Cencora, Inc.

Greetings and welcome to CoreSite Realty's third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your investor relations host, Kate Ruppe. Please go ahead.

Thank you. Good morning and welcome to CoreSite's third quarter 2020 earnings conference call. I'm joined today by Paul Zurich, President and CEO, Steve Smith, Chief Revenue Officer, and Jeff Finnan, Chief Financial Officer. Before we begin, I would like to remind everyone that our remarks on today's call may include forward-looking statements as defined by federal securities laws, including statements addressing projections, plans, or future expectations. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. We assume no obligation to update these forward-looking statements and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our filings with the SEC. Also, on this conference call, we refer to certain non-GAAP financial measures such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of our full earnings release, which can be found on the investor relations pages of our website at CoreSite.com. With that, I'll turn the call over to Paul.

Good morning, and thank you for joining us. I will cover our third quarter highlights, followed by Steve and Jeff's more in-depth discussions of sales and financial matters. Our Q3 highlights include new and expansion sales of $12.5 million of annualized gap rent, operating revenue of $154 million, representing year-over-year growth of 6.3%, FFO per share of $1.33, a year-over-year increase of 5 cents per share, or 3.9%, power and cooling uptime of 100% for the quarter, thereby sustaining seven nines of uptime year-to-date, Completion in October of LA3 Phase 1 and commencement of our previously announced 4.5 megawatt pre-lease and issuance of our third annual corporate sustainability report. The state of the economy in recent months appears to be leading more enterprises to raise the priority of their digital transformation initiatives. This dynamic seemed to help our new and expansion sales execution during the third quarter, leading to good new and expansion sales and good progress in building a robust sales pipeline for future quarters. Our sales, customer support, and data center operations teams have been extremely agile, helping our customers navigate these challenging times and plug into the value of our ecosystems as part of their hybrid cloud architectures. As discussed last quarter, we continue to see some elongated sales cycles for traditional enterprises due to the COVID-19 pandemic, but the overall size of our sales pipeline seems to compensate for this challenge. However, we ultimately have to execute on those opportunities and convert them into successful sales. Some activities are returning to normal. We resumed in-person data center tours, making sure they follow COVID-19 safety protocols. We have also seen more customers taking comfort in these protocols, which support the safety of our onsite staff and customers, leading to more normal volumes of customer visits in our data centers. At the same time, we continue to see increased remote hands activity and use of our customer portal. As I mentioned earlier, we recently published our third annual corporate sustainability report. Sustainability is an important ongoing goal for CoreSight as we focus holistically on a broad range of success measures that take into account all of our stakeholders. report summarizes our continued commitment to our customers, colleagues, and communities, including providing our customers with reliable and energy-efficient data centers, building a culture of fair and equal treatment, respect, responsibility, transparency, innovation, and operational excellence, and fostering communities of customers that work synergistically with each other. Turning to our property development, LA3 is our first ground-up data center in Los Angeles, so we are pleased to complete phase one on time in October, and equally pleased to commence our 4.5 megawatt pre-lease, with much runway to expand on the success of our Los Angeles campus. We also completed the NY2 power infrastructure project, adding an incremental four megawatts of power to support our existing space. The completion of LA3 phase one fulfills our multi-year plan commenced in 2017 to add four ground-up enterprise class data centers to our portfolio with the goal of restocking contiguous capacity to strategically support the expansion of our campuses and our existing customers and to bring new customers to join these communities. We realized some of the fruits of this plan this quarter through our ability to opportunistically win a modest and fast-moving hyperscale deployment. As important, We are making good progress on the permitting and entitlements for SV9, our next new data center on our Santa Clara campus. We continue to see a strong sales funnel for our new CH2 data center in Chicago. However, it primarily consists of enterprises with longer and less predictable decision timelines. And recently, we executed our Illinois Memorandum of Understanding, providing our participating customers with sales tax savings. Our increased capacity is crucial to meeting the customer demand we continue to see for edge capacity and edge cloud deployments in our major metro markets, especially for enterprises seeking the highest performance, cost-effective, secure, and reliable co-location solutions for multi and hybrid cloud IT architectures. In closing, our increased capacity is providing increased sales opportunities, driving our strong Q3 sales, And our network, cloud, and enterprise dense campuses and major metro markets are well positioned to benefit further from the secular tailwinds for data center space. With that, I will turn the call over to Steve.

