CoreSite Realty's (COR) CEO Thomas Ray on Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: CoreSite Realty (COR)

CoreSite Realty Corporation (NYSE:COR)

Q2 2014 Earnings Conference Call

July 23, 2014 12:00 PM ET

Executives

Derek McCandless – General Counsel

Thomas Ray – President and CEO

Jeff Finnin – CFO

Analysts

Emmanuel Korchman – Citigroup

Jonathan Atkin – RBC Capital Markets

Jordan Sadler – KeyBanc Capital Markets

Jonathan Schildkraut – Evercore

Dave Rogers – RW Bear

Colby Synesael – Cowen and Company

McCarver – Stephens Inc.

Prior Cristanio – Jeffries

Jonathan Petersen – MLV & Co.

Jonathan Schildkraut – Evercore Partner

Operator

Greetings, and welcome to the CoreSite Realty Corporation Second Quarter 2014 Earnings Call. [Operator Instructions]

As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Derek McCandless, General Counsel for CoreSite Realty Corporation. Please go ahead sir.

Derek McCandless

Thank you. Hello, everyone, and welcome to our second quarter 2014 conference call. I am joined here today by Tom Ray, our President and CEO; and

Jeff Finnin, our Chief Financial Officer.

As we begin our call, I would like to remind everyone that our remarks on today’s call may 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 attained. 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 the supplemental information that is part of the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com.

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

Thomas Ray

Good morning, and welcome to our second quarter earnings call. Today, I’ll discuss highlights of our financial results, review our sales results for the second quarter, update our view of market conditions and provide insight into our view of our near term growth opportunities. Jeff will then present a detailed review of our financial results and balance sheet position, as well as update you on our outlook for the full year.

In Q2, we continue to see sales momentum, which coupled with focused internal execution, resulted in continued solid financial performance. Total operating revenue increased 14% year-over-year, led by greater than 20% growth in revenue from interconnection. This marks our 14th consecutive quarter of interconnection revenue growth in excess of 20%.

In Q2, we recorded some onetime items that Jeff will explain in more detail later on the call. Excluding those onetime items, Q2 FFO was $0.51 per share in unit, correlating to 13% growth year-over-year.

Adjusted EBITDA, excluding onetime items, increased 12% year-over-year, to $30.04 million. Including onetime items, the net of which added $0.06 to the total reported FFO.

Q2 FFO amounted to $0.57 per share and unit. That said, we focus upon our earnings metrics excluding onetime items as we measure our performance.

Regarding new and expansion turnkey data centre sales, in Q2, we executed 121 leases, representing annualized GAAP rental revenue of $9.4 million, which is our highest level of GAAP rent signed from TKD leases since we became a public company. This was comprised of approximately 59,000 square feet at an average GAAP rental rate of $159 per square foot.

Total sales production of $9.4 million for the quarter is more than double our trailing 12-month quarterly average and includes the 26,500 square foot lease at SB3 with a new customer that we discussed last quarter.

The $159 average rental rate is in line with our trailing 12-month average. During the second quarter we executed four leases in excess of 2,000 square feet, resulting in our average lease size executed in Q2 of 490 square feet. Excluding the large backfill lease at SV3 our average lease size executed in Q2 was 270 square feet, 6% higher than our trailing twelve month average of 254 square feet.

Regarding the geographic distribution of sales in the second quarter, our strongest markets in terms of annual GAAP rents signed in new and expansion leases were Silicon

Valley, Los Angeles, Boston and Virginia.

Regarding New York, Phase I of our NY2 facility consisting of the first three computer rooms brought to market, is now 19% occupied and 30% leased. We had limited, new and expansion signings at NY2 in Q2, however activity at this site has been strong and our follow-up reflects several opportunities at advanced stages of discussion.

Regarding Northern Virginia, at our VA2 development in Reston, the skin is going on, generators and transformers are set on site and we expect to deliver the first phase of TKD inventory by September or October of this year.

Related in Q2, we saw solid sales at VA1, as we work to drive occupancy in that building before we open VA2. To that, we believe that VA2 will deliver just as we become limited on large blocks of capacity at VA1.

Turning to the performance of our verticals. Our network and cloud verticals together accounted for 51% of leases and 27% of annualizes GAAP rents signed in new and expansion leases in the second quarter.

The digital content vertical was also quite strong this quarter, representing 25% of leases signed and 65% of annualized GAAP rent with substantial contribution from the large lease at SV3.

We continue to see increased penetration with enterprises, with this vertical accounting for 19% of new and expansion leases signed in the quarter. As a point of reference, the number of our enterprise customers grew by 18% over the last 12 months.

In the second quarter, we continue to experience strong net fiber ads across our network dense portfolio, with particular strength in Los Angeles, New York and Chicago. Total fiber cross connect volume increased 19% year-over-year, with total connections growing by 9%.

Regarding sales staffing, we’re now 94% staffed in terms of frontline reps onboard with the company. After considering the extent to which newer reps are not yet fully off-ramp, the quarter coverage of our current team correlates to approximately 76% of where we expect to finish in 2014.

Similar to the dynamic we discussed last quarter, all of our markets are substantially staffed, with the exception of the New York campus as we continued to hire that NY2. We are pleased with the concealed execution of our sales and marketing teams and focused upon further accelerating the sales pace we established in the first half of this year.

Turning now to the view of the markets our outlook is substantially consistent with what we discussed last quarter. We’ve seen a pickup in demand activity in the New York, New Jersey market although there remains a large supply of the available capacity in that market.

