Earnings Labs

Cencora, Inc. (COR)

Q3 2013 Earnings Call· Thu, Oct 31, 2013

$312.31

+0.10%

Key Takeaways · AI generated
AI summary not yet generated for this transcript. Generation in progress for older transcripts; check back soon, or browse the full transcript below.

Same-Day

+1.61%

1 Week

+2.14%

1 Month

+8.02%

vs S&P

+5.77%

Transcript

Operator

Operator

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

Derek McCandless

Analyst

Thank you. Hello, everyone, and welcome to our third quarter 2013 conference call. I'm 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 or future expectations. These forward-looking statements reflect current views and expectations, which are based on currently available information and management's judgment. We assume no obligation to update these forward-looking statements, and we can give no assurance that the expectations will be attained. Actual results may differ materially from those described in the forward-looking statements and may be affected by a variety of risks and uncertainties, including those set forth in our SEC filings. Also, on this conference call, we refer to certain non-GAAP financial measures such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of the full earnings release, which can be accessed on the Investor Relations pages of our website at coresite.com. And now, I will turn the call over to Tom.

Thomas M. Ray

Analyst · Citi

Good morning, and welcome to our third quarter earnings call. Today, I'll begin by discussing key highlights of our financial results, as well as current market dynamics and our outlook regarding growth. Jarrett will then provide a more in-depth review of our sales results for the third quarter and update you on our performance and targeted verticals in geographies. Jeff will then present a detailed overview of our financial results, balance sheet position and update 2013 guidance. Our third quarter financial results reflect continued execution of our business plan. Top line growth continues to be steady, and earnings growth remains robust. Specifically, total revenue increased 5% sequentially and 13% year-over-year, while adjusted EBITDA and FFO both increased 17% year-over-year. Revenue performance year-to-date has been near the low end of our guidance, driven by a favorable mix of continued strong growth in our more profitable revenue line such as interconnection and breakered power, offset to some extent by a deceleration in revenue growth from metered power, which does not contribute materially to gross margin. Specifically, in the third quarter, interconnection revenue grew 6% from the second quarter and 20% year-over-year. Revenue from sales of breakered power grew 9% sequentially and 25% year-over-year. And rental revenue increased 3% sequentially and 12% year-over-year. Regarding new and expansion TKD sales in the quarter, annualized GAAP rental revenue signed of $4 million reflects a 25% decrease from the trailing 12-month average of $5.3 million. We attribute this to the fact that we did not sign any leases exceeding 5,000 square feet in the quarter. We ascribe this to normal lumpiness in the execution of larger transactions. In fact, we saw a meaningful number of larger opportunities in our funnel at the beginning of the third quarter, many of which we targeted to close in the…

Jarrett Appleby

Analyst · Citi

Thanks, Tom, and hello, everyone. I'd like to start by discussing in more detail our sales activity during the quarter. In the third quarter, we executed 106 new and expansion turnkey data center leases, representing $4 million of annualized GAAP rent with an average rent of $170 per net rentable square foot. In addition, we added 21 new customer logos in the third quarter. And year-to-date, we have signed a total of 87 new customers, which is an increase of 9% over the first 9 months of 2012. Growth in multisite deployments continued in the third quarter, reaching a record 44 new and expansion leases signed with customers deploying in more than one location. This represents a 50% increase over the trailing 12-month average, which we believe is attributable to our vertical sales model and the investments in our sales and marketing staff embarked upon a year ago. Importantly, with 106 leases signed in the quarter, we continue to see strong transactional volume, the cornerstone to our effort to increase sales, supporting a more favorable product mix of cross-connections and power and the breakered-amp pricing model relative to base rent. Sales closed in the third quarter reflect and reinforce our strategy of building customer community in network-dense, cloud-enabled data centers supporting performance-sensitive applications. The networking cloud verticals drove the majority of our sales in Q3, representing 39% and 28%, respectively, of the leases signed. This dynamic further supports our strategy of creating high-value points of interconnection and supporting the best environment for our customers to maximize their growth. With our focus on the networking cloud verticals, we are also seeing a direct correlation in the growth in interconnection as an 18% year-over-year growth in fiber cross-connects. Our growing network density and diversity across our data center platform is one of…