Thanks, Paul. And hello, everyone. I'll start by reviewing our quarterly sales results and then talk more about some notable wins. As Paul shared, we delivered new and expansion sales of $12.5 million of annualized gap rent during the third quarter. up approximately 35% compared to the trailing 12-month average, which included $5.6 million of core retail collocation sales, $6.9 million of scale leasing, and an impressive 37 new logo wins with opportunities for future growth. Our new and expansion sales were comprised of 72,000 net rentable square feet, reflecting an average annual gap rate of $173 per square foot. We continue to see elongated sales cycles, but we benefited from strong sales funnel and the hard work of our sales team producing both good volume and some strategic wins for the quarter. Additionally, we continue to see elevated demand in the market, supporting our efforts to build a robust pipeline for future sales. If our current pacing continues, 2020 will be our strongest year for creating new sales opportunity volumes. However, we ultimately need to convert these opportunities into successful sales transactions over the next several quarters. Looking at new logos, the 37 new logos represents $1.7 million of annualized gap rent, our best quarter since Q3 2019. New logos accounted for approximately 13% of our total annualized gap rent during the quarter and were strongest in the enterprise vertical. We are excited about the quality of these new logos and believe they will drive future growth as our IT needs evolve. Notable new logos included a global markets company that is one of the world's largest financial derivative exchanges, which signed and commenced during the quarter, a mobile marketing platform that fuels many popular mobile games through its studio and marketing technology, and a major participant in the investment industry. Attracting and winning new customers that value our platform remains a key area of focus, and it's great to see it continue to bear fruit. Our sales results were further supported by strategic wins from existing customers, which enhances the attractiveness of our data centers and connectivity platform. As Paul mentioned, having the capacity to provide flexibility for our customers to scale their deployments while benefiting from native cloud on-ramps and robust interconnection collectively delivers unique value to support today's IT requirements that few others can match. Customer demand and realizing this value to support their hybrid, and multi-cloud needs continues to be evident through some of our Q3 existing customer expansions. Two of our most notable wins across verticals and business sectors this quarter were the signing of a communications cloud-based technology company that provides video and collaboration services and a high-tech financial services and mobile payment processing enterprise. In summary, the strength of our third quarter sales results reflects our initiatives to improve retail, scale, and new logo sales that further enhance the value of the ecosystem effect on our campuses. We remain optimistic about our opportunities going forward as our pipeline for the fourth quarter and 2021 remains strong. And we continue to focus on translating our pipeline and capacity into new sales and revenue. With that, I will turn the call over to Jeff. Thanks, Steve.

Today, I will review our third quarter financial results, discuss our balance sheet, including liquidity and leverage, and conclude with some items to consider for the fourth quarter and 2021. Looking at our financial results for the quarter, operating revenues were $154 million, which represents 6.3% growth year-over-year and 2.3% sequentially, including growth in interconnection revenue of 10.8% year-over-year and 1.2% sequentially. Customer lease renewals equaling $20.7 million of annualized gap rent, which represents a cash rent mark-to-market of 2.9%, and we report a churn of 1.9%. Commencement of new and expansion leases of $7.2 million of annualized gap rent. Our sales backlog as of September 30th consisted of $17.8 million of annualized gap rent, or $23.6 million on a cash basis for leases signed but not yet commenced. We expect approximately 60 percent of the GAAP backlog to commence in the fourth quarter and substantially all of the remaining GAAP backlog to commence first quarter of 2021. Net income was 50 cents per diluted share, an increase of three cents year over year, and a decrease of two cents sequentially. FFO per share was $1.33, an increase of 5 cents per share, or 3.9% year-over-year, and a decrease of 2 cents sequentially, or 1.5%. Adjusted EBITDA was $81.4 million for the quarter, an increase of 4.5% year-over-year, inconsistent with the previous quarter sequentially. Moving to our balance sheet. Our debt to annualized adjusted EBITDA increased slightly, as expected, and was 5.2 times at quarter end. Inclusive of the current gap backlog mentioned earlier, our leverage ratio is 4.9 times. We expect to finish the year with leverage slightly higher than the current quarter at approximately 5.3 times. We ended the quarter with $326.8 million of liquidity. which provides us the ability to fully fund our 2021 business plan. Turning to our work ahead, we have accomplished a great deal in the first nine months, and we are focused on continuing that momentum. In regards to the fourth quarter, we still anticipate elevated churn as a result of the first of two move-outs associated with the customer in the Bay Area that we have discussed the past several quarters. and expect churn to recede to our historical levels of 7.5% to 8.5% in 2021, inclusive of the 200 basis points related to that specific Bay Area customer during the second half of the year. Turning to 2020 guidance, we increased our 2020 guidance related to net income attributable to common diluted shares to our new range of $1.92 to $1.96 per share from our previous guidance range, which was $1.81 to $1.91 per share. In addition, we increased our 2020 FFO guidance to our new guidance range of $5.26 to $5.30 per share from our previous range of $5.15 to $5.25 per share. And we increased our 2020 adjusted EBITDA guidance to $323 million at the midpoint from $321 million previously. The increase of $0.08 per share at the midpoint of FFO, or 1.5%, is largely driven by approximately $0.02 to $0.03 per share in net COVID-related savings, such as travel, entertainment, and conferences, and $0.05 per share attributable to lower than anticipated property taxes insurance, and other operating expense savings. As it relates to 2021, we will provide detailed annual guidance during our fourth quarter earnings call in early February. However, I'd like to leave you with a few thoughts. We have brought a significant amount of capacity to the market with four ground-up data center developments over the last three years, which supports our leasing efforts as our sales team has more contiguous capacity to meet a broader range of customer requirements. Keep in mind, the operating expenses related to the recently completed and pre-stabilized projects are higher at the completion of phase one than subsequent phases, and therefore typically negatively weigh on investment returns. As we look forward to 2021, we have the ability to bring consistent amounts of capacity to the market through incremental computer rooms and infrastructure development within our existing data centers. This enables us to bring capacity online more quickly and invest lower levels of capital per incremental computer room compared to the requirements for the initial phases of each new development, like VA3, CH2, LA3, and SV8, all delivered in the past 12 to 18 months, ultimately culminating in higher returns on the incremental capital as compared to capital invested in building the core and shell during the initial phase. The expected capital investment in 2021 is currently estimated to be approximately $185 to $225 million and continues to be dependent upon sales activity through the end of the year and the anticipated timing related to additional capacity requirements. In closing, We have ample liquidity to fully fund our 2021 business plan. Our balance sheet is strong with no near-term debt maturities. Our business fundamentals are strong, and we believe we are well positioned for the long term. With that, operator, we would now like to open the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask the question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of John Atkin with RBC Capital Markets. Please proceed with your questions.