We are seeing rents solidify in the Bay Area and sublease space has been absorbed and demand has remained robust. The downtown Chicago market is exhibiting increasing rents as near term supply remains somewhat limited. We continue to see Los Angeles, Boston and Miami as substantially consistent with last year. We are more optimistic on the margin regarding the Northern Virginia market than we have been in the last few quarter. Our analysis of this market continues to point at 60 MW of new supply coming to the Loudoun and Fairfax County sub market excluding the 23 MW Yahoo sub release.

This compares to trailing annual absorption of approximately 40MW per year. We previously thought that this could lead to softening rents for undifferentiated requirements in the market. However our current final data suggest that the market may see better than expected absorption in 2014 somewhat offsetting the potential of near term oversupply. We continue to watch the market closely to see the extent to which final demand converts to signed leases in the market.

Regarding our plans for continued investment in growth we remain very excited about our opportunity at our NY2 facility. Leveraging off the upfront cost we’ve already invested in the asset. We believe we have the ability to construct approximately 16 MW of additional inventory at the site at an incremental cost of between $4.5 to $5.5 million per MW, with this low cost to deliver additional capacity we believe we may have the opportunity to invest significant additional capital into this investment at a yield on incremental investment that will meaningfully exceed our target of 12%.

Similar to NY2 we are excited about our opportunities with our VA2 development in Reston. At that site we expect deliver a highly scalable 2000sq ft core and shell data center along with 3MW of TKD capacity in the first phase later this year. Much like NY2 at VA2 we believe we have the ability to construct approximately 9MW of additional inventory at the site at an incremental cost of between $4.5 and $5.5 million per MW.

As such as at NY2 we believe that the follow on investment opportunity inherent at VA2 is substantial and brings the potential for strongly attractive yields on incremental capital. The combination of NY2 and VA2 alone represents 4,53,000 sq ft of new Class A product in two of the largest markets of US.

Laying the foundation of opportunity to develop an aggregate of approximately 25 additional MW at an incremental cost substantially below for replacement cost. We believe this represents a mathematically significant opportunity for follow on investment a very strong returns on capital. Beyond NY2 and VA2 we remain focused upon driving occupancy in our existing TKD space which including the 3MW to be delivered at VA2 later this year represents 21% of our current portfolio.

We believe this component of our portfolio represents a further opportunity to drive earnings and in this case with even more limited requirements for new capital. Further our follow-on investment opportunity in our LA2 and Boston locations provided added headroom to invest attractive yields and drive earnings with reduced requirements for new capital.

Finally with regards to our growth plans based upon trailing sales in our current funnel we anticipate that our inventory availability will become more constrained in the Bay Area and downtown Chicago over the next 18 to 24 months. As such we are currently evaluating potential next steps in those markets as we access our broader strategic in growth plans all relative to the strong internal growth opportunity inside our existing asset base.

In summary, we are pleased with our financial results thus far this year and very encouraged with the progress shown by our sales and marketing teams and with our execution on development activities for the year. With that I turn the call over to Jeff.

Jeff Finnin

Thanks Tom and hello everyone I’ll begin my remarks today by reviewing our Q2 financial results. Second I will update you on the development activity, third I will provide an update regarding our capital investments and our balance sheet and liquidity capacity. And fourth I will update our outlook and guidance for the full year.

Our second quarter data center revenues were $63.7 million a 3.3% increase on a sequential quarter basis and a 14.5% increase over the prior year quarter. Our second quarter data center revenue consisted of $53.5 million in rental and power revenue up 5.1% sequentially and 14.2% year-over-year $8.6 million from interconnection revenue an increase of 6.6% sequentially in 21.8% year-over-year and $1.6 million from tenant reimbursement and other revenues. Office and light industrial revenue was $2 million substantially consistent with the first quarter in the prior year second quarter.

Q2 lease commencements represented $8.2 million of annualized GAAP revenue, comprised of approximately 61,000 square feet at an annualized GAAP rate of $135 per square foot. Renewals in the second quarter totaled approximately 42,000 square feet at an annualized GAAP rate of $167 per square foot and represented mark-to-market growth of 2.1% and 8.1% on cash and GAAP basis respectively.

We continue to expect full year cash rent growth in the range of 1% to 4%, churn in the second quarter was 1.8% at the high end of our expectations of 1% to 2% per quarter primarily due to the impact of the churn associated with the amendment to a single customer release at SV3. Our back log of projected annualized GAAP rent from signed but not yet commenced leases is $6.9 million.

We expect approximately 60% of the current backlog to commence in the remainder of 2014. I would point out that approximately 36% of the back log is associated with the new lease at SV3 which is expected to commence in the second quarter of 2016 at the point in time our current lease is completed. Excluding the impact of onetime items FFO was $0.51 per share and unit for Q2 representing an increase of 4.1% on a sequential basis and 13.3% year-over-year.

Total reported FFO for the second quarter including onetime items was $0.57 per diluted share and unit. Related to onetime items in the second quarter we recorded an impairment charge of approximately $1 million or $0.02 per share to FFO related to our ongoing IT and software development initiatives.

As we discussed in the first quarter we embarked on a deep dive of our investment in internally developed IT systems and through further evaluation have decided that the currently available commercial off the shelf packages can effectively and efficiently address our business needs.

Therefore with discontinued internal development on a number of work streams and recorded a commensurate impairment charge. Additionally in the second quarter we realized a benefit of approximately $3.7 million or $0.08 per share in FFO resulting from a true up of accrued real estate tax liabilities associated with estimated amounts from 2010 due to a change in ownership of our acquired properties at IPO. The final tax amounts for these properties acquired at IPO became known in the second quarter and we reconciled the actual amounts to the accruals accordingly.

