Cencora Inc

NYSE:COR

Earnings Call Transcript 2018-Q1

[Operator]

Greetings and thank you for joining today's CoreSite Realty Corporation First Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief 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, Greer Aviv, Investor Relations and Corporate Communications. Thank you, you may begin.

Thank you, Mr. Aviv. You may begin.

[Greer Aviv, Investor Relations and Corporate Communications]

Thank you. Good morning and welcome to CoreSite's first quarter 2018 earnings conference call. I'm joined here today by Paul Szurek, President and CEO; Steve Smith, Senior Vice President, Sales and Marketing; and Jeff Finnin, Chief Financial Officer.

Before we begin, I would like to remind everyone that our remarks on today's call may include forward-looking statements as defined by Federal Securities Laws, including statements addressing projections, plans or future expectations. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. We assume no obligation to update these forward-looking statements and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our filings with the SEC.

Also, on this conference call, we refer to certain non-GAAP financial measures, such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of 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 Paul.

[Paul Szurek, President and Chief Executive Officer]

Good morning and thank you for joining us today. Our financial results again demonstrate consistent execution and solid growth with revenue, adjusted EBITDA and FFO per share increasing 13% and %year-over-year respectively. The components of our internal growth remain strong as evidenced by healthy same store growth and monthly recurring revenue per cabinet equivalent, low churn, strong cash rent growth on renewals and continuing operating and power efficiency improvements.

We are fortunate to have an excellent team operating in great markets and to have built an advantages position in these markets. Our data center campuses combined dense network nodes with purpose built power efficient, scalable, flexible data centers suitable for the higher density applications that are being more regularly deployed.

Our customers benefit from an IT environment that minimizes latency, accommodates high data volumes and provides exceptional interoperability of enterprises, clouds, networks and managed service providers, resulting in unusually valuable solutions. The network effects of our customer ecosystems increased the stickiness of deployments, drive interconnection revenue and attract quality new logos.

Our sales activity generated 7.1 million of annualized GAAP rent signed in new and expansion leases. Sales activity was constrained by less available capacity in key markets. We entered the quarter with approximately 32% less than typical capacity in our four largest markets. Near the end of the quarter we restored capacity to more normal levels with the completion of computer rooms at VA3 and LA2. Meanwhile, the quality of sales was very high due to continued strength in our core retail colocation business, which is generally proven to be more profitable over time.

We had a healthy balance of organic capacity expansions by existing customers coupled with one of our strongest quarters in numbers and quality of new logo acquisition, which has historically boded well for future organic growth. These new logos reflect continued robust demand for our network and cloud-dense platform in large edge markets.

Demand is holding up well with supply for the most part in balance. Pricing therefore, seems generally stable around our markets especially for our core retail collocation, performance sensitive and hybrid IT deployments. In Los Angeles we placed into service 87,000 square feet of multitenant data center capacity, 54% of which was preleased and commenced in the quarter.

Additionally, in early Q2, we acquired another Los Angeles colocation provider that operates in One Wilshire and the nearby Hope Street building, acquiring more than 120 additional customers, increasing our economies of scale in downtown LA and ending litigation with that company.

In Reston we completed and placed into service at the end of the quarter a colocation room of 26,000 square feet of turnkey capacity at VA3 Phase 1A and have seen strong interest from both existing customers and new prospects for this new capacity.

We ended the first quarter with 108,000 square feet of additional turnkey capacity under construction, including Phase 1B at our Reston expansion and projects in DC, Denver and New York. We continue to expect to break ground on SV8 and LA3 later this year, which together will provide an additional 355,000 square feet of multi-tenant shell with a combined 12 megawatts of initial computer rooms.

While we have increased staffing in our data centers to keep up with customer reliability needs, we have simultaneously improved operating efficiencies in most parts of the organization. As important, our operating and technical approved minutes increased our power utilization efficiency by approximately 8% compared to a year ago.

In summary, our hybrid business model and the resulting strong organic growth and industry leading returns on capital continue to deliver good results and to provide a solid runway for future success.

With that I will turn the call over to Steve.

[Steve Smith, Senior Vice President, Sales and Marketing]

Thanks Paul. New and expansion leasing activity was solid our core retail colocation group, which accounted for more than 95% of signings in the quarter. In total we executed 136 new and expansion leases totaling $7.1 million in annualized GAAP rent, comprised of 30,000 net rentable square feet at an average GAAP rate of $239 per square foot.

Most importantly we continue to see excellent volumes of new logos acquired, with Q1 being the highest level in the last twelve months, while the value of the pipeline has also been trading higher over the same period.

As you relate to portfolio wide pricing a per kilowatt basis Q1 was 1% above the trailing 12 month average with variations only above or below the trail to depending upon the market.

We signed 47 new logos, which accounted for 25% of annualized GAAP rent signed, compared to 8% over the trailing 12 months.

Enterprise customers accounted for the majority of the annualized GAAP rent signed from these new logos, reflecting the growing demand for hybrid use cases that value low latency, access to cloud On-Ramps and world class support of their critical IT environments.

