American Tower Corporation (AMT) Q1 2013 Earnings Report, Transcript and Summary

Greetings, and welcome to the CoreSite Realty Corporation First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Derek McCandless, General Counsel. Mr. McCandless, you may begin.

Thank you. Hello, everyone, and welcome to our first quarter 2013 conference call. I am joined here today by Tom Ray, our President and CEO; Jarrett Appleby, our Chief Operating Officer; and Jeff Finnin, our Chief Financial Officer. As we begin our call, I would like to remind everyone that our remarks on today's call include forward-looking statements within the meaning of applicable securities laws, including statements regarding projections, plans and future expectations. These forward-looking statements reflect current views and expectation, which are based on currently available information and management's judgment. We assume no obligation to update these forward-looking statements, and we can give no assurance that the expectations will be attained. Actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and uncertainties, including those set forth in our SEC filings. Also, on this conference call we refer to certain non-GAAP financial measures such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com. And now, I'll turn the call over to Tom.

Thanks, Derek. Welcome everyone to our first quarter call. Today, I'll offer our perspectives regarding the high-level performance of our business, general market conditions and our market opportunity. Jarrett will then review our sales results and our progress in supporting an increasing portion of the performance-sensitive needs of our customers. Jeff will then review our financial results for the quarter, and we'll close with Q&A. With that, let's dive in. Our Q1 operating and financial results reflect further execution of our business plan in what we believe is a compelling market opportunity. We believe that a handful of key metrics indicates that our platform is further strengthening in value and that the market is increasingly adopting CoreSite as a key provider to support performance-sensitive applications. First, in Q1, we added more new customers to our platform than during any quarter since going public. Second, we continue to realize solid growth in cross-connect volume, and importantly, we see accelerating cross-connect orders from our more recent customer deployments. Specifically, the number of cross-connects ordered in the first 3 quarters of deployment of new and expansion deployments in 2012 was 32% greater than for new deployments in 2011 and 50% greater than for new deployments in 2010. Third, we believe we have materially increased the number of new and expansion executions for what we identify as strategic deployments, customer applications that we believe disproportionately attract other applications and increase the value of our platform. Specifically, in the most recent 3-quarter period, Q3 '12 through Q1 '13, we executed new and expansion agreements for what we identify as 35 strategic deployments. This compares to 8 such deployments in the 3 quarters prior thereto and 4 in the 3 quarters prior to that. Finally, we are executing what we believe are strategic agreements much more broadly across our portfolio, reflecting the benefits of our vertical sales alignment, enabling our teams to sell across our platform. Specifically, over the 3-quarter period, Q3 '12 through Q1 '13, we executed at least one strategic transaction in each of our 8 primary geographies. Whereas in each of the prior 3-quarter periods, we executed a strategic transaction in only 3 primary geographies. Leading the way in the most recent 3-quarter period with 7 deployments each are New York and Virginia, which includes our facilities in Reston and Washington. Following closely with executions for 5 strategic deployments each are Los Angeles, the Bay Area and Denver. We believe that these metrics point to good things happening across our platform, and most strongly, in the markets where we have our largest development opportunities: New York, Virginia, the Bay Area and Los Angeles. Beyond the specifics associated with our sales and operations in the quarter, we believe that the broader set of market conditions remained substantially unchanged to last quarter, both across the data center industry generally and specific to CoreSite in the performance-sensitive colocation segment of the industry. Looking at our business and our market opportunity from the perspective of customer verticals rather than geographies, we are similarly pleased with the breadth and depth of the progress we are making across our platform. Specifically, we are encouraged with our penetration in Q1 in our network, mobility and cloud verticals, as Jarrett will speak to in more detail in a moment. Finally, I'll take a moment to address the company's near-term growth plans. We believe that our development projects underway and available to be commenced across New York, Virginia, the Bay Area, Boston and Los Angeles provide us with a full plate during 2013 that will result in strong growth this year and in the following years. As such, we are highly focused upon executing our development and sales plans for this year. Meanwhile, we remain vigilant in working to be aware of opportunities to acquire operating companies in North America that are highly aligned with our business model, whether from a geographic or customer vertical perspective. That said, we will remain highly selective as we evaluate external growth opportunities beyond our current 2013 development pipeline. With that, I'll turn it over to Jarrett.