Thanks. So a number of markets where you've delivered multiple megawatts, as you mentioned, Jeff, towards the tail end of your remarks. And I wondered if you could maybe talk across the kind of the competitive environment, pricing, expected yields, demand environment across each of the four to just give us a flavor for how you view things commercially at present?

John, this is Paul. Thanks for the question. I'll try to answer that. And Steve and Jeff can jump in if I leave something out. I mean, obviously, the biggest markets in terms of volume for us, as Jeff pointed out, were Santa Clara and Los Angeles and New York. But we also see good volume and good opportunities in Virginia and Chicago. Chicago is a bit behind for the reasons I mentioned, but the pipeline there looks good. We've got to execute on it. It didn't help that it came up in the early stages of COVID, which slowed some things down. I would say that our pricing comments would be consistent with what they've been in prior quarters. In most of our markets, supply and demand is pretty much in balance. Pricing is solid. It may vary in a particular market depending upon the density and the deployments that are won in that market in any given quarter, but quarter over quarter, they seem pretty stable. You know, Virginia still is the most challenging market from the standpoint of pricing, but it hasn't changed, it hasn't gotten any worse in the last couple of quarters and may have even improved a little bit. We continue to target and believe we can achieve on average our historical yield targets. Those haven't changed. And at this point in time with the development that we've completed, and the inherent expansion capacity that we have within our existing portfolio, the main determinant of our future is going to be how well we can translate these sales funnels into sales, how well we execute on that. And just to put the capacity in perspective, because I know there appeared to be some confusion in analyst notes coming out, at least with a handful, We currently have the ability to increase in existing buildings, both with available space and computer rooms we can turn up quickly within six months, roughly 88 megawatts of capacity. And we have land that is either already entitled or in the entitlement processes like SV9 that to turn up another 126 megawatts of development. So as our sales continue to succeed, we have a tremendous pipeline of developable capacity behind them to pursue those sales. Does that cover your question?

Yes, unless Jeff was going to add more.

John, the only thing I would add just a little bit around pricing is there were some questions in terms of our pricing this quarter on the signed deals on a per square foot, which is simply stated if you just look at the composition of our scale leasing this quarter versus our retail co-location, a much higher percentage this quarter in scale, which compressed that pricing a little bit.

And then as we think about SV7, I mean, you had some success at SV8. I'm curious about SV8 signing was with the earlier customer that you had signed with SV8 last year. And then there has been quite a lot of demand in Santa Clara with a large build-a-suit project and kind of repeat demand from the cloud vertical. I'm curious your thoughts on filling SB7 with that type of demand or whether the build-to-suit commitments that have happened recently have kind of saturated that customer's appetite.

Hey, John, this is Steve. I can probably give you a little bit more color on the sales, the pipeline, and how we're placing deals in 7, 8, or otherwise. As you mentioned, we have quite a few buildings in Santa Clara, and as we build out our campuses, which that's a great example of, where we have multiple buildings within a campus, it really does give us a lot more flexibility on where we place customers based off of their unique requirements and our capacity within each of those buildings. So as we went through Q3, the opportunity to really maximize the capacity within SB8 made a lot more sense than just deploying and breaking up space in SB7. And we do have a customer that we forecasted to churn out, just churned out some of their space and will churn out the rest of it next year. So that's been forecasted for quite some time and we are encouraged with the pipeline that we see for the potential to backfill that potentially with a single tenant, but that remains to be seen.

Thank you. John, you did seem to ask if the expansion in SVA was the existing customer in SVA and it was not.

Okay.

Thank you.

Thank you. Our next question has come from the line of Sammy Baudry with Credit Suisse. Please proceed with your question.