Excluding the impact of the previously mentioned onetime items in second quarter adjusted EBIDA increased 12% year-over-year. In terms of total reported results including onetime items due to adjusted EBIDA was $34.1 million. Sales and marketing expenses in the second quarter were approximately 5.7% of total operating revenues in line with last quarter.

We expect the sales and marketing expenses for the second half to be approximately 6% of total operating revenues. Our G&A expenses were 10.2% of total revenues down a 190 basis points from the previous quarter. We expect G&A expenses to be approximately 11% of revenue for the remainder of the year.

As shown on the page 18 of our supplemental, we spent and expensed $2.6 million during the second quarter related to ongoing repairs and maintenance slightly above the average amount spent over the trailing 12 month period as of June 30th 2014 our stabilized operating data center portfolio was 85.4% occupied. Including leases executed at the end of Q2 but not yet commenced. Our stabilized data center occupancy rate would be 88%.

I will now discuss our recently completed and ongoing development activity across the portfolio. As reported last quarter in Q1 we completed the last two computer rooms being delivered in Phase I at NY2 in Secaucus resulting approximately 53,000 net renewal square feet of data center space in our pre-stabilized pool at this asset.

We now carry $43.3 million on our balance sheet as completed capacity plus $54.5 million as construction and process related to corn shell that is currently being held for future turnkey data center development.

Regarding VA2 at the end of Q2 we carried $66.2 million of construction and process related to the asset. And we anticipate investing an additional $12.8 million this year to complete the corn shell and deliver 3 megawatts of turnkey data center capacity to the market.

As we’ve discussed previously, as we complete development projects we realize a reduction in our run rate of the capitalization of interest, real estate taxes and insurance resulting in a corresponding increase in the amount of operating expense.

As a reminder we have included the percentage of gross interest capitalized on page 20 of the supplemental as you think about your models for 2014 we continue to expect the capitalization of interest to decrease to approximately 40% to 50% of total interest expense incurred similar to where we were in Q2.

Turning to our balance sheet as Tom stated we strongly believe in our follow-on investment opportunity not only at NY2 and VA2 but across our current portfolio. As such we are focused upon maintaining the liquidity and capital to support these investment opportunities. And we believe we are well positioned to execute and fund this opportunity.

Specifically as of June 30th 2014 our debt to Q2 annualized adjusted EBITDA is 2.0 times. And if you include our preferred stock it is 2.9 times. We continue to target a stabilized ratio of debt plus preferred stock to annualize adjusted EBITDA of approximately 4 times. As of June 30th 2014 we had $177 million drawn on our credit facility with approximately $221 million of available capacity.

Regarding our mix of floating versus fixed rate debt plus preferred equity, as of June 30th 2014 we had a floating rate debt equivalent to 1.3 times Q2 annualized adjusted EBITDA and the combination of our fixed rate debt plus preferred equity correlated to 1.6 times Q2 annualized adjusted EBITDA.

Finally excluding a onetime charge of $0.02 per share in the first quarter and the onetime net benefit recorded in the second quarter in the amount of $0.06 per share. We are increasing our guidance for FFO per diluted share and unit to arrange $2.07 to $2.15. From the previous range $2 to $2.10 including the impairment charge and net benefit of $0.06 per share noted previously. The updated 2014 guidance of FFO per diluted share and unit is $2.11 to $2.19.

When excluding the net $0.04 benefit from the true up of real estate taxes and the impairment charges recorded through the first half of the year. The midpoint of our new guidance is $2.11 per share in unit.

The $0.06 increase in organic guidance is been driven in part by increased revenue expectations for the second half of the year as well as lower property tax expenses offset to some extent by approximately $0.02 to $0.03 of accelerated non-real estate depreciation expected in the second half of this year related to our IT systems.

We now expect total operating revenues of $265 million to $270 million compared to the previous range of $260 million to $270 million. Data center revenue is now expected to be $260 million to $265 million compared to the previous range of $255 million to $265 million.

Lastly we now expect adjusted EBITDA to be in the range of $127 million to $132 million compared to the previous range of $120 million to $125 million reflecting the outlook for higher revenues in the second half and the $3.7 million real estate [indiscernible].

A thorough summary of our 2014 guidance items can be found on page 21 of the earnings supplemental. I would remind you that our guidance is based on our current 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 resulting from acquisitions, dispositions or capital markets activity other than what we’ve discussed today.

Now we’d like to open the call to questions. Operator?

Question-And-Answer Session

Operator

Our first question today is coming from Emmanuel Korchman from Citigroup. Please proceed with your question.

Emmanuel Korchman – Citigroup

Hey good morning guys thanks for taking the questions. Jeff if we could stick to guidance for a second you said there was a $0.06 increase at the midpoint to 2014 FFO guidance part of that is increased revenues which on my numbers is $0.02 to $0.03 of that. How much is being driven by the property tax at the lower property taxes especially if you’re saying that there’s a depreciation offset?

Jeff Finnin

Yeah overall when you look at the property tax run rate we would expect for the second half of this year to generate about a $0.5 million incremental FFO to the bottom line for the back half of the year so about the $0.01 a share.

Emmanuel Korchman – Citigroup

So you’ve got $0.01 there let’s call it something like a $3 million increase of revenues and you float it down with expenses you get probably again $0.03 to $0.04 there I’m just not getting to $0.06 so what am I missing in terms of guidance shift – the guidance amendment?