Thanks, Tom. I'd like to start by discussing our sales activity during the quarter. In the first quarter, we executed 42,800 square feet of new and expansion turnkey data center leases, which was 30% above our trailing 4-quarter average. The new leases were well distributed across our 5 verticals with digital content and network verticals growing in all 9 of our markets, while the cloud vertical grew in 5 of our primary markets. We believe our interconnected communities of customers and partners, which we refer to as the CoreSite Mesh, enhance the value of our data centers and differentiate our platform. We remain focused on leveraging the growth within our networking cloud communities, which strengthen the foundation of the CoreSite Mesh in all verticals across our entire platform. Last quarter, we executed 110 new and expansion agreements, with 31% of those closings coming from the network vertical; 30% from the digital content vertical; 22% from the cloud vertical; and the remaining 17% from the enterprise, system integrator and managed services verticals. Our installed base of fiber cross-connects increased by 20% from Q1 2013 over Q1 2012, which includes the Comfluent acquisition. Excluding the Comfluent acquisition, fiber cross-connects grew 13% over the last year. The 42,800 square feet of new and expansion sales bookings in Q1 represents approximately $5.1 million in annualized GAAP rent at a rate of $119 per square foot. This rental rate is below our trailing 4-quarter mean, meaningfully driven by lower power density and a shift in a geographic variations in the sales mix during the past quarter. Specifically, when normalized for power density, our rate in Q1 is $144 per square foot, 15% below the average rate we achieved in 2012. This lower rate in Q1 was predominantly driven by our negotiating and execution of a fixed market agreement with a strategic customer, which includes larger deployments backfilling capacity recently vacated at our as SV2 facility in Milpitas and opening sales in the 102,000-square-foot third floor of our LA2 facility. From a long-term strategic standpoint, we were pleased to close on several key customer wins during the quarter in the network, cloud and digital content verticals. Specifically, we won a significant digital content solution with a network-rich consumer cloud platform where the access points or on ramps for the application will be housed in CoreSite facilities across 6 of our markets. We anticipate that as this new application scales, it will drive significant network traffic and bring additional eyeball networks and cable providers to our data centers. In addition to the new expansion bookings during Q1, over 39,000 square feet of new and expansion leases commenced during the quarter, which had a GAAP rental rate of $161 per square foot, representing $6.3 million in annualized GAAP rent. This represents a 40% increase in commencements over the trailing 12-month average. On renewals, we realized the rental churn rate of 1.1% on approximately 41,000 square feet of space with rent growth of 2% on a cash basis and 21.6% on a GAAP basis. The difference in cash and GAAP rent on renewals relates to a powered-shell lease for 22,000 square feet at our Chicago 1 facility and migration of a digital content application from our LA1 facility to our LA2 facility. Excluding these 2 specific transactions, the cash and GAAP growth rents were 4.4% and 9.4%, respectively. We continue to see more applications in all of our verticals move from in-house solutions to public and private cloud deployments for the scalability, reliability and diverse community of providers. These applications leverage our data centers and choice of 275 networks to improve performance. To capitalize on this shift and further enhance the value of our platform to enterprise-seeking public and private cloud solutions, in Q1 2013, we launched a new product called the Open Cloud Exchange. With this interconnection exchange product, our customers are able to use these on-ramps to the cloud to interconnect with high-performance networking cloud providers and optimize IT architecture. We believe that enhancing our platform with products designed for this new private and public cloud marketplace, paired with a dedicated team to provide these solutions to customers, will enable us to capture market share and realize a return on our investment. Taking a closer look at new and expansion sales during the quarter, we closed 29 new customer logos across all verticals, significantly expanding key communities inside our data centers with over 2/3 of the new customer logos coming from our cloud, network and mobility verticals. We made substantial progress in our network and mobility vertical, executing deals with numerous global network providers, including Chunghwa, Peerless Networks and Teliax. In our cloud vertical, we won 2 expansion deals with InterMedia and Layered Tech, while in our enterprise vertical, we won a significant new private and public cloud deployment with Samsung SDS relative to its IT infrastructure. In addition, today, we are announcing an important strategic network vertical win with XO Communications. XO has announced its expanding its XO-concentric cloud deployments in our cloud-enabled data center campuses at LA1 and Virginia 1 to better serve enterprises wanting to directly connect to their high-performance cloud and network services. Key customer wins during the quarter also included Arista, a leading software-defined cloud networking company and AppNexus, a leader in advertising insertion platforms for mobile applications. These companies are key enablers for the cloud, network and mobile communities. In Q1, we also executed 5 new and expansion agreements in the systems integrator and managed service provider vertical. We also commenced a key channel relationship with SunGard with a deployment to support health care, financial services and retail customers. Customers such as SunGard enable the communities in our data centers to support enterprise customers who may lack the scale and expertise to transition their IT architectures to a new high-performance Wide Area Network in private and public cloud environment. On an operational level, we remain pleased with the progress that our sales team has made. We believe we are on schedule to complete the development of our sales and marketing teams into a fully tenured vertical, go-to-market organization over the course of this year, and we anticipate that we will continue to see improvement in the number and the value of transactions. We believe that our vertically aligned sales force is a key differentiator in our industry and is the most effective way to create and expand the valuable communities within our platform. Additionally, during the quarter, we continued to maintain our commitment to deliver high availability operational performance and to strive for future improvement by investing in technology systems of the highest industry standards. We remain on track to finish our comprehensive IT upgrade by the second half of 2014. With that, I will now turn over the call to Jeff.