Hi. Thank you for the question. And first one just for Jeff. Just to haven't looked at this at the live transcript yet, but for churn in 2021, did you say 7.5 to 8.5% inclusive of the 200 basis points expected churn in the second half of 2021?

That's correct, Sammy.

Okay. Okay. Thank you for that clarification. And then for just back on backfilling, right, and this is kind of tied to pricing. are you able to find customers willing to be paying that same hurdle rate or that same price point that you guys had a couple of years ago for that capacity that is now becoming vacant? Or have you guys been engaged in situations where you need to be a little bit more lenient on pricing just to get the capacity signed and occupied?

Yes, I mean, you're talking specifically around Santa Clara?

That's right.

Yeah. I would say that, you know, the pricing – You know, it remains to be seen as to how we actually lease the backfill for the customer I think you're referring to, but I would say that the pricing that that customer had been paying is right in line with market. So, you know, depending upon densities and, you know, the overall dynamics of the pipeline and the customers that may take that space can vary, of course, but overall the current pricing in the market is very close to what that customer had been paying.

Got it. Got it. Thank you. That's all I have.

Thank you. Our next question has come from the line of John Peterson with Jefferies. Please proceed with your questions. Okay. Thanks.

Good afternoon, guys. Good morning. Your renewal spreads this quarter were pretty good on a cash basis. I think the strongest we've seen in over a year. I'm curious if, you know, I guess kind of high-leveled, Were you feeling more emboldened this quarter in terms of pushing rents, or is that more just a function of the mix of what you were renewing this quarter?

Hey, John, how are you? Yeah, you know, a lot of what impacts those cash renewal spreads is largely dependent on the market in which we're renewing those customers, and then secondly, the types of deployments, i.e., retail colo versus scale. And so that has a big impact in terms of what we're doing from a mark-to-market perspective. But I think it's representative of what Paul alluded to earlier in terms of the markets being relatively balanced in supply and demand, which just allows us to continue to drive some reasonable economics and, you know, ultimately performed at a very good level this past quarter. Can't expect that every quarter, but we're very... happy with the outcome for this most recent quarter and still expect to finish the year for 2020 inside our guidance range of 0% to 2%.

Okay, got it. And then you mentioned a lot of the demand came from, I guess, Santa Clara, L.A., and New York, but what about Northern Virginia? How are the dynamics changing there? Is it kind of opening back up in terms of demand, or is it still a tough market for you guys?

Hey, John. This is Steve. Overall, I would say that the market still remains strong in Virginia. We've been a bit more opportunistic on more of a hyperscale that you see the bigger headlines from as to how they value our ecosystem and bring value to our campuses. But if you look at the results that we've delivered, even our first phase at Virginia, they've actually been pretty good. And the rate that we've been able to acquire there has been quite strong in comparison to the overall market. You know, the larger hyperscale and scale opportunities are still pretty lumpy, but, you know, it appears to be picking up. And as Paul mentioned in his remarks, I think overall the market is probably more in balance now than it has been.

Okay. All right, great. Thank you.

Thank you. Our next question has come from the line of Colby Sarnasayo of Cowan. Please proceed with your questions.

Great, thank you. My sense is that the company aspires to high single digits, maybe even low double digit type revenue growth. And when we look at the interconnect, enterprise oriented demand, I guess non-scale, that's a business that's growing in the mid single digits. So really to kind of get to those higher levels, you need to do more hyperscale or scale deals. But that to your point has been fairly lumpy and maybe not as consistent as I think what investors or maybe what the company would want to see. Is there a thought about potentially lowering your hurdle rates, taking the returns down, recognizing that the market has changed and that you could be a lot more successful and also equally important that the market or investors might be accepting of those lower returns, recognizing there's maybe a better appreciation for you know, the business that you have today than maybe just a few years ago. And then secondly, I apologize, I missed the first 10 minutes or so of your call, but can you repeat where the larger scale leasing was done in the quarter? And I guess to that point, what is the thoughts around New York and New Jersey in terms of what you're seeing from a scale demand perspective these days? Thank you.

So, Colby, let me start with your last question. We had three scale leases with three different customers, Santa Clara, Chicago, and New York. In terms of, you know, look, I think we're pretty on top of our business model and our pricing and what we're going after. And respect that you may have a different view on that. But we believe that we can deliver the right levels of sustainable growth and be better positioned to deliver that year in and year out by continuing to provide a higher level of value to customers through growing these customer ecosystems that enable them to save a tremendous amount of money and effort by co-locating with each other and with their network and cloud providers in major metro markets. And that higher value to customer translates into higher returns. And we believe that there is sufficient amounts of that if we continue to execute to enable us, as we've said in the past, to achieve mid to high single digit growth in FFO per share on a sustainable basis, especially once we get through this recent churn episode that we've had. And once we start leasing up, some of these newer buildings that are fairly fresh and right now are a bit of a drag on our growth. But I think in the long run, what investors will appreciate is our ability to deliver more value on our capital while delivering a very healthy and more sustainable growth rate and not pursue extensively lower yield deals that eventually mean you just have to do more and more development or spread investing every year just to keep, to tread water as opposed to having a value added business model that is more sustainable for growth year over year. Now maybe that means we're sacrificing an opportunity for double digit growth in a particular year or two. I don't know, maybe not. But I think as a sustainable business model, that focuses on delivering value to customers that translates into value to shareholders, it works pretty well and should continue to work well. Obviously, we just have to keep executing.

