CoreSite Realty Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.22.13 | About: CoreSite Realty (COR)

CoreSite Realty (NYSE:COR)

Q4 2012 Earnings Call

February 22, 2013 12:00 pm ET

Executives

Derek McCandless - General Counsel

Thomas M. Ray - Chief Executive Officer, President and Director

Jeffrey S. Finnin - Chief Financial Officer

Jarrett Appleby - Chief Operating Officer

Analysts

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Emmanuel Korchman

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Jonathan Petersen - MLV & Co LLC, Research Division

John Stewart - Green Street Advisors, Inc., Research Division

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

David Kim - KeyBanc Capital Markets Inc., Research Division

Operator

Greetings, and welcome to the CoreSite Realty Corporation Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Derek McCandless, General Counsel. Thank you, Mr. McCandless, you may begin.

Derek McCandless

Thank you. Hello, everyone, and welcome to our Fourth Quarter 2012 Conference Call. I am joined here today by Tom Ray, our President and CEO; Jeff Finnin, our Chief Financial Officer; and Jarrett Appleby, our Chief Operating Officer.

As we begin our call, I would like to remind everyone that our remarks on today's call include forward-looking statements within the meaning of applicable securities laws, including statements regarding projections, plans or future expectations. These forward-looking statements reflect current views and expectations, which are based on currently available information and management's judgment. We assume no obligation to update these forward-looking statements, and we can give no assurance that the expectations will be obtained. Actual results may differ materially from those described in the forward-looking statements, and may be affected by a variety of risks and uncertainties, including those set forth in our SEC filings.

Also, on this conference call, we refer to certain non-GAAP financial measures such as funds from operations. Reconciliations of these non-GAAP financial measures are available in a supplemental information that is part of the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com.

And now, I will turn the call over to Tom.

Thomas M. Ray

Thanks, Derek, and welcome, everyone, to our fourth quarter call. Before reviewing Q4 results, I'd like to review some of our key accomplishments in 2012. During the year, we restructured our sales, marketing and go-to-market activities to a vertical model. Despite the disruption this caused, we executed through the year in both financial and operational terms. Specifically, in 2012, we increased revenue by 19.7%, adjusted EBITDA by 36% and FFO by 26.5% over 2011. This continued drive in top line growth, and our 69% flow-through margin to adjusted EBITDA in 2012, are particularly encouraging in light of the material changes we made in our sales and marketing teams during the year.

Also in 2012, we invested over $92 million in growing our data center platform, and entered a new market in Denver with the acquisition of Comfluent, the area's most network-dense colocation operator. We signed 338 new and expansion TKD leases for approximately 130,000 square feet, reflecting an average size of 387 square feet per lease. With this customer growth, our installed base of fiber cross connections increased by 21%, which includes cross-connects related to our acquisition of Comfluent. Excluding the Comfluent acquisition, fiber cross connections grew 13% over 2011.

Turning to Q4 '12. Our financial results reflect consistent execution of our business plan and solid growth over Q4 '11. Specifically, revenue increased by 20% over the prior year quarter, adjusted EBITDA by 38% and FFO per share by 23.5%. Reflecting investments in our sales and marketing functions, Q4 booking volume was the highest since we became a public company. New and expansion sales of $11.6 million in annualized GAAP rent included TKD sales of $8.4 million. It also included an estimated $3.2 million in annualized GAAP rent related to a 100,000-square foot powered-shell built-to-suit on our Santa Clara campus. We note that the rent on the build-to-suit is subject to potential minor adjustments to reflect any changes in final project cost. We expect to invest $19 million in this project during 2013, as disclosed in our Q4 supplemental. 1/2 of the rent from this project should commence in Q4 '13 and the remaining 1/2 toward the end of 2014 or early 2015, depending upon the timing of the completion of certain power upgrades associated with the lease.

As expected, Q4 lease commencements of $2.9 million in annualized GAAP rent, were lower than our historical average, reflecting lighter bookings in Q3. Pricing in Q4 remained firm across our platform. Specifically, we achieved rental mark-to-market of 11.7% on a cash basis and 15.6% on a GAAP basis. We recorded churn of 2.1%, slightly below our trailing 4-quarter average of 2.5%. Our GAAP rental rate on new and expansion TKD sales in the quarter was $151 per square foot, reflecting lower power density in the product mix sold in the quarter, as well as conceding lower rent to win a key network anchor application in Chicago.

Beyond the record dollar volume of our Q4 sales, we saw a healthy blend of new business across all verticals. Specifically, we signed 23 new logo customers in Q4, including 7 network, 9 cloud and 5 enterprise customers. In the key network and cloud verticals, we executed over 64 new and expansion leases. Of that, we executed 27 leases with network and mobility providers. Among the key Q4 wins in our network vertical were leases signed with service providers Sidera, Zayo, GTT and CITIC. Other new customers in the vertical included Saas Unified Communications leader, BroadSoft, and 2 mobility service providers.

Our cloud vertical segment also showed great strength in the quarter and represented 64% of annualized GAAP rent signed. The 39 new and expansion agreements in this vertical include key wins from global cloud providers in our Boston, Reston and Santa Clara markets. Specifically, we executed new agreements with what we believe are 3 of the top global cloud service providers, each leveraging off of the growth of our cloud-enabled data center campuses and the launch of our Open Cloud Exchange. The Open Cloud Exchange, which was announced in January of 2013 offers our customers direct connection to the variety of cloud-based IT resources and applications on our platform. We believe that success in our network and cloud verticals leads to increasing value across our platform.

In addition to strength in our network and cloud verticals, we saw solid growth in the systems integrators and MSP vertical with industry leaders such as a Digital Voice Solutions and SunGard, a new partner specializing in supporting enterprises in targeted industries such as health care, financial services and retail.

Together, these Q4 customers enhance the valuable mesh of technology solutions already offered by the over 750 companies relying on CoreSite's data center platform and our valuable mesh of customers and applications.

With that, I'll turn the call over to Jeff to run through our financial results.