Jeffrey S. Finnin

Analyst · Citi

Thanks, Jarrett, and hello, everyone. Thank you for joining our third quarter call. I'll begin my remarks today by reviewing our Q3 financial results. Second, I will provide an update regarding our capital investments and our balance sheet and liquidity capacity. And third, I will update our guidance for the year. In the third quarter of 2013, we recorded revenue of $60.6 million, a 5.1% increase on a sequential quarter basis and a 12.8% increase over the third quarter of 2012. Year-over-year revenue growth in the third quarter was diluted to some extent by our whole building customer at SV3 reducing its power draw. Partly driven by this, our revenue from the sale of metered power declined 3% year-over-year. Our Q3 operating revenue consisted of $51.3 million in rental revenue from space and power, an increase of 5.3% as compared to Q2; $7.4 million from interconnection revenue, an increase of 5.5% over Q2; and $1.9 million from tenant reimbursement and other sources. As Tom and Jarrett both mentioned, we are pleased to see continued strong interconnection revenue growth and a shift in our mix as this product line has grown as a percentage of sales by nearly 80 basis points compared to the same quarter a year ago. Q3 commencements were strong, with leases representing $6.7 million of annualized GAAP revenue comprised of approximately 37,000 square feet, a GAAP rate of $180 per square foot. Performance on renewals in the third -- in the quarter was mixed, with solid cash and GAAP mark-to-market growth of 6.6% and 10.7%, respectively, but higher than average churn of 2.7%, bringing our year-to-date churn to an average of 2% per quarter at the higher end of our guidance range of 1% to 2% per quarter. Our backlog of projected annualized GAAP rent from signed…

Operator

Operator

[Operator Instructions] Our first question is from Emmanuel Korchman of Citi

Emmanuel Korchman

Analyst · Citi

Jarrett, maybe you could go back to your comment earlier about some attrition from the sales force, and now you're trying to replace heads. Could you give us some more color as to what might have happened? Was it performance-driven? Was it that they felt like the product mix was wrong? Sort of give us some color as to why those people are no longer with you.

Jarrett Appleby

Analyst · Citi

First of all, thanks for the question. First of all, you would expect some normal churn in the sales organization tied to performance and opportunities or both, so this is built into our plan. We did ramp up the team. We wanted to provide some additional color for you on this call in terms of where we are in getting tenured reps and ramping up the sales engine. This is in the range of what we would normally expect based on performance or opportunities in the business.

Emmanuel Korchman

Analyst · Citi

And then, Jarrett, we'll stick with you for a second. On the NY1 occupancy drop, you mentioned that it was a large wholesale customer that had moved out. But it looks like it was an outsized portion of the rental income versus how much space was given up, which doesn't seem to sort of jive with the idea of a large wholesale customer moving out. Could you help me reconcile that?

Jarrett Appleby

Analyst · Citi

Well, there's 2 components to it. On the rent side, again, we are -- the types of performance-oriented deployments that we're selling now include rent, power and cross-connect. So if you look at it from a rent side, yes, they were our larger opportunity in the hosting provider. When they approached us, we did not have the NY2 solution available in Secaucus, so we weren't able to serve both the network performance side and the larger power side of that business. So we decided to move to New Jersey. In terms of the rate, we did see -- and we are replacing those types of solutions with performance-oriented applications that include rent, power and cross-connect in total.

Thomas M. Ray

Analyst · Citi

So Manny, if you look at our churn in the Q, and the move-out in NY1 was a meaningful component, there were 3 deals that moved out that represent about 2/3 of all the churn. And as we look at rent margin on power and cross-connect revenue, the sum of those revenue and profit streams with regard to power, some of those, for the trailing 12 months that we've achieved in the 3 buildings that these 3 moved out of, the trailing 12 was 59% greater than the rent, power profit and cross-connect revenue that moved out. So as to rent, 3, 4 years ago in NY1 when we signed this customer on a rent only model, that rent has moved out, and it was a reasonable rent. It was, in terms of profitability, substantially below what we've been achieving in the trailing 12 months in each building where these deals moved out. So hopefully, that gives some color around the churn.

Emmanuel Korchman

Analyst · Citi

And Jeff, just finally, on your point on the total operating revenue guidance coming down for '13, I think you mentioned that there was a 1% to 2% impact, sort of -- and maybe I missed on what that item actually was, but it doesn't get me to number that's below the range, it gets me to the bottom end of the range. So what else am I missing in that number?

