CoreSite Realty's (COR) CEO Tom Ray on Q4 2015 Results - Earnings Call Transcript

| About: CoreSite Realty (COR)

CoreSite Realty Corporation (NYSE:COR)

Q4 2015 Earnings Conference Call

February 11, 2016 12:00 PM ET

Executives

Derek McCandless - General Counsel

Tom Ray - President and Chief Executive Officer

Steve Smith - Senior Vice President, Sales and Marketing

Jeff Finnin - Chief Financial Officer

Analysts

Jonathan Schildkraut - Evercore ISI

Jordan Sadler - KeyBanc Capital Markets

Jon Petersen - Jefferies

Brian Hawthorne - Stephens

Matthew Heinz - Stifel

Manny Korchman - Citi

Colby Synesael - Cowen & Company

Operator

Greetings and welcome to the CoreSite Realty Corporation Fourth Quarter 2015 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Derek McCandless, Senior Vice President and General Counsel. Please go ahead, sir.

Derek McCandless

Thank you. Hello, everyone, and welcome to our fourth quarter 2015 conference call. I’m joined here today by Tom Ray our President and CEO, Steve Smith, our Senior Vice President, Sales and Marketing; 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 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 the supplemental information that is part of the full earnings release, which can be accessed on the Investor Relations pages of our website at, CoreSite.com.

And now I’ll turn the call over to Tom.

Tom Ray

Good morning and welcome to our Q4 call. We’re pleased to report continued execution of our business plan in the fourth quarter, delivering solid growth and finishing out 2015 as another strong year for our company.

Looking at Q4, ‘15 over Q4 ‘14, we reported 31% growth and FFO per share driven by 25% growth in revenue and 32% growth in adjusted EBITDA.

We continue to see solid margin performance with our calendar 2015 adjusted EBITDA margin expanding to 51%. This represents an increase of 340 basis points over our margin in 2014.

In addition to our solid financial results for the quarter, we finished 2015 and began 2016 with positive leasing momentum. Signing in the fourth quarter 155 new and expansion leases reflecting record transaction count for our company.

We’re pleased that in 2015, we increased transaction count each quarter with Q4 ‘15 signings more than 60% greater than the same period a year ago. We attribute this growth to three key factors. First: staffing across our sales and marketing teams were steady in 2015, being largely intact for more than a year now with minimal voluntary churn compared to 2014.

Second: we made material improvements to our front-end technology systems in 2015, with the first phase of our technology systems investment focused upon our sales activities and launching to strong success in Q2 of this past year.

Finally, we believe that enterprise adoption of cloud services, maybe seeing an inflexion point with an accelerating number of customers connecting to cloud providers across our portfolio.

Regarding our interconnection services, interconnection revenues saw another quarter of solid growth at 26% over the prior year quarter, with calendar ‘15 reflecting 25% growth over 2014.

And looking at interconnection volumes, Q4 results reflect a similar story to the rest of 2015 as compared to 2014. First, 2015 saw a continued decrease in lower priced copper cross-connection volume of 3% over 2014. Second: we saw a continued strong increase in cyber cross connections with 2015 recording 15.8% growth over ‘14.

Finally, in 2015, we saw over 50% growth in interconnections made over our higher value logical interconnection product set comprised predominantly of our Any2 Internet Exchange, Blended IP and the CoreSite Open Cloud Exchange.

In looking at this shifting mix, we’re pleased to see the sales mix in our interconnection products, points where the high bandwidth latency sensitive workloads we work to enable our platform to support. Related to this, we were pleased in 2015 to launch 100 gig service on our Any2 Exchange in both Los Angeles and Denver in direct response to articulated customer demand.

We anticipate scaling our 100 gig platform across other markets in 2016 as our customers increasingly rely upon us to serve high bandwidth requirements.

In addition to strong leasing and growth in interconnection revenue, in 2015, our company executed upon several key operational objectives we had for the year. First, 2015 marked the fifth consecutive year that we achieved Six 9s and portfolio wide-up time, providing our customers with the performance and the liability they need to run their mission critical applications and support performance centered workloads.

Additionally, in 2015, we obtained ISO 27001 Certification for our Data Center Colocation services across all of our operating data centers. This certification underscores our focus around our information security controls and our commitment to providing our customers with secure, reliable and high-performance data center colocation solutions.

ISO Certification joined the robust mix of additional operational certifications in areas of compliance support that our company brings to the world’s most demanding enterprises including many among the Global 1000 which represents over 30% of our revenue.

Finally, as previously mentioned, in 2015 we delivered the first operational phase of our investment in technology systems, designed to simplify our company for our customers and employees.

Beyond enabling our sales and marketing teams to move faster and more efficiently, we successfully laid the building block to support to further technology improvements across our company, many of which are currently in-flight and targeted to become operational in 2016.

In summary, we are pleased with the operational advancements our team has made across our company in 2015. And even more strongly encouraged about the prospect of further advancement over this coming year.

I’ll now move on to provide an update on our outlook for our key markets. With regard to the performance sensitive market segment, we remain encouraged by the demand we’ve been seen across our platform and we believe the trends we’ve seen will remain favorable throughout the coming year and beyond.

Regarding the wholesale market segment, current activity in the market suggest to us that the first half of 2016 maybe as favorable as 2015 in terms of growth absorption with upside regarding rental rates in select markets due to a more favorable balance between supply and demand.

We believe we have less visibility into demand for the second half of 2016 and we’ll continue to closely monitor demand dynamics as we progress through the year.

Regarding our expansion activities, 2015 marked another year of significant capital investment for our company, specifically we invested $133 million in expansion capital during the year, completing construction of 185,000 net rentable square feet across our markets.

At year-end, we had a number of additional projects underway which will increase our footprint by 370,000 square feet including two new buildings in the Bay area, additional capacity at VA2 in Northern Virginia, further build-out of LA2 in Los Angeles and expansion at BO1 in Boston. We estimate all of this capacity will be placed into service by the middle of 2016.