Jeff Finnin

Yeah I think overall when you look at the increase in revenues, Manny, there’s really three things that’s driving the increased revenues. If you look at overall we just got better visibility into the remainder of the year obviously plus what we were able to generate in sales for the first half. In addition the lease that we signed at SV3 add some incremental revenue there associated with the particular customer that the – this second quarter. And then thirdly the continued growth of our interconnection business as Tom alluded to.

And as I mentioned in my call you know interconnection grew up in excess of 20% per quarter, all of that’s been factored into the overall revenue guidance. And then ultimately you just need to assess how much of that you really drop under the bottom-line that incremental revenue a large portion of that if not substantially would be dropped into the bottom-line with the exception of some offset for power expense.

So if you take that on the top line you’ve got some, you’ve got the property tax run rate that comes down by $0.5 million on the back half of the year offset to some extent with the non-real estate depreciation that I mentioned in my prepared remarks as well. Hopefully all that gets it to about the $0.05 to $0.06 I guess it’s really $0.06 at the midpoint in the guidance.

Emmanuel Korchman – Citigroup

And then on SV3 the language in the press release perhaps an early termination on the last call we spent a lot of time talking about the fact that, that existing tenant would still be involved, is that still the case or should we read more into the early termination language?

Thomas Ray

There’s been no change so yeah I’m sorry if we confused it this quarter but the prior tenant, get back our computer room, upon execution of the new lease were surely after execution of the new lease. The prior tenant will surrender another room in accordance with the terms of the lease. And that second room is already pre leased to the new tenant and that’s, that’s the story of the new tenancy.

Emmanuel Korchman – Citigroup

Got it. Thanks guys.

Operator

Thank you. Our next question today is coming from Jonathan Atkin from RBC Capital Markets. Please proceed with your question.

Jonathan Atkin – RBC Capital Markets

Yes couple questions. First of all on the follow-on opportunities for expansion you gave some good color around Virginia and New York and then alluded to LA and Boston. I wonder if you can quantify to a little bit greater detail timing and magnitude of Latin Angles and Boston and when you’re likely to expand. And then on the cross-connect strength you gave a kind of a geographic breakdown or the sources of that but qualitatively what do we think about as being the key drivers of the increased acceleration and the cross-connect revenues?

Thomas Ray

Sure as to LA2 and Boston I guess at a high level John we don’t think we’ll need additional inventory in LA2 in the next several quarters, we have enough there. And when we do add inventory there, there’ll be smaller sequential add-ons. So I think that’s the right way to look at it, you just look at our absorption and what’s available to building and when that gets constrained we’ll add a little bit more. Boston the approach is the same, moderate, adds to inventory as absorption demands.

In Boston we are pretty tight on space right now, we have activity frankly and what’s leftover at the moment. So we’re going to look hard at a very small add in Boston maybe in the beginning of next year but just as needed and as lease is signed but neither of those markets are markets were you absorb a tremendous amount of capacity in the year so those would be fairly measured incremental adds.

And as to cross-connects qualitatively I just think it’s just the fruit of the business plan but this is what we wanted to do. We wanted to driver further network density, we’ve been reporting record adds of network customers, network leases for the last year, year and half, two years. And we’ve already said you kind of get a lot of cross-connects ramping in. Six to nine months after you sign the lease, after deployment and so I just think you’re seeing, you’re seeing the fruit of that show up in the numbers.

Jonathan Atkin – RBC Capital Markets

Great and then if you could touch on Chicago and any kind of thoughts on expanding in that market whether it’s downtown or suburban. Your competitor’s maybe thinking similar as well but what do you see happening in that market in terms of new space becoming available either by yourself or by peers. And then just on the management side Steven Bryan is kind of settled into the roles. And I wondered what – you talked about kind of where you are in terms of quarter bearing headcount and so forth. Anything else you feel like sort of highlighting from a qualitative standpoints in terms of go-to-market approach?

Thomas Ray

You bet. And Jon I would add you’re getting four for one on this, that’s okay because we love you. As to Chicago what we said in the prepared remarks we’ll evaluate it since we’re – we have a little bit of availability in our Chicago one asset to convert, to data center capacity still but that’s not going to last forever. And so our next move in Chicago might necessarily would be a little bit larger move than just converting one floor of 20,000 feet. And so it just takes thought we’re going to look at all of our opportunities for our capital and look at the broader operating environment and make a decision. So we just, we haven’t made any decisions regarding what or when in Chicago and we can’t guide anybody else and what was the fourth question?

Steven Bryan I think it’s – again we’re doing what we wanted to do this year. And you’re right we have very good people executing in their roles and producing quantified results. I think the only thing I would add is just, underscore what we said over the last two quarters and then what we said in this script and that is in order to hit the quota coverage that we would like to hit and we expect to hit as a run rate at the end of this year.

We need to be substantially fully staffed with quota bearing heads by the end of Q2 then we met that objective. We were 94% then I would characterize the 6% as fairly standard churn and so what we wanted to have for complimented of – of quota bearing reps in place and we’ve done that. Hats off to Steven Bryan and hats off to our HR group, Veena Bricker and a lot of internal staffing. So we what I would add is, I think we’re executing and doing what he came here to do.

Jonathan Atkin – RBC Capital Markets

Thank you.

Operator

Thank you. Our next question is coming from Jordan Sadler from KeyBanc Capital Markets. Please proceed with your question.

Jordan Sadler – KeyBanc Capital Markets

Thank you. Wanted to – question on the leasing volume. Good numbers this quarter obviously curious if there’s been any change in the compensation structure to sales people, in the quarter or over the course of this year to sort of kick start the effort?

