CyrusOne (CONE) Gary Wojtaszek on Q2 2016 Results - Earnings Call Transcript

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CyrusOne, Inc. (NASDAQ:CONE)

Q2 2016 Earnings Conference Call

August 2, 2016 11:00 ET

Executives

Michael Schafer - IR Officer

Gary Wojtaszek - President, CEO & Director

Gregory Andrews - CFO

Analysts

Jordan Sadler - KeyBanc Capital Markets

Matthew Heinz - Stifel

Vincent Chao - Deutsche Bank Securities

Richard Choe - JP Morgan

Jonathan Schildkraut - Evercore ISI

Amir Rozwadowski - Barclays Capital

Colby Synesael - Cowen & Company

Simon Flannery - Morgan Stanley

Emmanuel Korchman - Citigroup

Barry McCarver - Stephens Inc.

Frank Louthan - Raymond James

Jonathan Atkin - RBC Capital Markets

Jon Petersen - Jefferies

Operator

Good morning, and welcome to the CyrusOne Second Quarter 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instruction] After today's presentation, there will be an opportunity to ask questions. [Operator instruction] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Michael Schafer. Please, go ahead.

Michael Schafer

Thank you, Erikson [ph]. Good morning, everyone, and welcome to CyrusOne's second quarter 2016 earnings call. Today, I'm joined by Gary Wojtaszek, President and CEO; and Greg Andrews, CFO.

Before we begin, I would like to remind you that our second quarter earnings release along with the first quarter financial tables are available on the Investor Relations section of our website at cyrusone.com. I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward-looking statements related to CyrusOne, and are subject to risks and uncertainties.

Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's which you may access on the SECs website or on cyrusone.com. We undertake no obligation to revise these statements following the date of this conference call, except as required by law. In addition, some of the company's remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the Investors section of the company's website.

I would now like to turn the call over to our President and CEO, Gary Wojtaszek.

Gary Wojtaszek

Thanks, Schafer. Good morning, everyone, and welcome to CyrusOne's second quarter 2016 earnings call. But just about any way you measure it, our results in the second quarter with a strong as we have ever recorded whether it's financial performance, the amount of data center capacity deliver or sales bookings for the quarter.

This quarter we set a new record for ourselves in each category; our revenue adjustment EBITDA and normalized FFO growth rates were exceptionally strong both sequentially in a year-over-year basis. We deliver over 60 megawatts of data center capacity and our MRR signed was 34% higher than the previous record level also just recently achieved.

I'm surrounded by a phenomenal team who is executing at highest level that we are clearly firing on all cylinders. Beginning with Slide 4 adjusted EBITDA was up 48% over the second quarter of 2015 where normalize FFO per share was up 34%. Revenue of 130 million was up 46% over the second quarter of 2015 including $5 million from lease acceleration fees, which Greg will discuss in his remarks.

Released a record 282,000 collocations square feet in 40 megawatts of power totaling $58 million in annualized GAAP revenue. This includes the preleasing of 2 megawatts in over 75% of the colocation square feet under construction at our newest Chicago datacenter we acquired in March.

A backlog at the end of the quarter stood at $82 million as of the end -- with a total contract value of approximately 730 million. Additionally a strong bookings we had in the second quarter continue the first weeks of July we least 12 megawatts across most of our markets and purchased the shell for development in northern Virginia, which is in addition to our previously announced purchase of 40 acres of land. These leases will generate $14 million in annualized GAAP revenue increasing our backlog to nearly $100 million.

In the 2 months following our initial 36 megawatt prerelease that we announced earlier in the quarter, we sold an additional 16 megawatts or $23 million of annualized revenue which is also one of our strongest bookings periods ever.

Moving to slide 5 we now have more than 950 customers up approximately 66% over the last three years and nearly 184 to 1000 customers. We believe it is very valued without a diverse product offering so that we can consistently increase our customer base, which in turn insures that we can consistently grow every quarter, so that we're not relying on just a few large customers.

We understand that a typical enterprise customer will need data center solutions that provide them with various types of space, and power rip redundancies across multiple locations, ranging from one cabinet disaster recovery solution up to a 10 megawatt primary deployment, as well as the connectivity products enable them to officially move that data around. Our operating model is robust enough so that we can easily service all the customers that walked in the door, being able to sell to you in charge different prices to all these customers allows us to generate the mid-teen returns that we are able to generate on the capital that we deploy.

Revenue from our product line which enables us to increase our yield on each facility grew to $ 7.4 million in the second quarter a nearly 60% year-over-year increase, and 5% sequential increase. We expected to continue to grow over time as more of our customers adopt these products. As you know we believe that attracting new customers is the most important leading indicator our future success as we have previously seen that they will continue to grow with us over time.

As we have mentioned 40% of the NPV of a customer comes from the future value of the business that customer will give us overtime. Over top 35 customers 23 have been with us for at least three years and the revenue from these customers has grown at a compound annual rate of 26% over this period, highlighting the importance of new customer acquisition. This includes a broad mix of customers across many different industry verticals, I would also point out that our energy bookings this quarter were up more than 55% compared to the prior four quarter average. This is welcome news as we started to see some green shoots in this industry segment, in terms of the number of conversations and towards we're starting to see again. And although oil is approaching $50 barrel is below our customers long term target price of $60 to $65 a barrel seems to be high enough to get them interested to start the long term IT planning again.

Also in the quarter we are seeing a lot of interest in our newest Chicago facility, with construction currently underway implants of additional capacity delivered and available to sell in September. As I mentioned we have already released 2 megawatts or 75% of the space. This is what the financial services customers and as we have a very robust panel of additional customers in that market.

As you know this is one of the most interconnected facilities in the Midwest and many financial IT and since our customers are looking to locate here. Not surprisingly the strongest industry vertical from a leasing perspective this quarter was the hyper scale cloud vertical. This was a segment that we started targeting two years ago and we now count every single one of the largest cloud companies as our customers. We are in the midst of an unprecedented shift in the IT industry that is witnessing tremendous growth. This quarter we saw Amazons cloud business grow by nearly 60% year-over-year to $2.9 billion in revenue with the sequential annualized increase of $1.2 billion. And Microsoft's cloud business grew by 100% sequentially increasing by an estimated $1 billion annualized.

Lastly, we saw oracle announced its 9 billion out act -- was a $9 billion acquisition of next week. Fully staking out its position in the clouds. Despite all this growth cloud companies do not have a robust penetration into the enterprise space yet, so there is a tremendous amount of growth potential for this industry. We are witnessing a seismic shift in terms of how companies are choosing to manage the exponential data growth and struggling with the demands it places under organizations.

All the cloud partners we are talking to are challenged trying to accurately forecast the customer demand, which only deteriorates the further they go out on the time horizon. This demand forecasting challenge then translates into additional challenges for their datacenter capacity planning teams in understanding location, size and timing of the datacenter capacity they will need. It's exactly because of this forecasting challenge that the hyper-scale companies are coming this -- one. Our ability to deliver product more efficiently and at a lower cost than any of our customers can for themselves, is very valuable to them.

We signed many deals this quarter with these customers across our portfolio completely leasing up all 4 phases of northern Virginia. The second phase of our San Antonio development and another species on our on our Phoenix campus. Additionally subsequent to the end of the quarter we acquired a new 130,000 square foot facility in northern Virginia, which was 100% freeways to a cloud customer and is expected to be delivered in the fourth quarter of this year.