Among our new logos are five new financial organizations, including the leading European Stock Exchange and [indiscernible] a high frequency trading technology firm. Further we saw an uptick in demand from the transportation sector, signing three new logos, including a leading designer and manufacture luxury mission electric buses, a provider of solutions for global air traffic control, airlines and airport operations as well as the developer of GPS tracking and fleet automation solutions.

We also continue to see good traction in the online content and services industry with one of the largest online content marketing and advertising companies joining our platform, along with an internationally e-discovery and digital prints and solutions provider. Existing customers also continue to expand across our portfolio which accounted for 75% of annualized GAAP rent signed in Q1.

Many of these customers are scaling the footprint across the CoreSite platform as they further leverage the benefits of our strategic proximity in major edge markets. While our scale of colocation lease signings were modest by historical standards, the pipeline and capacity is solid and were lumpy in nature we continue to strategically work towards winning these deployments as they add value in supporting the ecosystem in hybrid cloud customers like the architectures.

Before discussing our vertical performance, I want to point out that in Q1 and moving forward we have updated our customer vertical composition to help us more effectively cost supplier accounts based on the core services the customer provide to its end users. You will notice small shifts in the vertical diversification chart on Page 16 of the supplemental to reflect the update a customer classifications.

Network and cloud customers accounted for 21% and 13% of annualized GAAP rent signed respectively. The network protocol had another strong quarter of activity with the highest transaction count since Q3 2016, including the new logos. We also signed a significant power expansion with a subsea cable in the Bay Area, evidence of continuing demand from our subsea customer base.

The cloud vertical produced a very healthy 70 logos including a network-cloud for one of the largest global SaaS providers to support a new deployment in Northern Virginia. Additionally a leading e-commerce platform expanded with the new deployment at SV7 to support a new hybrid model leveraging AWS Direct Connect.

As it relates to enterprise vertical, this vertical accounted for 66% of annualized GAAP rent signed driven by steady growth in the content vertical. In addition to the new logo customers I discussed earlier, we also signed several in place expansions with existing strategic content customers in Los Angeles, the Bay Area and Boston. Finally, an existing 41,000 global live sciences customer expanded its footprint in the Bay Area

From a geographic perspective, our strongest markets in terms of annualized GAAP rent signed in new and expansion leases were Silicon Valley, Los Angeles, New York, New Jersey and Northern Virginia collectively representing 88% of annualized GAAP rent signed. Bay Area leasing was well distributed among all our facilities with available capacity and was driven primarily by organic expansions of existing customers.

In terms of verticals, enterprise and network customers accounted for a large portion of leasing activity along with the new deployment for next gen multimedia on behalf of its end customer, which is one of the largest network cloud and e-commerce providers in China.

Demand in Los Angeles remained steady with strength in the enterprise vertical followed by network and cloud deployments. In New York, New Jersey we continue to see good momentum with the highest level of annualized GAAP rent signed in the last two years. Enterprise leasing was strong, especially from the financial and healthcare and an uptick from performance sensitive applications such as gaming and media.

Finally in Northern Virginia, leasing was well balanced with healthy activity in all verticals. Absorption is steady with demand from the top technology customers continuing to grow or we are seeing a continued trend of sophisticated data center customers shifting to higher density deployments.

In summary, 2018 is up to a good start. We've solid momentum on our core retail colocation business remaining discipline and opportunistic with regard to larger scale colocation opportunities. We're looking forward to our next phase of newly constructed capacity and growth for the company.

I'll now turn the call over to Jeff.

[Jeff Finnin, Chief Financial Officer]

Thanks Steve and hello everyone. My remarks today will begin with a review of our Q1 financial results followed by an update on our development CapEx and our leverage and liquidity capacity. Q1 financial performance resulted in total operating revenues of $129.6 million, 2.9% increase on a sequential quarter basis and 12.8% increase year-over-year.

Operating revenue consisted of $107.4 million and data center revenue comprised of rent and power, an increase of 2.4% on a sequential quarter basis and 13% year-over-year. Interconnection services contributed $16.6 million to operating revenues, an increase of 1.9% on a sequential quarter basis and 14.1% year-over-year.

The lower sequential growth in Q1 reflects the impact of a large network customer rationalizing its cross connects due to its acquisition activity. As we have seen over the years, there are quarterly fluctuations with cross connect, adds and disconnects and we believe it is more relevant to look at growth on a trailing 12 months basis. Specifically for the trailing 12 months ended Q1 2018, interconnection revenue increased 17.3% driven by 10% increase in total volume over the 12 months ended Q1 2017.

Turning to FFO, we reported $1.27 per diluted share in unit up 7.6% on a sequential quarter basis, excluding the non-cash expense related to the original issuance cost of our redeemed preferred stock in Q4. On a year-over-year basis FFO per share increased 12.4%.

Our first quarter FFFO per share contains a benefit of approximately $0.02 related to onetime items. The first being, better than expected cash collections, which resulted in a reversal of bad debt expense. The second item reflected funds from a legal settlement with an office customer relating to its lease.

AFFO growth was also strong increasing 18.1% year-over-year due primarily to lower levels of tenant improvements and capitalized leasing cost.