Jeffrey S. Finnin

Analyst · Citi

Yes, Manny. Just picking up from where we left off last call, the guidance range that we gave in connection with Q2 was we guided towards the lower end of that revenue range -- of the original revenue guidance range, which was $237 million to $247 million. What I mentioned in my prepared remarks and is consistent with what we saw in the second quarter is that our customer at SV3, the revenue associated with their power revenue has decreased and -- which is on a metered power basis. We essentially said that the impact, the revenue impact from that particular decrease in draw was about 1% to 2% of our overall revenue. Well, ballpark, call it about $3 million.

Thomas M. Ray

Analyst · Citi

Jeff, I think puts you at the low end of revenue guidance.

Emmanuel Korchman

Analyst · Citi

So that's 1% to 2% impact, and you're already at the low end rather at the midpoint.

Jeffrey S. Finnin

Analyst · Citi

That's correct.

Emmanuel Korchman

Analyst · Citi

So you get -- so you're $3 million effectively below the low end.

Thomas M. Ray

Analyst · Citi

No, we can give it a new range. But that revenue negative variance on metered power from a single building customer puts you at the low end of the range from what Jeff said at Q2.

Operator

Operator

[Operator Instructions] And the next question is from Jonathan Atkin with RBC.

Jonathan Atkin

Analyst · RBC

Just a brief follow-up on the topic of power deal. So the deals that you're signing now and the deals kind of in the pipeline, what would be the way to characterize the mix of metered versus breakered-amp?

Thomas M. Ray

Analyst · RBC

Well, Jon, throughout the year, that mix has been increasing, filtered toward breakered-amp. And we've been disclosing the growth rate around sales of breakered power so that -- there's been clearly an increase in that, and it's been material. I think the deals signed in Q3 -- you have a significantly greater portion that was breakered than on our trail -- because we didn't sign any big deals in Q3. That was just a big deal lumpy quarter, and that's that. But across the year, the signings on the breakered model have grown substantially. And we will just encourage people to look to the growth rates and revenue from the sale of breakered-amp power that we've been disclosing to get a read on that trajectory.

Jonathan Atkin

Analyst · RBC

Great. And then my question then on the rates of interconnection growth. Is there anything to suggest that it would deviate from kind of recent growth rates in terms of just the actual dollar volume of growth quarter-on-quarter? And then you said it would moderate or accelerate as you are -- if you have the LINX -- that relationship out of VA1 and then the other kind of European exchanges. On a broader scale, I think Open IX is coming into a site elsewhere in the Virginia markets. I'm just wondering if you can kind talk about the dynamics around that topic of interconnect.

Thomas M. Ray

Analyst · RBC

You bet, Jon. I think there are 2 dynamics at play inside our interconnection revenue. One is we had a big, meaningful price increase that we implemented about a 1.5 years ago, plus or minus, so that led to a significant jump at that point in time. And I think you could pretty well see that over 1 to 2 quarter basis -- 1 to 2 quarter period. Since then, we had still consistent growth, and most of that growth is backed by or is driven by increases in volume. So we're working hard to make sure that the investment community understands, not only the trailing increase in revenue, but also the trailing increase in cross-connect volume. And over time, you should think that maybe you get a small increase in pricing, a colo-based cost of living, a 3%, plus or minus, increase in pricing over time, all of these being equal. And the rest of your growth rate and revenues are going to correlate to growth in volume. That's over time. In the near term, we believe our embedded cross-connect base still has greater than a 3% upside versus the market. And so we think there's still some running room there. And I don't expect the Open IX initiative to materially change that in the near term. So I hope that helps.

Operator

Operator

The next question is from Jordan Sadler of KeyBanc Capital Markets.

Jordan Sadler

Analyst · KeyBanc Capital Markets

I wanted to see if you could expand a little bit on the pipeline. I think, Tom, in your prepared commentary, you mentioned that there were some larger tenants that you expected to sign during the quarter that ended up still in the mix at the end of the quarter. If you could sort of maybe characterize them, what kind of -- and give us a sense of scale in terms of what the pipeline actually looks like or the funnel, I think, as you described it.