As an aside it was a little more than two years ago that we announced our plans to launch in northern Virginia. At that time the expansion was met with a lot of skepticism but it turns out that this is been our fastest growing market, we recently completed the acquisition of an additional 40 acres which provides us with additional capacity for growth over the next few years.

Slide 6 provides more color on the magnitude of the leasing this quarter with megawatt signed up 150% and white-floor space signed up 143% versus the prior four quarter average. We signed over 360 leases for 282,000 square feet of white-floor space or 40 megawatts of power across every market with exceptionally strong bookings in San Antonio, northern Virginia, Phoenix Chicago and Houston.

Total MRR sign was $4.9 million or $15 million annualized more than double the prior four quarter average, which also included two record bookings quarters. The weighted average lease term was more than nine years consistent with the trend in recent quarters work much longer average lease terms.

Finally we're seeing continuing good traction with our power administration freeing as 65% of the leases signed this quarter included [ph]. Despite the record bookings over the past few quarters our sales flow actually higher than it was at the beginning of the year. We are seeing broad demand across different geographies and industry groups a lot alike -- well I would not expect us to repeat these record bookings in the third quarter. I would say that we are feeling very bullish on the overall tone of the market right now.

Turning the Slide 7. This quarter we delivered more than 16 megawatts of capacity with the northern Virginia and San Antonio bills totaling 42 megawatts being completed in just six months. This was a record for us and represents what we believe are the fastest deployment times in the industry. Equally as important are built causes less than $7 million per megawatt which we believe is also a leading industry metric. As we explain that our Investor Day, we're able to achieve these results because of the constant emphasis on engineering cost out of our products, and a relentless focus on improving the efficiency of our supply chain. Our speed to market capabilities which we guarantee to our customers; are extremely valuable to them and serve as a buffer to their demand forecasting challenges.

Our customers no longer have to worry about being able to meet their customers' demands, knowing that we can deliver a new data whole in 10 weeks in and around up 30 megawatt building in six months. The shore road building deal was awarded to us because of our proven capabilities in delivering a superior product at the fastest time to market in the industry. As an aside, I point out that this is something we have done concurrently across several different markets at the same time. Which highlights just how well we have scaled our company.

Moving the Slide 8, since we started this company we have always been very disciplined about deploying our capital, insuring that we generate a high return of what we are investing. As shown we have invested close to $850 million or 70% more capital into this business over the past two years and have consistently maintained development yield in the upper teens, there is no magic to how we achieve these results.

As I mentioned earlier it's because of our relentless focus on engineering costs out of our designs, which allows us to deliver a megawatt capacity of we believe is the lowest cost in the market, and proprietary capability of being able to sell resiliency solutions across the same power backplane, which allows us to get a higher utilization of our assets. Additionally, we saw a robust mix of retail and wholesale products all of which are inter matched with a robust connectivity offering which allows us to generate a higher average price per foot verses just selling large amount of wholesale space.

In closing, I have never been more bullish on our long term outlook and am very excited about the prospects for CyrusOne going forward. We are in our strongest bookings position ever with the backlog of nearly $100 million most of which will be delivered by the first half of 2017. This is the largest backlog we have ever had equal to 25% of last year's revenue, and about 18% of this quarter's revenue annualized. This gives us excellent visibility into 2017, and ensures that are double digit growth rate should continue well into next year.

With that I'm going to turn it over to Greg will provide a little more color on our financial performance.

Gregory Andrews

Thanks, Gary. Good morning, everyone. Beginning with Slide 10 revenue adjusted EBITDA and normalized FFO all increased at a really strong pace again this quarter. Our revenue growth of $41 million or 46% was driven by last year's acquisitions of Cervalis, this year's acquisition of our Chicago Aurora 1 datacenter. And the leasing of additional capacity delivered in northern Virginia, Phoenix and Alice over the past year.

During the quarter we completed our Northern Virginia and San Antonio datacenter ahead of schedule. It was reflected in revenue for less than one month. Additionally approximately $5 million of the increase in revenue resulted from lease termination fees recognized during the quarter. Even adjusting for theirs the growth rates in revenue adjusted EBITDA and the normalized FFO would still be very strong at 40% 37% and 44% respectively.

The lease termination fees came from two customers who pay the southeast us in order to get out of their contracts earlier than they would -- than they otherwise would. In one instance a customer in Austin which is a large IT services company that handles government contracts lost the government IT contract to another very large IT service provider. So the customer decided to terminate its lease with us which is resulting in the recognition of more than two years of lease payments over a period of several months. This customer accounted for a little less than half of the $5 million.

The other early termination wasn't intentionally accelerated lease exit that we negotiated with the customer in Phoenix. We had interest from to fortune 500 customers but didn't have enough capacity available. At the same time in place customer desire to exit, we negotiated a favorable lease termination that accounted for slightly more than of the net half of the $5 million of accelerated revenue this quarter, and re-released that's space on the two customers who wanted it. One of these customers also signed a lease for our latest acquisition after quarter end, on shore road in northern Virginia. So with this intentional turn event we replaced one customer contract whose lease payments ended in another year with two fortune 500 companies whose leases runs 5 and 10 years and we've released 100% of our new northern Virginia facility, we consider this to be a great outcome.

Churning for the quarter was 2.5% overall and 1.5% excluding the company initially turned so that just discussed. The 1.5 % was roughly 60% driven by terminations and 40% by rate. As we noted last quarter we expect churn to be higher in the second half of the year than it has been in recent quarters. Net of the company initiated churn and Phoenix our full year estimate for churn is 8%, this implies approximately 2% to 3% in each of the next two quarters.

On Slide 11 our NOI margin was up nearly 250 basis points partly on the theme -- partly due to operating expense control. SG&A however it was higher due to a number of one-time items related primarily to recruiting, compensation, consulting and legal costs. In addition higher recurring compensation costs and advertising expense also explain increase. In the back half of the year we expect quarterly SG&A remain in roughly the same $ million18 to $19 million range as in the second quarter, as increases in staffing needed to manage our higher level of activity offset some of the reversion from the one-time costs in the quarter.

Turning to the balance sheet on Slide 12. During the quarter we increased our gross assets over $3 billion. Our enterprise value is as you know much greater than that at approximately $5.7 billion. This difference of nearly two times reflect some financial value created by the company over its history. As you might expect we think the market is a better yardstick for measuring the size and value of our business thank historical cost accounting under GAAP.

We continue to use the same business model that we've used in the past and to the same result. In the quarter we invested approximately $130 million with most of that funding datacenter development. And the balance funding the acquisition of land for future builds. We also reduce the cash payable by over $30 million to fund this total of $160 million we use $75 million of excess cash from our March equity offering, and borrowed $85 million under our unsecured revolving line of credit. As quarter and we have $13 million of cash on hand and nearly $560 million a committed line capacity available for our future needs.

As previously noted during the quarter we completed construction and commissions 100% leased data centers in northern Virginia and San Antonio. As a result their construction in progress balanced decreased by nearly $150 million. We also commend lease-up at our Carrollton data hall 5 and our Houston west 3. Over the last 3.5 years as a public company; our construction it progresses range from a high of 7% of enterprise value where we were at the end of the first quarter to a low of roughly 3% of enterprise value where we are currently. We're comfortable with capital allocated to construction in this zone. We underrated development risk carefully and we manage the levels of pre-leasing and available inventory as we deploy capital in the building new datacenter.