The largest among our investments currently underway in the largest ground-up data center development in our history is our 230,000-square foot ft.7 project in Santa Clara. We are encouraged by current supply demand dynamics in the Bay area, and we believe that wholesale rents have returned to equilibrium increasing over 20% from the trough five years ago.

With more rational and healthy rents now in the market for larger requirements, we are hopeful that we will bring ft.7 to market at a favorable time. As a reminder, our first phase of TKD delivery at ft.7 comprises 80,000 square feet and with 48% pre-leased to an anchor customer as of December 31, 2015.

Turning to Northern Virginia, although there is ample supply in the market, demand remains steady and we saw solid leasing momentum at our Reston campus during 2015. We are now under construction at VA2 to convert the remaining 96,000 square feet of shell space into TKD capacity, which we expect to complete in the first quarter of 2016. This capacity is currently 24% pre-leased.

In Los Angeles, leasing activity across our campus has been robust with particular strength at LA2, where stabilized occupancy increased 120 basis points to 90% in Q4 compared to Q3. In light of the steady demand we’re seeing in the market, in Q4 we commence construction of incremental capacity at LA2, which we expect to substantially complete during the first half of 2016.

In summary, we’re pleased with our financial and operational performance in 2015, and we remain focused upon executing our business plan. We believe that we are making important investments to support the future growth and continued evolution of our company, and that our national platform continues to grow in its ability to demonstrate added value to our customers.

We entered 2016 with high morale and high energy and we will work hard to further strengthen CoreSite’s position in nourishing key communities of interest and bringing differentiated value to the market.

With that, I’ll turn the call over to Steve.

Steve Smith

Thanks Tom. I’d like to start by reviewing our sales activity during the quarter. Q4, new and expansion sales totaled $8.9 million in annualized GAAP rent comprised of 42,000 net rentable square feet at an average GAAP rate of $211 per square foot of TKD capacity.

As it relates to pricing, the Q4 rental rates of $211 per square foot represents a 44% increase over the average rental rate over the first three quarters of this year. Most of this increase was driven by increased power density in Q4. When adjusted for power density, our Q4 rental rates represents an 8% increase over the first three quarters of this year.

While we have seen demand for high density requirements increase over time, this quarter was uniquely heavy in its way and therefore does not represent a marked change in our projected outlook.

Overall, our Q4 and 2015 sales results reflect our broad appeal across our key U.S. markets as well as the progress our sales organization is making in targeted industry verticals.

At the new and expansion transaction counts, we continue to see steady progress against our goal of increasing quarterly volume, with a specific focus on targeting small customer requirements.

Regarding Q4, we executed a new company record of 155 new and expansion leases for TKD capacity.

In terms of size distribution, 147 leases were for smaller requirements of less than 1,000 square feet, seven leases were for mid-sized requirements of 1,000 and 5,000 square feet and one lease was for 8,300 square feet for an average of lease size signed in the quarter of 272 square feet.

Importantly, Q4 leasing represents continued strengthening in our transaction engine producing smaller leases, correlating to a 7% increase and a number of leases smaller than 1,000 square feet compared to Q3 and a 36% increase over the average of the trailing four quarters.

Looking more broadly at our leasing results for all of 2015, we had a strong year across all metrics. Regarding new and expansion sales, we signed a record 526 leases totaling 404,000 net rentable square feet correlating to $46 million in annualized GAAP rent.

The $46 million in GAAP rent leased reflects an increase of 39% over 2014 and represents the highest level of rents signed in our history.

Related, we continue to make good progress in diversifying our customer base and enhancing the value of our communities of interest across the portfolio. In Q4, we added net new logos and cumulatively added 95 net new logos in 2015. This represents an increase of 16% compared to the number of new logos added in 2014.

Among the logos, there were new to our base in Q4, 63% were in the enterprise vertical. As such, we continue to focus on enhancing the long-term value created in our data centers by the high quality of customers and applications attracted to our national platform and global customer base.

In addition to strengthen new and expansion leasing, our renewal activity in Q4 was solid as renewals totaled approximately 50,000 square feet at an annualized GAAP rate of $204 per square foot reflecting mark-to-market growth of 3.8% on a cash basis and 6.7% on a GAAP basis.

On a full-year basis, cash rent growth was 4.6% in-line with our guidance of 4% to 5%. Q4 churn was 2.3% in the fourth quarter and includes the reduction in annualized rent of $2.6 million or 150 basis points of churn related to the original full-building customer at SV3 of which we’ve been forecasting throughout the year. For all of 2015, churn was 7.5% below our guidance of 8% to 9%, and adjusting for the SV3 customer, it was 6%.

Regarding vertical mix, during Q4, networking cloud deployments accounted for 46% of new and expansion leases signed. Within the network vertical we saw solid performance across our national platform with particular strength at our Reston campus, with new network deployments from six carriers including both domestic and international providers, as well as the completion of new fiber builds by two large providers.

We believe these key wins highlight the continued interest in growth of the network ecosystem, we have dealt at a competitive enterprise alternative to the Ashburn market.

Differently, in a cloud vertical, we continue to see strong demand for small ecosystem cloud services around the big cloud deployments across our platform, reinforcing our belief that the large cloud providers will continue to attract incremental customers and support future enterprise adoption.

Additionally in Q4, we executed a new network edge node deployment for major file sharing platform at our LA campus, remaining positive about good momentum we have built around our cloud offerings in our portfolio in a variety of options for connectivity and diversity we provide our customers.

Turning to our enterprise vertical, leasing in Q4 was strong again, with this vertical accounting for 54% of new and expansion leases signed in the quarter. Strength in this segment was led by digital content and other general enterprises. We signed 35 new logos in the enterprise vertical including a large international global asset management company for multi-market deployment with a leading provider of technology products and services and a leading social media platform.

For the full year of 2015, we continue to see strong leasing momentum across both our network and cloud verticals as defined by transaction volumes as well as the type of deployments we’ve been able to attract, increasing the value of our network dense in cloud enabled data centers.

Specifically in 2015, the number of new and expansion leases signed in our networking cloud verticals accounted for 48% of leases signed, and we ended the year with more than 300 network service providers and more than 200 cloud providers across our platform.