Adjusted EBITDA of $72.9 million increased 6% sequentially and 13.2% year-over-year. Our adjusted EBITDA margin for the trailing 12 month ended Q1 2018 was 54.7% and was in line with our expectations and our guidance for the full year.

Sales and marketing expenses totaled $5.1million or 3.9% of total operating revenues. General and administrative expenses were $9.2 million or 7.1% of total operating revenues, both amounts are in line as a percent of revenue to prior year and our expectations for the full year.

Now turning to our same store metrics, Q1 same store turnkey data center occupancy increased 430 basis points to 89.1% from 84.8% in the first quarter of 2017. Sequentially, same store turnkey data center occupancy increased 40 basis points. Additionally, same store monthly recurring revenue per cabinet equivalent increased 0.8% sequentially and 9.3% year-over–year to $1,458.

Keep in mind that our same store pool is redefined annually in the first quarter and the 2018 pool only includes turnkey data center space that was leased to our colocation customers as of December 31, 2016 and excludes our power to shell data center capacity.

We renewed approximately 119,000 total square feet at an annualized GAAP rent of $170 per square foot. Our renewal pricing reflects mark-to-market growth of 5.6% on a cash basis and11.5% on a GAAP basis. Churn was 1.9%, which included 100 basis points impact from to move outs, including the customer in New York that we alluded to during the Q4 call.

The second customer consolidated its capacity in Santa Clara and the vacated space has already been back filled with the new lease schedule to commence in the second quarter. We continue to expect churn for the year to be in the 6% to 8% range inclusive of a specific customer that is expected to contribute 200 basis points of churn in the fourth quarter.

We commenced 82,000 net rentable square feet of new and expansion leases at an annualized GAAP rent of $184 per square foot which represents $16.2 million of annualized GAAP rent. The level of commencements was in line with our expectations and as a reminder we expect commencements of $40 million in annualized GAAP rent for the full year.

We ended the quarter with our stabilized data center occupancy at 93.4%, a decrease of 100 basis points compared to the prior quarter, primarily due to the churn at our Santa Clara campus that I just mentioned. At LA2, 21,000 square feet moved into the stabilized pool at 86.3% occupancy while 25,000 square feet at VA2 moved into the stabilized pool at 75.4% occupancy.

We completed forty seven thousand square feet of data center capacity at LA2, which was 100% occupied and is now also reflected in the stabilized pool. In addition we completed another 40,000 square feet at LA2 and 26,000 square feet and VA3 Phase 1A, both of which were completed and are now components of the pre-stabilized pool.

Turning to backlog projected annualized GAAP rent from signed, but not yet commenced leases was $3.7 million at March 31, 2018. On a cash basis our backlog was $16.8 million. We expect substantially all of the GAAP backlog to commence during the second quarter.

We have a total of 108,000 square feet of data center capacity in various stages of development across the portfolio. As of the end of the first quarter we had invested $40 million of the estimated $131 million required to complete these projects. Keep in mind that the capacity currently under construction and the associated investment does not include forecasted investment for projects currently in permitting, entitlement or design including SV8, LA3 and CH2.

Turning to our balance sheet, our ratio of net principle debt to Q1 annualized adjusted EBITDA was 3.4 times in line with the prior quarter. Subsequent to the end of the first quarter, we closed on an amended and expanded credit facility with $1.05 billion of total borrowing capacity. This credit facility amendment also extended our debt maturity profile with no maturities until June 2020.

The revolving credit facility amendment provides an incremental $100 million of borrowing capacity, bringing its capacity to $450 million and extends the primary term of the facility to April 2022, with a one year extension option.

In addition, we entered into a new five year $150 million term loan. This new loan matures in April 2023 and bears interest at a variable rate based on LIBOR. We chose to swap 75 million of the variable interest rate associated with this term loan to a fixed rate of 4.1%.

As of March 31, 2018 pro-forma for the financing and related swap, our ratio of fixed versus variable rate debt would be 47% fixed versus 53% variable, in line with our stated goal of maintaining a balance between fixed and variable priced instruments in our capital structure.

Including of the increased liquidity resulting from the financing transactions, we had $381.7 million of total liquidity available, including cash on the balance sheet at March 31, 2018. As we mentioned in previous calls, we will update guidance when we believe conditions have changed materially enough to alter the limits of our guidance range and we still think the range of guidance previously provided is appropriate.

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

[Operator]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]

Thank you. Our first question comes from the line of Jordan Sadler with KeyBanc. Please proceed with your question.

[Jordan Sadler]

Thanks and good morning. First question regarding the pipeline Steve, I think you characterized it as solid. I'm curious if you could sort of parse the trend in the pipeline sequentially for us. I'm wondering if you're continuing to aggregate or accumulate new potential clients or existing clients and capacity or if you're losing folks to alternative inventory in the market.

[Steve Smith, Senior Vice President, Sales and Marketing]

Sure. Hey, Jordan, thanks for the question. As it relates to the overall pipeline the result of spoke to in the prepared remarks around new logos. There is a concerted effort to try to bring in more new logos as they have demonstrated future organic growth for us, so that is the focus for the company and we like the success that we've seen out of Q1, so that is a continued effort. We do see more of that in the pipeline. Overall, as far as general pipeline is concerned, I would say it's consistent, but consistently growing as we find more and more customers that value the platform and want to buy from us, so we're encouraged with what we see so far.