On Slide 13, we show how diversified our portfolio has become by market. This diversification reflects our growth through acquisitions and through develop. As we continue to deliver prelease capacity and are less well represented markets, such as Chicago, Phoenix, San Antonio and northern Virginia the market makes will continue to diversify further. Measured year-over-year our portfolio has expanded by over 650,000 square feet of collocation space that's a remarkable 48% increase. Our stabilized portfolio is now 92% utilize. Our pre stabilized data halls in Dallas Houston and Austin are in the early stages of lease up., as they fill up they will add tailwind to the growth coming from the pre-release development projects we have under way.

Moving to Slide 14, we are increasingly signing longer term leases with new customers. The weighted average term for new leases signed during the quarter was 9.3 years. Over the last four quarters the terms a new leases that average approximately 8.8 years, as a result the remaining average life –lease life for the portfolio pro forma for our revenue backlog has now grown to 53 months or nearly 4.5 years. That's an increase from 47 months just last quarter and 28 months at the end of 2012. The longer duration of our leases when combined with the high credit quality of our customers and the embedded revenue growth from rent escalators, means that we generate an increasingly consistent predictable and durable stream of cash flow.

Slide 15 summarizes our development pipeline at quarter end. Let me spend a minute on the project in the active pipeline as well as we called the shadow pipeline that will follow our current project. In northern Virginia we completely sold out the first phase is it sterling and are currently working on delivering the final phase of 15 megawatts which is 100% pre sold, and will be completed by the first quarter of 2017. Additionally, as we mentioned earlier, we acquired a new 130,000 square foot building and are turning net shell into a data center that is also 100% pre-lease.

Lastly, we have acquired 40 acres of land and are starting plans to develop that site. We expect the have a 300,000 square foot shell and the first 60,000 square foot data hall completed by the middle of next year. In San Antonio we completed a 12 megawatt developed -- delivery in our second phase and that facility is fully leased. We've started construction on our third phase there which will deliver 24 megawatts and 132,000 square feet that is also 100% pre-lease. With an additional 8 acres of land on that campus and we expect construction on that will begin sometime in 2017.

In Phoenix, we are completing a 6 megawatts 32,000 square foot built out within an existing shell that will be completed in September. Additionally, we anticipate starting construction on a new 60,000 square foot building which will deliver 12 megawatts for delivery in mid-2017. While this building is not yet sold out we're talking to several different customers who are interested in our Phoenix campus so we expect a large portion of this will be pre-released upon completion.

In Chicago, we are developing the additional 36,000 square feet of space within the existing Chicago Aurora 1 facility. The first part of that will be delivered this month, 75% of that space is also pre-leased. We expect the remainder of that space to be completed by the end of September. Additionally, we have 15 acres of land that came with the acquisition and we've started development plans to build a 300,000 square foot shell there, we expect that to be completed by the second quarter of 2017.

Finally, we have 45 acres of land under auction in the Pacific northwest that we are targeting for hyper scale data center project. In the current active pipeline; the construction project that we have under way at an estimated cost to complete in the range of $280 million to $252 million. In addition, the first phase of the -- project in Northern Virginia will add approximately $35 million to the pipeline at the beginning. The majority that capital will be invested this year. What's really great about this pipeline is that 95% of it is pre lease. As you know pre-releasing substantially -- are development activities and typically results in rent starting when construction is complete. With a clear view on contracted revenue and excellent control over our best in class construction costs, we expect to achieve developing yields in the mid-teens on our development pipeline.

Moving to Slide 16, as quarter ends our balance sheet remains strong, net debts enterprise value was just 20. Net debt to adjusted EBITDA was 4.0 times, even with little round rental income recognize during the quarter from our latest completions in northern Virginia and San Antonio. Our fixed charge coverage including interest expense, capitalized interest and operating lease expense was 4.0 times. Our weighted average term of debt is over five years and we have no debt coming due in the next three years. At quarter end we had over $570 million readily available liquidity.

As you know, we recently put to place an aftermarket equity program to supplement are readily available sources the capital. ATM programs are used by nearly 100 reached the source capital efficiently, and it is an appropriate tool for us to have in our tool belt as well. This type of program is also helpful in addressing rating agency questions about access to capital and financial policy. We will keep you updated quarterly on any activity that we may undertake under the program. Recently Moody's and S&P each placed the company on positive outlook. We continue to engage in active dialogue with both rating agencies to ensure they are informed about the progress we have made with respect to both our business profile and our financial position. Now we'll turn to our outlook for the remainder of 2016 and beyond.

Turning the Slide 17, our revenue backlog at the end of the quarter was $82 million the biggest we've ever had at the end of a quarter. As shown in the bottom chart we expect a little more than half of that backlog to commence in the second half of this year and a little less than half the commencement 2017. The delivery of projects underlying our revenue backlog should help fuel revenue EBITDA and FFO growth throughout 2017.

Slide 18 includes are updated guidance for the current year. Given the record bookings this quarter as well as our acquisition of land for future development we have increased our cap-ex guidance to a range of $635 million to $655 million. So far this year we have encouraged nearly $250 million of CapEx. We have a clear line of sight to another $325 million based upon our existing development pipeline, the balance represents capital that we anticipate funding for investments currently still being under -- as you can see by our unchanged revenue and EBITDA guidance the additional CapEx we are forecasting is not expected to have an impact this year, instead we expected to drive our continued growth in 2017 and beyond.

We're increasing the low end of our prior range of first year normalized FFO guidance by $0.02 to a new range of $2.50 to $2.58 per share. The change reflects our strong year to date results including our early opening of our two latest developments. And lower interest rate reductions for the rest of the year. Partly offset by higher G&A expense. The midpoint of our guidance represents per share normalized FFO growth at 17% year-over-year.

As we look ahead into 2017 it's still early but we believe we can sustain double digit growth in per share normalized FFO, on the wave of bookings that we have signed so far this year and our leases that we would expect the sign over the next 12 to 18 months. Our record bookings this quarter are powerful leading indicator of strong growth to come.

Thank you your time today, this concludes our prepared remarks and then please open the line for questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instruction] And our first question comes from Jordan Sadler - KeyBanc Capital Markets. Please go ahead.

Jordan Sadler

Thanks and good morning. Wanted to start off with the guidance a little bit, you gave some color and I appreciate the little bit of a peak at 2017 Greg but can you talk about the driver of sort of the tweak to the low end this quarter and may be why the leasing done during the quarter, which seems to have a pretty short horizon in terms a commencement. As well as the increasing the cap-ex guidance which I would think would impact maybe capitalize interest at the margin. Why the guidance wouldn't have been moved a bit higher.

Gary Wojtaszek

Hi Jordan, Gary here. On the least commencement so it was a record booking for us, I mean I don't think we've ever had a blowout quarter like this and it's probably one of the strongest that we've seen in the in the industry ever as well. All of those are really going to be coming due towards the end of fourth quarter basically and into 2017, so the impact for this year's results as a result of those sales are really going to be felt into 2017. That's why in my comments I talked about this being the strongest position we have ever been in, in terms of being able to comfortably forecast a good year and a half in terms of where we sit now. We have never been in that type of position previously. Greg can give more color on the upper per share of guidance.

Gregory Andrews

Right. So all the capital that we will be deploying into meeting the demand of our new bookings really started to pay off next year. What effected the way we thought about guidance is this year was really what I mentioned on in our prepared remarks, as we completed our Northern Virginia, San Antonio builds a little earlier than we had thought.