Thanks, Jarrett, and hello, everyone. Thank you for joining our first quarter call. I will begin my remarks today by discussing our first quarter results. I will then provide an update regarding our capital investments and our balance sheet and liquidity plans. In the first quarter of 2013, we recorded revenue of $55.1 million, a 16.5% increase over the first quarter of 2012. This represents a slight decline on a sequential quarter basis, driven by inclusion of approximately $1 million in nonrecurring revenue in Q4 '12, as noted on our last call, plus a $600,000 decrease in power revenue. The decrease in power revenue is attributable to a decrease in power draw by our metered power customers and a credit resulting from a customer billing dispute. Our metered power leases provide for a submetered power billing structure. As such, half of the decrease in power revenue was offset by a decrease in power expense. Our Q1 operating revenue consisted of $46.6 million in rental revenue from space and power, $6.6 million from interconnection revenue and $1.9 million from tenant reimbursement and other revenue sources. Our backlog of projected annualized GAAP rent from signed but not yet commenced leases is $9.1 million as of March 31, 2013. We expect approximately 45% of the backlog to commence toward the end of Q2, another 45% in the second half of 2013, substantially weighted towards the fourth quarter and the remaining 10% in mid to late 2014. Moving onto funds from operations. We recorded first quarter FFO per diluted share in unit of $0.41, an increase of 13.9%, or $0.05 per share in unit over the same quarter of the prior year and a decrease of 2.3% or, $0.01 per share in unit on a sequential quarter basis. The decrease in FFO per share in unit from the previous quarter is largely a result of the following. First, inclusion in Q4 of $1 million or $0.02 per share in unit in nonrecurring revenue, as I mentioned a moment ago. Second, additional preferred stock dividends in Q1 being our first full quarter with the preferred stock in place, following our issuance in December 2012, net of the interest expense we would have incurred on our credit facility. This is approximately $1 million greater than Q4 or $0.02 per share in unit. Third, a $300,000 credit we issued to resolve a customer dispute in Q1 offset by additional capitalization of internal lease commissions due to additional clarity around the time incurred by our sales team on successful leasing transactions. The net impact of the foregoing items is a decrease in FFO of approximately $0.04 per diluted share in unit. Excluding those items, FFO per share in Q1 would have increased by $0.03 per diluted share in unit, or 7.5% over Q4 '12. Regarding expenses, G&A expenses were in line with the guidance we gave last quarter. Sales and marketing expenses also increased in line with our expectations. However, due to the small decrease in revenue previously discussed, our ratio of sales and marketing expenses to revenue was 6.9%, slightly above the 5.5% to 6.5% range we communicated on our last call. We expect the ratio of sales and marketing expenses to revenue to normalize within but toward the higher end of our target range as we progress through the remainder of 2013. As of March 31, 2013, our operating data center portfolio was 79.7% occupied. Including leases executed but not commenced, the portfolio was 81.6% leased. As we have discussed in the past, we expect to complete construction of 225,000 square feet of data center capacity or 18.6% of our current operating data center portfolio during 2013 as a result of our strong development pipeline. To help better represent the performance of our operating portfolio, distinct from our pre-stabilized portfolio, we have revised our supplemental to disclose these 2 components of our portfolio separately. The pre-stabilized portfolio consists only of capacity that we placed into service in March 2013 at both SV4 and LA2 as shown on Page 18 of our supplemental. Next, I'll address our development spending. We currently have approximately 275,000 square feet of data center capacity under construction at SV4, SV5, BO1, CH1, NY2, and VA2. We have incurred construction costs of $67 million out of a total estimated cost of $190 million. Presales in the projects currently under construction include 24,000 square feet in BO1 and our 100,000 square-foot build-to-suit project at SV5. Turning to our balance sheet. As discussed on our Q4 call, we amended our credit facility in January to expand its capacity, convert it to unsecured and extend its term to 2017. As of March 31, 2013, we had $52 million outstanding on this facility, leaving $294.5 million of available capacity. When combined with $8.5 million of cash on hand, we ended Q1 with over $300 million of current liquidity. Our ratio of debt to Q1 annualized adjusted EBITDA was 1.1x at March 31, 2013. Including our outstanding preferred stock, our ratio of long-term debt plus preferred stock to annualized adjusted EBITDA was 2.3x at quarter end. We expect our leverage to increase as we complete the capital projects outlined a moment ago. We continue to target a stabilized ratio of debt plus preferred stock to annualized adjusted EBITDA of approximately 4x, though this may vary to support strategic initiatives or as market conditions warrant. Finally, we are reiterating our 2013 guidance of FFO per share in OP unit to a range of $1.72 to $1.82. This guidance assumes a weighted average end-of-year diluted share count of approximately 46.9 million shares in OP units, reflecting continued vesting of outstanding long-term equity incentive awards. This guidance does not account for any additional capital markets activity, property dispositions or investments beyond what we have discussed. With that, we'd like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Tom, could you maybe just elaborate a little bit on the commentary surrounding the potential acquisition opportunities? It sounded as if you were focused on -- you used, I think, the term operating companies, specifically, as opposed to property in North America, and I was just curious what sort of the nature of sort of target sort of opcos might look like?

Sure, Jordan. And it's always delicate to mention any kind of acquisition interest for fear of people running with that. I think the bottom line is there isn't really much to say. We're very focused on building out our data centers and selling them this year. We have a lot of product coming to market that's under development right now. We do pay attention, I guess, is really the message of what might be out there. And I guess, perhaps I might not have even said that last paragraph about acquisitions. But we do pay attention, we stay in the market. I guess the note about operating companies is that there are two ways to think about acquisitions. One is geographic, dots on a map, where else do you want to be. We don't need anything else right now in the markets we're currently in. We have a full plate. So if we were to look hard at something right now, it would probably be more oriented toward something with cash flow in it, because we have a full development pipeline right now for the year. And that's it, there's no more message than that.

Okay. But I guess I was driving at -- it would be something that was cash flowing, but when you say operating, would it be something with sort of a higher technology application or hands-on application?