Also in 2015, we saw solid enterprise momentum with broad-based strength across a number of industries and verticals including digital content, healthcare and financial services.

From a geographic perspective, our strongest markets in terms of annualized GAAP rents signed in new and expansion leases in Q4 were Los Angeles, the Bay area, Chicago and Northern Virginia, D.C. Together, these four markets accounted for 80% of the new and expansion leases signed in Q4 and 95% of our annualized GAAP rent in the quarter.

In Los Angeles, we continue to see consistent demand and leasing continues to be well distributed between the two buildings comprising our One Wilshire campus. In terms of verticals, digital content remains solid accounting for 40% of leases executed in LA, while networking cloud deployments represented 48% of leases in LA in Q4.

Stabilized occupancy across the LA campus was 89.3% at the end of Q4, an increase of 280 basis points compared to Q3, driven by increases at both LA1 and LA2.

Absorption in the Bay area has been remarkably strong in 2015, and the fourth quarter was no exception as demand from the networking cloud verticals accounted for approximately half of the new and expansion leases executed in this market, with general enterprises falling closely behind.

Stabilized occupancy across this market is now approaching 95%, while our Santa Clara campus is now 97% occupied. With limited supply in the market and the outlook for continued strong absorption, we are very encouraged for the opportunity regarding our investment in SV7. We expect 80,000 square feet of TKD capacity of Phase 1 to be completed in the middle of this year.

In Chicago, leasing was driven by the enterprise vertical including a multi-market lease with global technology services organization. In addition, we saw demand from the digital content and network verticals, stabilized occupancy at CH1 is now almost 92% while our recently completed pre-stabilized phase is now 80% leased and occupied.

As we discussed last quarter, in the New York, New Jersey market, we saw an up-tick in funnel volume but we have not seen that translate into net absorption. For the year, net absorption in this market was in line with the prior three-year average but significantly below the 2014 level, primarily driven by lower demand for wholesale requirements.

In 2015, we did continue to see solid demand for smaller deployments as well as good enterprise penetration. In Q4, we executed 10 leases at NY2 all under 1,000 square feet including seven new logos. Of those leases, 70% were in the enterprise vertical.

In addition to enterprise, we continue to focus on building the network and cloud density of our NY campus. To that end, we now cap 24 networks available at NY2 and our seamless connection to the carriers in cloud that NY1 continues to drive demand between the two locations.

In Q4, we also completed another new fiber build into NY2 from a leading global network enhancing our ability to serve enterprise and contact companies in this market.

Lastly, in Northern Virginia, D.C. leasing was strong at VA1, which accounted for the majority of signings in this market during Q4. Network and cloud deployments accounted for nearly 40% of new and expansion leasing, with stabilized occupancy at 92.5% at VA1, we look forward to delivering the new capacity associated with phases 3 and 4 at VA2 in Q1 and believe that will be well timed to meet market demand.

In summary, we closed out 2015 with solid momentum and will continue to focus on executing against our stated targets as we go into 2016. We will continue to enhance the diversity and value of our platform while continuing to provide our customers with superior customer service.

With that, I will turn the call over to Jeff.

A - Jeff Finnin

Thanks, Steve, and hello everyone. I’ll begin my remarks today by reviewing our Q4 financial results. Second, I will update you on our development CapEx and our balance sheet and liquidity capacity and third, I will introduce our guidance for the year.

Q4 financial results were strong with total operating revenues of $90.9 million, a 5.3% increase on a sequential quarter basis and a 25.4% increase over the prior year quarter. Q4 operating revenue consisted of $74.7 million in rental and power revenue from data center space, up 5.7% on a sequential quarter basis and 26.4% year-over-year. $12 million from interconnection revenue, an increase of 5.5% on a sequential quarter basis and 26.1% year-over-year and $2.2 million from tenant reimbursement and other revenues. Office and light industrial revenue was $1.9 million.

Q4 FFO was $0.80 per diluted share in unit, an increase of 8.1% on a sequential quarter basis and a 31.1% increase year-over-year. Adjusted EBITDA of $47.7 million increased 9.2% on a sequential quarter basis and 31.5% over the same quarter last year. Related, for the full-year 2015, our revenue flow through to adjusted EBITDA and FFO was 66% and 54% respectively adjusted for unusual items in 2014.

Sales and marketing expenses in the fourth quarter totaled $4.1 million or 4.5% of total operating revenues. For the full-year, sales and marketing expenses correlated to 4.8% of total operating revenues, 50 basis points below the 2014 level and slightly below the low-end of our guidance range.

General and administrative expenses were $9.7 million dollars in Q4 correlating to 10.7% of total operating revenues. For the full-year, G&A expenses correlated to 10.3% of total operating revenues in-line with our guidance.

Regarding our same store metrics, Q4 same store turn-key data center occupancy increased 770 basis points to 87.9% from 80.2% in the fourth quarter of 2014. Additionally, same store MRR per cabinet equivalent increased 3.2% year-over-year and 1.2% sequentially to $1,459. In Q4, two rooms of 18,000 square feet each at NY2 moved into the stabilized operating pool as both rooms exceeded 85% occupancy.

As we have discussed previously, we define stabilization as the earlier to occur between 85% occupancy in 24 months after an asset is placed into service.

Lastly, we commenced 54,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $172 per square foot which represents $9.3 million of annualized GAAP rent. We ended the fourth quarter and full-year 2015 with our stabilized data center occupancy increasing 510 basis points to 92.5% compared to 87.4% at the end of 2014. 390 of the 510-basis point increase was driven by lease commencements over the trialing year.

The remaining 120 of the 510-basis point increase reflects Q4 ‘15 adjustments to factors we use to convert cage usable square feet to net rentable square feet based primarily upon three elements, namely, estimated cage usable square feet, critical power consumption and the associated cooling relative to the data center’s capacity.

From this evaluation, we adjust our conversion factors and the resulting occupancy based on the limiting resource of space, power or cooling.

Turning now to backlog, projected annualized GAAP rent from signed but not yet commenced leases was $15.9 million as of December 31, 2015 or $27.2 million on a cash basis. We expect nearly 60% or $9.1 million of the GAAP backlog to commence in the first half of 2016, which includes rent associated with the powered shell built to suit at SV6.