Jarrett Appleby

Analyst · KeyBanc Capital Markets

Well, Jordan, I didn't think we disclosed post quarter that we did sign additional leases in NY2, for example. So those were deals that are fully closed in Q3 that did close in Q4 in the prepared remarks. So we've seen some of those larger deals delay in that new site, and we shared that script here. We do see continued growth. The larger deals...

Jordan Sadler

Analyst · KeyBanc Capital Markets

So that 8,000 square feet of leases, that was the sort of larger, lumpier one that you were sort of referring to?

Jarrett Appleby

Analyst · KeyBanc Capital Markets

In the total, yes, there was the larger, lumpier one there. So that did not close in the quarter, but it did post quarter, saw it at NY2. We do see a lumpy Q3 for some reason. That seems to be the larger deals don't seem to get as close as -- and they're -- that many of those have moved into -- most of those have moved into Q4.

Jordan Sadler

Analyst · KeyBanc Capital Markets

Is there anything going on in particular in the enterprise or system integrator verticals that are causing them to sort of come in below expectations?

Jarrett Appleby

Analyst · KeyBanc Capital Markets

It's really deal-dependent. Several are related to government -- a couple of them are government-related. They just got delayed in terms of funding, again, with the federal shutdown, and some of those opportunities are already in Q4. Largely, I think those are deals dependent on end users, so we don't have direct input. And it was a big shift that you see us doing. And we balanced out both the vertical, which we're getting great success on networking cloud vertical, and digital content, to start going a little more direct with the geographic enterprise focus. So we're doing both there to get more control and manage that to move away from some the system-integrated dependencies on end-user deals.

Jordan Sadler

Analyst · KeyBanc Capital Markets

That's helpful. And Jeff, did you have a cash backlog?

Jeffrey S. Finnin

Analyst · KeyBanc Capital Markets

Let me get that for you here before the end of the call, Jordan. I don’t have it right off top of my head.

Operator

Operator

The next question is from Stephen Douglas of Bank of America Merrill Lynch.

Stephen W. Douglas

Analyst · Bank of America Merrill Lynch

Two, if I could. I guess -- I mean, you mentioned the international customer wins that you got. And I'm wondering how big of a factor your cross-selling agreement with interaction was there. And then second, one of the questions we got a lot is about whether cloud is actually a good thing for your business. And I guess, I'm wondering if you're seeing any kind of uptick in interest from specifically the enterprise segment as a function of having the multiple customer wins in the cloud vertical that you've mentioned.

Jarrett Appleby

Analyst · Bank of America Merrill Lynch

Well, in terms of the global business, Stephen -- we are seeing -- we've been spending more time directly, not really with interaction or -- it's really direct relationships we have with NTTs and BICS of the world. We are spending more time, ourselves, in Europe and Asia directly with the network providers they deploy here. And we're excited because they are choosing us and our sites to provide alternatives in new -- North American markets, and they're bringing larger deployment like the NTT example, that we use here. So that is a direct relationship and focus on the network side. And on the cloud side, we do see, again, benefits with these cloud service providers, the infrastructure and service providers to enterprises, and we see continued focus and growth. We went -- last year, we had a -- last quarter, we had a great quarter with 65 networking cloud deployments. Now with 71 this quarter. So we are absolutely targeting those networks in cloud where we believe the enterprises will want to connect. And they're setting up their service offerings in these sites across our platform.

Operator

Operator

The next question is from Dave Rodgers of Robert W. Baird.

David B. Rodgers

Analyst · Robert W. Baird

Maybe Tom or Jarrett, earlier in the year, we talked about a lot of strategic customer signings, just a couple in particular that were fairly large, but brought the rate down as they became a little more high-profile. Can you talk about the deployment of those customers? Are they on track? And kind of how far along they are in their deployment? And the second part of that would be, relative to your expectations, how far along with the ancillary demand from the strategic deployments be at this point in time?

Jarrett Appleby

Analyst · Robert W. Baird

Well, you are seeing here the commencement data that we are deploying, and some of the larger and smaller deployments are going on, on a timely basis. The largest opportunity that we mentioned, I think, Jeff talked about in terms of the power with scale over the course of 2014 timeline, the very large ones do take larger time to deploy. The smaller opportunities and leases that we're signing and the midsized are coming in on a timely basis. And you can see that in the commencement data that we're providing.