So thank you for that. And just one real quick follow-up. The three scale deals that you mentioned, were they all relatively evenly balanced, or did one market have a notably bigger deal perhaps than the others?

The Santa Clara deal was bigger than the other deals, but they were all in the scale category.

Great. Thank you.

Thank you. Our next question has come from the line of Michael Rollins with Citi. Please proceed with your questions.

Thanks. Good morning. I'm curious if you could talk a little bit about how you think of investing in your platform and product development going forward as you think about introducing additional managed services that you could provide for your customers or even conceptualizing your role as others and probably yourself explore the concept of the edge data center and getting infrastructure closer to where people are using the information and accessing the information.

Thanks. Hey, Michael. This is Steve. I'll give you my response, and Jeff and Paul can chime in as needed here. But I think how you finish that question is really where we start, which is providing that foundational high-connectivity, scalable data center that is at the edge. Each of our markets that we're in starts with a carrier hotel that is highly interconnected that's then tethered to a modernized, scalable data center that allows for modern workloads to be deployed there and leverage that low latency that's within those downtown metro cities. So that's a unique offering that very few others can provide out there, as I mentioned in my remarks. So it starts with that, and then How we've built that out to provide even more value to our customers over time, and in fact, just in the last year, is really connect those together where now we have inter-site connectivity between those campuses to where customers can have diversity on how they deploy their architecture. They can have diversity as it relates to accessing different availability zones for different cloud providers. There's a lot of value that has been extended within each of those markets through that offering that we just rolled out about a year ago. That combined with our NE2 exchanges that really provide the peering that many of the service providers, cloud providers are looking to exchange traffic on. As you know, NE2 is the largest exchange in the whole West Coast. There's a unique value there. So there's a lot of embedded value that really we've started with. And then if you look at where enterprises are moving today and really migrating from their, in many cases, an existing data center that they may manage and own themselves into more of a hybrid performance-oriented architecture where they are leveraging a data center like ours to connect to those other cloud providers, they need help, right? So to your point around managed services and other surround cloud-adjacent type services, we have worked very closely with those third-party providers that are very good at that and really develop the ecosystem for them to come in and thrive and know where we play and where we don't play. to where they can come in, invest in our ecosystem, know what the guidelines are around that ecosystem and how they make money and how they deliver value to our customers. So we've worked hard over the last several years to really educate our sales team, educate our partners on how we extend that overall value chain to our customers so that they can really have the full range of services and how they map out their overall IT architecture. So that's a bit different than how some of our competitors have rolled out some of their offerings where they've chosen to compete with their ecosystem. And we've been very diligent and thoughtful about how we ensure that we support and endorse that ecosystem and reward our sales team and those partners that come into Avast.

Mike, I would just refer you back to my comments to Colby about the business model. Much of our success is driven by helping our customers succeed. And Steve has described a number of the ways that we do that. And a big part of that is getting the right providers in our data center communities and making it easy for customers to work with each other so that it is a much more efficient and effective way for them to architect their IT and their digitization over the near term. but also to retain the optionality and to continue to explore better ways of doing things over the long term without having to leave that data center.

Yeah, I think one of the biggest things just to kind of wrap up on is the enterprise they're looking for is flexibility and choice over time. As you outsource a data center, it's not a trivial exercise and it's really a long-term bet. So the potential to be locked into either a single provider with single or limited access to networks or cloud providers or other services that are around there because they have chosen to get into that business themselves. I think we've proven out over the last 15 years of data center providers that that's probably not a great model.

And just one follow-up on the sales cycle that you described being elongated. I know it's tough to predict in this environment what the future may hold, but have you learned the catalyst for decisions from your customers on balance? Are they looking to the results of the election to try to get in a position to make decisions? Are they waiting for just a larger part of their workforce to return to office or just having some stabilized strategy of how to manage through this? Are there some learnings that we should just be mindful of Whereas if something evolves in the environment or for the macro economy, that we could appreciate how that might help or slow that sales cycle for your customers.

Yeah, I haven't seen the political climate come into play in any discussions that we're having at this point. I think a lot of customers are just navigating it individually as to their individual circumstances. As you can imagine, technology is more important than ever. for really any kind of enterprise and business to be operating at all today. So how they embed that technology into their success and their overall business strategy is different from one to another. We've had some adjustments that we've had to work through over the last six months or so and how we help customers through that selection process, how it fits into their model, how they evaluate alternatives, virtual tours, those kind of things. I think, hopefully, just in the results you've seen, we're getting better at it. Customers are getting more adept at it. The elongated sales cycles, as I mentioned in my prepared remarks, are still there. I think it still takes more time for people to coordinate their internal resources, prioritize capital, all those kind of things that you would imagine. But collectively, the pipeline, as I mentioned, is quite strong. And I think we're now catching up with a lot of those sales cycles. So it remains to be seen on how that ultimately translates longer term. But You know, we're all navigating it together, and I think we're getting better at it together as well.