Thomas Ray

None we put in a slightly revised and updated comp plan at the beginning of this year. And fairly normal we evaluate sales comp each year and we’ll make some tweaks but our approach to sales comp this year is to not mess with it. Just let people rely on what they see in front of them or let our sales teams rely on a structure and a pattern and that’s what we’ve done. So no, no changes.

Jordan Sadler – KeyBanc Capital Markets

Okay. And how do we – looking at the sort of capitalized leasing cost. How do we think about those in the context of just on an everyday basis or on a quarterly basis, I know they’re going to move around? We’ve seen them move around but last couple of quarters they’ve come in little bit higher, anything in particular driving that?

Jeff Finnin

Hey Jon its Jeff. A couple of things when you look at the year-to-date amounts of the capitalized leasing cost, you’ll see that we’ve incurred about $9.4 million of total leasing cost. One item that is driving that higher this year and we’ve talked a little bit about it on previous calls is related to purposely going out in retaining and renewing our customers here in the marketplace that is leading to some higher associated commissions in line with the transaction we did back in 2012 with the previous owner of that business.

So that amount is, is in the first six months that amounting resulted in about $4.2 million here in the first half. That together with the transaction we signed at SV3 is leading higher commissions as well as we had one incremental commission on an office lease that we finalized and put into place and commenced here in the second quarter at SV1 in the Bay Area.

Thomas Ray

I’m going to hit the former point with a hammer just because I think it has been maybe not as clear to the investment community. When we bought the compliment business in Denver as we disclosed it that time we paid the certain amount upfront with a deferred payment structure. Some people might call that an earn out Jordon but our accountants do not. And the way that deferred payment associated with the purchase agreement is structured it’s in relation to signing leases.

So they’re committed they are but they are, those commissions are payable only in association with that PSA a purchase and sale agreement. And at the end of this year there’s a measurement date related to that purchase and sale agreement related to these commissions that are driven by signed leases. And at the of that year and that measurement period you won’t see further accruals related to those activities.

Jordan Sadler – KeyBanc Capital Markets

Okay that’s helpful stuff. Hey Jeff could you just throw us the cash backlog number?

Jeff Finnin

Yeah the cash backlog number is $10.8 million Jordan.

Jordan Sadler – KeyBanc Capital Markets

Perfect thanks guys.

Operator

Thank you. Our next question today is coming from Jonathan Schildkraut from Evercore. Please proceed with your question.

Jonathan Schildkraut – Evercore

Great, thanks. Maybe first I’ll do a little follow-up on the lease commission question. And then I have a few others. I think in the last 10-Q Jeff you guys had targeted or thought the lease commissions associated with the Confluent acquisition would be I think in the $8 million range, is that still the right number?

Jeff Finnin

Yeah I’d say as we sit here today and you’ll see the 10-Q filed later this – I guess actually probably tomorrow or Friday, that number is at $8.9 million.

Jonathan Schildkraut – Evercore

Thank you. Just two other questions, first there was still really good momentum around the MRO per cabinet. I think it was up about 7% year-over-year and I was wondering if you might give us some sort of insight into through the breakout of your, of your footprint between say wholesale and retail or some other sort of insight into where we might think that MRO could go over time. And then the last question and I think you talked a little bit about this but with occupancy still high right now. And I think it’s the highest that I’ve seen on record. Do you have the ability to meet the demand that you’re seeing in the marketplace. Thanks.

Jeff Finnin

Sure with regard to occupancy and our ability to meet demand I think absolutely we disclosed some of our occupancy statistics in terms of the stabilized portfolio Jon from the net lease out. The development properties that have been delivered but are not yet stabilized. So if you look at total availability across the portfolio and you include the three we’re about to deliver at VA2 over the next handful of months.

We’re about 79% to 80% occupied, so we feel like we’ve really maintained and we’ve been running at that number somewhere between 75% and 85% for the last four years. So our expectation at growth from the turnkey data center capacity that we deliver to the market frankly is the same as it’s been for the last 4 years. I think what’s a little bit different right now is thatVA2 and NY2 investments bring tremendous additional scalability.

That low incremental investment relative to that replacement cost. So as we view it honestly John, we do our internal growth opportunity right now better than it’s been over the last 4 years, same within the existing store with a lot more on the attractive follow on capability we’ve ever had.

Thomas Ray

And John just a little bit more color on the occupancy as Tom brings up the difference between our pre-stable and stable pools. On the pre-stable, just keep in mind as we go into 2015 first quarter, we outline on page 18 exactly when those pre-state pools or developments will come into our stabilized pool. And so that may have some impact on the occupancy, it just depends ultimately the percentage occupied ultimately when they roll into the stabilized pool.

Secondly on your other question around MR per [indiscernible] the revenue growth is just shy of 8% year-over-year is really coming away from three component, first of all it is as those customers renew we are getting some uplift from a rental perspective and you know our numbers reflect that in terms of the rent growth we reported this quarter and in previous quarters, so that’s part of it. Secondly is just the incremental cross connect and interconnection revenue coming as those customers add incremental cross connects. And thirdly it would relate to some level of incremental power to the extent they’re adding power in that same particular space.

Jeff Finnin

And I think at the highest level we’ve talked about, there’s a meaningful discount between our revenue per rack between some other folks in the industry and us, and we’ve been working purposely to close that gap. We’ve closed a portion of it, but frankly there’s a lot of head room left to work on and we continue to believe in our ability to keep moving that up, moving up ARPU and close more of that gap.

Jonathan Schildkraut – Evercore

If I can sneak just one more in here, do you have a number for what percent of your bookings came from your existing base for the quarter?