Another 21% is expected to commence in the back half of 2016, which includes a portion of the rent associated with the SV7 pre-lease.

Turning to our development activity in the fourth quarter, we had a total of 370,000 square feet of capacity under construction consisting of both turnkey data center and power shell space. In addition, we have deferred capital projects under construction which relate to operating data-center square feet previously constructed and placed into service that following development completion requires incremental capital when a customer’s density or space requirements exceed our initial development.

We estimate a total investment of $211 million is required to complete these projects of which $86.2 million had been incurred at the end of Q4. These amounts are comprised of the following projects.

In Santa Clara, we had 80,000 square feet of turnkey data center capacity plus 150,000 square feet of power shell under construction at SV7. As of December 31, 2015, we had incurred $23.8 million of the estimated $110 million required to complete this project and expect to complete construction of Phase 1 near mid-year of 2016.

Also on Santa Clara, we had 136,580 square feet of build-to-suit powered shell at SV6. As of the end of Q4, we had incurred $18.1 million of the estimated $30 million required to complete the development and we expect to complete it late in Q1 or early in Q2 of 2016.

In Northern Virginia, we had 96,000 square feet of data center space under construction in Phase 3 and Phase 4 at VA2, and had incurred $22 million of the estimated $32.5 million required to complete these projects. We expect to complete construction of both Phase 3 and Phase 4 during the first quarter of 2016.

In Boston, we had 14,000 square feet of turnkey data center capacity under construction at BO1. At the end of Q4, we had incurred $9.4 million of the estimated $11 million required to complete this project and expect to complete construction in Q1.

Finally, in Los Angeles, we commenced construction of 43,000 square feet at LA2 and had incurred $7.6 million of the estimated $18 million required to complete this process. Construction at LA2 is expected to be completed in the first half of 2016.

Moving on to other CapEx matter. This quarter, we had added disclosures in our earnings supplemental regarding potential deferred capital projects and expenses. While we have historically disclosed the expenditures related to these projects and our guidance regarding capital expenditures and data center expansion, the timing at which we make some portion of these investments can be uncertain. And in some cases, ultimately we may not invest a portion of the total cost that we initially disclosed as being associated with a given expansion project.

Regarding these projects, at times, we do not complete the full build-out of new data center infrastructure to deliver all power and cooling capacity in accordance with our full design. And rather defer investment of a component of planned capital until customer utilization warrants such investment.

Once a project is substantially complete, we define as deferred expansion capital, the difference between the amount, of capital then invested and the amount of capital we estimate would be required to fully build out this space in accordance with full build-out depending upon our assessment of future customer requirements and our plans to add capacity to our data centers.

Again, the timing by which we might invest in deferred expansion capital and in fact whether we ultimately invested at all is subject to uncertainty based upon customer utilization.

At the end of the fourth quarter, we had deferred expansion capital projects under construction in Chicago, Los Angeles, New York and the Bay area, which should all be completed during the first quarter of 2016. We estimate the total cost of these projects to be $9.5 million as reflected on Page 20 of the Q4 earnings supplemental.

On Page 21, we have provided an estimated range of longer term deferred expansion capital. We currently estimate this amount to be $30 million to $40 million, if, when and to the extent we determine that we will commence construction on any project representing any portion of deferred expansion capital, we will update our disclosures and add it to our current projects under construction reflecting the project as a deferred expansion capital project.

As a reminder, when 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 operating expense. As shown on Page 23 of the supplemental, the percentage of interest capitalized in Q4 was 29% and for the full-year it was 34%, in line with our estimate.

For 2016, we expect the percentage of interest capitalized to be between 15% and 25%, weighted towards the first half of the year based on our current outlook and the development pipeline. We forecasted this reduction in capitalized interest what correlate to an increase of interest expense of $1.5 million or $0.03 per share of reduction in FFO in 2016.

Turning to our balance sheet, as of December 31, 2015, our ratio of net principle debt to Q4 annualized adjusted EBITDA was two times, including preferred stock ratio was 2.6 times, below our stated target ratio of approximately four times. This correlates to incremental debt capacity of $264 million at December 31, 2015 based upon Q4 annualized adjusted EBITDA.

Subsequent to the end of the fourth quarter, we entered into a new five-year $100 million term loan by exercising a portion of the accordion under our $500 million senior unsecured credit facility. We used the term loan proceeds to pay down a portion of the balance on the existing revolving credit facility as well as for general corporate purposes.

The execution of this incremental $100 million term loan further extends and staggers our debt maturity profile and increases our liquidity to support our business objectives and fund growth. To that point, following the execution of the term loan, we have approximately $300 million of available liquidity which is more than sufficient to fund our current development plans.

As it relates to our dividend, during the fourth quarter, we announced an increase in our dividend to $0.53 per share on a quarterly basis or $2.12 per share on an annual basis, a 26% increase over the prior year. This dividend rate equals 62% of the mid-point of our FFO per share guidance, in-line with our historical FFO payout ratio which has been in the range of 59% to 63%.

Historically and again in 2015, the composition of our dividend has been 100% ordinary income, due to the Carlisle conversions in April and October 2015, and the associated increase of tax expense from the conversions, some portion of our 2016 dividend maybe a return of capital. As always, we remain focused on maintaining our dividend payout levels to comply with our REIT requirements, balance with our opportunity to retain cash to invest in future growth.

And now, in closing, I’d like to address guidance for 2016. 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 on our portfolio resulting from acquisitions, dispositions or capital markets activity other than what we’ve discussed today.

As detailed on page 25 of our Q4 earnings supplemental, our guidance for 2016 is as follows. FFO per share in OP unit is estimated to be $3.37 to $3.47. This implies 20% year-over-year FFO growth based on the mid-point of the range and the $2.86 per share we reported in 2015.

Total operating revenue is estimated to be $380 million to $396 million. Based on the mid-point of guidance, this implies 16% year-over-year revenue growth. As it relates to interconnection revenue growth, we expect that 2016 growth rate to be between 15% and 17% which is more closely aligned with overall volume growth.