Yeah, we were really hoping that the Dodgers finally winning a World Series this century would be a catalyst, but that remains to be seen.

I thought you'd be rooting for your Denver teams.

Got to be realistic here. Thank you.

Thank you. Our next questions come from the line of Jordan Sadler with KeyBank Capital Markets. Please proceed with your questions.

Thanks. First on Steve, just following up on, you know, the pipeline a little bit, the robust pipeline you guys discussed. I caught in your comments, you said that 2020 would be the strongest year for creating new sales opportunities um or volumes and you've got to convert these so how does that sort of translate into actual you know leasing production is that sort of 2021's business or is that you know fork you into 2021 or how do i sort of interpret that comment yeah well i think you should look at the overall pipeline um robustness that really as we

been managing this really every day, every quarter for ever since I've been here. But just monitoring and managing that as we came into COVID, there was a lot of questions as to what the effects were going to be. And overall, we've seen an increase in interest in our platform and therefore the pipeline that comes along with it. So that's encouraging. And that has continued even up through Q3. The timing and conversion of that is still TBD, as I mentioned, some of those more immediate opportunities can close even in quarter. Our typical close cycle is typically 90 to 120 days is kind of normal, but we're well into that pipeline that we've seen create, so we're encouraged so far, but again, we're in some uncharted territory here as well.

Okay, and then... In terms of, I just want to clarify the scale leases. I wasn't sure. I thought I heard Santa Clara, LA, and New York, and then I heard Santa Clara, Chicago, and New York. Can you just clarify? Where were the three scale leases exactly?

It was Santa Clara, Chicago, and New York.

Okay. Thank you for that. And then... The one for Jeff just on churn. So 6.2% year-to-date, Jeff, but your guide of 9 to 11 implies, you know, about another 3.8% of churn in 4Q. And we know about the 8.3 million in Santa Clara, but are there any other sizable known move-outs or may you be tracking below the midpoint of that 10%?

Yeah, no, there's, you know, if you look at, the one item in the Bay Area that's going to by itself be about 260 basis points in Q4. And so that, together with our typical quarterly churn, we would expect our churn in the fourth quarter to be north at or above 4% for the quarter. It's going to be elevated as we've been talking about all year, so just keep that in mind. related to not only the churn amounts, but obviously the Q4 quarterly results, as well as you guys think about your models. But somewhere north of 4% is where we'll come in for the quarter.

Okay. And then one more follow-up, and let's come back to Steve. In terms of quarterly lease production, last year was a pretty robust year, I think, helped by some scale leases. I'm just As you look at quarterly production and sort of the bread and butter retail business, what are your thoughts around sort of the level of that core colo business? Where should we expect that to be now that you've got sort of ample availability of product? What are you targeting on a quarterly basis?

I don't know if I could give you a specific, I don't know that we're going to break it down specifically to retail versus scale, but I will tell you that, you know, that is the core of our business and that's where we try to drive uniformity across the platform, which is exciting to see us now have more capacity in more markets because it allows us to kind of raise that level over time to where we're not just so reliant on just a couple of stronger markets where we now have Chicago, we really have, you know, capacity in all of our markets now. So, On balance, that is where about, I would say, 80% of our overall sales efforts are really geared towards. It's kind of that retail enterprise kind of lower scale opportunities. So as you've seen our sales results in the past can be a bit lumpy. Most of those lumps are contributed to more of those larger scale, hyperscale opportunities, which is still part of our mix. It's part of our business strategy and how we've architected our our campuses, but I think you can look at the trail and kind of see where those lumps come in and where they leave, and that will give you a good indication where our retail and kind of core enterprise business is.

Okay. Thank you. Thank you. Our next questions come from the line of Eric Rasmussen with Stiefel. Please proceed with your questions.

Yeah, thanks for taking the questions. Just first, on Northern Virginia, you said you've seen some pricing stability and even some improvement in that market. So I guess with that, what does that mean for you in terms of opportunity as you sort of think about that market going forward?

Yeah, we're encouraged with the market. Obviously, we have a pretty big bet in Northern Virginia with our VA3 campus and are quickly moving through our first phase there. So overall, the pipeline is good. The competitive dynamics are still that. They're competitive. And we continue to look for those right opportunities that value our campus. So all things in Virginia are not equal. And those that value interconnection, access to enterprises, and cloud on-ramps, those are the ones that we really focus on. But there seems to be more and more of a preponderance of that. We're encouraged with the outlook.