Jeffrey S. Finnin

Thanks, Tom and hello, everyone. Before I review the results of the quarter, I'd like to take a moment to outline the steps we took in 2012 to strengthen and expand CoreSite's financial foundation.

As we've grown our business, we've maintained a strong balance sheet with low leverage and limited near-term debt maturities. We believe that we are entering a new phase of growth as a company, and in 2012, we enhanced our balance sheet to support that growth.

In December, we issued $115 million of perpetual preferred equity, netting the company $111 million after expenses. We used the proceeds to repay all of the secured debt outstanding on our VA1 property, and to repay all borrowings outstanding under our credit facility.

Additionally, in January, we amended our credit facility. Supported by the increased value of our portfolio, we increased our line capacity, reduced the spread by 25 basis points, moved to an unsecured structure and extended the term to 2017. This additional liquidity secures low-cost capital to support expansion and terms out all of our near-term debt maturities.

Additionally, diversifying our capital structure in reducing our secured indebtedness also brings us closer to a longer-term goal of achieving an investment grade rating.

With that, I will now turn to fourth quarter and full-year operating results.

Regarding full year results. In 2012, we recorded revenue of $206.9 million, reflecting an increase of 19.7% over 2011. Adjusted EBITDA increased 36% to $89.4 million in 2012. Importantly, our adjusted EBITDA margin increased 500 basis points to 43%. FFO increased year-over-year by 26.5%, coming in at $72 million for 2012. Our revenue flow-through rate to adjusted EBITDA in 2012 was 69%, demonstrating our ability to leverage off our current platform as we continue to scale the business.

Regarding our Q4 results. We reported FFO per diluted share and unit of $0.42, which represents a 23.5% increase over Q4 of 2011. Our operating revenues were $55.3 million, a 20% increase over the prior year quarter. Our Q4 operating revenue consisted of $46.1 million in revenue from space rental and power charges, $6.2 million from interconnection revenues and $3 million from tenant reimbursement and other sources. Interconnection revenue increased 88% over the prior year quarter, and increased from 7.1% of revenue in Q4 2011 to 11.1% of revenue in Q4 2012. A material component of this growth resulted from increases in unit pricing. As Tom noted, our organic increase in fiber cross-connect volume was approximately 13%.

For 2013, we forecast organic growth and cross-connect revenue between 9% and 13%.

Regarding our investments in our sales and marketing functions, we incurred sales and marketing expense of $3.4 million in Q4. This correlates to approximately 6.1% of revenue, which is within our target range of 5.5% to 6.5% of revenue. We expect this level of spending to continue in 2013.

As of December 31, 2012, our data center portfolio was 77% occupied, including all operational properties, which includes the pre-stabilized assets, as shown on Page 18 of our supplemental. Including leases executed, but not commenced, our data center portfolio was 81.3% leased. Regarding our backlog of signed, but not yet commenced leases, annualized GAAP rent from this pool is $10.4 million as compared to last quarter's backlog of $1.6 million. The backlog is expected to commence in 2013 with approximately 2/3 in the first half and 1/3 in the second half of the year.

Regarding capital spending on expanding our national platform. We expect to invest between $180 million to $200 million in 2013. This amount is comprised of the following key projects: $65 million to complete the initial phase of our NY2 project, including the $24 million already invested to acquire the land and the site. We anticipate investing the remaining $41 million ratably over the second and third quarters; $60 million in our VA2 development with commencement expected in the second half of 2013; $19 million in our SV5 built-to-suit development on our Santa Clara campus, expected to be completed in Q4 2013; $36 million to $56 million in various projects across Los Angeles, the Bay Area, Boston and Chicago. For a more detailed breakdown of these projects and planned near-term future construction, please refer to Page 18 of our supplemental package.

Now, I will turn to our balance sheet. As of December 31, 2012, we had no amount outstanding on our revolving credit facilities. We had approximately $8.1 million of cash available, and currently $355 million of capacity under our credit facility, providing what we believe is sufficient liquidity to fund our expansion plans for 2013. Our debt to Q4 annualized adjusted EBITDA is 0.6x and our debt to total enterprise value is 4.1%. During the quarter, we announced our Board of Directors had approved an increase in our dividend for the second consecutive year. We increased our dividend by 50% to $0.27 per share on a quarterly basis or $1.08 per share on an annual basis. We remain focused on maintaining our dividend payout levels to comply with our REIT requirements, balanced with our need to retain cash to grow our portfolio through internal and external investments.

Additionally, I would like to note that in our supplemental for this quarter, we revised the nomenclature that identifies our data centers. For example, our locations at 32 Avenue of the Americas and Secaucus, New Jersey will become NY1 and NY2, respectively. We have provided a reconciliation of the former and current sets of nomenclature on Page 8 of our supplemental.

And now in closing, I'd like to address guidance for 2013. Please keep in mind that our guidance is based on our view of supply and demand dynamics in our markets, as well as the health of the broader economy. We do not factor in changes in our portfolio, such as acquisitions, dispositions or capital markets activity. As provided on Page 21 of our supplemental, our guidance for 2013 is as follows: FFO per share and LPE unit is estimated to be $1.72 to $1.82. Keep in mind that the recently completed preferred stock offering impacts our 2013 FFO guidance by approximately $0.10 per share in unit in 2013. Revenue is estimated to be $237 million to $247 million. General and administrative expenses are estimated to be $28 million to $30 million, in line with our earlier guidance that our G&A would be approximately 12% of revenue. Adjusted EBITDA is estimated to be $105 million to $110 million.

The significant drivers of this guidance are as follows: estimated churn rate per quarter of 1% to 2%. Please note that this is not net of increases in our rent growth, as we will report those amounts separately. Cash rent growth on our data center renewals is estimated to be 4% to 7% for the full year. Capital expenditures related to development are estimated to be $200 million to $225 million. This includes the expansion capital discussed above, plus amounts related to our IT upgrade project, tenant improvements and other capital expenditures. Recurring capital expenditures estimated to be $4 million to $8 million, or approximately 2.5% of our revenue for 2013.

With that, let me turn it back over to Tom.