I think originally we had penciled those in for third quarter, kind of thinking maybe in July we got them done in June so little bit extra revenue on that. As well as interest rates, I think we all at the beginning of the year thought might take higher and now doesn't look like that's the case. So, pickups there offset by higher G&A which again onetime cost in the second quarter as well as little bit in the first quarter and then some recurring G&A cost that we anticipate as we kind of scale our platforms.

Jordan Sadler

Okay. And the lease termination fee of $5 million or so between the two. That was originally anticipated in the guidance?

Gary Wojtaszek

Yes. So, most of that is really offsetting in what we would have received in rent from those customers. I think there is a little above $3 million that's really kind of in excess of what we would have gotten from those customers. What's happening is the lease termination fee is kind of the timing of that, a little hard for us to predict because the accounting for it was a little more complex than we thought. The tenants retained some of the space for a little time and so we had to spread out what they were paying us over that period. Some of the things are paid in advance, some are being paid after. So there is kind of just a lot of nuance to the recognition of that but yes that was factored into our previous forecast.

Jordan Sadler

Okay. Except for the $3 million. That was $3 million greater you would have received?

Gary Wojtaszek

Well, that we didn't know about at the beginning of the year but I think we have visibility on that starting at the end of last quarter.

Jordan Sadler

Okay. And in terms of what would be -- maybe just for a glimpse into what's happening with market rents? Can you maybe talk about what happened on the renewal or the re-leasing of that space? What the spread might have been or maybe just give us general context for what's happening with rents across the portfolio?

Gary Wojtaszek

Yes, Jordan. I mean it's been consistent with what we have been saying. I mean if you look at all of the, we have about 4 dozen lease renewals in the quarter and what we have been saying historical is up 2%, down 2%. If you looked at all those it was up 2%. If you exclude in that customers that gave back space which would have been in our churn number then the price increase for that same amount of space would be 9%.

Jordan Sadler

That's 9% excluding churn okay. All right I think I will hop back in the queue thanks.

Operator

Our next question comes from Matthew Heinz of Stifel. Please go ahead.

Matthew Heinz

Hi. Thanks, good morning and thanks for taking the question. Just wondering if you could help us understand how you are thinking about pro forma leverage here? Taking into account the revenue backlog and development of pipeline as it stands today. Do you think you can comfortably deliver the backlog with the equity in the short term? And just kind of remind us again what your threshold for debt EBITDA is on the high end?

Gregory Andrews

Hey, Matt. It's Greg so, we have I think consistently said that we are comfortable with debt to EBITDA in the four to five times range. I think we would even be comfortable in excess of that on a temporary basis. So right now we are at a 4.0 times up from 3.8 last quarter and I think if we funded everything here with just that we would move kind of that low end of the range to the high end of the range. So, we absolutely can do that but we also recognize the importance of maintaining a strong balance sheet for the long-term. So, we will kind of make those calculations as we go through the process of funding the pipeline.

Matthew Heinz

Okay. Thanks and just a couple of more follow-ups if I may. First on the interconnection revenues, I didn't see that disclosed in the slide, maybe I missed it but could you give us that number and also on the churn it looks like, including the self-imposed move out, looks like it is expected to inch up towards 10% for the year. Just wondering what else is happening there that's driving the churn higher aside from the move out that you initiated yourselves?

Gary Wojtaszek

Yes. In my comments Matt, I talked about the IX; I think it was up just about 60% year-over-year and 5% sequentially, quarter-to-quarter so another row showing results for them. But regards to the churn, so there's two components to that. Our base churn excluding this intentional churn event was 1.5%. What we said is that excluding that intentional churn we are going to be at that 8% number for the year, less than what you may have calculated. With regards to the churn event, what we had was a situation that the customer was going start paying us rent. Their contract with us was going to basically run out next year. They were going to have the ability to use that space over the next 2 years following. And so, we had an opportunity where we had two customers that we could have resold that space to. To Fortune 500 customers that were interested in taking us down for I think 7 years on a combined basis.

So we worked out an arrangement with that existing tenant for them to leave not before we added that by September and we moved these other two customers into that space over that period. What was interesting about it is because what we were able to achieve for that customer in Phoenix there, that customer then also came back to us and was willing to do an additional deal with us in Northern Virginia which is the new acquisition that I mentioned in my prepared remarks where we bought an existing 130,000 square foot shell of a building there. We will redevelop that and deliver about a dozen of megawatts or so of capacity in that facility by the end of this year. So, net-net there was a really great outcome for us.

Matthew Heinz

Okay. Thanks for the color guys.

Gary Wojtaszek

Yes.

Operator

Our next question comes from Vincent Chao of Deutsche Bank. Please go ahead.

Vincent Chao

So I just wanted to go back to the commencements Page number 17. So I think last quarter there was about $45 million scheduled to come online in the third quarter. That simply, now it's $39.9 million. That is just due to the Phoenix or San Antonio or earlier deliveries, is that correct?

Gary Wojtaszek

Yes. Sorry, Northern Virginia and San Antonio.

Vincent Chao

Okay. And in terms of the increased recurring G&A that you talked about. I think the full year guidance is calling over just over 52% EBITDA margin. As we think about 2017 and some of the previous things that have been done, do you think it is reasonable to expect some leverage on that 52+% or do you think that's a good rate to be thinking for 2017?

Gregory Andrews

Yes. It's a little early. We haven't gone through the extensive [ph] process that we will begin after this quarter but I do think it's reasonable to expect some leveraging on that. I think what we have been doing a little bit this year is building infrastructure that is needed to help kind of scale to the higher level of activity that we have. This, a year ago, we were doing about $250 million a year and this year we are talking about more than double that and we think we will be at more elevated levels for some time so, we are kind of taking that in today and we do think we will get leverage out of that as we go forward.

Vincent Chao

Okay.

Gary Wojtaszek

Just to provide more color on that what you saw in the investor day presentation when Andrew was there was a really good overview of all the investments and focus we have been making in the customer service organization. All with the goal of how to create a scaled solution company so that we can monitor all of our interactions with the customer in one location in Dallas here. That enables us to keep track of all our facilities globally as well as customer requests. That was very expensive to put in place but those type of scale type programs we are doing across the platforms. So, our goal is to basically build a company as you mentioned in the investor day significantly larger than we currently are and to be able to do that you need to make current period investments enable you to scale that business.

If we had known tension of growing the business, we can absolutely increase our margin significantly higher than they currently are, but as I have been saying over the last couple of years. Anytime, that we are running really good to our results, I am always going to be looking at investing money back into the business to help back particularly in the sales & marketing side. And I think you will see that in our SG&A increases this quarter. We have launched this last quarter a really big initiative associated with the achievement we had in Northern Virginia delivering that 30 Megawatts in 6 months. That is something that we have been talking to and marketing to about 50 or 60 of the key cloud companies out there, explaining how we have achieved this explaining what we can do, explaining how valuable this is for them and we are seeing really good results on that.

The number of hits on our website are up 50% from where we were just a quarter ago and so we expect that probably by the first quarter of next year, we are going to see the results of that in terms of the tangible bookings from those customers that we have currently don't have.

Vincent Chao

Okay. Thanks for that. And I guess in terms of that investment that you made on the customer service and issues, I mean is the bulk of that suspended now behind you or do you still expect some more to come through here towards the end of the year?