[Jordan Sadler]

Any color you can sort of share on sort of how you've been limited by capacity, so just maybe provide an example of where or how you're limited and how that sort of stems the ability to put up overall leasing volume revenue.

[Steve Smith, Senior Vice President, Sales and Marketing]

Sure, and I think really it comes down to those larger leases that likely show up in larger chunks of revenue as well, so as you look at the broader capacity across the platform large chunks of space are fewer in various markets and particularly in some of our strongest markets, which therefore has an effect as to those larger leases and sometimes kind of the larger edge or kind of scale type of environments that we would otherwise win, so that's really the biggest space where we have been constrained.

[Jordan Sadler]

And then just one point of clarification, Jeff, did you say on churn, on the 68% guidance that includes or excludes the customer that's going to contribute 200 basis points of churn in 4Q?

[Jeff Finnin, Chief Financial Officer]

Yeah, Jordan that annual 68 includes that 200 basis points.

[Jordan Sadler]

Okay, is that a year-end move out or is it just some time in -

[Jeff Finnin, Chief Financial Officer]

Yeah, it's a mid Q4 term at this point in time.

[Jordan Sadler]

Okay, thank you.

[Jeff Finnin, Chief Financial Officer]

You bet.

[Operator]

Our next question comes from wind of Dave Rogers with Robert W. Baird. Please proceed with your question.

[Dave Rodgers]

Yeah, hey guys Jeff I wanted to follow up on your comment about 10% increase in cross connect volume and parse that out, you obviously lost a decent amount of cross connects with the churn event in the fourth quarter and it's now again early in the year. What does that volume growth look like? It's historically been 14%, so can you give us a sense of what that looks like either without the customer churn event or what maybe the new adds might have been to offset that in the fourth and first quarter?

[Jeff Finnin, Chief Financial Officer]

Yeah, good morning, Dave. I think the best way - historically we've given volume growth sometimes in the aggregate, which is what I'm referenced in my 10% and sometimes we also give volume growth for just fiber, just to give you some color around that. Obviously our fiber cross connects make up roughly 80% of all of our cross connects which - that is the product that we sell that really probably drives the most performance in terms of volume. If you look at it just isolated on the fiber cross connects that volume growth was 13.6% year-over-year, gives you a better idea exactly what's driving the volume growth and obviously the revenue growth as well.

[Dave Rodgers]

And sorry, that 13.6 is net of the churn as well just on fiber?

[Jeff Finnin, Chief Financial Officer]

That's correct, yeah. And I would say, just to give you some other color in terms of the adds versus disconnects, the - really what drove the lower volume growth was we just had a higher disconnects. Our growth rates were coming in, in line with our expectations, it was really some of the churn we experienced in the first quarter from the one customer that had higher than what we would typically see in terms of disconnects.

[Dave Rodgers]

Okay, that makes sense and that's helpful. Thanks, Jeff. And then maybe Steve as you look forward, you had talked about starting SV8 later in the year, do you worry and look out at pricing at all as you start a larger facility and how do you kind of plan to go to market with that type of asset? Would you build it completely spec, will you add some tenants ahead of time, how are you thinking about that and pricing?

[Steve Smith, Senior Vice President, Sales and Marketing]

Sure, well specific to the Bay Area, we've seen pricing hold up very well there. There are some additional inventory that's coming online, so we continue to watch that very closely, but I think one of the things that we do benefit from specifically in Santa Clara is a very strong customer base that is also looking to expand as well as other customers that just value that location, the interconnection that we bring along with it and the ecosystem. So we do watch it and there is, as I mentioned, some other capacity coming online, but so far pricing seems to be holding and we're optimistic about the opportunity ahead of us.

[Dave Rodgers]

Okay, great. Thank you.

[Steve Smith, Senior Vice President, Sales and Marketing]

Thanks Dave.

[Operator]

Your next question comes from the line of Jonathan Atkin with RBC. Please proceed with your question.

[Jonathan Atkin]

Thanks, so it sounds like demand is quite strong and the financial results certainly were quite solid, but I do want to drill down on just the churn topic. The churn that you saw around disconnects, was that listed as cabinet churn or was that cross connects grooming or was that cross connect absolute disconnects, grooming meaning going from say 10 gig to 100 gig?

[Jeff Finnin, Chief Financial Officer]

Yeah John the specific item we referenced is really a customer we would best describe is really rationalizing their cross connect deployments and they were disconnecting certain of those cross connects because of some M&A activity on their side. They happen to acquire a customer or two of ours and they're just rationalizing their spend based on what they see in the traffic that they're trying to exchange between different parties.

[Steve Smith, Senior Vice President, Sales and Marketing]

Then Jonathan, just to give you a little bit more color there, I was just going to say as far as the rationalization it really just rationalizing various assets that they may have done. We've done it in various locations it's more about consolidating those than it is about any impact of 100 gig versus 10gig.

[Jonathan Atkin]

If there are anything going on, on that front or are you like getting it cycled through that or have you yet to see it or have already seen it in terms of the grooming impact?