General and administrative expenses are estimated to be $35 million to $37 million or approximately 9.3% of total operating revenue. This correlates to a 5% increase in G&A expenses over 2015 reflecting our efforts to scale our business and operate it more efficiently.

Adjusted EBITDA is estimated to be $196 million to $202 million. This correlates to 17% year-over-year growth based on the mid-point of the range and an adjusted EBITDA margin of approximately 51%.

Last quarter, we noted our expectation for moderation in the rate of expansion of our adjusted EBITDA margin primarily due to product mix. Our guidance suggest that relatively flat margin compared to full-year 2015 reflecting the volume of larger leases signed over the trialing 12-month period as well as the increase in metered power associated with these deployments.

The significant drivers of this guidance are as follows. Estimated annual churn rate of 6% to 8% for 2016, keep in mind that we expect an elevated level of churn in the second quarter of 2016, due to another portion of rent associated with the original full-building customer at SV3 expiring. The amount is equal to $1.9 million in annualized rent or an incremental 90 basis points of churn.

Cash rent growth on our data center renewals is estimated to be 3% to 5% for the full year. Total capital expenditures are expected to be $210 million to $240 million. The components are comprised of data center expansion cost, estimated to be $185 million to $200 million, this includes the expansion capital related to the final phases of VA2, the build-out of both SV6 and SV7 as well as incremental turnkey data center capacity across the portfolio as needed.

Non-recurring investments are estimated to be $15 million to $20 million, and include amounts related to our IT initiatives, facilities upgrades and other capital expenditures. Recurring capital expenditures and tenant improvements are each estimated to be $5 million to $10 million.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question today is coming from the line of Jonathan [sic] Schildkraut with Evercore ISI. Please proceed with your question.

Jonathan Schildkraut

You can call me Thomas. But, listen, a couple of questions here, I guess, first, Tom, you mentioned in both the press release and in your prepared comments some of the momentum from ‘15 as continued into the early part of the year. And I guess that sort of asks us to ask you precisely what you’re seeing in the early part of the year and for a little bit more color.

And then, sort of a second question, one of the things that Tom, you and I have talked about historically has been sort of the increase in the average sort of size of the performance sensitive deals that were coming in. Now, you guys report on square feet and I think our conversation was more about power density. And so, I was wondering if you might give us little sort of color around that and maybe what some of the drivers are if it is in fact still recurring? Thanks.

Tom Ray

Sure, I’m going to take the first and give Steve the second. On the - that’s the second, the first was markets. Yes, Jonathan, I think what we’re trying to make clear is we see continued firm demand in the funnel right now, pretty consistent with last year. As always, three or four quarters out, it’s harder to see and there is certainly lot more chop in the macro environment right now. So, we’ll be paying attention to where, to signs around longer term demand. But what we see right now is a good steady funnel in-line with that of last year. And that’s it, there is no other message than that.

Jonathan Schildkraut

All right, great. And then, on the sort of average size of the performance sensitive deployments that you’re seeing?

Steve Smith

Yes, this is Steve. As far as performance sensitive I think that can cover a broad range, anywhere from network providers to some of the more financial institutions, some of those that are very more inter-parted base. But have a latency since the requirement. And we’ve seen increases across the board for more performance sensitive type of requirements. But I would say, as far as how that shows up as far as deal size is concerned, I think deal size has remained relatively consistently.

As I pointed out in my comments, earlier in the call, we have seen density requirements increase over time. This quarter was uniquely heavy in its weighting. But we have seen equipment providers come out with you that is requiring more power and more cooling. And that’s just to drive some of this heavy workloads.

Jonathan Schildkraut

Great, I’ll circle back into the queue. Thanks.

Operator

Thank you. Our next question today is coming from Dave Rodgers from Robert W. Baird. Please proceed with your question.

Unidentified Analyst

Hi, it’s Stephen Dye [ph] here with Dave. What are the prospects for interconnection growth in 2016? 2015 you saw a keep-up with the recent trend and you’ve discussed on past calls just in general the network density improving. Can we expect more of the same in 2016?

Steve Smith

Well, we’ve been consistent, in the past couple of years seeing that it at some point revenue growth is going to start to converge with unit count growth plus maybe there is 2% or 3% annual pricing bump on top of that. But what we pay most attention to is the rate of our fiber growth and our fiber growth is kind of been in that 16% to 18% range, more up in the not. And we don’t know exactly when that revenue growth trend is going to converge closer to that unit cap growth trend. But we do believe that that’s likely and I don’t know, if you think of that happening over a few years that’s probably not a bad way to model.

Tom Ray

And Steve, and the only thing I would add to that is, right towards the end of my prepared remarks I did give some color around revenue growth in 2016 specifically unrecognized when we, I simply said we expected to be somewhere between 15% to 17% revenue growth in ‘16 largely due to what Tom just talked about.

Unidentified Analyst

Great, thank you. And then, for G&A in 2016, we think a similar pattern in terms of seasonality as 2015, I’m just trying to get a better sense on that going forward given a bit of a bump in 4Q.

Tom Ray

Yes, Stephen [ph], I think just address me with a bump in the fourth quarter as you get a chance to read this supplemental. Inside there you’ll see that we ended up recording about $1.75 million in the fourth quarter. It was specifically associated with two legal issues that we are dealing with, we talked briefly about it in the third quarter call.

That amount was expensed during the fourth quarter. And as we sit here today, we’re estimating on those two cases that we expect to resolve them for somewhere between zero and $3 million. We’ve accrued $2.7 million as we sit here today, which we’re comfortable with. But as we move forward into 2016, we’re obviously incurring some level of legal expenses on a quarterly basis just to defend those suits. But that gives you the spike in the fourth quarter of ‘15.

Steve Smith

I think in general it’s probably reasonable to straight line.

Tom Ray

Yes, I think it’s fairly flat as you think about it for 2016.

Unidentified Analyst

Great. Thanks guys.

Operator

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

Jordan Sadler

Thank you. Can you expand on the inflexion point Tom that you commented on regarding enterprise adoption of the cloud in your prepared remarks, you generally not prone type pre-release. So what specifically are you seeing?