No. No. Our business model is our business model. Anybody we would want to look at would have to have a business model that's very closely aligned with ours. The message in there was really...

More of a stabilized?

Yes. If we were to do anything into next year, we're not going to go enter 2 more markets with spec development. We have plenty of that, and that's really the message.

Okay. That's helpful. Just as a follow-up. In terms of the rental rate, do you think there was a little bit more color there in Jarrett's commentary on the nature of it, the lower power density and the geographic variation? But then, there was a 6-market agreement as well, and I was just curious -- and then some opening sales in LA. Are these sort of -- these concessions typical of what you've seen in the past? Or are they new and reflective of just the dynamic in the market today?

Jordan, it's Jarrett. These are -- when we look at it, these are opportunities that are really platform deals that we're seeing. In this particular case, it was a consumer platform. What you would see is -- the deals are comprised of rent, power and cross-connects -- and there are some larger deployments that we'd have to support like this. I think we talked about LA2 and SV2. Those assets are where the larger deployments were, and then the on-ramps were across our platforms. So we'd expect -- I think Tom provided color upfront over 2 or 3 quarters or so that will pull through the interconnection piece of the business, and that's typically what you'd see there.

Jordan, I'll add just a little color. I think there were 2 dynamics, predominantly, that drove the lower rental rate per foot in Q1 sales versus the trail. One of those is just power density. And when you normalize for watts per foot, the number is, I think, $144 instead of $119. That's just normalizing for power. That's flat-out math. And then, I think the driver of a $144, which is still -- I don't know -- 15% below the trailing price, plus or minus, is location. We did 25% of our sales in the Q at our SV2 facility in Milipitas where we had a prior tenant leave a larger chunk of space that we've all talked about, left it about a year ago. We're now about 75% re-leased on that capacity, and that is a building in our portfolio that is not network dense. We have -- I would say that asset and the Miami asset, as we've talked in the past, are less strong than our other assets. So that was a big chunk of it. We did a large deal in one of our buildings that wasn't a great asset and price reflects it, but it was a nice backfill. And then the other component of the larger deal was in LA2, which is the Alameda building, where we got 100,000 feet back from a tenant a little bit ago, and we've now opened up leasing in that building with a very low-cost basis. So we were aggressive on pricing on a deal opening up that third floor but still, I think, with very attractive yields on cost. So when I think about managing our investors' capital, we feel very good about Q1.

Our next question comes from the line of Emmanuel Korchman with Citi.

If we look at your lease distribution table in the supplemental and we look at the space 5,000 square feet and below, it looks like the annualized rents in that category have fallen compared to last quarter. Is that just a matter of people taking -- the same users taking larger spaces and kind of moving and within the portfolio? Or is there something more to that?

Yes, Emmanuel. This is Jeff. That's exactly what it is. We actually had a couple of customers through some expansions, ended up moving into a category, I think, into that the 5,000 to 10,000 square-foot category.

So it's just a re-jiggering kind of between buckets more so than anyone trying to wait until...

Correct.

And then, Tom or Jarrett, if we looked at the 6-market lease that we keep talking about, is that already commenced? Or is that going to hurt the commencement numbers in the next 3 to 4 quarters?

Yes, it's going to be ramping up over the course of this year, so it hasn't commenced. It just closed at end of the quarter. So that will phase in over the course of this year, over the next [indiscernible].

And so how much of that is part of the $9.1 million, for the signed, not commenced?

We haven't commenced any of it. Yes, it is a component of that $9.1 million, Manny. I don't think we've given -- we haven't given specific dollar amounts for specific deals.

Our next question comes from the line of David Toti with Cantor Fitzgerald. David Toti - Cantor Fitzgerald & Co., Research Division: Did you mention what proportion of the move-outs in the past quarter that you know of are either building their own facilities or going to the cloud?

I'm not aware of a... David Toti - Cantor Fitzgerald & Co., Research Division: Can you get that kind of information?

Well, the move-outs that build their own facilities are usually much larger deployments. So I guess nothing in the last Q -- that we've talked about a large global social networking company at length over for last year and a half. They moved out of 2 megawatts on 3 quarters ago, plus or minus, and likely consolidated that into a building that they built over the last couple of years. I'm not aware of any other consolidations into fee-owned or user-owned buildings. And then migration to the cloud, I think I might need David and Jarrett to weigh in. I think that happens a lot, right? Enterprises are doing that all the time. It's just so much of the other side of that coin -- the cloud deployment ends back up in multitenant data center.

And to build on that, just a little color, we're announcing and we have the AWS relationship, where they're deployed in our sites and you can directly connect. That is bringing some clients to us. We announced Samsung SDS. They're moving their private cloud near a public cloud, so that is an opportunity for us that they're bringing it into the multitenant centers. And then the XO Concentric announcement, service providers like XO are building up their cloud deployments in our sites to market it. So I think we're getting some -- actually some benefits. It's early days from the private and public cloud deployments.

I'd say on -- in general, I'd say the rate of absorption from our cloud customers significantly exceeds the rate of contraction from an enterprise guy going to a cloud. And then separately, as to user-owned buildings, we just don't have much of those deployments in our portfolio. That's just not our business. David Toti - Cantor Fitzgerald & Co., Research Division: And then maybe touch on this, I might have missed it. Can you talk about -- when you were talking about the acquisition opportunities in transaction markets, did you mention international opportunities and your thoughts? I know we touch base on that every once in a while, but I'm wondering where your head is around international opportunities today.