[Steve Smith, Senior Vice President, Sales and Marketing]

As you look at just the last decade of M&A activity across the telecom industry, it's happened pretty regularly over that period of time and we see a lot just based here in Denver there's a lot that goes on. So it happens and it's happened over time and I think it will continue to happen as we go forward, but on balance I think if you look at the collective demand for data, the applications were rolling out and the continued demand for interconnection, the broad based fundamentals are very strong, so I think you'll see more of that as more M&A happens, but I think on balance the market as a whole continues to grow.

[Jonathan Atkin]

And 4Q event this year that Jeff talked about mid 4Q, is that more just sort of cabinet - somebody exiting the contract, so can you provide color around what sort of vertical, which geography are we talking about?

[Jeff Finnin, Chief Financial Officer]

Yeah, it's obviously a customer of ours there and more than one geo Jonathan and an enterprise customer of ours that is just not getting full utilization out of their space and again that terms in mid Q4.

[Jonathan Atkin]

And then finally is there anything to call out, DHV, SV8, given the nature of the pipeline that you're seeing, anything different about the products that's been marketed or indicates that C8 will be built around resiliency or power density that you would want to call out and related to that anything about cost to bills in terms of labor or materials or speed to deployments are there any different trends to be aware of in the overall markets?

[Paul Szurek, President and Chief Executive Officer]

Jon, this is Paul. VA3 is traditional colocation network-dense and so you have to maintain a fairly high level of resiliency there. SV8 will be very similar to SV7 for similar reasons. Having said that, we have redesigned the electrical system around more cost effective concurrent maintainable structure, which does generate some cost savings. In addition, frankly we're seeing overall I would say net reductions in cost due to better process management and better procurement practices and so those are offsetting - more than offsetting some of the other cost increases that you mentioned that are happening in the construction market. But for these major metro networking cloud-dense note higher levels of resiliency are still required by margin [ph].

[Jonathan Atkin]

Thank you very much.

[Operator]

Our next question comes from the line of Michael Rollins with Citi. Please proceed with your question.

[Michael Rollins, Citi]

Hi, good morning. I was curious if you could just put a couple of things into a little bit further context. So first on the bookings, just curious if you could describe a bit more about whether competition, whether it's from the cloud or from other competitors and regions having any impact on the flow of bookings over the last couple of quarters? And then secondly on the releasing spreads 5.6 this past quarter, what's driving that number, is it the price gap between you and your competitors, is it power densities or what's helping get the releasing spreads that you're achieving? Thanks.

[Steve Smith, Senior Vice President, Sales and Marketing]

Sure, thanks Michael. This is Steve. I'll start off and Paul you can chime in as you will there. As far as the overall bookings over the last quarter and you mentioned last two quarters and the impact of competition, I would say it's less about competition more about available space to sell and how we align with that. The competitive landscape as it relates to their available capacity does impact that I guess, so that's that is one factor to convey to consider there. But overall as we look at the broader based pipeline of the activity the number of customers that are buying for us as reflected in the results of transactions and logos it actually was very healthy. And so overall in balance the - how we're showing up in the marketplace and how customers are buying from us remains very strong.

[Paul Szurek, President and Chief Executive Officer]

As it relates to the mark-to-market performance, I think that also speaks to the value of the platform primarily and that sticky customer base that continues to grow in value the ecosystem more than anything as well as the lot of customers that we have in place that continue to auto renew and renew on a regular basis and continue to grow with us, so I don't think there's any magic there other than just that intrinsic value in the ecosystem.

[Michael Rollins, Citi]

Thanks very much.

[Paul Szurek, President and Chief Executive Officer]

Thanks Mike.

[Operator]

Our next question comes from line of Robert Gutman with Guggenheim Please proceed with your question.

[Robert Gutman, Guggenheim]

Hi, thanks for taking the question. Of the $16.1 million of commencements in the quarter, how much of that came from the preexisting commencement backlog versus signed and commenced deals in the quarter? And secondly what do you see as the time horizon on lease up for some of the pre-stabilized properties mainly in Northern Virginia and Los Angeles, which don't seem to have any leasing as of yet?

[Jeff Finnin, Chief Financial Officer]

Hey, Rob. Let me first address your question as it relates to commencements. My recollection was, don't quote me on the exact numbers, but we entered the year with a backlog of what we thought was going to commence in the quarter of just north of 13 million and so I want to say about 3 million of those commencements resulted from sales that we actually generated in the quarter and also commenced in the quarter, so call it about $3 million of that was incremental to the backlog that we had coming into the year.

[Paul Szurek, President and Chief Executive Officer]

As it relates to the other property, in Los Angeles we actually brought on board much more than the pre-stabilized capacity this quarter. The overall capacity was roughly 88,000 square feet, 54% of that was leased. Much of that was on one floor, so we just put the floor into the stabilized pool and the balance of it is in the pre-stabilized pool. And it's not unusual for us to put new retail colocation capacity directly into the pre-stabilized pool without much pre-leasing just the character that's space does lends up well to pre-leasing and really more the character of the customer. Having said that, we do already have one lease in VA3 and we have a lot of interest in both of these in good pipelines for both of these computer rooms and we're very glad to have the additional capacity on hand.