Thomas M. Ray

Thanks, Jeff. I'll now take a moment to discuss our perspective on market conditions and our internal organizational initiatives. At a high level, our views on the market have not materially changed from 1 year ago, and we expect a steady 2013. Although 2012 saw uneven sales volume from quarter-to-quarter, volume for the year remained consistent with past years. Our view of 2013 paralleled that of last year, and is supported by a steady volume of attractive opportunities in our sales tunnel. Our "boots on the ground" view is supported at a macro level by data from Gartner, which shows data center outsourcing increasing from 20% in 2012 to nearly 35% in 2016. In addition, Gartner forecasts that over 70% of server workloads will be virtualized over that same period, with new enterprise workloads deployed in multi-tenant data centers forecasted to nearly double in the next 2 years. We believe that these trends bode well for CoreSite, particularly as we focus on further strengthening our network-rich, cloud-enabled data centers in key interconnection hubs across North America.

Regarding organizational changes, 2012 marked a very successful year across 5 key areas: first, in 2012, our field operation teams provided our customers with what we believe is the best service in the industry. Our focus on operational excellence allowed us to execute upon more than 8,000 service orders, including a record number of fiber cross-connect installations; second, to further improve the CoreSite customer experience, we also made strong progress re-architecting our internal technology platform. Our previously announced IT upgrade project, designed to bring our technology systems up to the highest standards in the industry, is approximately 30% complete and we anticipate final execution by Q3 of 2014; third, regarding the reliability of our facilities, our performance in 2012 cements our position as an industry leader. First, our facilities team ensured 100% uptime through Hurricane Sandy and its aftermath. More broadly, for the second consecutive year, our team distinguished itself with 6 9s of uptime across our North American platform. This record of excellence stands out as one of the best in our industry; fourth, with regard to the vertical alignment of our sales and marketing functions, as of today, we were approximately 80% to 85% staffed in both our sales and marketing teams. We anticipate that we will add the remaining hires during the first half of 2013 and settle in with SG&A expenses consistent with our anticipated range from 17% to 19% of revenue. We expect the investments we made in 2012, and those will complete in the first half of this year, to result in headcount across our sales and marketing functions that is nearly 2X that in place at the end of 2011. We believe that this greater capability enables us to win a greater market share of high-performance applications, and provide a differentiated value proposition for our core verticals. Finally, we continue to expand our geographic platform. At year end, we had approximately 95,000 square feet of data center capacity under construction across our existing facilities in Boston, Chicago, Los Angeles and Santa Clara, with all projects slated for completion by mid-2013.

In addition to those existing building expansions, we expect to break ground on the following 3 new developments in 2013. In Reston, we are entitled and have submitted for a construction permit to build our 200,000-square foot VA2 data center, contiguous to our 260,000-square foot VA1 building. We expect to break ground on VA2 in the middle of this year and invest $60 million in constructing the powered-shell and first phase of salable inventory. On our Santa Clara campus, we expect to commence and complete SV5, the 100,000-square foot powered-shell build-to-suit. This pre-leased development enables us to serve a strategic customer and accelerate the monetization of a portion of the land we own on the campus. Beyond the pad sites supporting the build-to-suit, we retain 2 additional development parcels: one currently entitled for 210,000 square feet of development; and the other that we believe may support between 100,000 and 300,000 square feet, depending upon entitlements.

In Secaucus, New Jersey we will construct our NY2 facility on the supporting land parcel we acquired in 2013. NY2 will bring 4.5 megawatts of salable data center capacity to market in Q4 '13, with the ability to scale the existing building up to an estimated 18 critical megawatts. We believe that the land parcel we acquired will support additional ground-up development, and we will provide updates regarding the entitlement process on this site as appropriate throughout the year. We have high expectations for our NY2 expansion as we enter what we believe is one of the fastest-growing and most profitable submarkets in the U.S. for our business plan and our targeted applications and customers. Specifically, 2 of the United States leading colocation and IT services companies have experienced consistent, robust and highly profitable growth in Secaucus in the Meadowlands. Additionally, the Secaucus submarket is the leading location in the region for financial services firms, and provides robust, diverse, low-latency network access to Manhattan. These factors differentiate the Secaucus area from the outer submarkets of Somerset and Middlesex counties, which offer the same cost of power but significantly longer and less diverse fiber routes to Manhattan and subsea cable landing stations, access to which is often a key requirement for performance-sensitive colocation applications. We see strong opportunity in Secaucus, and look forward to bringing our NY2 facility online at the end of this year.

2012 was a great year for CoreSite. We had ambitious plans to reengineer our company, and we executed on all fronts. Importantly, we did so while keeping our sales and financial performance on track. As we look ahead, we are as optimistic as ever about our company and our market opportunity. We have a great platform of assets in the right locations in the best U.S. markets; the right go-to-market strategy supported by excellent products, service and a world-class sales and marketing team; and more than 750 key customers working together across our platform to create a valuable mesh of technology solutions. We believe that we are in the early stages of executing upon the opportunity before us, and we remain focused upon continuing to build a great company with a valuable and enduring market position.

Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from Jamie Feldman from Bank of America Merrill Lynch.

Unknown Analyst

This is actually Gee [ph] here for Jamie. Just a question on the powered-shell build-to-suit in Santa Clara. Can you just talk a little bit more about the strategic rationale, and also if you could provide the lease term and the yield on that build-to-suit?

Thomas M. Ray

Well, we have confidentiality provisions in the lease, Gee [ph], but what we can communicate is what's in the public disclosures. We've indicated GAAP rent of $3.2 million a year, annualized GAAP rent on a stabilized basis, and incremental capital costs of $19 million to build the building. And I think that the majority of the rest of the cost is the land parcel that was in place. We think -- I guess, a couple of different things. The returns met our thresholds, #1. #2, we are helping a customer that's very, very important to us across North America and just furthering and deepening a good relationship with that customer. And then #3, I think what that customer -- what we believe that customer will be doing on our campus will make the campus even more attractive to other networks and cloud service providers and enterprises. So it was a win on all 3 counts.