Tom Ray

Well, there are two things that are behind that comment, one is funnel, and so perhaps there is more high-probably that might be our norm. But the funnel is to us demonstrably showing more interest in connecting to cloud. But second, we try not to just talk about the funnel and hopes and dreams and wishes.

So, our interconnections to cloud and enterprise customers, over the last two years have increased meaningfully, that growth rate has increased meaningfully relative to interconnections to all other providers. And we saw a further increase in the slope of that line in 2015 over ‘14. So, we’re really just tracking the growth of interconnections involving enterprise and cloud customers. And that growth rate has increased very measurably over the last two years and that rate of increase accelerated over the trailing 12 months.

And the pace of that acceleration causes us to say, we’ve been saying for some time, it’s early days, it’s very early we’re working off of very small numbers. We’re still working off of relatively small numbers related to the cloud but not miniscule any longer. And the growth rate continues to accelerate. So, that has a saying, something is strengthening around that cloud vertical.

Jordan Sadler

Okay. Now, can you bridge that comment and sentiment around the slowdown in the interconnection growth, I realize that question was just asked. But you’re going from 26% year-over-year in the quarter to 16% for next year, and there seems to be a disconnect there.

Tom Ray

Well, I think you just see less growth in unit pricing going forward. We’ll see how we’re able to navigate through that and we’ve also been clear that we’re seeing growth in higher priced interconnection products and contraction obviously in the lower priced copper products. And the highest pricing among all of our products is within a logical interconnection set. That has the highest growth rate.

So, look, we’re going to hope to drive strengthening enterprise adoption around the higher priced product set and see where that takes us in terms of revenue growth. But it’s really too early to tell. And we wanted to put out there some numbers that we felt good about people modeling.

Jordan Sadler

It’s great, thank you. Can you give us the latest on Cross Connect and the portfolio?

Steve Smith

We’re just over 20,000.

Jeff Finnin

Yes, we disclosed last quarter, Jordan, it was over 20,000, and it’s consistent with where we are today obviously.

Jordan Sadler

Still over 20,000, excellent. Thank you.

Steve Smith

Yes.

Operator

[Operator Instructions]. Our next question today is coming from Jon Petersen from Jefferies. Please proceed with your question.

Jon Petersen

Great, thank you. I just wanted to touch on future development. I mean, I guess the first thing was NY2, you guys have done a great job of leasing up the first couple of phases there. It’s at 95% now. But they’ve got nothing in the pipeline, so I’m curious when we see phases 3 through 5 start to enter the construction phase?

Tom Ray

It’s all dependent on leasing. And the bottom-line is, we are, as I think most of the industry is now very good at building in modular fashion and assets delivering new inventory fairly rapidly. We tend to think of the ability to deliver new product in existing Core and Shell in a range of 60 to 90 days. So, we just don’t know. And when we have clear absorption, you’ll see more space enter into the development pipeline. But there is no reason to point the bat around that right now and we’ll see where demand takes us.

Jon Petersen

So, I mean, so are you saying that you are pretty confident you’ll be able to pre-lease it before you start construction or like the significant portion of it, is that what you’re waiting for to 95%?

Tom Ray

Not at all. We’re just saying, we can build very rapidly so we’d like to continue to push occupancy pretty high. And that’s it, we’re not saying anything more or less than that.

Jon Petersen

Okay.

Steve Smith

This is Steve, just to give you a little bit more color around that. As we went through in the earlier remarks, we’re seeing a lot better transaction around the enterprise phase and those smaller individual deployments which does allow us to drive greater density before we’re, having to fill that additional capacity. So that’s what really allows us to kind of push the envelope further there where we’ve had little bit lighter absorption relative to wholesale which I think is.

Tom Ray

It’s lumpy.

Steve Smith

It’s lumpy and that’s really indicative of the market in that area.

Jon Petersen

Okay. And then just one more question on future developments, so I’m just looking at page 21, the hope for development. You guys are pretty much maxed out in Chicago, and once you finish Northern Virginia, you kind of maxed out. But once you finish VA2, this seems like you maxed out there. So, I guess, what’s the plan for future expansion of market?

Steve Smith

We’re aware of both of those facts and are thinking accordingly.

Jon Petersen

All right, thank you.

Operator

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

Brian Hawthorne

Hi, this is Brian Hawthorne filling in for Barry McCarver. And first question, can you talk about the growth that comes from current customers versus new customers?

Tom Ray

You want to answer that Jeff?

Jeff Finnin

Yes, I think in general, it varies a little bit from quarter to quarter. But when you look at the volume of leases and Steve commented a little bit in terms of the logos. But as you look at it from a rents perspective, I think historically we have been around 20% has come from new in any given quarter and the other of it is coming from the existing customers.

Steve Smith

And that seems to have kind of stabilized out over the last couple of years, it’s pretty consistent since we’ve reached a level of mass.

Jeff Finnin

Yes.

Brian Hawthorne

Okay. And then, on the pricing, you talked about on the new expansion leases is going to be little bit higher, it’s going to be lot higher this quarter, but that was driven by power. I guess, kind of how should we think about that then going forward through this year and kind of how much of that was driven by power?

Tom Ray

Well, as Steve said, on a power adjusted basis, we saw the rent in Q4 up about 8% over the trial. So, what, in general, the markets are healthier, we’re seeing reasonable rent growth, in some markets more so than others. But things are healthier, we’re expecting yields to go up a bit this year. And that’s it.

Brian Hawthorne

All right, thank you guys.

Jeff Finnin

Thanks Brian.

Operator

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

Unidentified Analyst

Hi, this is Rashim [ph] in for Jon. Can you update us on the strategic front and internationally do you feel it would benefit you to enter Europe? And then domestically, it seems a number of your public and private peers are entering new markets. Is this something you also feel inclined to do more or less? Thanks.

Tom Ray

Sure, no change really to what we were saying for a long, long, long time. On the margin, we see some value and greater reach, greater breadth in terms of serving the customer, we see some value and scale in terms of internal operations. But we do believe that our existing platform has appropriate and very meaningful reach in North America which we view as a very big vibrant market. And so, we believe we’re highly effective in increasing the value of our business, doing just what we’ve been doing.