David B. Rodgers

Analyst · Robert W. Baird

And maybe then just a follow-up for Jeff, going back to your capitalization policies and kind of the guidance, maybe you're trying to kind of lead us to for the first half of '14. It sounds like day 1 completion of the development, all the OpEx is going to come on regardless of the occupied or lease percentage of those assets. I just wanted to expand on that a little bit in terms of what is the expected timing on some of the big -- I guess, your kind of big 3 developments are out there, big money drivers, in terms the uptake of that space? And how we should be thinking about that dilution on a monetary amount basis in the first half of next year?

Jeffrey S. Finnin

Analyst · Robert W. Baird

Yes, Dave. Appreciate the question. Just let me dive into this because I think it is important to make sure people understand the amounts around it. And some of it is provided in the supplemental, and some of it is not. But let me just dive through the components. As you look at development, obviously, you've got capitalized interest, taxes and insurance. On Page 20 of our supplemental, you can currently see how much we've capitalized in interest year-to-date, which is about $3 million. On an annualized basis, it would equate out about $4 million. That equals about 60% of our year-to-date interest expense. So I think the best way to think about capitalized interest is if we were at 60% of it being capitalized year-to-date in 2013, we would expect that to moderate in 2014 as those developments complete and start to come online. And I think a better range would probably be somewhere in the 40% to 50% range rather than 60%. The other component of that is taxes and insurance. So the smaller amount -- and we don't typically disclose it, but just to give you some context, year-to-date, we've capitalized about $1.2 million through September. On an annualized basis, that's about $1.6 million. You would expect to be about a 50% reduction in that amount in 2014, given the timing of those developments coming online and what else might be in the pipeline in 2014. The third component, Dave, you didn't specifically ask, but let me touch on it because we -- it was categorized in those comments, and it's around some of our IT development and expenditures. As we've disclosed in the past, we are incurring some development dollars associated with our IT systems. And year-to-date, we've capped about $1 million of those costs through September 30 on an annualized basis. That's about $1.3 million. As we've said in our prepared remarks, we expect a development of that IT initiative to substantially be completed by, call it early Q2. And as a result, there'll be some development subsequent to that point, but we would expect those dollars also to decrease by about 50% in 2014.

Thomas M. Ray

Analyst · Robert W. Baird

You would expect some degree of that capitalization to put forward to expense.

Jeffrey S. Finnin

Analyst · Robert W. Baird

Right, yes. Does that help, Dave?

David B. Rodgers

Analyst · Robert W. Baird

It does on the expense side. And then with regard to revenues, anything that wasn't in your prepared comments that we should be thinking about in terms of the uptake of this space relative to the expenses coming on?

Jeffrey S. Finnin

Analyst · Robert W. Baird

Yes, that's a great -- I think -- we typically model our stabilization period when we deliver space over about a 24-month period of time. And I think that's been fairly consistent. At times, we beat it. But I think that's a fairly good way to look at it in terms of the space that's being delivered. As we said in the prepared remarks, on NY2, we expect to bring on one of those computer rooms in December. The other 2 in early Q1, and so that gives you some idea on the timing of that particular development.

Thomas M. Ray

Analyst · Robert W. Baird

Dave, let me touch on this dynamic at a higher level for a moment. I think that our business is -- spans the spectrum, as we all talked about quite some time. We do smaller deals. We're very well practiced at them, and we have a good internal sales engine to execute them. That sales engine, frankly, is a little bit behind in terms of staffing and resource capability right now than we'd hoped. Q3 was kind of a one step forward, one step back quarter in terms of staffing, and we'll get over that. But we have that capability, and separately, we're practiced, if you will, wholesale guys. In Q3 and really in Q2 as well, you saw less wholesale sales at CoreSite. We have 2 big development projects coming online. We have NY1 coming at the end of this year, and VA2 coming in, in the middle of next year. And we just look at those, really, on an IRR basis. And there's some level of that inventory that's coming to market that we believe is smart to sell back into the wholesale funnel or just trying to give the Street a heads-up around that. And the reason we believe that is the incremental return on the incremental cost of developing new kilowatts inside this core foreign shelf that we just completed is fantastic. It's not as good as what we can do with that capacity over the long haul, but if, let's say, NY2 was little over 20-megawatt building, rather than systematically working through the whole thing with performance-sensitive colocation, we're going to drive the transaction engines steady and consistently, and we feel like that, that engine and its profitability in terms of breakered power and cross connections is accelerating. And we will work to go do…

Operator

Operator

The next question is from Tayo Okusanya of Jefferies & Company.