[Robert Gutman, Guggenheim]

Great, thank you very much.

[Operator]

Our next question comes from Colby Synesael with Cowen. Please proceed with your question.

[Colby Synesael, Cowen]

Great, thank you. First up, just regarding the acquisition that you made in LA, I wonder if you could just provide a little bit more color in terms of revenue, EBITDA or FFO impact as well as utilization of that 30,000 square feet? Yeah, I think you mentioned 120 customers, so I would assume there's some financials. And then secondly, I think the goal is 40 million in commencements in 2018, you did 16 million in the first quarter, I think your backlog is about 4 million to call halfway there. How comfortable are you with that goal relative to where you are today? Thank you.

[Jeff Finnin, Chief Financial Officer]

Yeah, good morning, Colby. Let me give you some commentary first about the company US Colo in the Los Angeles market, just ballpark they have about $5 million in annualized revenue. In terms of the impact to 2018, we have assumed about $0.01 to $ 0.02 of accretion per share for 2018 that gives you some idea where their adjusted EBITDA and FFO are coming in. In terms of the space itself, it's about 30,000 square feet of capacity there and they're largely I would say stabilized at this point in time; there's not a lot of that. It's very highly utilized at this point in time, so it gives us some idea in terms of where they are and obviously we'll get more into the granularity as we integrate and get our team involved working closely with their individuals at this point in time. In terms of the commencements, you're right. Based on what we did in Q1 in our visibility with our backlog we're right at the 50% mark. And obviously it's something we'll continue to monitor as we look forward and the other 20 million of that is obviously going to have to come from our future shells which Steve and his team continue to work very hard at and will keep you updated in terms of how we proceed during the year. I think in general that's just one of those guidance numbers that we will update as we see fit and periodically as we see changes needed and at this point in time where we are at this point we're comfortable with our guidance not only our commitments but everything else that we've given guidance till today.

[Colby Synesael, Cowen]

I just put a follow up then so as relates to the acquisition, so you're not changing your revenue guidance, but I guess you're swimming with this cost $2.5 million or $3 million from that, just want to clarify? And then secondly as relates to the commencements, assuming you have to do 20 million in the back half of the year, is it fair to assume that you are assuming in that a fairly notable step up in leasing somewhere in the next few quarters relative to what we've seen the last two quarters.

[Jeff Finnin, Chief Financial Officer]

You're correct; we're not changing our guidance. Again materially we don't think it needs to be modified and if you can read into it as you need to, but I think that's the way the numbers would play out in terms of the quarter expectation for the next three quarters in terms of sales and ultimately commencements.

[Colby Synesael, Cowen]

Great, thank you.

[Operator]

Our next question comes from the line of Sami Badri with Credit Suisse. Please proceed with your question.

[Sami Badri, Credit Suisse]

Thank you, regarding a recent Chinese hyper scale deployed into your data centers earlier year in the year, specifically Alibaba and to Silicon Valley and Northern Virginia. Have you or any of your customers seen any concerns that were expressed around international, specifically a Chinese tenant and interconnection-dense facilities. Could we just get any color on that because you have heard from things from the channel regarding concerns we just wanted to get your take on what you are seeing on your side.

[Steve Smith, Senior Vice President, Sales and Marketing]

Yeah, thanks for the question. This is Steve. As far as any concern, we haven't seen any concern around it. In fact we think it adds to the overall ecosystem and choice for our customers, so what we announced earlier was the cloud On-Ramp which is similar to other cloud On-Ramps that we have deployed in the Virginia market and other key markets around our platform. So that's what we announced and so far it's been very good for the broader campus there as well as other enterprise customers that are looking for additional choice. We do see other international customers that are leveraging that platform likely more than US customers that now see core side even more beneficial than they had in the past, so overall it's been very positive for us.

[Sami Badri, Credit Suisse]

Got it. Thank you for the color on that. Then my other question has a lot to do more Miami, as I look at Page 8 of your supplemental, it looks like Miami's campus is the only one that does not have cloud On-Ramps deployed and Equinix is down there and is taking full advantage of the facility and the market. I'm just trying to get your perspective on why that is not really a cloud On-Ramp market or a target?

[Steve Smith, Senior Vice President, Sales and Marketing]

I think that really relates more to the size and capacity at that facility Sami, it's our smallest facility and we continue to do a solid job in terms of keeping it leased up and generating cash flow, but it's not been a growth focus for us.

[Sami Badri, Credit Suisse]

Got it, thank you.

[Operator]

Our next question comes from the line of Nick Del Deo with MoffettNathanson. Please proceed with your question.

[Nick Del Deo, MoffettNathanson]

Hey, thanks for taking my question. First, as you noted over the last year or two you've kind of been a victim of your own success and it's left with a relatively tight inventory position relative to your history. Now what's the sweet spot for inventory where you have enough on hand to sell but don't have too much trended in capital in place and when you anticipate getting back to and consistently stay in that sweet spot given the project you have development?