Jeff Finnin

We don’t have it in our fingertips, Johnson it will be probably, technically it will be a little bit higher than in the past because of the large lease at SV3 which was an existing customer, the end user under that was not an existing customer. So that there’s a new relationship there, but because of the SV3 lease, we typically run in that kind of 65% to 80% range. It wouldn’t surprise me if it’s little bit higher on the cube. We’ll have to go look at that, we didn’t check it this time.

Jonathan Schildkraut – Evercore

Thank you for taking the questions.

Jeff Finnin

Thanks John.

Operator

Our next question comes from Dave Rogers – RW Bear. Please proceed with your question.

Dave Rogers – RW Bear

May be for Tom I want to ask a couple of different questions may be around leafing spreads as you look to that going forward. You’ve given guidance for the second half of the year and you’ve been pretty much tightly within that range for the first half, any variability in the second half of that number do you think around each of the two quarters? You look at 2015 and I know it’s a little early, I think it’s big year of exploration than in the average rate next year as well and in that where you have been signing deals, any color you can give on the second half of this year and both this year and next year what you should be thinking about that?

Thomas Ray

Yeah look, I think the spread should follow market racks and relative to the trailing 12 we expect you know the rest of this year to be more favorable. So we’ll have to see what that leads to, but the markets are, I think, more healthy. And I think we’re executing in the markets more favorably than we did on the trail, so hopefully that will lead to not pressure, but some upside in terms of 2015 explorations, look Jeff we have a very disciplined process around doing a deep dive on the top 20 roles and getting very specific information about those.

And then we do a statistical analysis on what’s left over and we look at the in place ramp versus where we think the market is. And we don’t see anything out there that is concerning, and in terms of more specifics around churn and market to market, they’ll come out with our new guidance at the beginning of the year, but I would say we think we’re pretty disciplined about looking at that, and there are no bombs hiding out there.

Jeff Finnin

And Dave, in terms of the other question around Q3 versus Q4 variability, the only thing to be sure you factor in is Q3 is typically our one quarter where our power expense tends to be higher just do the summer rates. So you will generally see a reduction in the overall contribution from the power portion of our revenues, just keep that in mind as you look at Q3 versus Q4.

Dave Rogers – RW Bear

And mainly on the same topic that’s all in the same topic FD3 can you recap for us what the impact of the spread there is or was or will be I guess I should say, and then when you’ll really recognize the impact of that?

Thomas Ray

We can’t provide any financial information that would lead to back solving the restructuring of the tenant that gave some space back or the economics of the tenant moved in. We can say it is MPB and FFO positive, we think that across the Bay area market, when you look at everything we’re doing there; we’re probably a couple pennies up. Two sets of FFO more favorable to the company’s bottom line across that old market than we thought we’d be at the beginning of the year. And there’s a component of GAAP that is related to the SV3 transaction and that’s the best we can give people.

Dave Rogers – RW Bear

Okay I appreciate that, and may be tell on your comments both on the capped interest as well as new investment opportunities. The development pipeline as thin as we’ve seen it I think maybe since you’ve come public. And I guess if you talk a little bit more about how purposeful that is maybe to be able to drive more occupancy in what you term the portfolio, or what is out there today. Is it more of a function of timing or supply in the market that is keeping you a little bit more cautious about that back log, is it more internally willing to execute or is it surely about opportunities and I guess there’s a lot there. If you can give some color on where that might be headed Tom it will be helpful?

Thomas Ray

Yeah, it is what we’ve been saying, the bottom line is we have capacity in most of our markets we were out and we were headed out towards running out in Virginia first, so we’ve addressed that and we wanted to have a stronger presence in New York, so we’ve addressed that as a strategic goal. In addressing those strategic objectives, we have laid out what we foresee as our best internal growth capability we’ve ever had. So we’ve always liked having a disciplined balance sheet that leads to – that can support potential opportunities down the road.

For other strategic objectives, may be to use that tool may be you don’t, but we like having that weapon available to us, which is a balance sheet with room in it. We have the ability to grow tremendously off the investments that are on the plate right now. So I would say we’re very happy with the risk return profile of the company. It would be different if we were also out of inventory in LA and out of inventory in three or four other markets.

We’d be having a different discussion, but we have room to run in most of our markets, we’ve addressed two big strategic moves on the East Coast. We do need to start thinking about Chicago and in Santa Claire over the next couple of years. We have landed developing Santa Claire should we choose to and we just like the risk return profile and importantly we like the capital profile of how we run the business right now. We’re happy and we think we’re going to do good things for our investors.

Dave Rogers – RW Bear

Great then one last question, sorry just in terms of any competitive discussions that you’ve had with tenants that make you think about open – the more competitive platform to you today than a year ago?

Thomas Ray

You know sincerely. I don’t think I’ve had challenging discussions about cross connections, certainly in the last quarter in Q2 to date, I sincerely think that 99% of the discussions I’ve had about cross connection Open IX have been with mostly analysts, not customers.

Dave Rogers – RW Bear

Talk one more, thanks.

Thomas Ray

Turn it up, Dave

Operator

Thank you. Our next question comes from Colby Synesael – Cowen and Company. Please proceed with your question.

Colby Synesael – Cowen and Company

Great. Thank you. I just wanted to make sure I understand this and I apologize if it’s been said and I just didn’t pick it up but the 26,000 square feet the customer in the Bay Area you talked about. I think you said that you’re going to commence that in the second quarter of 2016 I just want to make sure I understand that from the revenue will actually start to come in the door.

And then as part of that I guess, part of that 26,000 feet is space been taken up by the customer who’s returning 12.6000 square feet. And I was trying to get a sense when you stop recognizing revenue from that 12,600 square feet and if you can write it actually how much revenue is associated with that. So let me just stop there and then I have a follow-up question.