Well, we're highly focused on North America. We think we have a great opportunity here and a great business to grow. We will pay attention to anything. But I'd say our views toward international investing have not changed at all. We think it's early for us to go try and build a business organically on another continent right now. We have just a tremendous runway in front of us in North America. So something that we would look at abroad would have to be a fairly large, a fairly sizable stabilized business, and there aren't that many of those. And our view, our interest or lack thereof hasn't changed a bit.

Our next question comes from the line of Jonathan Schildkraut with Evercore Partners.

My first question goes back to something in Jarrett's prepared remarks, I think. And I didn't really understand the answer, so I thought I'd just answer the question again. When I look back at your GAAP and cash growth rates upon renewals, they historically have really kind of tracked each other pretty well. In this quarter, we sort of saw a real divergence in terms of those 2 numbers, and I was wondering if you might explain that again. And then I have a follow-up.

Well, Jonathan, yes, there's one in terms of the migration. We saw the power-shelled lease in Chicago for 22,000 square feet and a migration in L.A. from LA1 to LA2. When you correct for those, that does normalize it in the range that we talked about. Cash would go to 4.4%, and GAAP would go to 9.4%. So there were 2 individual deals that affected that, and this is what we'd expected in guiding going forward.

And Jonathan, the big swing or the increase in the variance between GAAP and cash in this Q was because of that powered-shell lease where fundamentally you're rolling an old 10-year deal to a new 10-year deal. So the cash mark-to-market on that could be reasonably small but the gap is very, very big, solely because you're rolling a prior long term to a new long term.

Got it, long-term deals. That makes a lot of sense. All right, great. I was just wondering if you could give us a little color on -- and you mentioned in your prepared remarks, Tom, just that you saw some pretty stable trends. Obviously, you guys are continuing to execute. But as you prepare to move into some bigger facilities and, particularly, in New Jersey, where we're hearing about some pricing weakness, does the way that you approach the competitive entry into that New Jersey market versus, I guess, 32 A of A, does it change at all and what's your approach?

Yes, it's a great question, and it absolutely does change. When -- we are very focused on building value inside our buildings, and that comes from heavily multi-tenanted, multi-customered, lots of different applications that fit together in very specific sets of communities, cloud, mobility, et cetera. That said -- so that is our core business. That said, any time you have a new 280,000 square-foot building, doing 1 or 2 larger wholesale deals to put a little balance in your income statement and just stabilize the asset rapidly, we look more at those opportunities in the early days of a new large build. So in the past, you look at SV4, the Coronado building in the Bay Area, our Reston, building VA1, in the early days of those, we would do a couple of larger deals. And so we are in that market, wherever we have a lot of inventory. And then as you get assets up and running, then you kind of throttle back on your interest in that kind of business. I would say what's different now than in the past, to look at larger wholesale deals, we're still really focused on the customers who will also bring applications that add value to the buildings. Just a generic enterprise server farm that's all wholesale, still not very interesting to us. But sometimes, you see some of the larger content or network guys with 1 or 2 meg requirement that also serve as a nice network anchor. And then the early days of a new build, we do look at those opportunities.

Super. And if I can ask just one last question. I think you guys have really over the last several quarters made tremendous progress towards going after performance-sensitive applications. In a lot of ways, it's just highlighting the value of the asset that you guys have in the way that it should be viewed from the marketplace. As you go through that process, and we have seen some very nice momentum around the repricing of customers who do renew, will there be an impact to churn? This was another low quarter with very low churn. But as we look forward, will we see a give-and-take between churn levels and your ability to really take advantage of the quality of your asset by pricing that space appropriately?

We think that's still a little ways off, Jonathan. I think our most direct comp in the marketplace has managed churn over the last couple of years to get repricing through new applications inside existing capital, and that certainly is something that may happen over time. I think it will probably happen reasonably effortlessly with the 1-meg deal here or the 0.75-meg deal there that 3 years from now probably should go to a different market, frankly. It should go some place with a lot cheaper power. So I think we will, over time, probably organically harvest existing capacity in the portfolio, the higher and better use. I don't think in the immediate term, we're driven toward doing that.

And Jonathan, the only thing I would add is as you did see we were at 1.1% churn this quarter. In our guidance for the year, we did give guidance, basically the same would be 1% to 2% per quarter for 2013.

Our next question comes from the line of Matt Rand with Goldman Sachs.

I might have missed this earlier, but I was hoping you could give a little bit color on -- in New Jersey, the expected cost for your Secaucus development increased by about $20 million versus your last supplement. Can you talk about that a little bit?