Okay. And then maybe just to follow up, I know a lot of questions on the sales cycle, but, you know, we are hearing, and yourselves have talked about it as well, an improvement on the enterprise side and the sales cycle, maybe some, you know, improvement on that, not, you know, seeing opportunities, you know, come through a little bit quicker. But are you saying that this could be more of a 2021 sort of story, or have we even seen that improvement carry into the fourth quarter as it relates to sort of getting back to your historical levels?

Well, I think, you know, we've continued to try to get better at it. We've seen some customers, existing customers especially, that may be deployed with us already that are really going through more of the virtual tour and making decisions on expanding with us without even physically seeing the space, which, you know, a year ago that would likely never happen. So it's very customer dependent, but I think customers are getting more savvy about how they buy, what they buy, and really kind of going through that evaluation process more pragmatically than more of a physical, you know, getting on site and really walking the space. So we'll see where that plays out. But we've seen some of that play out early, whether or not that translates into longer-term opportunities and what happens with the current pandemic and so forth. There's just so much up in the air, it's hard to predict.

Thank you.

Thank you. Our next question has come from the line of Nick Galdea with Moffitt and Advancing. Please proceed with your question.

Hey, afternoon, guys, or I guess good morning where you are. Obviously, the majority of your business is in California. Can you dimension your exposure if Proposition 15 passes?

Hey, Nick. We can. Obviously, it's an item we've been watching closely for a couple years, and obviously it'll play out here over the next couple weeks. But we have given some numbers historically, and just to summarize what we've said, if you look at our overall property tax exposure in California, specific to those leases where we are unable to pass through any increases in property taxes in the current leases, it equals about $3.5 million. And that equals, ballpark, about 15% of our overall property tax expense for the company. And so that's the area where we have exposure. Just to give you some additional commentary there, when you look at the average remaining lease term for those leases where we have that exposure, it's about two and a half years. And so for that proposal, I think it's going into effect in 2022. We'll have opportunities to negotiate with customers over that period of time to minimize that impact, and we'll see how that all plays out. But that gives you some idea of the exposure today.

Okay, that's helpful. Thanks, Jeff. And then, you know, with your 2021 churn outlook, can you talk about your degree of comfort, you know, in the context of the changes you've made to your churn forecasting methodology over the past year or two and, you know, how you'd assess the risk that it falls outside of that band?

Yeah, Nick, I give a lot of credit to the teams that have been working collaboratively over the last 12 to 18 months. A lot of resources on my team as well as Steve's, and they've done a really good job of peeling back the onion just to better understand where we think that that is headed. We're comfortable with the numbers we gave earlier, which 7.5% to 8.5% gets us back to our typical range. including obviously the 200 basis points from the one customer. If you kind of set that aside, you'd say we're probably down at the lower levels of where we've been historically. It's not going to be perfect. We obviously do make some assumptions and provide, and we always get better clarity the closer we are and after we're going through conversations with customers. But I'd say as we sit here today, we're comfortable with what our expectations are for 2021. And so, yeah, We've got the numbers, and we'll just see how we perform against that as we get into 2021.

You know, Nick, the only thing I'd add to what Jeff said is that, you know, we just have a declining, significantly declined base of those types of customers whose churn, you know, was initially harder to forecast coming into 2019 and 2020. And so just having that group reduced significantly helps us have more confidence in our forecast. Okay. Got it. Thank you, guys.

Thank you. Our next question has come from the line of Brendan Lynch with Barclays. Please proceed with your question.

Hi. Thanks for taking the question. I wanted to follow up on your commentary earlier about third-party technology that you have available in your data center. You announced a partnership with the VMware Tech Alliance Partner Program earlier this month. Maybe you can give us some color on what this enables for your clients and whether this was specifically in response to current customer demand or rather you're trying to open up to a new sub-segment of customers.

Thanks, Brandon. This is Steve. You know, I think the announcement with VMware and Dell is a great example of how we are looking to try to enable some of the tech leaders to invest in our platform and provide those services out to our customers. Probably can't get into the exact details. I would just kind of tease you a little bit and say stay tuned and you'll see a lot more detail around that. But the intent is for them to have their technology deployed to support those hybrid architectures. And they have some technology that I know they're excited to deliver and excited to deliver in their platform. So, But it's really around supporting the enterprise in those hybrid environments, multi-cloud environments, where VMware is obviously very strong, and we're excited about the partnership.

You know, one of the keys to that, though, that Steve mentioned earlier, and I'm probably being redundant here, but it's working with companies like that to make it quick and easy to for other customers to turn up their services in our data centers and significantly reducing the time and the lift associated with that. That makes sense.

And you can see that across other technologies, whether it's Amazon Outpost and others. They're just trying to make those kind of new technologies available. They know the landscape that they're coming into, incentivizing our team to work with them to do so. That's really the core of the strategy that we're working towards.

Sure, that makes sense. And then just one other quick one. One of the reasons you cited that you raised guidance was lower than anticipated property taxes for the remainder of the year. With municipalities struggling financially in the COVID environment, do you anticipate material property tax increases in 2021?