Unknown Analyst

And also just shifting gears a little bit. Can you talk about the general competitive landscape for each of your markets? We're hearing more about capital shifting into colo from wholesale. I know your products are more differentiated with higher network density, but maybe you can just talk about what the pricing pressure you're seeing for colo in general and how your data centers are doing?

Thomas M. Ray

I'd say across the markets, really no change. And Jarrett, do you want to offer more feedback?

Jarrett Appleby

Yes, I think for what we're focused on, I think we've been talking a lot about the cloud and networking community. Again, that's part of the reason where we selected these sites in close proximity. It took a lot of years to build up the network density that we have over the years, and we continue to build on that. So from our side, it is differentiated. Folks are looking for an alternative to incumbents. We'd heard of others trying to move in this space. But again, I think it's going to take quite some time for you to build up the network density and choice and the ability to support digital content in the CloudCommunity like we have.

Operator

Our next question is coming from Jordan Sadler from KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Want to just quickly follow-up on Gee's question on the build-to-suit. The GAAP rent, is that a net rent, triple net rent?

Thomas M. Ray

It is.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

It is. And if you were to throw an allocation to the land down there, either book value or what have you, what would the total all-in be on the site?

Thomas M. Ray

I don't think we've disclosed that anywhere, Jordan. I think -- you see market prices for land. I'd say may be between the $30 and $90 an FAR foot is probably where the market is.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

$30 and $90?

Thomas M. Ray

Yes. I mean, it's a fairly wide range.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay, okay. Okay, that's helpful. And how did the transaction come about? Was it reverse inquiry? I don't see you guys -- or I don't hear a lot about you guys pitching shell.

Thomas M. Ray

Yes, we don't. It's fairly rare. There are times we do in some locations. I think this came about from a good relationship at executive levels and at the staffing level, the sales team with a large customer.

Jarrett Appleby

And Jordan, I think, we've been talking about the value of our platform. What's happened is we're getting a lot more of that. We're clearly focused on transaction level, but we are focused on our strategic account list. And when these opportunities opportunistically come up, what we can -- it's a win-win, we'll focus on that.

Thomas M. Ray

I think we just have more resources and Jarrett has made a huge difference. More resources at the field level and at the executive level going deeper and deeper with our top 31 targeted accounts.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. And just generically across the 3 developments that you described, Reston, Santa Clara and Secaucus, did you say -- comment on returns, maintaining 12-plus percent returns? Is that sort of fair? Is it going up, down?

Thomas M. Ray

No change. And we've always said north of 12%. And that's no change.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay. And then this is lastly a comment on sort of building out a network-dense facility, with Jarrett, I think this was sort of your last comment, the difficulty in building the necessary network density. I think you guys have talked about, historically, in order to sort of create these facilities, they have to be in locations that already have significant network density and then you have a facility that has -- bringing an anchor tenant to a facility in 1 of these locations. Is that sort of a fair assessment? And any other sort of critical obstacles to creating these network-dense facilities?

Jarrett Appleby

I think that's at the core of it and also having a relationship across multiple markets. We're in 9 markets today, so we really get to provide a value proposition across the platform. That's why a tuck-in like Denver made a lot of sense for us to bring the density there. But it also where we had a lot of those clients. They told us to go there. Another good example is L.A., where you have One Wilshire tethered in -- LA1 tethered into LA2, and we get that value proposition, and you'll see that in New York, with New York 1 tethered in with NY2 in Secaucus. So we build on those communities, and we make it easy to be in the city and also nearby and that's one of the big value propositions of Secaucus. It's right with those providers and our carriers and our CloudCommunity said they wanted to be there.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

There are some of these facilities that would sound a lot like the ones that you're describing that are really operated currently by wholesale providers that don't really traffic in the same businesses that you do. Is there an opportunity there at all?

Thomas M. Ray

Well, I was going to say I think -- we think about the key ingredients. One is location, location, location, and there are other data centers that are in markets that have a lot of fiber and a lot of carriers. Another key ingredient, obviously, is capital, which I think all the publics share and some of the privates share. But important additional key ingredient is your customer mix and your customer base. You really are putting together puzzles inside these data centers, application puzzles, and they create a virtuous cycle. So having very, very, very heavily multi-tenanted, multi-customer, multi-application data centers is vital. And to that, it speaks to what I think of as the fourth key ingredient, and that is you got to have scale to support all of the IT and all of the people and all the human resources. There's a meaningful amount of fixed cost infrastructure to be effective in our business. And it's not economically rational to do that with a $200 million capital business. It works when you're $1 billion or $1.5 billion, you're kind of past the tipping point. But I think scale to support people and systems is required. So I think those are the key ingredients.

Operator

Our next question is coming from Emmanuel Korchman from Citi.

Emmanuel Korchman

Just looking at the news that's kind of been happening in the cloud space with a major cloud provider cutting revenues or cutting service fees this morning. How do you think that'll impact maybe your business and just the data center business overall, if any?

Jarrett Appleby

Yes, I think there's clearly some movement. I think a lot of it is there's just a lot more choice. There are more providers. I think the one you might be referencing was an early mover for small-medium enterprise, and now there's a lot more choice. I think where they are headed is in a lot more in these data center campuses, to take advantage of selling into these communities. So we're seeing an acceleration of choice and options for the client, and that's really what our initiatives around Open Cloud Exchange and our cloud-enabled campuses are to do what we've been focused on: Choice for networks, it's the same type of choice for cloud. So I just think it's accelerating it, and all the movement to outsourcing and workloads to the cloud, we're actually -- for folks in our community should see the benefits of that overall.

Emmanuel Korchman

And then Jarrett, earlier you had mentioned the 9 markets you're in and the fact that Denver was partially driven by tenants asking for that as an additional option. How many other markets do you sort of need to be in to be even more sort of fully -- full as a platform? And then maybe how many of those do you get into over the next year or 2 years?