Yes, we should have done a better job messaging in the releases this morning, so our apologies for that. But the math is as follows: $18 million out of that $20 million is just a timing shift from later capital to phase 1. You're right, we haven't increased the square footage that we're communicating to be built in phase 1. But by revising the plan, as we've done, we're going to end up getting an extra 3 megawatts of capacity out of the asset. So we'll end up with a 21 critical megs instead of 18. So about a 17% increase in ending capacity in exchange for a 1% increase in total project cost. So it's a pretty good deal. I think -- essentially, we think we're going to go from a prior vision of maybe around $8,500 a kilowatt to closer to $7,500 a kilowatt at stabilization. What's driving that is the asset had a 40,000-foot area that our plan, which was conservative, assumed that we would have to fill all of that with gear. Since acquisition, we've been engaged with the Meadowlands Commission and other entitlement authorities, and we do have a clear read on being able to put more equipment outside the building. So we're going to spend a little bit more money on structural steel. We're going to spend a little bit more money putting things outside the building and creating structural scalability inside the building, and that will enable us to bring an extra 3 megs. And the shift of that is a very small increase in total project cost but a meaningful shift from later phases to the first phase.

Okay, I appreciate that. And then on that facility, can you talk a little bit about the proximity to Equinix's assets? Does that help you from a competitive perspective?

Well, we think -- we certainly select our sites to be in a position to drive network density, cloud density and communities of interest from our customers. We think that the center of gravity for the financial ecosystem shifted from Manhattan to Secaucus in the post-911 era, and that shift to Secaucus certainly had something to do with our decision to locate where we did. We also see a meaningful pressure from the cloud and content communities off of Manhattan to New Jersey priced power. But especially when -- in the content verticals, when it has -- when an application needs mobile support, mobility support, which increasingly they all do, that shift out of Manhattan needs to be in a location still with great latency over to Manhattan, where the eyeballs are, where the users are and the mobile devices. And so Secaucus, yes, it has the financial vertical, which is appealing. And it has great network access, a lot of network, so you get great network choice and tremendous low latency back to serve mobility, cloud and networks into Manhattan. So all of that factored into the location decision.

Okay, that's helpful. Then finally, I'm interested in this 6 market agreements you had with a single customer. It seems like based on some of the cloud deployments, you're doing more and more of these with one customer in multiple locations. Can you tell me how a typical negotiation goes over that or how you look at pricing across the different markets?

I think it's really -- we put together a platform deal. It is still market by market. It has to be competitive. But the benefit, we're seeing more opportunities like cloud. We have 5 markets that we're scaling in our campuses, where we're serving the cloud community. The digital content and network are growing 9 markets. So we definitely had a West Coast bias in a couple of markets like Virginia, where we're consistently seeing 5 to 9 market opportunities. So you do have to compete a bit with local. But it does give us some price stability, and the benefit is really around increasingly the value of interconnection and in connecting to the cloud providers. And these on-ramps are more and more strategic for us. And again, those -- we're providing those as 5 to 9 markets at a time.

And I'd add, I think our expectation is to see a meaningful shift in product mix surrounding these multi-market agreements. And specifically, they do have a little bit lower rent going in. But by definition, if you're looking at a 6 or 7 or 9 market agreement, what -- when we're very interested in most types of opportunities is when they're supporting customer applications, they're going to drive traffic. So the one we did this time is a significant customer cloud, end-user content application that we believe is, number one, going to attract some networks to some buildings, some assets we'd like to add more networks to; and number two, will drive a lot of disproportionate number of cross-connects. And so we do price rent lower not to give it away, but I think the market is more aggressive on rent to land deals that the market believes are going to drive significant [indiscernible] and cross-connect margin. And that's -- those are the same set of decisions we've been making for 13 years. We used to make those decisions on a one-off basis at LA1 or D.C. or NY1. We're now very fortunate to be able to make the same decisions to land network anchors in a greater number of markets and populate more and more of our buildings and our platforms with these kinds of apps. So yes, the rents are lower, and our visibility into cross-connect growth around different apps is pretty good. And we think that the total economics of these deals remains highly attractive.

Okay, great. And are you able to sort of get less attractive geographies leased-up as a result of packaging them into these deals? Or is that not as much a factor?

No, I think it is. The metric I gave in my prepared remarks was 1 year ago and 1.5 years ago, we might get 3 nice deployments, deployments that we think add value to the buildings. We got 8 a year ago. We had 4 1.5 years ago. And those numbers correlated to 3 markets in each of those time periods. On the most recent 3-quarter trail, we got 35 of them. We got at least 1 in every single building. We got 7 in New York and Virginia. We got 5 in the Bay Area and Denver and New York -- or yes, L.A. So yes, absolutely, we're seeing a much greater number of these apps and much better distribution across the portfolio, and we wouldn't have gotten those in some of our less powerful buildings without selling to the platform. And I think you're seeing that the platform sale being able to lift the entire value of the whole platform, the whole portfolio. And it takes time, right, but, I mean, the early returns to us are very positive.

Our next question comes from the line of Dave Rodgers with Baird. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: Yes, Tom, I guess following up on the comments on strategic transaction that you've talked about. Is there a point in time when taking Secaucus out of the equation, that this begin to abate and that we don't see maybe some of the pressure on the rental rates? I guess with that, can you provide some color on the average lease lengths that you've been signing for some of these more strategic customers?

No, I think they -- our interest in doing wholesale deals declines really as each asset fills up. So I would expect, Dave, the dynamic to continue. Whenever we deliver a very large slug of inventory in any market, we'll probably still look to move a little bit of it faster in the early days. So it will decline somewhat as the portfolio strengthens. But you still sell based on your inventory, and when you have a lot, you sell more aggressively. And what's the second half of your question? I apologize, I'm sorry.