[Paul Szurek, President and Chief Executive Officer]

So historically we've been in the 225,000 to 250,000 square foot of available inventory, it means it's not occupied and it's not under lease. That's been consistent with our sales performance over the years. We're at, I guess we started Q2 at 246,000 square feet of capacity and in most of that new capacity is in our top four markets, the only one where we didn't add any new capacity this past quarter was Santa Clara. With our pipeline that's in place we should be able to sustain that level of available capacity seven quarters out of eight for the foreseeable future beginning in 2019 once we bring SV8 online and we'll add to that with CH2 once it comes online and LA3, so I feel very good about how we're positioned for the future starting late in 2018 and going on into 2019 and we have good available inventory right now, so it feels like we're the right spot.

[Steve Smith, Senior Vice President, Sales and Marketing]

The other thing I would just add to that as well as we've taken some pre focused efforts here internally to ensure that we can just move faster in the market. So as we look to capacity getting to a more critical level that we can move quicker on land, we can move quicker on permitting and we can move quicker on getting things out of the ground and getting them constructed. So I think that will also help us stay ahead of the curve, but at the same time not struck out capital when you don't need to.

[Nick Del Deo, MoffettNathanson]

Okay, that's helpful. And maybe switching gears a bit, on a STN virtual cross connect versus physical cross next question. Can you talk about the common use cases you see where customers are opting for virtual cross connects versus physical cross connects?

[Steve Smith, Senior Vice President, Sales and Marketing]

Sure and I think the most obvious use cases the traditional enterprise those that typically have one or two connections to a network into a cloud provider or many of them are using cloud today that they can now how those virtual circuits go across multiple clouds. And many of those are just evolving over time as there is more and more clouds available for those enterprises to use. So you think about your ERP, CRM, all the other application storage and so forth that are now becoming more as a service it just makes those more readily available and able to scale over a virtual type of connection. I mean, historically they in many cases haven't even had that service available for them at all, so I think it opens up the value colocation much more so than it has in the past because now that those services are available, but then the data center they can leverage those hybrid use cases.

[Paul Szurek, President and Chief Executive Officer]

Should point out though that the data indicate very strongly that it's an advantage for our customers who want that flexibility to access services that are outside our data center, within the data center open cloud exchange and the virtual activities that we provide clearly seem to dominate and so far we've seen SDN as a very strong positive - net positive on cross connects and we haven't seen any evidence of cannibalization of colocation or other services we provide.

[Nick Del Deo, MoffettNathanson]

Okay, that's great. Thank you, guys.

[Paul Szurek, President and Chief Executive Officer]

Thanks Nick.

[Operator]

[Operator Instructions] Our next question comes from line of Frank Louthan with Raymond James. Please proceed with your question.

[Frank Louthan, Raymond James]

Great, thank you. As you look at adding more capacity is there any particular markets that you would entertain and additionally in North America or overseas that you are looking and then with regards to the customers that was rationalizing the cross connect deployments, how long ago was the M&A, was this left over from 12 or 18 months ago or something relatively recent and you see any other customers that you think might be going through some similar process.

[Paul Szurek, President and Chief Executive Officer]

Let me take the first question and then I'll let Jeff handle the second. As we mentioned in the past we continue to look at other markets and see ways that we can scale in those markets with our network-dense model and that is obviously not something that's easy to do and so we haven't made many moves in that area in the past. We continue to see the highest returns on our capital by deepening and broadening our capacity in the markets that we're in with very attractive markets and seems to have lot of growth going forward. And so as we've said in the past, until we actually are ready to move into another market and have something signed we typically we don't talk about what potential targets might be.

[Jeff Finnin, Chief Financial Officer]

And Frank let me just add just a little bit and I'll answer the second question, but I think overall that comes down to our overall capital allocation strategy and I think we continue to be very disciplined related to that obviously focused on driving high returns on invested capital as Paul alluded to. So I think - I don't think we have not modified that at all and obviously you can see the results on those returns from our financial results. As it relates to the cross connect disconnects that we saw, I think it's fair to say that that M&A activity is not a recent event from that particular customer and that's consistent with what we typically see when some of those customers are - when there's M&A activity from some of our customers. It is not an immediate type of event where you might see some of those disconnects. Sometimes you see them one to three years later, sometimes you never see them, it really is dependent upon their utilization of those cross connects in the traffic that they're trying to move and connect to, so it's not a recent event for this particular one.

[Frank Louthan, Raymond James]

Are they adding any other cross connection capacity in other areas that maybe were they're taking some way and adding some on a different location?

[Jeff Finnin, Chief Financial Officer]

Absolutely, we see - and specifically for that customer this quarter we saw a lot of additions as well and so absolutely that's its stay. That's why when we think about it talk about the cross connect activity, it really is a fluid type of activity we see in our data centers, you see high volumes of additions and disconnects just depending upon what our customers are trying to do in any given period of time and so - hence the reason we have people staffed to execute on that in a very timely manner, but that particular customer is adding and we saw a large group of additions from that customer in Q1 as well.

[Frank Louthan, Raymond James]

Great, thank you.

[Operator]

Our next question comes from the line of Jon Peterson with Jeffrey. Please proceed you're your question.