Gary Wojtaszek

Yes. We expect that behind us.

Vincent Chao

Okay. Thanks a lot.

Operator

Our next question comes from Richard Choe of JP Morgan. Please go ahead.

Richard Choe

Great. Thank you. Just wanted to get a little bit more color on the second half turn up to this 3% this quarter. Can you give us a little bit more of what is driving that, where it is coming from, is it regional or is it more vertical? And is this specific events or is it more kind of being conservative given that it's elevated?

Gary Wojtaszek

There's no specific area. It's across a couple of different verticals, locations. Their each has a unique story on what's striving it. One instance a customer lost a contract with a government agency to another one of their competitors so they are going to be turning down. Another customer is basically consolidating their data centers into some of their space internally and they are going to be churning out and any other customers I mentioned earlier about what we were able to replace one customer with another, with two other Fortune 500 companies so it's, there's nothing specific. It's across the board but it's higher but is relatively speaking, last year we saw the lowest churn in our history on an annualized basis so averages out to be basically where we typically expected and to be in that 4% to 6% range over the last two years.

Richard Choe

And to clarify on that the second half, elevate second half churn is from the second quarter churn event or is there other stuff? Is there something else coming down the pipeline?

Gary Wojtaszek

Some of it in a second quarter churn event plus some other stuff. So, the way those accelerations work is those customers stay with us for a period of time and some of that is a churn because we are giving that space to a customer as it becomes available. So, you have the current interior churn that increases over time as they fully churn out with you. So, it bleeds in to, from the second quarter, into the third.

Richard Choe

And in terms of San Antonio and Northern Virginia being a 100% pre-leased, are you seeing any revenue from those right now and when will you see the bulk of that revenue?

Gregory Andrews

Yes, if you look at what the bookings chart was last quarter, kind of what Vinnie was asking about and you look at that what you will see is that some of the projects were completed in San Antonio and Virginia but it was only done towards the end of the month so that back log chart or whatever was showing there. And we have some of that as revenue in the quarter but it's not much. It's only a couple of weeks of it. So all that will flow through fully in the third quarter, so we will get that full impact.

Richard Choe

And lastly, yes the bookings are very high, it seems like CyrusOne is winning more than share of deals, can you talk to us a little bit, has the competitive landscape changed anywhere like in Chicago -- their data center and the kind of pricing overall in general?

Gary Wojtaszek

No. Look, what we saw this quarter was everyone did good. I mean GPS had a blowout quarter. Everyone did really strong. I think what it shows is that we are always speaking across the market. We are all doing well together and this just is a great indication of the unbridled growth in data and so everyone is doing better collectively. Some are doing better than the others in a particular quarter but it's just a lumpy nature of the business so with regards to results we had shown here in my prepared remarks showing what our returns have been some discussion in the market about pricing being this and that. Pricing being low and I have always said that pricing is just an irrelevant metric without understanding what the capital deployment is relative to that.

We run our business on a return ratio and what you see is that our returns are like a heart attack patient, basically pretty constant at that 17% to 18% over the last 2 years. So, looking at price without understanding the capital deployed to support it is kind of irrelevant.

Richard Choe

Great, thank you.

Gary Wojtaszek

Yes.

Operator

Our next question comes from Jonathan Schildkraut of Evercore ISI. Please go ahead.

Jonathan Schildkraut

Thank you. Few questions if I may. First Gary you talked about some of the hyper scaled demand in the market place and you also talked a little bit about your multiple levels of resiliency. I would love to get your perspective on what these hyper scale buyers are looking for? They coming in and using the different models of resiliency or are they looking for certain level of resiliency in demand overall? And then similarly, sort of across the same line, you talked about seeing healthy pipeline for the back half of the year and I was wondering if it's still sort of the same shed of hyper scale buyers or if there is bit of an ebb in flow in terms of some of those guys being more prominent in the pipeline versus what you saw in the front end for the year?

Gary Wojtaszek

Thanks, Jonathan. Yes, the resiliency is by customer. What I would say though is only about 10% of the bookings this quarter was in the lower resiliency solutions of the vast majority of the deals we are doing with customers was our more conditional high resiliency type solutions. That changes quarter to quarter. Depending on the types of applications that are running there. Typically we are seeing a lot more demand from the cloud guys that are willing to do the lower resiliency solutions but not any applications we are helping support them with this quarter. With regards to the bookings, this is a phenomenal thing. We have in the third quarter in a row, we have just kind of kept lapping ourselves right? We have been putting up really big numbers and fortunately, right now having well deserved break before we get at it again next week. But he has been running at a really fast pace and the amount of bookings that we have this quarter was a record versus last quarter which was a record versus the quarter before.

What I would say in terms of our funnel though is that as we sit here now, it is 40% higher than where we have ended at the end of the first quarter and 30% higher than where we sat at the end of this year, so in spite of tremendous amount of bookings, the funnel that we are looking at is huge. It includes some additional cloud companies that we are talking to that we expect to win that we have not closed previously, as well as several enterprise companies that are also looking at big deployments with us. So it's broad, it's across all of our markets and we really gotten the construction teams running to make sure that we can have product available as fast as we can to insure that we can get that up and running. I mean, one of Greg's prepared remarks was about 95% of our capital this year is being allocated towards pre-sold projects which is the highest we've ever had. This is like just a phenomenal position to be in. But I think that's also indicative of what we're seeing across the entire industry. I think industry-wide; this is probably the highest point of capital towards pre-sold deals ever. So it's a really good data point for the industry.

Jonathan Schildkraut

Yes, I may have read that somewhere. So I wanted to ask you two more questions if I may. I guess, first, in terms of addressing all that demand. I think you laid out a pretty strong pipeline to deliver capacity in number of different markets. But the one market that you didn't really talked to was Dallas, sort of the home market in terms of the ability address some of the demand coming down the pipeline, and so maybe just a little bit of color in terms of the prep work to make sure that you have the available land, et cetera, in Dallas. That would be helpful. And then, I guess my final question would just be on any more color you can give us on the demand that you guys got in the CME data center. Was it performance sensitive? What's the trading focus? What was that demand, what drew those guys into that market? Thanks.

Gary Wojtaszek

So in Dallas, and then Greg had it in his remarks, so we've got the capacity there. We just delivered another data haul there, so we're feeling pretty good in terms of available inventory. Some of the new customers that I was talking about that we're tracking right now; we expect to have closed and moved into our Dallas facility. So within our existing facility here, we've got enough capacity at the current pace to last about another 18 months or so, but we've got development projects underway in terms of searching for additional capacity within the Dallas market. So I feel good about that and I feel good about the follow-up that we're tracking here. With regard to the CME acquisition that we did, tons of interest. I mentioned in the last call like we've never had that amount of inbound interest ever when we said we're ever going into a new market, and lots of customers calling us. We closed over two megawatts of deals this past quarter, selling at 75% in the space that we're going to have delivered next month.

And those are financial service customers, but our focus here is to do more with that site. We believe that the creation of financial technology play there is we're bringing in a lot of the cloud guys as well as the financial guys in that same location is ultimately where we see that market heading, and we're seeing a number of the IT guys, I mean the cloud guys talking to us about us taking towards, they've not pulled the trigger on anything yet, but we expect that that's going to happen soon. That's why we're actually in the process of developing that additional 15 acres there and we expect to have another 300,000 square feet brought online towards the end of the first quarter of next year.

Jonathan Schildkraut

Thanks for taking the questions, Gary. Much appreciated.