I think -- the question on the term, Dave, I think, was your second question. On the term for the quarter, it was right in line with what we've said historically, on average 3 to 4 years overall. And we were just on the low end of that this quarter on a combined basis with everything.

Yes. And to frame it, in Q1, the "larger strategic transactions" without great pricing, I think one of them was 300 kilowatts and one was 350. Those are the biggest deals we did. So they're not earthshaking deals. And so on a deal that size, you'll still see a colocation-type term. But if we were going to do 2 or 3 megawatts, number one, the customers want 5s and 10s. And we're certainly willing to do so those on those kinds of deals. I just think, for lack of a better way to put it, Dave, the market is the market and a 300-kilowatt deal is often still a 3- or 5-year deal, and a multi-megawatt deal is still probably a 10-year deal. And we're a normal company that meets the market. David B. Rodgers - Robert W. Baird & Co. Incorporated, Research Division: And I guess just following up on the development pipeline, you have 3 developments coming online. It looks pretty close at least, given the dollar spent to date, Boston, Chicago and then another round at SV4. Maybe talk about some early traffic or demands there that give you some confidence in some initial leasing getting done there.

You want to take it?

Yes, we are -- in a couple of these, you have seen some movement in New York. We're continuing to presell the networks and the cloud deployments. In Boston, we had some movement with a system integrator partner and a magnet in the digital content that is commencing now. So you're seeing some movement there. And the pipeline is growing roughly 25% across our portfolio each quarter. So we are seeing movement in Boston. In Chicago, frankly, the vertical piece is a little bit surprising. We just want to -- we have another digital content, network-oriented asset that's commenced there, but we've been a little slower there as we've moved to a vertical sales force. But the funnel is growing in Chicago. We have moved the needle in a few financial service clients. In fact, 7 of the top 7 deals in the financial services is vertical, as we've hired up. But we're continuing to focus on Chicago and expect to grow that with this digital content and the network community coming in there.

Dave, just one other piece of color for you. In the supplemental for that Boston project that completes here in the second quarter, we have footnoted that, but it is 100% leased at this time. And that will come online here next quarter.

So Boston's sold. The Bay Area, SV4, it's just pretty consistent singles and doubles. It's just more inventory for the building. There is a [indiscernible] that -- and there are a couple -- that a couple of different customers have on those buildings that may or may not get triggered. We want to be prepared in case they are, and we'll have visibility around that over the next few months. So that asset is really -- we just keep delivering inventory kind of in pace as we sell it or as we think we might. And as Jarrett said, I think Chicago's been frankly slower than we anticipated, and there you go.

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

Yes. So on a general basis, which markets in which you operate have you seen the greatest absorption overall? And then conversely, in which markets have you seen the greatest amount of competitive supply come on?

Well, in, Jon, what kind of time frame? If we look at Q1, we frankly sold the most volume in L.A. and the second most in the Bay Area. But in general...

This is more of from an industry standpoint. We know where you sold. But as you look at the overall sector and the competitive set, which markets do you think it seem that the most absorption, including yourselves but not limited to?

Well, it's really kind of the same. I haven't seen a huge change. You still see Virginia and the Bay Area as the biggest absorption markets. I do think Secaucus -- infill New Jersey has continued to do very, very well. But it doesn't absorb as much as a 30- or 25-meg annual megawatt market like the Bay Area or Virginia. Those markets are still absorbing. I think that our view is that competition or supply in the Bay Area has somewhat leveled out. That market has troughed. We don't see it rebounding briskly in the near term, but we think it's troughed. And we think Virginia is -- probably has a little bit further to go in terms of towards its trough. There's a lot of supply there. And we're building a shell in our VA2 development, but we're only going to build 1 of 4 floors of data center precisely for that reason. We're going to stick to our co-lo business. So I don't know if that helps. I guess we'd also say, we certainly get a lot of information from the marketplace that Chicago is doing very, very well. And you know, once again, Chicago had a great party and we weren't invited. And we're going to get in to that party by hook or by crook, but that's a little bit more market commentary for you.

And in the 6 market strategic customer, are you having kind of preselling discussions with other customers as a result of that magnet customer coming on board? Or are we getting ahead of ourselves that we need to see them take occupancy before you start to see some beneficial flow-through impacts?

Yes, we're talking to the community right now, Jon, and laying out, particularly the eyeball networks and the cable providers. And under NDA, we can share what's doing on there in the application. And those are the kind of things that we're looking to pull through other folks.

Our next question comes from the line of Tayo Okusanya with Jefferies. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Just trying to understand a little bit more what's going on with pricing. So the explanations you give for your price there in the quarter, when you adjust for the power density, you get to the $144. And then the $144 is 15% to 20% lower than where you've historically been because of some of the strategic deals that you did in this quarter. Am I to assume then that pricing generally in the market has been stable? Is that the message you're trying to get across to people? Or you just kind of had this unique thing happen during the quarter.