That's a great question, Brandon. I hate to give them any room to execute on that. I think that the reality is when you look at the assessed values across each of our markets. They're reading the same information everybody else is in terms of the industry, and they've been, I would say, aggressive in terms of their valuations, and it's just an ongoing effort from our perspective to challenge those assessments and those values that they're utilizing And I would tell you we do it frequently, and periodically we're successful in them. Actually, I'd say frequently we're successful in them. And that's what you ultimately saw in the result this year. In terms of next year, you know, there's always that incentive, and it's just something we're going to have to continue to watch and see what and how it ultimately plays out. But it's nothing I can predict today, but it is definitely an incentive for them given some of the dynamic that's in play with lower revenues this year as a result of COVID. Sure.

Thanks for the call.

You bet.

Thank you. Our next question has come from the line of David Guarino with Green Street. Please proceed with your questions.

Hey, guys. Thanks for the question. Just a quick one from me. With all the interest we've seen from private companies entering in the data center space, how much competition are you seeing in the colo space or Would you say most of the new competition is more geared towards the hyperscale data center side? Thanks.

I'm sorry, we couldn't hear the original part of your question. Who's coming into the data center space?

It feels like there's a lot more private competitors coming in, whether it's infrastructure funds or the whole host of private investors coming in from the sideline.

Yeah, thanks for the question, David. Going back to our overall capital allocation strategy, We try to stay out of the way of where it's easy for capital to get deployed and where it is, in fact, being deployed and creating a seller's market. So that's why we built our model around interconnection and cloud on-ramps in major metro markets where it's harder to turn up additional capacity. You know, nobody can be completely insulated when there's lots of new capital coming into an industry, and obviously it's clearly made the hyperscale, especially the generic hyperscale, much more competitive. It's probably raising asset prices in second and third tier markets, and frankly, every market. But that's one of the dynamics we factored into and why we focus on the strategy that we have focused on.

Great, thanks. Thank you. Our next question has come from the line of Frank Lufa with Raymond James. Please proceed with your questions.

Hey, guys. This is Rob on for Frank. So what's been the pace of new logo growth for you guys versus 12 months ago? And then going off of that, what's been the nature of the applications that new customers are coming to you guys for? I know that's what you talked about. You talked about

digitization but what exactly does that entail and like what does that look like for you guys in terms of the applications that you're selling to customers yeah thanks for the question new loggers is obviously a key area that we've continued to focus on in this quarter being 37 new logos as far as the number is concerned is one of our highest that we've seen I think the last five quarters so that's it's good to see overall you know I would say the numbers in general are pretty even overall If you look at the mix of those logos that are coming in, though, the quality of them has improved over the last several years. And that's been a big focus of my team is to not just sign new customers, but those customers that value the ecosystem that also have the opportunity for growth. So we look at both the quantity, the deployments, and the revenue contribution, obviously, but also the long-term likelihood of them continuing to stay customers. So less likelihood of churning out, but also more likelihood of continuing to grow. So the quality has continued to get better, especially over the last, I would say, two years. That's been a key focus. Oh, applications. As far as applications are concerned, as you see kind of the shift towards more of that kind of mid-to-large enterprise, it's interesting to see how technology from the cloud providers has kind of trickled down more to be more available to some of those enterprises where they can now take advantage of some of the same economies that a lot of large cloud providers have been solely able to do. So whether it's hardware, virtualization, applications that they're running, being able to load balance applications across various environments and into the cloud even, allows them to really manage their environments within our data center differently. So what you're seeing is really customers architecting their design to where they can manage their kind of core workloads within our data center more effectively and more cost efficiently while still leveraging cloud for those workloads that are better managed there and also give better diversity and redundancy. So it really becomes a mix of all of those things and how it comes together with, you know, SaaS, so software as a service, platforms as a service, and then the core infrastructure. So that mix varies by customer, but we're seeing more of that consolidation of especially mid to large enterprise where they are taking their their core applications and their more steady state workloads and managing it themselves and managing peak loads and more around the world type applications that need to move from region to region and follow the sun through cloud type providers.

Great. Thank you guys very much.

Yep.

Well, thank you. Thank you all. Thank you for your interest in CoreSight, Kate and Jeff and Steve and I appreciate it. We're also honestly very fortunate to work with a group of colleagues who have been tremendously agile and innovative throughout this year, whether it's figuring out how to get customers deployed quickly and interconnected very quickly to just getting all this new capacity built. in an environment where safety is a much more difficult thing to achieve and regulations continue to change related to both construction and operations and to deliver such good uptime for our customers. You've heard a lot on this call about how strong our campuses are, about the customer ecosystems, about the major metro markets, and how they've enabled us to to drive value for our customers and translate that into shareholder value. But these colleagues that we have working around the country and all these facilities are really what makes it work, and we're very grateful for them. Thank all of you for your time. Have a good and safe rest of your day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.