[Jon Petersen, Jefferies]

Great, thanks. Just one on the US Colo acquisition you mentioned that that ended litigation, can you just give us a little more context on what that litigation was about? And then also maybe broader - I know at One Wilshire you're not the only colocation provider there, I guess are there other opportunities at that facility or maybe some other facilities that you have to roll out some of the guys that are competing with you in the same facility and drive little bit of growth that way?

[Paul Szurek, President and Chief Executive Officer]

Sure, Jon. Gad to answer those. We've had a discussion of this litigation in our financial statement foot notes for over a couple of years now. It really was a dispute about various contractual elements between US Colo with us and to go into it beyond that is probably not very helpful. We typically don't talk about M&A unless we have something to disclose and so unfortunately probably shouldn't address the latter part of your question.

[Jon Petersen, Jefferies]

Okay, fair enough. Thank you.

[Operator]

Our next question comes from line of Richard Choe with JP Morgan. Please proceed with your question.

[Richard Choe, JP Morgan]

You mentioned in your earlier comments that you came in with a lot less capacity than normal, do you feel like you're at a place - and I think you mentioned it a little bit for where we could see signings kind of ramp up from here now that you have enough capacity or do we have to wait for a later in the year into second half of '18 and into '19 before we could see signings kind of ramp up because of a more balanced capacity situation.

[Paul Szurek, President and Chief Executive Officer]

So I don't want to put any additional pressure on Steve and his team. They do a great job. And they've really done a remarkable job in increasing our acquisition of these quality new logos over the last two, three quarters, but there is a very strong correlation historically between available capacity especially in our big four markets and sales. And so as we've increased capacity in two of those big four markets LA and Virginia bringing additional capacity online in a third, New York in Q3, historically - based on historical persons that you translate into higher sales. We do still have a bit of a constraint capacity situation in the Bay Area, some of that will be - that will be remedied next year when we bring SV8 online.

[Richard Choe, JP Morgan]

And then in terms of what your customers are asking for or maybe what you're focusing on are you seeing customers ask for larger deployments and this is might be a shift that you have to kind of shift to in terms of the process and how you're willing to sell space and power or are you still kind of just focusing on Colo and high density and higher interconnection. Just kind of wanting to see what you're seeing in the marketplace of what customers are asking for.

[Paul Szurek, President and Chief Executive Officer]

Really not a huge change from historical trends, our focus continues to be on the core retail colocation customer that's our bread and butter and for all the reasons that Steve and I mentioned in our prepared remarks, that's worked really well for us. There is from time to time larger deployments that need storage and compute at the edge market, these tent to be lumpier, but we still see opportunities for those in the pipeline and expect to bring some of those into the sales mix as we have additional capacity.

[Richard Choe, JP Morgan]

Great, thank you.

[Operator]

Our next question comes from the line of Jonathan Atkin with RBC. Please proceed with your question.

[Jonathan Atkin]

Yeah, just a follow up on the subsea cable situation where you're well positioned particularly Los Angeles at both One Wilshire and Alameda, but you mentioned the Silicon Valley campus and can you talk a little bit more? Is that an actual physical termination point or just an extension into your facility? Thanks.

[Steve Smith, Senior Vice President, Sales and Marketing]

Yeah, as far as the subsea cable customer base, I'm not sure that we've disclosed the exact end points on that level of detail, so probably would hold off and give me more detail until we make sure we have that clearance from the actual customer. But overall we have 11 subsea cables to terminate within our platform and that has continued to add more value not only to those international customers but to domestic customers that are looking to get access to those international marketplaces. So I'm sorry, I can't be little bit more specific, but just need to do a lot of more diligence to make sure that we can disclose.

[Jonathan Atkin]

Okay, fair enough. Thank you.

[Operator]

Our next question comes from the line of Stephen Bersey with MUFG Securities. Please proceed with your question.

[Stephen Bersey, MUFG Securities]

Hi, guys. I think you mentioned you saw 8% improvement in efficiency for power utilization, just wondering kind of drivers behind that and if that [indiscernible] on a certain location and can you potentially see improvements in other areas.

[Paul Szurek, President and Chief Executive Officer]

So it's across the portfolio and I want to make clear that that's on a same store basis, so that doesn't reflect the impact of new construction. It's a combination of factors, in some facilities we have gone back and upgraded and reprogrammed automated control systems, in other facilities we did a deep dive into all the components of power utilization and 20 tweaks lead to significant achievements and in power efficiency and in one facility in particular, as we disclosed in the past, we upgraded to a very large, more economically efficient chiller plant from the smaller chiller equipment that we had there in the past and that generated significant return on investment and drove power efficiency in that in that site. So we think there's still more opportunity as we continue to get better at operations and focus on technological improvements that can drive PUE, but it was a real big gain year-over-year and I'm very pleased with the engineering and facilities team for what they've accomplished here.

[Stephen Bersey, MUFG Securities]

Great thanks guys.

[Paul Szurek, President and Chief Executive Officer]

Thanks, Steve.

[Operator]

Thank you. Mr. Szurek, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

[Paul Szurek, President and Chief Executive Officer]

Well, I just want to thank everybody for their interest and their questions and listening to us talk about the company and thank my very valuable colleagues at CoreSite for their excellent work they continue to do. We look forward to the future and we will look forward to speaking with you all next quarter. Thank you very much.

[Operator]

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