Gary Wojtaszek

Thanks, Jonathan.

Operator

Our next question comes from Amir Rozwadowski of Barclays. Please go ahead.

Amir Rozwadowski

Thank you very much, and good morning folks.

Gary Wojtaszek

Hey, Roz.

Amir Rozwadowski

How are you? I did want to follow-up on the prior question around leverage. So it does seem as though maintaining the balance sheet is very important for you folks and you would be willing to go on the high-end of your leverage target. Should we think the principle means for financing the CapEx should be sort of drawing down on your revolver at this point? Just trying to understand how we should think about it within the mid-term.

Gary Wojtaszek

Hey, Amir, we have that $570 million of liquidity available to us. So I would definitely think that that will be a source available for funding our development. Long run, we want to maintain a really strong balance sheet and have a lot of financial flexibility. So as you model out over more extended periods of time, you should model out for leverage to be kind of fairly even in that four to five times range over a longer period. I mean that's really how we're managing this. We're thinking about the value created over a long period of time and not so much focus on exactly where to be in a given quarter.

Amir Rozwadowski

That's very helpful. And then I was wondering if we could actually touch upon inorganic growth opportunities. If we go back to your analyst day, you folks had talked about sort of the opportunities set that you see with bolstering on potential other assets. I mean, we saw the successful transaction with CME recently, but I was wondering if you could talk a little bit about where you see certain opportunities for inorganic growth, both domestically, and if you folks were to consider moving internationally, if that's something that we could think about over the mid-term for you folks.

Gary Wojtaszek

Sure, yes, we've been saying consistently that we are absolutely interested in expanding our platform. We believe that this is a global play and ultimately needs to be a global company. In terms of the priorities, there are focus here in the U.S., there is a couple of holes in the portfolio here in terms of geographic locations that we need to have stronger presence in, and that's priority. From the acquisition lens, we're focused on looking at companies that can complement our current geographic footprint and current customer footprint, so strategically that's important. And then outside of that from a financial perspective, we want these deals to be financially accretive out of the gate. So there is a lot of different things that we're looking at. We're going to take our time and think through it, make sure that those deals are going to work for us, consistent with what we just did with CME in last year.

Amir Rozwadowski

If I may, one last question. In thinking about valuations or some of the private deals that are available at this point, I'm sure you have roster folks across your desk here coming to you. How should we think about sort of valuation lows that you're seeing from a private market? And the reason I ask is just trying to think about through the ability to achieve those sort of mid-term, mid to longer term growth targets from inorganic perspective for you folks.

Gary Wojtaszek

Sure. Yes, the private market has traded in a fairly tight range between a 10 and 13 times EBITDA multiple over the last several years. There is a couple of deals that were outliners on that for specific reasons. But they all trade within that same range.

Amir Rozwadowski

That's very helpful. Thanks so much for the incremental color.

Operator

Our next question comes from Colby Synesael of Cowen and Company. Please go ahead.

Colby Synesael

Great, thank you. I think going into the quarter, whether right or wrong, most people had anticipated based on the leasing numbers that you pre-announced that you would raise your revenue and EBITDA guidance which you obviously didn't, and I'm trying to get a sense what may have been the delta there. It seems it could have been the churn but you're maintaining your guidance I think previously you had said the range is going to be 6% to 8% but last quarter you said it would be on the higher end of 8%, and now you're reiterating the 8% but I think you're excluding that move out in Phoenix. So I'm just trying to get a sense of was that anticipated when you said you'd be at the higher end of the 6% to 8% last quarter that you're excluding that Phoenix move out?

And even as I appreciate that a lot of that coming out on the late fourth quarter, again it just seems like there was some wiggle room at least to suggest that you'd be at the higher end and you're not doing that. So I'm just trying to get some color what may have changed really this quarter versus when you previously [ph] something slightly different. The second thing is your messaging double-digit growth for 2017, and as I'm sure you know in terms of its expectations. Is there anything there that we should be aware of, is there any potentially large churn event that could happen in 2017, or do you think you can get back down to that, I think you said 4% to 5% long-term average, Gary, that you guys have done? Thanks.

Gary Wojtaszek

I'm not sure, as Greg mentioned one of those, there's no, this is a timing issue. For one, there's absolutely no revenue impact for our year at all. It is a complete push. It's just accelerated revenue into this quarter that would have normally just come through over the course of the year. So you've got this churn anomaly going on but with real no revenue impact. With regard to why the revenue didn't increase for this year, if you go back to last quarter our capital deployed versus in terms of like pre-lease capital deployed was, I think we stood around 60% or 70%, which was the highest we've ever had. So when you think about that number, what it's basically saying is that it is committed capital to revenue that will be recognized once we deliver that product.

And so we are driving the product constructions ream to run as fast as possible on delivering this which they've done. I mean delivering 30 megawatts in six months in one project is a record in the industry. That has never been achieved before, and we came in their regular line with what we had hoped for. When you look at our capital expenditures now with the updated guidance, the proportion of our Capital now is 90% to 95%. What that is basically saying is that we can't get any of that revenue until we deliver more of this products so all of that goodness can start flowing through our top line, so that's really the driver.

With regards to the longer term, we are absolutely in the same position. What we have been saying this far is that 4% to 6% range has been kind of what we think where it's going to be and that's we expect and that's we model in our long term plans so we expect that we are going to get back down there so I don't know what people are looking at. But the other thing I point out at is that if you look at our bookings right? I think in my prepared remarks, if you look at the booking back log we had that $96 million relative to the revenue we generated this quarter, that's about an 18% lift versus that number on a gross basis including power.

If you did it, like exclusive of power so just under pure infrastructure charge, you are looking at a 20% lift versus where we were in this quarter. We have never been in that type of position in this company for the last 7 or 8 years. Like this is just a really good position to sit in from where I am sitting right now.

Gregory Andrews

Hey, Colby if I could just add to what Gary said there. I don't think we meant to imply anything in particular about 2017 until more early to be doing that other than all this activity will start to drive increases in revenue in 2017 as opposed to in the current year. And the other thing I would emphasize here is that, because we have got the question a lot on the road, is this guy up to digging the python where you have had one and two and three quarters of elevated bookings and that could just suddenly go away and I think Gary's point there is that our funnel is stronger than it was at the end of the first quarter and at the end of the fourth quarter and our conversations with customers are talking plans over longer horizons. Not you know, what they need next quarter but what they need over a period of year, a year of several years and so we really believe that we have shifted up to a higher level which I think is really good news for to come in, not just 2017 but 2018 and beyond.

Colby Synesael

Okay. Thank you very much.

Operator

Our next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

Simon Flannery

Gary, I wanted to come back to your comments on the hyper scale providers and obviously there finding you a great partner for dealing with their capacity needs. How do we think about the sustainability and there is a concern about the lumpiness of that business and it seems like it's been pretty consistent for the past several quarters here but perhaps you can just characterize the conversations here. Are you really helping them catch up with extraordinary demand? We have seen tremendous numbers out of the various cloud guys this year or is it more that they are now turning to you as kind of a permanent partner to build out a certain portion of their infrastructure as they go forward so we will see this on a fairly sustainable level year-on-year even if it's not every quarter. So it'd be great to get some more color helping us think about the sustainability of this over the next several years. Thanks.

