CyrusOne Inc.
Q3 2020 Earnings Call Transcript

Published: 29 Oct 2020

[Operator:]

Good day, and welcome to the CyrusOne LLC Third Quarter 2020 Earnings Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

[Michael Schafer:]

Thank you, Grant. Good morning, everyone, and welcome to CyrusOne third quarter 2020 earnings call. Today, I'm joined by Bruce Duncan, President and CEO; and Diane Morefield, CFO. Before we begin, I would like to remind you that our third-quarter earnings release, along with the third quarter financial tables are available on the Investor Relations section of our website at cyrusone.com. I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward-looking statements related to CyrusOne and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on cyrusone.com. We undertake no obligation to revise these statements following the date of this conference call, except as required by law. In addition, some of the company's remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures and those comparable GAAP measures in the earnings release, which is posted on the Investors section of the company's website. I would now like to turn the call over to our President and CEO, Bruce Duncan.

[Bruce Duncan:]

Thank you, Michael, and welcome to CyrusOne third-quarter earnings call. To begin the call, let me address the leasing results for the quarter. I'd like to be straightforward, and the only thing I can say about our leasing results for the third quarter, is that they were very disappointing. We have talked about the lumpiness of the hyperscale business and how the timing of these larger deals can impact bookings from quarter to quarter. This quarter is reminiscent of the fourth quarter of 2019, which was followed by two very strong quarters in the first half of this year. But the bottom line is that we have to produce much better results in the fourth quarter. And we are confident that we will. It is up to us, the CyrusOne team, to deliver. We continue to be very positive on the broader demand signals and are encouraged by what we are hearing in discussions with our customers. Beginning with Slide 4, you can see the financial results for the quarter, which Diane will discuss in her remarks. We have leased $107 million in annualized revenues through the first three quarters which is higher than our total 2019 bookings results, as our revenue backlog remains high at $82 million, position us well for continued growth in 2021 and beyond.

[Diane Morefield:]