Omotayo T. Okusanya

Analyst · Jefferies & Company

Thanks for the color around, again, the delineation between undifferentiated colo and as well as performance-sensitive, high-quality colo. Could you guys give us a sense of just how much of the undifferentiated stuff is still within your portfolio? And just from an innings perspective, where exactly you feel you are in regards to really moving to the performance-sensitive stuff?

Thomas M. Ray

Analyst · Jefferies & Company

You bet. Again, we've shared this in the past that we look at this issue in terms of how many cross-connects are in place per deployment. And we've seen that move in the right direction as well. So like the clinical data at this point, 83% of our revenue comes from deployments with 5 or more cross-connects, and 63% of our revenue comes from deployments with 10 or greater cross-connects. So that's our best read into what's performance-sensitive. And those ratios have increased over the last year since we've started talking about them. And I think that's probably the best way to look at it.

Omotayo T. Okusanya

Analyst · Jefferies & Company

Okay, that's helpful. And then just a quick follow-on just in regards to Silicon Valley and the subleasing going on with Facebook. Could you just kind of give us a sense of what you're hearing regarding that, the impact of that on pricing? And what ultimately Facebook may do with that space, whether or not they get the space subleased?

Thomas M. Ray

Analyst · Jefferies & Company

Sure. I mean, look, the Bay Area is a tough market. It has been for 2.5 years. I don't know that it's materially tougher now than it was a year ago. There is a lot of space available to come back to the market via Facebook, but as with any real estate product, when lease terms get shorter on a remaining primary lease, and that primary tenant is working to sublease, cooperation with the landlord is valuable to help clear out that sublease inventory. To date, we really haven't seen much. I can't think of any offhand, but I might be wrong. If The Facebook sublease inventory gets resold, that's good and bad, right? I mean, if rates are -- I think are steady, that's not a great level, but they're steady over the last year, but you still have that shadow supply working its way back towards the market. Our objective is to -- if Facebook leases -- subleases its capacity on our portfolio, we understand that. If we have an opportunity down the road from here to make an intelligent deal with them where we can recycle that to colocation and not deploy capital to build another building on that site, just use that as -- use the Facebook inventory as a slot in our manufacturing schedule, if you will, for building product, we will take advantage of that opportunity. If we can't make -- if it's not rational for the parties to make an agreement before they roll -- we did structure their roll with us as 2.6 megs in the first year and another 2.6 in the second year, plus or minus. And the reason we did that is we've historically leased about 3 megs in our traditional product mix. 3 megs a year in the Bay Area, and that 2.6 is a pretty good fit with our retail operation. And we just don't plan to -- if all the Facebook stuff comes back to market in 2 years, I think wholesale rates will be pretty tough. They could get tougher. One could certainly see that scenario. We don't plan on reentering that space into that climate, and we've structured our lease accordingly.

Operator

Operator

The next question is from Michael Knott of Green Street Advisors.

Unknown Analyst

Analyst · Green Street Advisors

This is John Luciani [ph] here with Michael. I was actually also going to ask about the cash leasing backlog. And also related to that, if you guys could tell how much of that is replacing in-place revenue?

Jeffrey S. Finnin

Analyst · Green Street Advisors

Hey, John, this is Jeff. Yes, in terms of the cash backlog as of the end of the quarter, it's $10.2 million. About 45% of that will commence here in the fourth quarter, but the larger share of that is going to be coming from our customer on our build-to-suit development that were completed here in this quarter. The remaining 55% will come in rapidly throughout 2014. And I'm sorry, what was the second part of your the question, John?

Unknown Analyst

Analyst · Green Street Advisors

The second part was how much of that is replacing kind of in-place revenue in a space that's already -- you're kind of replacing the tenant, not leasing space that's currently vacant.

Thomas M. Ray

Analyst · Green Street Advisors

Not much.

Jeffrey S. Finnin

Analyst · Green Street Advisors

Yes, it's a great question. I agree with Tom. I don't think it's a substantial portion, but I don't have it specifically in the front of me, John. It's something we can do an analysis on and get back to you on, but I don't have this specifically in front of us.