Gary Wojtaszek

Sure. I think what you see with Amazon's growth, Microsoft's growth, Oracle's recent acquisition of NetSuite – these guys; they're on a rocketship ride. They are absolutely seeing an incredible shift from enterprise customers and others purchasing their products that they are selling and they are trying to meet that capacity as quickly as they can. That said, in spite of 100% year-over-year type growth rates and businesses that are over $10 billion now, their penetration to the enterprise space is really, really limited. The opportunity set that they have in front of them is enormous and it's very much similar -- just the broad growing demand for data that I was talking about at our investor day. I think we're in the early stages here of a trend that's going to go on for several years and our position with them has just continued to improve. We're at now to the point where we are becoming critical strategic suppliers to them where they're recognizing that we don't need to think through all the complexities of how do you design and deliver a data center in record time. They can rely enough to do that for them, which then gives them tremendous amount of flexibility so that they can be able to respond quickly to their customer demands.

I don't know how it goes quarter-to-quarter, but I can tell you that the position we're sitting in in terms of the relationships that we have with those customers has never been stronger and we're having more of these strategic type of conversations with more of the customers, more of those five companies that we don't do a lot of business with currently. I expect this is going to go on for a while.

Simon Flannery

And the returns on that business are in line with your overall returns?

Gary Wojtaszek

Yes, absolutely. That was the reason why we put up that chart today in there about our returns overall for the last two years. They have been constant. They haven't really moved much over the last several years.

Simon Flannery

All right. That's very helpful. Thank you.

Gary Wojtaszek

Yes.

Operator

Our next question comes from Emmanuel Korchman of Citi. Please go ahead.

Emmanuel Korchman

Gary, maybe you can just help us sort of get a flavor of how do recent discussions for the further out developments and now you're buying land and starting to think about developing, I don't know. Maybe you even have land or something [indiscernible] is starting to talk. But how do those discussions differ from a, the discussions for land, for space that's available right now, or secondly developments that are near-term six to nine months out and all of the sudden the tenant can't figure out their demand better?

Gary Wojtaszek

The conversation has absolutely more from where we were a couple of years ago. If you remember – I guess it was two years ago, we delivered for the first time ever for a big cloud company in Phoenix a data center that was a ground-up development. That was an Alphalfa field and we committed to them that we were going to deliver a data center for them. We did that in record time. We delivered that facility faster than some of our other competitors who had existing facilities built out. With that, we were able to basically prove to them as well as all the other cloud companies in the space that we have something unique here in terms of the cost that we're able to develop this at and the speed at which we can deliver that capacity.

Long story short, we've been trying to penetrate those cloud customers for the last couple of years, using that as a great example of what we're able to deliver. Now, all of these guys believe us. They are willing to sign contracts with us, knowing that we're going to be able to deliver the capacity when they need it, so that they're no longer feeling susceptible about putting their product road map at risk, relative to our ability to deliver that data for them. The relationships of the conversations we have had with them have changed dramatically because they've seen what we've been able to consistently deliver for all these other customers. Their willingness now to do pre-sell deals with us when we don't have space available has completely changed. It's the highest amount of capital we're deploying and it's the highest percentage of capital that we're deploying that's already sold. That was never ever the case before.

If you pull up something like my transcripts from a couple of years ago, I would say, Look, we never have been able to successfully sell any customer unless we have space available where they can see because no one was willing to trust us. Now, it's completely changed and it's great overall not just for us, but the whole industry because of the risk of the entire industry keeping up with that demand.

Emmanuel Korchman

And what about the other side of that equation, Gary? Are they thinking about their demands or their space needs differently, or is it a little bit of a land-grab situation? Sort of take all you can be willing to?

Gary Wojtaszek

No. They are absolutely thinking through that. The forecasting challenge that they have is enormous. Just think about what's going on in the whole IT space. It's a gigantic market and all of it is shifting more and more to the cloud. As they try to aggregate up all the different divisions in the verticals and the way their company is aligned, to figure out how much capacity that they're going to need their struggling with that, the accuracy of their forecast deteriorates so dramatically, but further out they go on that time horizon. So when they look at us, we basically reduce the risk in terms of their forecast and the accuracy. If they know that we can deliver within a really short time frame, even if they have a really volatile forecast, they know that we can deliver capacity and meet their needs and make sure that they can provide the services that they're going to sell their customers, that's something that they didn't believe that we were able to do a while ago. Now, they're all believers of it and they absolutely know that we can do something special, that they actually frankly can't even do for themselves because we can do it so much quicker.

Emmanuel Korchman

All right. Greg, a quick one for you. Are there any other one-time items similar to lead-termination fee that we should be aware of as we model out so we're not caught by any more surprises?

Gregory Andrews

In the forecast for the balance of the year, I don't believe there are any more one-time items there.

Emmanuel Korchman

Okay, thank you.

Operator

Our next question comes from Barry McCarver of Stephens Inc. Please go ahead.

Barry McCarver

Good morning, guys. Good quarter and thanks for taking my questions. A couple of quick ones. I know you've already touched on supply and demand broadly. A lot of your peers have already reported the quarter. We heard some concern about a couple of specific market, Silicon Valley in Northern Virginia. Didn't hear that from you in your prepared remarks here today. But just wondering if you could address those markets. How do you feel about the build up by competitors and are you concerned in the least about those two markets?

Gary Wojtaszek

Hey, Barry. No, Northern Virginia is going really, really good for us. That was something we announced. It was actually on this earnings call two years ago that we're going into that market and there was a lot of skepticism about our ability to compete in that market. Now we've sold out the first four phases there. Just sold out a new building that we just acquired a week or two ago, and we just acquired another 40 acres to have additional capacity there. So we feel really, really comfortable about the demand that we're seeing from customers in that market. While we don't have a presence in Silicon Valley, that's another one we're seeing lots of demand from customers asking us to go there so that we can meet their capacity demand there as well.

That said with regard to what we're seeing on supply from other customers, that's something that we are somewhat immune to from the perspective of we have always been focused on being able to deploy capital really quickly because historically, we did that purely as a defensive mechanism. We never wanted to get into a situation where there's too much supply in the market and people will start getting to irrational pricing going on there. The way we always combat that was through a speed-to-market. That minimize the amount of capital that we ever had at risk in any one particular market so that we could be responsive to customer's demands.

That said, what I've always said, if you ever see us deploy capital in any market, that's a derivative of the demand that we are tracking in that market. We deploy capital based on customer demand. We don't deploy it based on just a speculative type investment. We have a really robust sales process and we track all the customer demands by market and that's how we decide to bring capital on.

Barry McCarver

And then just one follow-up. That's very helpful, Gary, thank you. Just one follow-up. You mentioned in the Q&A some pockets in the U.S. markets that you may be in. I know you made an investment in the northwest earlier this year. That would be a new market. Are you still considering an additional market second half of the year? Any thoughts about any new markets in 2017?

Gary Wojtaszek

Yes. We acquired an option of 50 acres there. We're currently having development plans there now, so we'll be able to offer that to customers -- a quick time to market capability in a low-power cost jurisdiction. That's something that we will purely do on a built-to-suit basis there for those large customers which we believe will eventually be deploying more of their applications in a low-PCO environment. The other areas in the country where we have holes in the portfolio is in the southeast. Georgia, Florida area as well as in the lower northwest, like in Denver, Salt Lake, Nevada type area of the country and then Silicon Valley as well.

Barry McCarver

Very good. Thanks, guys.

Gary Wojtaszek

Yes.