Thomas M. Ray

Well, I think the question is when do you pass the tipping point of offering a comprehensive platform that puts you at the table on continent-wide opportunities with the largest customers. And I think we're past that tipping point. So we don't feel that we have to be in X or Y markets to be highly successful with our strategy. And then beneath that layer, and that layer really does define it, but beneath that layer, there's incremental value in broadening the platform and we have, to date, focused on Tier 1 markets. So again, we've named them in the past, Dallas, Seattle, Toronto, Atlanta. Those are markets that are high-liquidity Tier 1 markets that we pay attention to. But I think that customer-led demand is more our focus than the sense that, gee, we have to be in 1 or 2 additional markets and we'll do whatever it takes to get there. I think we are past the tipping point. We have a good broad platform, and I think that's showing up.

Emmanuel Korchman

Great. And then from the Secaucus development, you guys are doing roughly, let's call it 1/3 of it this year. How long to get a full build out there?

Thomas M. Ray

Well, it just depends, Manny. We have at times opportunity to do a little bit larger deals that might be interesting, that's that lumpy side of the business, and that -- there are times when you don't. So it's hard for us to guess. I think, we try to underwrite every significant tranche of capital as less than a 2-year build-out -- less than a 2-year lease-up to stabilization. That might imply 6 years at New Jersey. We would hope to beat that. But we'll scale the capital in accordance with the pace of demand and absorption. But the first big tranche of capital we deliver, we would say consistent with our 2-year stabilization guidance. We've been fortunate enough to beat that in the past and we're going to work hard to do it again.

Jarrett Appleby

And you do have events that were unfortunate like Sandy, but it's accelerating things to nearby New York, and we hope to capture that -- those opportunities now, as well, as people look nearby.

Emmanuel Korchman

And then just 1 quick clarification on the Santa Clara lease. Was that an existing portfolio customer, or was that just an existing kind of corporate level -- or exec level of relationship?

Thomas M. Ray

Existing portfolio customer in a company with which we have very good relationships.

Operator

Our next question is coming from Tayo Okusanya from Jefferies.

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Most of my questions have been answered, but this one is for Jarrett. I mean, Jarrett, when you first showed up, you kind of had this very clear mission of working on the realignment of the sales force. You guys are definitely getting good traction with that. I'm just kind of curious, as you kind of look over the next 6 to 12 months, are there any other kind of 1 or 2 key strategic initiatives you can talk about that you'll be undertaking just to continue to drive customer penetration and drive the top line at the company.

Thomas M. Ray

I think that was "What have you done for me lately?"

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

You know how it is, guys.

Jarrett Appleby

So first of all, we definitely want to get consistent, solid growth in the sales and marketing engines. So it's still early days and we're still ramping up and getting that team productive and I think we were sharing with you, it takes 6 to 9 months. So the team's not off the hook. This is still, we're building that engine. But behind it, it really is bringing the cloud and networking community. And we talk about network-rich, cloud-enabled data center campuses and the products associated with that, and you're seeing some of the partners in the software side. We want to make it easy to connect and scale with the cloud on these campuses. And that brings, as Tom was talking about, the value of the communities. We have 750 customers today. Once you have those ingredients, the soil, the community can really develop in these campuses. So those are the kinds of relationships and partners that we want to do to augment that. And whether it's system integrator and MSP partners that can do it for the clients, or showing folks how to take advantage of these new software tools. It's a fundamental shift in architecture and we just have education to do in the community and that's kind of what we're driving next.

Operator

Our next question is coming from Jonathan Schildkraut from Evercore Partners.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

I just wanted to ask, I guess, a couple of questions. There were some questions on the competitive landscape and we do a lot of channel checks and I just wanted to get a sense, because based on our checks we always thought that you were a very attractive value proposition relative to the pricing on some of your competitors, and maybe if you can give us some color in that regard, it would be helpful. And then secondly, a couple of your competitors are not getting renewed over at 111 8th in New York and I know that you're making a big investment out in New Jersey and you've obviously got your hubs at Avenue of the Americas. And I'm wondering if you're starting to see any demand or any conversations are coming out of what's going on at 111 8th?

Jarrett Appleby

Hey, Jonathan, you're hitting it. Those trends in 111 8th and others are creating opportunities for us, as well. Some of the larger footprints that you also can't do in those legacy facilities are really being driven by the applications in high-performance cloud. So from a competitive benchmark, that's why we picked Secaucus. And I know folks have a lot of questions there, but the pricing is a lot firmer. You have a whole community of electronic trading right nearby. So the financial service firms, you see Amazon supporting in our facility. Direct Connect options and other cloud providers are coming to New York and New Jersey. So all those, I think, present opportunities for shifting key applications out of New York, and growing in these campuses like in Secaucus.

Thomas M. Ray

And I think we're also optimistic about early discussions with some subsea cable re-architecture or expansion that, I think, historically went straight to 60 Hudson on one side and to 165 Halsey on the other. And think the newer cables are looking to establish more efficient routes into bigger, more professionally managed data centers and we think Secaucus is well positioned for that as well.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

And Tom, I know in your prepared remarks, you talked about scaling of the sales team. Is the initial phase, then, of the realignment complete? And how big a team are you willing to give, I guess, Jarrett, to go out there and drive sales?

Jarrett Appleby

I think we've shared. We're about 80%, 85% there in terms of the investment. The next 2 quarters, we'll ramp up the rest within the range that Jeff provided, so that should be sufficient to build on this engine and get that going. And again, Jonathan, it takes 6 to 9 months to get them fully productive. We are hiring domain experts from the verticals and so they're bringing expertise in relationships and talk about the platform and it took a while to change the funnel out now to -- to now get to those right opportunities. And the marketing engine is just starting to kick in. You see some of our new messaging around the cloud and network in the Mesh, as we call it, that's happening here, and how the communities come together. And those are all building blocks that we'll continue to drive. I don't know how far we can go, Tom, with that but...

Thomas M. Ray

And I think in terms of the resources we can supply to that, I think it's -- you can eat anything you want so long as you pay for it. I think as we get more and more successful, we'll continue to invest. And that's really baked into the guidance that we give of 5.5% to 6.5% of revenue. And if, as we accelerate revenue, if we're more and more successful, then I think we'll hold that ratio constant and continue to build muscle in the organization at least for the next couple of years.

