term deliveries that are scheduled in the second quarter, should we expect a return of leasing of the over 5,000 square foot deployments as they have been absent for the past two quarters? So should we be expecting that to be included in the second quarter leasing, basically, and obviously excluding SV8?

Well, I would say that, since we are in Q2 I'm not going to comment on where we are going to end up in Q2. But I will say that now we are actively working with customers and are working to execute against the pipeline that presents itself. So, I really can't comment on where we -- our forward-looking statements and where we're going to finish the queue other than the guidance that we've already provided.

Also out of the 32,000 square feet that was leased in the quarter, I think it looks about 5,000 was in the pre-stabilized properties. Can you talk about where the rest kind of landed and just a little color on vertical and geographies for the rest of the leasing that occurred in the quarter?

Maybe I can just start off with the overall markets. The markets that we closed in were kind of typical markets that you would expect from us as far as LA be in our top market; Santa Clara, Virginia -- so those were really kind of the top three for us. As far as the same-store versus other, I know Jeff is looking for that right now and I'm not going to add my fingertips right now.

Yes. I think obviously from a same-store perspective Robert, there was some leasing associated with that. And as you saw sequentially, our occupancy dropped a little bit. We would expect that to come back a little bit as those deals commence and there was some of that associated with that same-store obviously.

I'm sorry, just going to give you some colors as far as the verticals are concerned. That was really kind of split about half to enterprise and then the other half split between network and cloud; so that gives you a little bit more color.

Next question comes from Michael Roland [ph] with Citi.

Two, if I could. So first, the development yield guidance has stayed consistent around 12% to16%, but I was curious if you could unpack that with respect to what the expectation for development yield is for a retail deployment versus a hyper-scale deployment based on current market pricing? And then second, as I was looking at the top 10 customer list, I noticed that the bottom half with about 10% of revenue or rent is coming due to an average term of less than 12 months. How do you look at that in terms of opportunity for up-selling or renewal pricing versus maybe some of the risks on architectural changes, etcetera? Thanks.

So Michael, just as it relates to the different categories; as you know, we try to not give out that type of specific pricing in return figures. I think it's fairly common knowledge that retail leasing generates a higher return than hyper-scale leasing does. You know, we look at overall data center yields, we're looking at them on an expected mix; and I'll let Steve address the rest of the question.

Yes, I would just say as far as the mix is concerned, we do look at the difference -- obviously, it takes longer and more of them from a retail perspective to fill up our data centers and get to a stabilize yield for the building; so we really do try to strike that balance and look at the overall blend of the population of each data center to try to get to do the yields that we've stated. So that's probably the best way to think about it. As far as the Top 10 customers are concerned; I think you're probably referencing two of those customers that have expired in the Top 10, and I would just give you some color there that we do look at this as opportunity for us to not only extend those terms but to grow them. For all of our customers, I mean for those two I would just give you some -- that we have actually renewed several other spaces, both of them have quite a few spaces with us and we've renewed some of them and expect to move forward with completing the renewal of both of them.

Next question comes from John Peterson with Jeffries. Please go ahead.

Thanks. I was wondering if you could update on kind of your sales force how well staffed that is right now, and historically for CoreSite and all of your peers that has always been a little bit of challenge with turnover in the sales force. I was just kind of curious any update there?

Yes, sure. I would give you a little color. I mean, I'm happy that we are fully staffed which is always a challenge to get staffed with quality folks that you would like to see. We haven't really changed the overall expense component of our sales and marketing team. We have changed the mix and kind of some of the roles that we have throughout our sales organizations whereas -- as well as where some of those people are located in their focus based off where we have capacity or expect capacity to come online. So, it really is more of a mix and positioning component that we try to work with but to make sure that we're hitting the market as best as possible. We shifted a couple of resources around from sales to be more technical and trying to help customers through their hybrid deployment journey, and I think that's borne some fruit for us, as well as I've mentioned, we're putting some of the resources in markets like Boston and Chicago where we expect more capacity to come online.

And then, I was curious with all the development you guys have coming online, the first phase stuff; I would assume that's going to weigh on EBITDA margins over the next couple of years. I guess is that a reasonable expectation? I mean, I guess -- how do you think about your kind of long-term adjusted EBITDA margin targets with the company?

I think it's accurate that as we roll-off some of this development and start going to lease up, it is not going to give us the opportunity to expand those margins. I think that's the best way I'd look at it. I think they should be fairly consistent as we roll through some of this development and get it through lease up. Having said that, I would then just say the longer term and this goes on beyond probably 2020. I think we have an opportunity to expand that margin by maybe 100 basis points to 200 basis points but that's something we've got to think through on exactly how to execute on it. And I think what's key to that is how can we continue to leverage inside our existing markets, and I do think we can scale off of them but it's just getting much harder to do that in the future as it's been in the past just given the size of the company and the way we've been making some investments but it's something we've got in our mind and something we'll work towards but as we get through the next year or year and a half, we'll continue to provide some color commentary around that. But I wouldn't expect it to expand as it has in the past but it's something I think there is still some room for improvement.

There are no further questions. I would like to turn the call over to Paul for closing comments.

Thank you. Carole, Jeff, Steve and I appreciate everyone's participation in this call. As you can see, we're pleased with what our colleagues have accomplished this year so far, and grateful for the opportunities ahead of us. We continue to see good demand for edge data center capacity in our markets, and now are bringing online the product to meet that demand. We have, and will probably always have much work ahead of us, and we have a great team pursuing all that work. We look forward to the future. Thank you. And have a great day.

This concludes today's conference. Thank you for your participation.