Operator

Our next question comes from Frank Louthan of Raymond James. Please go ahead.

Frank Louthan

Great. Thank you. Two questions quickly. One, on the government vertical. I haven't heard much about that. Any thoughts on that? I don't know if you're [indiscernible] demand, but with the Northern Virginia, any exposure, any thoughts there? And could you give us an update on the data center? What exactly was the utilization when you acquired it and just break up the difference with him which you reported the new construction there. How is that utilization trending? Thanks?

Gary Wojtaszek

Yes. I'll take the last question first, Frank. It [ph] was 100% waste when we acquired it from them. We're currently developing some additional capacity there and the deals that we just sold will be 75% of that capacity that we're bringing online is going to be pre-lease. We're seeing a lot of demand in that market. And your other question was what?

Frank Louthan

Thoughts on the government vertical and expanding into that area.

Gary Wojtaszek

Yes. We've been spending a lot of time on that, trying to develop that book of business and that is slow in going. We have a funnel there, but there's nothing really substantial yet to speak of that. We knew when going into that, just given one of our brother in the industry, it took them a good two or three years to develop that business into the great business they currently have and we're expecting the same type of time horizon.

Frank Louthan

Got it. Thank you.

Operator

Our next question comes from Jonathan Atkin of RBC. Please go ahead.

Jonathan Atkin

Yes. I was interested if you could comment on the development of ecosystems as you bring in these hyperscale cloud providers. You've been so busy doing these big deals, but I wondered whether you're seeing any kind of a magnet effect materialize at this point?

Gary Wojtaszek

More conversations than actual deployments, John. There are so much business going on right now with all of these folks. They are consuming just about all of our time and effort just to meet their requirements. There's a lot of discussions about other folks wanting to be locating there, but not to any large degree.

Jonathan Atkin

Great. Thank you.

Operator

Our last question comes from Jon Petersen of Jefferies. Please go ahead.

Jon Petersen

Thanks. I was hoping you guys could give some color on the development yield. How they are and your release, you talk about 16% to 19% yield. Obviously a very accreted number versus your cost to capital. However, we heard from a lot of your peers, in their calls they've implied that they passed on a lot of these hyperscale cloud deals that you guys are doing because they don't make economic sense. I know you guys mentioned in your prepared remarks there's no magic way that you get to those yields. But I don't know if like one way we can even look at it is help us reconcile NOI yields versus EBITDA yields? Because I know your G&A was a little higher this quarter. You talked about some of the recruiting cost and things like that. I want to just a certain amount of variability in G&A that's related to increasing the amount of [ph] you have in your portfolio?

Gary Wojtaszek

Jon, if there's any of those peers that think they can take money, we are more than happy to pay them a commission to float all of those deals to us and we'll be willing to do those deals all day long.

Jon Petersen

I think you're already getting them.

Gary Wojtaszek

Just sending that out there, we're happy to pay anyone a commission to bring more over those deals to us. The reality is we have been designing and focusing on the design of our facilities and our supply chain for the last half decade. The result is that we can consistently deliver these types of yields that we have been putting up for the last several years. I hear a lot of that chatter in the industry and I don't know where it comes from, but all I can say is I would personally be happy to take all of the deals in the industry if the other guys can't walk away. I think you probably saw a lot of that when Walmart was first starting out their company and you had a lot of these mom and pop stores going out of business basically because of the logistical and supply chain efficiency that Walmart was able to bring into that industry, which is fairly for a number of years. They should get up and now we see the same thing going on with Amazon being just as disruptive in that same type of industry. I think the results and the [indiscernible] they spend on the room.

With regard to the EBITDA numbers, I think you could do a similar type of thing. My only caution there is some of the expense in the EBITDA number as opposed to the NOI number is somewhat forward-looking. Right? When I think of your NOI number, that is really kind of a static type number relative to those buildings that you have in place. If you look at what we're doing in the G&A line, there is really where you get a much better sense for the investments that we are making in the business to where we're going to be over the next couple of years. I talked about what we've been doing on the customer service side, we've been beefing up our legal team, finance team, marketing, sales – those are all forward-looking investments that we are making, given where we want to be over the next couple of years. If I had no intention to want to grow this business and want to do something on a broader scale, we would not be making any of those types of G&A investments in the company.

Jon Petersen

I like your Walmart and Amazon analogy, but just to follow-up on that, one of the ways that those businesses were successful is by lowering their margins and making it up on the volume. I guess if you were to apply that to the data center industry yields for you guys and for your peers are so high and it's spread between you across the capital and yield is so wide, at what point do – and maybe you guys are the Walmart or Amazon. At what point does somebody come in and say, 'We don't need yield this high. We can do it accreted and we only need 12% yield, but we can make it up on volume and just lease by crazy.' Do you see that happening at some point in this industry and where are we at?

Gary Wojtaszek

We've always taken the position that we never want to lead with price. We have always felt that as long as we can make a really nice return on the capital that we're deploying, we're happy to continue to do that. So if there's irrational decisions being taken by other folks in the industry, we'll have to think through that, but the reality is that we're maniacally obsessed with continuing to pull out pause and how to do things faster and cheaper. That is what we do all the time. So when I think about the competitive landscape whole focus is how do I continue to push the envelope and do things differently and more creatively?

From an innovative perspective, that is really where we make our money. I talked about when we first started the company a long time ago, we always went into this from the perspective of we always wanted to be the low-cost provider in the industry. That was purely done on a defensive basis, because we never had the cost to capital advantage to play around on the right-hand side of our balance sheet. I never wanted to be in a position where I had an inferior position on what I can actually deliver a cost of the product to be, only worsened by the fact that I have an inferior cost of capital position.

Our cost-to-capital position has improved dramatically over these period of time, but we have always had the high ground in terms of being able to deliver a megawatt-capacity at the lowest cost. We're just going to continue to sell what we have and hopefully, some of these other folks that can't meet the current prices out there will select out and we can continue to gobble up a bigger share of the market. But we don't see any reason why you have to drop your price to be able to do that.

Jon Petersen

Thank you for that. And then just one maybe simple question, have you done all these hyperscale cloud leases? Is there anything about those leases that's a little different or something you didn't know down the road. I don't know, something like do these guys have purchase options to buy out the building at the end of the 10 or 15 year lease or the ramp up is quite a bit lower? Is there just anything that's going to come up five to six years down the road that will be different that we're not thinking about today with these leases?

Gary Wojtaszek

No. Nothing like that in these leases.

Jon Petersen

All right. Sounds good. All right, thank you.

Gary Wojtaszek

The only thing I would say is that the lease bumps on these, when they're going out for 12 years or less than the typical we have been seeing lease increases of between 2.5% and 3%, these are less than that, just given that a life of these are much, much longer duration.

Jon Petersen

Less than that like 2%?

Gary Wojtaszek

Yes. Closer to that range, maybe a little less at times.

Jon Petersen

Okay, all right. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Gary Wojtaszek for any closing remarks.

Gary Wojtaszek

Thanks, everyone. Appreciate you joining our call today. As I mentioned, this is the strongest position Cyrus One has ever been in and we feel really bullish about the prospects in front of us, but I would also point out that the entire industry continues to do really well. We are the last one to report our results this quarter and again, all of my peers also put up really strong results for the quarter. I think it builds well for the industry heading into 2017 and beyond. Thanks, everyone.

Operator

The conference has now concluded. Thank you for attending to this presentation. You may now disconnect.

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