Jonathan A. Schildkraut - Evercore Partners Inc., Research Division

Great. And then just 1 last question. And Jeff, I guess I'm going to keep asking this question 'till I get the answer I want. But you broke out interconnect as a separate revenue line item. CyrusOne, during their IPO roadshow, said their PLR had interconnect in the QRS. Equinix is obviously down this path and would obviously deliver a pretty good benefit to you and to the shareholders if you were able to move that from the TRS to the QRS. So where is the company thinking about this, and where are you if there is a process?

Jeffrey S. Finnin

Jonathan, I think the way to summarize where that all is, is that we're optimistic as we look into 2013. However, the ultimate resolution and the timing of that is not in our control. And so while we are optimistic, as soon as we have better clarity, it's something we'll give better guidance on.

Thomas M. Ray

And just to be clear, Jonathan, I think that somebody wrote something 1 month or 2 months ago about the potential upside to earnings based on if we were to get a PLR and put the cross-connect revenue inside the QRS. And we just urge people to be cautious about their enthusiasm around that underwriting, because today you can look at the amount of tax we've actually paid. The allocation of expenses into the TRS to date has meant we haven't paid huge taxes, that is certainly accelerating. We just urge people to be very disciplined about the math around that and we'll try and help in that regard as well.

Operator

Our next question is coming from Jon Petersen from MLV & Co.

Jonathan Petersen - MLV & Co LLC, Research Division

I was hoping you could talk a little bit about your long-term capital structure. I believe in the past you set a goal of 4x debt and preferred to EBITDA. I think you're at 1.8x today, so you still got a ways to go. Can you talk about some of your options for long-term debt and what kind of yields you think you can get today?

Jeffrey S. Finnin

John, this Jeff. Yes, I think as we've disclosed in the past, managing the company somewhere around that target of 4x debt-to-EBITDA is consistent with what we've done -- said in the past and that's where we are today and as we continue to look out for it. I think when you look at our 2013 business plan, as we've laid out, in terms of our guidance, given our expansion of the credit facility, it's fair to think about things along the line that we will continue to fund our expansion by utilizing that credit facility. We've got plenty of liquidity to do so. However, we'll continue to monitor the markets and we want to be opportunistic as it relates to continuing to finance the company, but it's not something that we have as a high priority this year, but it's something we want to watch and see what happens to rates. I think in terms of the other options to us, you can see that we've paid off over the last couple of years a big portion of our secured debt. We still have 1 mortgage outstanding today. That's something that we have -- is available to us, but it does tie up our assets, and as we said on my comments, our goal is to free up those assets as we continue to look towards trying to get to investment grade rating for the company. We still have some scale to go, but it's something that we still have in mind. Obviously, unsecured debt is another avenue, but as you look out at the unsecured debt opportunity, it is something that takes a large amount of capital in order to go that route from the first issuance for somebody like CoreSite. You're talking somewhere around $250 million to $300 million at 1 time. So the line of credit helps us from the standpoint of, as we continue to expand capital, to do it in dribs as we need to on a quarter-by-quarter basis.

Jonathan Petersen - MLV & Co LLC, Research Division

So I guess, is what you're saying you'd work up the line in credit to that $250 million, $300 million and then you would start to look at the unsecured market or...?

Jeffrey S. Finnin

I think that's what we've planned for. The other avenue, and I didn't mention it, but obviously we did a preferred stock offering just late last quarter. The nice thing about the preferred stock is that it allows you to issue some capital in smaller increments. As you saw, we did it about $115 million. And so that's another good avenue, but it's going to depend on pricing. We did it in the fourth quarter and took advantage of a good opportunity with low rates and a compressed spread that we wanted to take advantage of and executed on it, we thought, pretty well. And so that's another avenue depending upon the amount of capital we need as we look out to the landscape.

Jonathan Petersen - MLV & Co LLC, Research Division

Okay. And then just a clarification on 1 thing. Can you talk about the kind of business that the powered-shell tenant is involved in? And I'm just kind of concerned. I mean, would these guys potentially be competitors? I mean, would they be leasing to people that you guys might be leasing at adjacent properties, or are they in a completely different business that is not competitive at all?

Thomas M. Ray

Well, I was going to say we won't talk at all about the tenant. But at a high level, we're not hugely interested in leasing to competitive service offerings, that's for sure.

Operator

Our next question is coming from John Stewart from Green Street Advisors.

John Stewart - Green Street Advisors, Inc., Research Division

Tom, what exactly do you mean when you're talking about a vertical model? Can you kind of dumb that down for us a bit, please?

Thomas M. Ray

Go ahead, Jarrett.

Jarrett Appleby

Well, John, what we do is, 1 of the things that we've learned is the value of sites, 9 sites that we have across North America, really provides a data center platform for services. It starts with the network service providers, so that would be a vertical, the network in mobile. And so we want to understand their business, and so we've created a sales and marketing team to understand what types of deployments, what type of value that we can provide. But we also support -- we have a vertical around digital content, cloud and IT services, system integrators and managed service providers and then enterprise, which is comprised of some of the emerging communities like health care and financial services and government, for example. So that's what we're doing. We're going to market through a vertical sales and marketing strategy and communicating and understanding their needs and what kinds of deployments and services that they need from us across North America.

John Stewart - Green Street Advisors, Inc., Research Division

Okay. And maybe this follow-up is for a combination of Tom and Jeff. But Tom, in your closing remarks when you mentioned that you were sort of 80% to 85% of the way through the vertical alignment process, I thought I heard you say that, that would amount to 17% to 19% -- or G&A at 17% to 19% of revenues. And so the question is, can help us understand exactly which costs and which functions run through OpEx, G&A and sales and marketing line items?

Thomas M. Ray

Yes, and Jeff will take you through in 1 minute, but to be clear, that ratio 17% to 19% is SG&A. We've been running G&A around 12%, it went to 13% in the Q because of some anomalies, but we think 12% is still a good run rate. Go ahead, Jeff.