Operator

Operator

The next question is from Jordan Sadler of KeyBanc Capital Markets.

Jordan Sadler

Analyst · KeyBanc Capital Markets

Tom, I wanted to just follow up on your commentary regarding you're potentially focusing on or targeting some of the potential wholesale tenants for some of the new development. And I'm just curious, would that include -- what would the scope of wholesalers be? Would it include resellers?

Thomas M. Ray

Analyst · KeyBanc Capital Markets

I think that's unlikely, Jordan. I mean, we never say never. We're cash flow optimizing mindset here, but I think that's unlikely. I think these are -- it's substantially more likely that they'll be enterprise in cloud and network, from a network service provider's who, of course, also have growing MSP and cloud businesses inside their organizations. So they're taking larger footprints, but they're also interested in the -- being on top of their fiber paths and other parties' fiber paths, so I doubt they'll be resellers.

Jordan Sadler

Analyst · KeyBanc Capital Markets

Okay. And then, could you just clarify regarding the rates that you are seeing initially at NY2 from the first few leases that are there? I think you said they'd be lower initially than the overall portfolio. Could you just clarify sort of what's going on there?

Thomas M. Ray

Analyst · KeyBanc Capital Markets

Yes, I just think that the early days of lease-up at NY2 were very heavily orient toward more wholesale-type requirements as we get traction going in that building. We feel good that we'll have plus or minus, and it could be a plus 10 networks contracted in that building when we open it. We feel good about the fundamental business plan we laid out when we made the decision to go there. And it's easier to kickstart a big new data center by nailing a couple of larger deals and putting cash flow in it. While we do that, we'll be moving to transaction engine. But in the early days, you'll see a greater weight, a greater product mix oriented toward wholesale. And throughout the course of the investment, you'll see that mix shift much more strongly over to performance-sensitive colocation if we're right about our thesis. So it's just the timing, approach. It's the approach to how you manage the lease-up of a new data center in a new market.

Jordan Sadler

Analyst · KeyBanc Capital Markets

Okay, that's helpful. One more, if I may. Tom, this is more of a high-level question for you. Just obviously, the spaces in terms of stock performance, and maybe sentiment has become a bit washed out for a variety of reasons. And I'm kind of curious in terms of your thought process, in terms of -- how does that get cured? What is sort of the solution? And how long does it take? And can it be cured? And then at the same time, is there any opportunity in that for CoreSite?

Thomas M. Ray

Analyst · KeyBanc Capital Markets

Well, look. I mean, the ultimate cure -- for my view, the ultimate cure for stock price valuation is performance, the EBITDA and FFO and the FFO distributable to shareholders. So you cannot be cured, absolutely. Companies perform or they don't. And we live by those laws, and there you have it. We feel every bit as excited about our ability to grow earnings in this company as we did a year ago when sentiment is really high. So that's how we view the world. Are there opportunities? Well, look, I just look at it this simply, Jordan. If you can -- if the wholesale landscape gets to a point where you can buy wholesale products below the depreciated replacement cost of the asset, that can spell opportunities for anybody, just building a platform. That said, I don't see prices anywhere near that level, and we are not interested in buying somebody else's wholesale space at more than we can build it on our own. But yes, if there was such a level of distress in the wholesale segment, I think there'll be opportunity. I think the performance-sensitive colo business remains a steady, solid business. So I just don't see a huge amount of distress coming around that such that it would be meaningful valuation arbitrage. It would be great if I'm wrong, we'd like to be a predator in the jungle rather than a prey. There's no doubt that's how we're wired as human beings. I just don't really see that landscape, but we'll see.

Operator

Operator

Thank you. We have no further questions in queue at this time. I'd like to turn the floor back over to Mr. Ray for any additional remarks.

Thomas M. Ray

Analyst · Citi

I just want to thank everybody for their time. Again, we appreciate that there a lot of questions out there in the marketplace right now. We're about our business, and honestly in most respects, we look at Q3 as another day on the job. And we're excited about the go forward. We're happy to follow up in any manner and talk more about the information that's already been publicly disclosed to help people understand it. And we look forward to seeing you again in the quarter. Thanks for your time.

Operator

Operator

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