I guess the core message is pricing for the -- really kind of regular co-lo, I think, has been stable. I think pricing for performance-sensitive, I think there's still kind of steady 3% growth in that business. We did a deal that had 300 to 400 kilowatts in each of 2 locations, where we were very aggressive on pricing to backfill one chunk of old inventory in a building that is not one of our stronger buildings, and then the pop open the old Sprint floor at 900 Alameda. I think beyond that, our view of pricing, our core business is business as usual. And it's just one of those anomalous quarters of -- we didn't been sign deals in our stronger buildings, and a couple of the larger deals we signed were just not dense with regard to power. So the square footage number came out low. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Got it. Okay, that's helpful. And then now that you kind of backfilled kind of like the Milpitas space, which is the largest of your empty spaces from a client move-out. I mean, are there any more kind of large spaces that you could still have to be aggressive pricing-wise to fill over the next few quarters x your development coming online?

Yes, I don't have that -- I think Jarrett and I talk about all the time, there isn't anywhere else we're saying, "You know what, it's time just to move that merchandise. Whatever the clearing price is in the market, let's shrug our shoulders and just take it and fill it." There isn't anywhere right now that we're saying that to ourselves like, "If the clearing price for a 1-meg deal in Virginia or the Bay Area is a bad clearing price, let's pass on those large deals and just keep doing what we're doing." So that's where our mindset is. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Okay, that's helpful. And then on the Milpitas deal, I know you were aggressive on the pricing, I know you didn't mention that cost base on that building is pretty low. So what kind of yields are you achieving just on that lead in that kind of 12% to 15% range?

Well, I think the yield on both the locations where we put on each individually and assets in aggregate, that the yields are comfortably above our 12% hurdle.

Our next question comes from the line of John Stewart with Green Street Advisors.

This is Eric Franco [ph] here with John Stewart. Could you just discuss what the GAAP backlog of $9.1 million? How does that translate on a cash basis over the next 12 months, call it?

You said on a cash basis, what's the backlog? It's about $12.5 million as compared to the $9.1 million from a GAAP perspective. In terms of trending, I think we said in our prepared remarks that about 90% of the GAAP amount ends up commencing during 2013, some in Q2 and then back ended in Q4. From a cash perspective, that's a little lower than that. I don't have the number right at the top of my head, but it's -- my recollection is it's probably somewhere around 65% rather than the 90%.

And I'm assuming most of that is already incorporated in the operating portfolio versus the development pipeline. Am I right in that assumption?

Yes, it is.

The next question, just regarding future acquisitions. I know it's pretty speculative. But if you ever saw any attractive acquisition opportunity, just curious, given your pretty healthy balance sheet, just in terms of funding, how would you decide to think about your capital structure in terms of -- you seem to have a lot of variety of fundings at your disposal, including common stock of your -- the preferred market's certainly open to you and your recap lines. Just curious to get your thoughts on what seems attractive at this point.

Yes, it's a great question, Eric. I think when we look at currency related to some type of a strategic deal, as Tom alluded to earlier, I think bottom line is we do like having the dry powder that we have today. So from that standpoint, we like continuing to operate at that low leverage. But we look at our means of currency anywhere from whether it's the common stock, the preferred stock or some type of unsecured debt issuance. And ultimately, it's going to vary based upon the size of some type of a deal if we were to get something done and the timing and what that looks like from a pricing standpoint. I think all of those factor into ultimately what we would use. But I think size will play a big part in that. I think as we've said earlier, when we have a target of debt to preferred stock ratio of the call it somewhere around 4x...

Net debt plus preferred to adjusted EBITDA.

Yes, I'm sorry, debt plus the preferred to the EBITDA ratio of roughly 4x. We said we would go higher for that on the strategic deal, but that gives you some level of idea how large the deals would be before we would have to start looking at other means to finance that besides just debt and preferred stock.

Yes, I think in terms of product mix, Jeff and I have talked about it really over the last week or so that -- I think you'll see us try to maintain a fairly staggered roll of maturities. We just did a perpetual with the 7 handle. We have a bunch of very short-term stuff that will be ramping up on our line of credit. If there's been some price talk that maybe we can do a 7- or 10-year bond, a 7- or 10-year paper with a 5 handle, somewhere in the 5s. So that might be an interesting layer in the stack, but we don't need that yet. The pricing off the line is incredibly attractive. So you'll see our line run up some and then we'll take a look at how to term it out. Since we just did a preferred, we may look at 7- to 10-year paper, but we may go back to preferred if it's -- let's say the preferred comes inside of 6. We might look at that. So but I think in general, you'll see us stagger our maturities, and that will show up in a couple of different tranches of pricing. And as to which one we hit at any given time, we're just going to pick the best thing at the moment.

Ladies and gentlemen, there are no further questions at this time. I would like turn to the floor back over to management for closing comments.

Thank you. Our view is that the Q1 is another good step as we execute the business plan. I guess, I've thought of it a little bit as -- it's a very solid base hit right through the GAAP, probably moved a guy from first to second. We didn't get a revi in the Q, but it was a nice at back, good, solid. And we continue to play our game. The team here, we're here to manufacture runs and win a championship, and we're not going to be happy with anything else. And we think we're on track to go make that happen. We're very happy at how our customers are responding to what we're doing in the market. We think the market opportunity remains very strong. We think our momentum in grabbing the kinds of business that we want to grab is accelerating very well. We're just trying to build value in our business. So we appreciate the trust our customers put in us. We very much appreciate the hard work of our people, and we are thankful for the support of our shareholders. We are going to just keep working hard to deliver strong returns. So thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.