Jeff Finnin

Let’s just take the highest level one on the transaction again SV3 and again we, we just can’t give you guys any granular financial data related to the lease that went out, the lease that went in but at the highest level the building is four computer rooms. The existing tenants before this provision to occupy and leased off four of them. We leased two of those rooms for a total of 26,000 feet to a new customer. And half of that space or in this case 12,500 just because the size of rooms but the first room has already been vacated by the old customer. And the new customer has moved into it. And that, the earning from that are now coming through our income statement beginning in Q2 that was there.

A year from now, two years from now the second computer room, the remaining square footage of the total 26,000 that room expires by its own terms on the prior customer. And the new customer has already leased it from us.

Thomas Ray

And that’s the piece of revenue that won’t commence until the second quarter of 2016.

Jeff Finnin

Maybe one way to think of this, we did two 12.500 foot leases essentially and one is already started and the old customers moved out. The other one the customer will move out, the newer will move in, in two years in accordance with that leases LXD.

Colby Synesael – Cowen and Company

So I guess post second quarter the situation on all moving parts if you will, associate with SP3 and [indiscernible] result, is that right?

Thomas Ray

Well you will see a commencement and a churn –

Colby Synesael – Cowen and Company

Yeah in 2015 but you’ve already all the pieces have been figured out in terms of what goes where.

Thomas Ray

They’re all in place, as to the first half of that building. It’s all done.

Colby Synesael – Cowen and Company

And is the customer who is initially the four computer rooms too which they’ve now what they will be vacating. Are they going to also for your understanding vacate the remaining two at some point?

Thomas Ray

I think that’s more likely than not but we honestly don’t know and kind of what we’ve been saying for the last couple of years but because the customer doesn’t know. The customer may need to keep those. And again we have a great relationship with that customer, very open dialogue. It’s just unclear but what there was an opportunity for us to eliminate risk as they have to build and make money doing it, that’s done. And as to the other half of the building that the amount of capacity that would come back if they did move out is less than one year of trailing absorption and so we were very comfortable with that but they may keep it who knows.

Colby Synesael – Cowen and Company

When did the lease and the other two computer rooms that you were referring to right now. When do those expire?

Thomas Ray

One of those in two years, one of those in three years.

Colby Synesael – Cowen and Company

Okay, perfect. And then I guess a different question just a real quick housekeeping item. Do you plan executing the accordion feature of the term loan in the second half I mean obviously you’re keeping the cash balance pretty tight right now, you have variety of different projects going on. Can you just kind of give us your thoughts on how you – I know you have room in your leverage. Can you just kind of remind us how you plan on paying for all these various things?

Thomas Ray

Yeah Colby I think as we sit here today we don’t have any firm plans to execute the accordion on a term loan. However it’s just one of the options available to us as we look out and look at what our available capital needs and sources are, as we look at the back half of this year and early into 2015. So what we monitor that plus all the other market opportunities and capital that’s available to us. And ultimately when we look at pulling down a commutable debt capital, it’s one that we look at but it will depend ultimately on the amount we need and the pricing will lead to those sources.

Colby Synesael – Cowen and Company

For our own modeling purposes would you suggest that whatever incremental cash we feel that you need beyond what’s currently on your balance sheet as of June 30th we just pull it from the credit facility?

Thomas Ray

I think that’s a good way to model as you look at the rest of the share absolutely.

Colby Synesael – Cowen and Company

Okay. Thank you.

Operator

Thank you. Our next question today is coming from Barry McCarver from Stephens Inc. Please proceed with your question.

McCarver – Stephens Inc.

Hey good morning guys, good quarter and thanks for taking my questions. I think you’ve got most of them, I did have one. Tom on your prepared remarks talking about northern Virginia and renewal rates there it sounded like you were a little bit pleasantly surprised that, that rates have remained so firm in that market despite quite a bit of capacity. A little more color on I guess the top of business that CoreSite seeing and maybe your thoughts as to why pricing has been so stable?

Thomas Ray

Well you know we were pleased, our bitter concern really was from this point forward in the market as a significant amount of new supply hits the market. So I’d say that, I think rents in the market on a year-over-year basis were up about 6% on the trail versus the you before then for us at CoreSite in northern Virginia again our big concern was going forward. And we’re, there is just a lot of activity in the market.

There are lot of big block deals in the market that are not CoreSite deals but other people might be interesting in them. And that might take some of the pressure off absorb some of that spec supply early. And the kind of activity we’re seeing is completely consistent with what we are seeing ever since we’ve been in that market.

It’s an amazingly broad market in terms of the sources and demand. You have an attractive cost of power there so for regional requirements Virginia has been an area that’s one lot of out of market regional base requirement let’s say a company wants big presence in the East and the West. Virginia captures some of that out of region demand we have a great government situation there. You have an excellent internet and telecom demand base there.

I shouldn’t have said great government situation but, you have demand from the government. And so there was a very broad base of demand generators across industries and which has led a very steady absorption. So we are there’s the chance and I mean really we just have to get side right now it is little more than I hope. But there’s reason to be hopeful that some of these big blocks of supply will get taken out reasonably early and lead the continued stability in that market. But we are going to have to see pens put to paper for that to happen.

McCarver – Stephens Inc.

That’s very helpful thanks a lot guys.

Operator

Thank you our next question today is coming from Prior Cristanio from Jeffries. Please proceed with your question.