Jeffrey S. Finnin

John, just to answer your question, as Tom just outlined, we've got those 2 line items broke out separately inside our supplemental on Page 12. So you've got the sales and marketing team, which is the resources and the team that Jarrett was referring to earlier, and that they commented on being about 80% to 85% built out. Obviously, that includes some marketing dollars on top of the individuals, but that is the team that they're talking about. In terms of the G&A, that is us. That is Denver, predominantly, and that is what, as Tom referred to, we've given guidance for that number to be somewhere around 12% of revenues on a go-forward basis. Does that help?

John Stewart - Green Street Advisors, Inc., Research Division

A little bit. So is OpEx exclusively real estate taxes and insurance? What runs through that line item?

Jeffrey S. Finnin

Predominantly, when you look at our property operating, we've got separate disclosure for property operating and maintenance. Those are the dollars predominantly associated with our individuals in the field, as well as some of our power costs. And so when you look at our facilities teams and our operating teams, those are the individuals making sure our data centers are up and running 24/7. They're the individuals deploying some of our deployments and doing some of our hands-free, our remote hands activity. That's what's labeled in our property operating and maintenance dollars. And then we've got real estate taxes and insurance are separately broke out as well.

John Stewart - Green Street Advisors, Inc., Research Division

So are the sales and marketing folks, are they in Denver?

Jeffrey S. Finnin

They're distributed. We have most of the marketing organization, we've got some very strong talent now on the vertical side that we've been adding this quarter. We're hubbing that up here in Denver. But the sales force is primarily in the field with customers, except for some of the sales leadership team.

John Stewart - Green Street Advisors, Inc., Research Division

And how common is it for you guys to pay a leasing commission to a third-party?

Jeffrey S. Finnin

I wouldn't say it's -- I don't know what percentage of the deals we do it on, John, but it's not a large percentage. It's generally going to really relate or depend upon the ultimate type of deployment we're doing in our leasing. So I wouldn't say it's -- I don't know. What do you think?

Thomas M. Ray

John, I'm try think of the dollars around that, and I know we've provided that in the past and we're not -- I'm just not ready to do that right now because we haven't had any of that recently, so it's just not at the top of mind. But where we pay commissions, 99% of the time, are on larger deals where the customer effectively outsources the entire procurement and site selection process to a real estate service provider like a CB. And we're respectful. When the customers comes to us and says, I have 2 people in corporate real estate or 2 people in my operations group and I have 8,000 leases to take care of, so we'll use CB or Grubb or whoever, then we respect that, and those people get paid, and frankly that cost is baked into the deal. But those are pretty rare. And on the colo side of the business, it's incredibly rare that there's an outside hand to feed.

Jeffrey S. Finnin

And John, the other thing I'll point you to is if you look at Page 13 in our supplemental, in our reconciliation of FFO to AFFO, we do separately disclose those lease commissions. So to give you an idea of what the levels have been the past 5 quarters, you saw an uptick this quarter predominantly because of 1 or 2 larger deals that we did, but you can see the numbers in there.

John Stewart - Green Street Advisors, Inc., Research Division

Okay. And lastly for me, what was the rationale for revising the property names?

Thomas M. Ray

Just to make it simpler. We're just getting more of them. I know it's not simple learning the new language, but we think the language is simpler once it's baked in. And I think we'll probably not be as communicative as we have been in the past about specific addresses. Just out of respect for our customers.

Operator

Our next question is coming from Jonathan Atkin from RBC Capital Markets.

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

I was interested, tenant improvements in the AFFO reconciliation was lower than earlier periods. So what kind of run rate can we see think about going forward? And then maybe for Tom or Jarrett, if you could talk about VA2 and contrast the demand profile you're seeing there compared to your legacy site in the markets? And then kind of the same question for SV4 and LA2 as well.

Jarrett Appleby

You bet. I'll take the first question, Jonathan, on the TIs. We've given guidance that does show up in our supplemental on Page 21 that we -- I'm sorry, we didn't that break out separately for the TIs, but on average, that number is predominantly made up of TIs that we spend regarding 1 of our customers out in the Bay Area, in our office portfolio. It's our -- the lease was GSA/IRS. And so that varies a little bit, predominantly because of -- when we're incurring large dollars, it's predominantly related to that customer as we're doing a restack inside that building. We estimate that restack to be done hopefully at the latter part of this year, but I think we've estimated to be spending somewhere around $4 million to $8 million in that restack for 2013.

Thomas M. Ray

And we certainly don't envision any other large office deals. That's just not our business. So this was a lease in the SV1 building at 55 South Market that was embedded in the portfolio when we went public, and the lease was executed. It's a good piece of business. I think it'll end up being quite valuable. But we went IPO and disclosed with probably an $8 million or $10 million TI obligation related to this lease, and we're just churning through it. I think when that is complete, I don't know what the right run rate is to think of, Jeff, but it's clearly a lot lower.

Jeffrey S. Finnin

Yes, I think when you look at what we've got in there this quarter, it's probably $0.5 million to -- I'm sorry $0.25 million to $0.5 million on a quarterly basis. But that's about what we know today, Jonathan. Does that help?

Jonathan Atkin - RBC Capital Markets, LLC, Research Division

Yes.

Jarrett Appleby

And then on part 2, Jonathan, in terms of the expansion projects, this is part of the benefit of the business model, is expanding these campuses when you have the momentum in Reston, in VA1, in VA2, you can build out literally in the parking lot. You get all the benefits of the networks and the cloud providers and the other enterprise and other clients in that center. You just extend and allow cross-connects. So there is a lot of demand still in Reston. You see that at Santa Clara with SV4, the same type of capabilities. And LA2 is really you are getting the benefit of the higher power density that you can't get in the One Wilshire facility. And so the tethering those together, essentially allowing you to connect to anyone: The network, the cloud providers, the digital content, the communities already built there. It's just room to grow, and they count on us to grow there. So it's just another phase to these campuses.