And that sets a baseline, that belief and that expectation around growth and earnings sets a baseline against which we compare any other activities. And we do look, we do pay attention, we’re the hardworking pragmatic people. We don’t have any natural aversion or drive to grow for growth sake.

The growth that we want to see is in earnings per share for the common shareholder, that’s where we focus. And we don’t anticipate that changing one bit.

Unidentified Analyst

Thank you.

Operator

Thank you. Our next question today is coming from Matthew Heinz from Stifel. Please proceed with your question.

Matthew Heinz

Thank you, good afternoon. Regarding the footnote disclosure on your third largest customer in the customer table. So, I was wondering if you could give us a bit more detail around the product mix of their deployments as well as your expectations for mark-to-market and then kind of the contribution for the expected churn there in your overall churn guidance?

Steve Smith

Sure, I’m just going to give you get some color from a sales perspective. That customer continues to mature with us, frankly, we’ve seen them level out to some degree as far as their overall growth release within our portfolio. And we continue to look at how we can evolve that relationship. But overall it’s stable and it’s continuing to evolve.

Tom Ray

Let me just give you some color Matt, I guess on the churn and the mark-to-market. Obviously, both of those numbers that we’ve given for guidance reflect where we think that customer will ultimately end up as it relates to lease renewals as well as some churn. We do expect some churn to result. But we’re still working with the customer and we anticipate some of that in the back half of the year. But again, those amounts are included in our annual guidance as it relates to both churn and the mark-to-market.

Steve Smith

And I’d say, that customer is very widely distributed across our portfolio, in a lot of different locations, in lot of different leases with a lot of different expiration dates. And the churn and mark-to-market are related. And we just, as everybody has pointed out, there are some markets where we’re not sitting on a bunch of vacant space.

And we’re not inclined to, we’re here to drive the returns on our investment and there will be times when that will contribute to churn. If we believe that we should, we paid more for space in certain markets or is there another set of customers, we’ll create more value for our shareholders than you can expect to see churn in those markets. And we think that’s just to divine and often good.

Matthew Heinz

Okay, that’s helpful commentary. Thank you. And then, if I could just follow-up one more on the interconnection piece. I guess, it seems like there has been about six or seven points of call it pricing or mix growth, that’s benefited revenues versus what you site as fiber volumes in the last several quarters. And I suppose the 2016 guide kind of implies that that goes away.

I guess, I’m just looking for a little more color on, is it the mix of copper and fiber and that transition is largely over with or is it just kind of that you’ve sort of reached the plateau in terms of how you can price fiber? Thanks.

Tom Ray

I just think the upside on fiber pricing is less than it was a couple of years ago.

Matthew Heinz

Okay, so, less driven by mix, transitioning more to fiber from copper?

Tom Ray

Yes, I mean, look, the mix continues to support, and we believe the mix will continue to support revenue growth exceeding interconnection, total interconnection growth, because the mix is increasingly at a higher revenue per unit, pointed toward more units that are higher revenue per unit.

Over the last several years, we’ve moved our pricing closer to where we’ve seen market, I think we deeply discounted the market, handful of years ago, we’ve moved that up. I think we’re still below that of probably the two larger interconnection incumbent. So we feel like there is still room but less though than before. And we don’t expect to lean in on pricing as heavily in the next year as we did in some of the past years.

Matthew Heinz

Okay, thanks a lot guys. Appreciate it.

Jeff Finnin

Thanks Matt.

Operator

Our next question today is coming from Manny Korchman from Citi. Please proceed with your question.

Manny Korchman

Hi Jeff, just a quick one for you. The impairment of internal used software that you guys took in the quarter, is that related to the same software package that you’ve taken impairments on in the past and if so, are we sort of done with those and that’s a product that you just, or a project that you just shelved at this point?

Tom Ray

I’ll hit it Jeff, I mean, I own that step. That right up in Q4 was from a new initiative this year that we drew or drive well on. That’s fixed, we’ve got, as we’ve said and as I said in my remarks, the technology platform we delivered in Q2, really focused on sales and marketing, the front-end of our business went very, very, very well.

Also during ‘15, we started several other technology projects internally that are leveraging off of that Q2 delivery, one of those we pulled the plug on this year in Q4. Then we’re going to take a different approach on it. So that’s it.

Manny Korchman

Thanks Tom.

Tom Ray

Yes.

Jeff Finnin

Thanks Manny.

Operator

Thank you. Our next question today is coming from Colby Synesael from Cowen & Company. Please proceed with your question.

Colby Synesael

Great, I have two. So just wanted to go back initially to, I think it might have been in Jonathan’s question to start off. You mentioned in your prepared remarks you had better visibility on the retail oriented or small deployment type product. And you said you felt that guidance or the visibility was good through the course, you thought that the demand wouldn’t perspective be similar to what you saw in 2015.

But you said for wholesale you only had good visibility through I think the first half of this year. Can you just kind of walk us through, why you might have better visibility on the smaller retail part versus wholesale? I would think that the lead times that are required for wholesale that might have actually been flipped.

And then I also have a question on AFFO, I know you don’t give guidance for AFFO, but I was wondering if you guys can give us some color on your expectation there particularly that might relate to the straight line rent adjustment line item as well as capitalized leasing commissions? Thank you.

Steve Smith

Hi, this is Steve, maybe I’ll just take the first part of that question relative to pipeline strength and momentum coming into 2016. As far as the retail business is concerned, that tends to be more of a run rate type of business. So, as we look at how we finish the year and coming into 2016, we’re just looking at the overall pipeline, it seems to be more consistent. As far as distance and visibility into the future, that can change these types of market conditions and everything else, right.

So, that’s TBD, I think as far as overall long-term 2016 view is concerned but overall pipeline and run-rate seems to be in line. Relative to wholesale, I think those type of opportunities do have a bit more I would call it six-months’ worth of visibility. You do see those opportunity that take a little bit longer sales cycle, those kind of customers are a little bit more pragmatic and thoughtful about their planning and when they look to deploy. So that just gives us a little bit better visibility as to at least the next six months.