Prior Cristanio – Jeffries

Good afternoon congrats on the good quarter most of my questions have been answered but just a follow on V2 I appreciate the comment about the Virginia market overall but specifically with your asset I was just how you guys are feeling about pre-leasing before it opens and what is kind of leasing velocity could look like whether you’re kind forecasting more like what’s happening to NY2 asset, we expect things to move a little bit faster or slower just trying to get a general sense for modeling purposes.

Thomas Ray

I would say we do feel on the margin better about continuing the traction Virginia that we’ve been enjoying at VA1. The situation for us in Virginia is different than New York. It’s a – it’s really a new market for us. We had to lease up with the staff up as you guys know and we are finishing that process. In Virginia we have a team on ground and we got an excellent team on the ground for quite some time. And so we think we’re going to be better able to just keep marching in Virginia rather than even to start things up as we needed to do in New York. So we’re optimistic, we are hopeful the funnel has some new good opportunities in it. And we will just see what happens but we would hope that will go little bit faster than that startup Phase in NY2.

Prior Cristanio – Jeffries

Sounds good to me, thank you very much.

Operator

Thank you. Our next question today is coming from Jonathan Petersen from MLV & Co. Please proceed with your question.

Jonathan Petersen – MLV & Co.

Great thanks. You talked about enterprises, how that kind of been growing as a tenant base and I think it’s at up 18% over last 12 months. I was hoping you could talk about kind of that trend relative to what we read in the press. We’d like the aggressive push by Microsoft and Google and Amazon. Recently they offered like a lot of storage for corporate users. And I am just curious from the ground level speaking to customers why they make decision to go to CoreSite rather than outsourcing a public cloud?

Thomas Ray

I think that decision is really driven by the enterprise decision to what extend to use the public cloud versus the private cloud. And the private cloud environment is quite often going out to a third party data center provider. And that decision is still driven by security and cost. We haven’t really seen it, I think that will continue to be the case. So for workloads that are not highly secure and that are may be less predictable. When you have something that isn’t very sensitive and you need burst capacity or you need capacity for certain amount of time.

The public cloud is a great way to solve for that need. When you have a very predictable set of very large long-term workloads I think we still see enterprises find better economics in putting those in a private cloud and using their own infrastructure. So the issues surrounding when enterprises go to the public cloud versus when they do it on their own, have been around for a number of years and I think they are holding steady. I just think you see such tremendous growth in data in bits and bytes in workloads that the public clouds are growing very rapidly and you see private cloud activity growing very rapidly as well.

Jonathan Petersen – MLV & Co.

Okay. Can you give us any examples of may be like stand out sectors whether its healthcare financials or energy or any of that we could think of is like a typical tenant of CoreSite and what kind of applications they run are there any good examples for that.

Thomas Ray

You might think of it more in terms of workloads or requirements been companies or industries. I mean the financial service industries or health care industry might have a greater portion of its workload in data that they want to keep secure and in private. But let’s take up any of those companies to extent they have visual mundane back office needs for their own internal networks, employee email. That’s not sensitive so when they are very comfortable putting that into public cloud environment.

And then the only question is cost. Is the public cloud going to be less expensive or more expensive. I think just like real estate, when a user in the cloud environment knows how much data storage and processing capacity they need and they know they’re going to need it for a long time. I think they can still get a better deal if they use private club. When they have to burst the public cloud makes sense. So for any company they have some information that is sensitive. They have some information that isn’t. So that’s the security filter by which they look at public versus private clouds. And then separately you have a cost filter.

Jonathan Petersen – MLV & Co.

Okay I appreciate the color. Thank you

Operator

Our next question is a follow up from Jonathan Schildkraut from Evercore. Please proceed with your question.

Jonathan Schildkraut – Evercore

Great no conference call would be complete without an question on M&A and so as you over the hour here so this would give the opportunity to at least complete it. Tom we haven’t seen a M&A in the sector just wondering your perspective on whether you think this space needs M&A. And then may be some other reasons that we haven’t seen so much or what might be impetus to see M&A occur thanks?

Thomas Ray

Well I believe the analysis the industry to others. Jonathan and you guys probably have a [indiscernible] as we do as to who is going to do what we can’t speak for other folks clearly there’s been talk and discussion of various M&A opportunities among various parties for ever since we’ve been public. As for us we are open minded because we’re just clinical about driving returns on capital for investors. As we’ve said consistently we have a very high bar with regard to risk and return on transformational M&A because we believe very strongly in our ability to make a lot more money for our investors what we perceive as lower risk that’s inside or existing portfolio.

So look we are open you can see scenarios where footprints are complimentary and that might lead to a little bit better reach for customers. You certainly see G&A savings but we have a good business and we’re going to keep operating it. And if there is something smart to do we’ll take a look at it. How’s that for a non-answer?

Jonathan Schildkraut – Evercore Partner

Pretty good non-answer.

Thomas Ray

Okay Jonathan. So I am running for office so I am just practicing. I’m not by the way.

Operator

Thank you we’ve reached the end of question and answer session. I would like to turn the call back over to Mr. Ray for any further closing comments.

Thomas Ray

Alright. We just want to thank everybody for being on the call and joining us as we look at in front of us. We feel like we really started to generate some momentum in the first half of the year. Our objective is to leverage off that and accelerate it in the second half of the year.

We want to thank the people at CoreSite we always thank our investors and our board which we do again but the people at CoreSite have driven what you’re seeing unfold in front of you right now been its on their backs and their hard work that it’s happening. We are grateful to them, we think we have a great road in front of us. And we think we’re off to the races so we are going to keep working on serving customers being disciplined about where we send our cash and just driving returns to our common equity. Thanks for your time.

Operator

Thank you. 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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