Operator

Our next question is coming from Dave Rodgers from Robert W. Baird.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Jarrett, given your past experiences and where you sit today, I'd like to talk more about the interconnect business, specifically your thoughts about volume growth over the next couple of years. Again, your experience would tell you -- or what does your experience tell you about how we should see volume growth in that business, which has been, I think, given your comments earlier, fairly anemic this year. But with the realignment, should we expect at any point that, that interconnect business maybe takes a step backwards in revenue amount or volume amount before moving forward, and then what's the pace moving forward over the next 1 to 3 years?

Jarrett Appleby

I think, first, if you -- Dave, if you benchmark it to the leader in the space, I mean, we grew 21% this year, 13% organically. You're seeing that movement, and I think we've guided where that is, where it is today, where we will see it for 2013. The key is to continue to build on this success. It does take a while to provide an alternative for the Internet and peering community. We continue to focus on private networks, network deployments and cloud deployments. And we think those are interconnection-rich over time and they take a while to grow. But again, we had 21% growth, was solid relative to our peer group. I do think there's a benefit, too, now, we're selling the entire portfolio to our customer base and selling them to expand in additional sites and really focus on those high-value customers. So yes, we are focused on those communities and interconnecting them and I think we're getting momentum.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

And I guess, again, given your experience, do you see that business accelerating in subsequent years once you've finally gained traction?

Jarrett Appleby

Yes, I do -- I see continued growth here in these campuses. New York was a great market for interconnection and that's a great example why we went into Secaucus and we tether back into NY1 and downtown markets, to grow that, and by expanding these campuses, VA2 and LA2, you get the momentum in those markets to continue to grow your customer base who can interconnect to each other. So yes, it's still early days, but we're definitely focused on those network-rich performance applications going forward.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Okay. Then, I think 2 of your 10 largest tenants expire in the back half of this year. Do you guys have any updates on how that's going to come out?

Jeffrey S. Finnin

Dave, it's Jeff. Yes, what we disclosed back there is just an average remaining term on those customers. But you can see that the average is less than 12 months. There's multiple leases within each of those customers. I would say that on 1 of them, we've got a couple of renewals. One's already done, one's getting ready to be finalized, and on the other, we're working through it. But at this point, we're working through with the ones that have come up or will come up here in the near future. So I think we expect most of them to be renewed, but we're still looking through the majority of 1 of them.

Thomas M. Ray

Even though it shows up as significant for a customer, the capacity is fairly well distributed, and we're not aware of -- I think we're fairly deep with these customers. It doesn't appear that anything that doesn't get renewed is going to be financially material.

David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's helpful. And then last question, Tom. I think earlier you responded to a question and said that you guys are able to sit at the table on any North American transaction that somebody's looking to do in terms of the sales cycle or the sales funnel. What about international? Is that a different table you'd like to sit at any time in the near term, or is that still a little further off?

Thomas M. Ray

Well, I think it's still a little bit further off, Dave. It's always on our minds, it's always on our board's mind of how do we best grow the company? And it's on the menu, there's no doubt. I would still say that it's a little bit further away. We don't have anything to message at all around that other than we just try to stay abreast and that's with a longer-term view.

Operator

Our final question today will be a follow-up from Jordan Sadler from KeyBanc Capital Markets.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Could you guys just clarify the interconnect growth for 2013. I know it was 21% overall in '12? Is it 9% to 13% total?

Jeffrey S. Finnin

Yes. Jordan, this Jeff. Yes, that's what I had mentioned in my prepared remarks, is our estimate for the revenue growth was 9% to 13% for 2013.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Can you share a mix of unit versus price?

Jeffrey S. Finnin

I think if you recall in the comments, what we said earlier was as, Jarrett alluded to, we had strong growth in 2012, and obviously, that is a mix of both price and volume. And I would say that a majority of the increases coming in 2013, that, that's substantially weighted towards volumes for 2013.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Okay, that's helpful. And I think Dave Kim has a follow-up.

David Kim - KeyBanc Capital Markets Inc., Research Division

Is there any particular driver behind the sequential move-up in tenant reimbursements?

Jeffrey S. Finnin

Yes, that's a great, great question. We actually had, in the fourth quarter, we had our typical processes to monitor and true up our CAM reimbursements and that got taken care of in the fourth quarter. I want to point out that, that resulted in probably an additional $0.01 per share for the fourth quarter of 2012, and so keep that in mind as you guys are modeling things on a go-forward basis. So call it about $500,000 in the fourth quarter associated with that item. In addition, also in our revenue, we had probably another $500,000 associated with a, what I would call, a onetime item where we had some holdover revenue from one of our customers. It's not something we would expect to recur on a go-forward basis. That was probably another $0.01 in our revenue item for the quarter. And the other thing that we mentioned also in my prepared remarks was, as you look forward into 2013, keep in mind, the preferred stock has an impact of about $0.025 per quarter as we head into 2013. So, as I said in my remarks it was about $0.10 for the year.

David Kim - KeyBanc Capital Markets Inc., Research Division

Okay, that's helpful. And separately, is there anything behind the decrease in taxes this quarter? We're a bit surprised given the strength in Internet.

Jeffrey S. Finnin

Yes, I think it's fair to say the element that we booked in the fourth quarter is predominantly related to what I'd call kind of your state and local taxes. That's the amount that does not relate to federal. We've taken cared of what we needed to for 2012 in the previous quarters on federal, and due to some of the changes in tax law that occurred right at the beginning of this year, it came -- it was favorable to us. And so as you look at that amount for the fourth quarter, that's really staked in state and local taxes.

Thomas M. Ray

Those are income, not real estate.

Jeffrey S. Finnin

Yes, those are purely state income taxes.

Operator

We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for closing comments.

Thomas M. Ray

Thank you. Thanks, again, to everyone for joining the call. We're pleased to have made all the changes we made last year and to keep our financial organization and our sales on track. Extremely excited by all the amazing talent that's joined the company. And we're going to work very hard this year to keep this thing going. Thanks for your time.

Operator

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

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