Colby Synesael

I guess, the point there that was that, your comments you have better visibility on retail versus wholesale isn’t necessarily a reflection of trends in the market as much as a function those types of specific services?

Tom Ray

Yes, I mean, it’s Tom, but look, retail, certainly for the performance sensitive and the colocation absorption in our business has been remarkably consistent for years and years and years. And we’ve I think obtained a degree of comfort that that will continue in large measure for certainly for the next 12 months, we’re giving visibility for a year around that and it feels very solid.

And on the wholesale side, you’re right, there are deals in the market and lots of people indicating the need space. Forgive us for being old and Maudlinly after living through several cycles, you just never know. So we just won’t point the bat too far into the future around wholesale. You just never know. So, we’re going to pay attention like we always do.

Jeff Finnin

Yes, on your second question, just to give you some historical thoughts, you’re right, we don’t guide to AFFO. But if you just look at where we’ve been over the past several years as a public company, our AFFO, it does become a little volatile, just it largely depends on leasing commissions as well as straight line rent as you point it out.

I think if you look at us historically, we’ve been, our AFFO as a percentage of FFO has been anywhere between 80%, to 85%, I think that’s a good range to use as you think about modeling it for 2016.

And then specifically around straight-line rent, straight-line rent increased during 2015 and that’s largely due to some of the wholesale larger deployments we saw which typically have ran some and as a result have a greater proportion of straight-line rents associated with them. We would expect that number to come down and moderate slightly in 2016 just due to those ramping in the cash continuing to be paid, and the straight line amount decreasing.

Secondly, on leasing commissions, you could see obviously the amount we paid in 2015 being about $21.5 million, we would expect that to moderate meaningfully in 2016, again what drives that are larger wholesale deployments. And we would expect that to be down in 2016 just due to the deployments we’re selling in - anticipate selling in 2016 versus what we did last year.

Tom Ray

But that’s where the uncertainty is.

Jeff Finnin

Yes, that’s really where there uncertainty is.

Tom Ray

Instant commissions.

Jeff Finnin

Yes, absolutely, that’s where it’s going to be driven by what we sell.

Colby Synesael

Great. Thank you. And congratulations on the results.

Tom Ray

Thank you.

Jeff Finnin

Thanks Colby.

Operator

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

Jordan Sadler

Thanks, I just wanted to come back to the availability of product that was touched on Chicago, Northern Virginia, potentially Santa Clara, you’ve got some there now. But if you sign some of these, so this is kind of two parts, one if you opportunistically sign some of these wholesale tenants that are in the market, I would imagine some of this availability would dissipate even quicker potentially.

So, one: I’m curious about that appetite to sign the wholesale guys versus the smaller retail tenants. And then separately, do you see opportunity to do new De Novo builds out there given land pricing in those markets?

Tom Ray

Well, that’s the first, our appetite for wholesale, it’s just driven by spot market pricing. There is no more magic to it than that. And again, we would lean more heavily when we have a lot of new inventory. How we think about that, hasn’t changed over all the years. As we talked about it a minute ago, we feel like we have a pretty good read on the field rate from the really good colocation business, and that’s a pretty steady line.

And in a big new building such as Santa Clara, for one, when you have that big of a building, then some degree of wholesale, leasing is interesting. But again, the math has to work. The rent has to be attractive. And then, can we build more in these markets, I think that on the one hand, this kind of development is more challenging than other types of development, I do believe that with regard to power in particular.

But on the other hand, its non-insurmountable, I think we’ve proven for a long, long time that we’re a highly capable land buyer and developer. We do stay on top of market opportunities, and we just continue to feel good about our ability to grow the company and to serve our customers and to take good care of our shareholders. And maybe we just don’t feel under any form of duress, we think we can execute and continue to grow.

Jordan Sadler

Okay, that’s helpful. Just lastly, I look at and you guys have executed well on development obviously, but I also look at your portfolio today and how highly utilized it is in a sort of longer-term context basically, as long as I’m sort of tracking the company. It’s much higher, your stock price also much in terms of valuation looks good, and pretty rich relative to some of the peers. I mean, how do you think about that your valuation and using your currency opportunistically?

Tom Ray

Well, we just think about our valuation mathematically on the trial, we’ve tried to produce strong growth and we feel like we have. And on the forward, we view our valuation as a maniacal drive to under-promise and over-perform, nothing is going to change. We are going to work like hell to deliver on the promise that’s inside this company and we still think that promise is pretty significant.

With regard to using as a currency for M&A, I mean, again no change, and I know you don’t expect anything other than that from us Jordan. It’s, I’m a firm believer that every decision needs to be accretive to what else you could have done. And maybe sometimes you’re multiple is high because you’re not using your currency in a manner that is dilutive or people believe you have discipline around how to use the currency.

Maybe we should be running about as happy spread investors but that’s not how we’re made. Again we view our equity extremely dearly and we believe we have a really good run in front of us more to accomplish. And that sets a baseline against we measure everything else. And that’s just not going to change.

Jordan Sadler

I think we all appreciate that. Thanks Tom.

Tom Ray

All right.

Jeff Finnin

Thanks, Jordan.

Operator

Thank you. We’ve reached the end of our question-and-answer session. I’d like to turn the floor back over to Mr. Ray for any further or closing comments.

Tom Ray

Thank you very much. And thanks to everybody for being on the call. I would depart from our norm, we have we think a really good relationship with everybody in the community. But I do need to call everybody on the phone out on this one, absolutely no proper for Year 2016 Super Bowl Champion Denver Broncos. We’re hurt, we’re stunned but we’re going to still love you. We’re back to business. That’s just it, back to business.

We have a lot we believe we’re going to accomplish. We feel like we’re still very well positioned to drive growth and drive earnings. And we’re going to stay focused on that. So, thanks for taking the time to understand our company. We appreciate it. We’ll be available to help anybody going forward to understand the company. And we’ll put a wrap on it. Thank you again.

Operator

Thank you. That 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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