Good morning, everyone and thank you, Bruce or those very kind words. I have truly enjoyed my four years here at CyrusOne having the opportunity to work with a great group of people and being part of an exciting company and platform and dynamic industry that plays such an important role at the intersection of real estate and technology. I've also enjoyed working with all of you in the investment community, not only here at CyrusOne but with many of you over the years in my previous roles as well and I thank you for all your support over the years. Turning to Slide 12. Revenue in normalized FFO per share each grew 5% compared to the third quarter of 2019. Churn remained low at 0.6% in the quarter. We are decreasing the upper end of our churn guidance range from 7% to 6%. For the full year, we anticipate churn to be between 5% and 6% and we are actually trending toward the lower end of that range, although we do expect the fourth quarter churn will be slightly elevated compared to recent quarters. Moving to Slide 13, NOI and adjusted EBITDA increased 4% and 3% respectively compared to the third quarter last year. The slight decrease in the NOI and adjusted EBITDA margins is driven primarily by higher percentage of zero margin pass through metered power investments this quarter as compared to last year. As Slide 14 shows, the revenue contribution from our US markets remains well balanced. Our continued European expansion will further diversify our portfolio and a significant portion of our backlog consists of deals in these markets. Turning to Slide 15, our development pipeline largely reflects projects to support the revenue backlog. As Bruce mentioned, with 63% lease CSF basis and roughly 70% in terms of megawatts as of the end of the quarter. In addition to 78 megawatts of power capacity under construction which is weighted toward our European markets, we also have 321,000 square feet of powered shell under development. The total cost to complete the projects is approximately $300 million at the midpoint of the estimated range, and we have substantial liquidity to fund this construction. On completion of these projects, our portfolio will consist of nearly 5 million colocation square feet. Moving to Slide 16, we continue to strengthen the balance sheet. And as Bruce mentioned, in September, we took advantage of historically low long-term interest rates issuing 400 million of 10-year senior notes with a coupon of 2.15%. The net proceeds were used to repay $300 million of outstanding indebtedness under our unsecured term loans maturing in March of 2023 and for general corporate purposes. The transaction further smooths and extends our maturity schedule, increasing our weighted average remaining debt term to 6.3 years and the weighted average interest rate on all of our debt remains very low at 2.13% and our percentage of fixed-rate debt has increased to 77%. The fixed floating mix is now in line with our targeted mix, given our investment-grade status, and is more in line with that of our peers and other IG rated . Slide 17 summarizes our key balance sheet metrics, and as you can see, we are well positioned to continue to fund growth opportunities and maintain significant financial flexibility with $1.7 billion in available liquidity as of the end of the quarter. Again, as Bruce mentioned, during the quarter, we raised nearly $229 million in forward equity through our ATM program and combined with ATM forward sales during the second quarter, we have a total of $413 million in available forward equity. The available proceeds from sales made during the quarter replaced nearly $220 million in equity that we did drawdown during the quarter to repay revolving borrowings outstanding and manage our leverage ratio. We continue to opportunistically monetize our GDS investments totaling approximately 160,000 shares during the quarter, generating net proceeds of approximately $13 million. Year-to-date, we have sold approximately 400,000 shares and raised a total of approximately $33 million in proceeds. As of the end of the quarter, we still owned approximately 1.9 million GDS shares with a total value of $155 million based on their share price at September 30. Adding the value of disposition to the value of the forward equity raised through our ATM program, we have a total of nearly $570 million in available equity and equity substitutes to fund the business going into 2021 and to continue to manage our leverage. Turning to Slide 18, our $82 million revenue backlog positions us well for growth next year and beyond. Just over 1/3 of the revenue is expected to commence in the fourth quarter. And as I've mentioned in prior quarters, 26 million of the backlog is associated with 22.5MW expected to deploy in 4.5MW blocks annually for mid-2022 to mid-2026. The corresponding capital commitment for this lease has also phased in over the four-year ramp period to align the capital spend with the commencement of the revenue. Moving to Slide 19, we have updated our guidance ranges for the full year based on results through the first three quarters. We have tightened the ranges for total revenue and adjusted EBITDA while maintaining the midpoint. We have increased the lower end of the guidance range for normalized FFO per share by $0.05, which increases the midpoint of the range by $2.5 as we are trading slightly higher on this metric as a result of our actual year-to-date performance. Based on our guidance midpoint, you will note there is an implied sequential decline in normalized FFO per share in the fourth quarter compared to the third quarter. This is primarily driven by a European income tax accrual true-up as well as the full quarter impact of shares issued in the third quarter associated with the drawdown of equity I just mentioned. Lastly, we are increasing our guidance for capital expenditures to a range of $900 million to $1 billion, which is an increase of $50 million at the midpoint compared to our prior guidance and is primarily driven by the London land purchase. In closing, we are focused on ensuring we are well-positioned to support our customers as they continue to grow and expand. As Bruce mentioned, the demand outlook remains positive with the continuation of the underlying trends that have driven growth in this sector. We appreciate you participating on the call and we're now happy to take any questions. Given the large number of questions that are in the queue, we do kindly request that you limit your question to one main question to give everyone a chance to participate in our Q&A. With that, thank you, and Grant, please open the line for questions.

[Operator:]

We will now begin the question-and-answer session. Our first question will come from Jonathan Atkin with RBC Capital Markets. Please go ahead.

[Jonathan Atkin:]

Thanks very much. I wanted to ask about leasing and about operations. So on the leasing side, I wonder if you can give us a flavor for kind of how many at-bats you have in 4Q. Is it broadly distributed across a number of markets in the US and Europe or is it a smaller number of larger deals if you maybe give us a little bit of flavor for that opportunity that you're looking forward to in 4Q in terms of leasing? And then on operations, if John wants to maybe provide a little bit of a comment on the company that he left and in the company that he's now COO of, what are kind of your observations, what's changed, what's different, what are your priorities going forward now that you're in COO seat? Thanks very much.

[Bruce Duncan:]

Great. Well, I will -- let me start, I would say, again, what we -- what we're looking at in the fourth quarter and again, we're very bullish in terms of where we are. The enterprise business has been steady for us. It's so -- it's steady in the third quarter and we continue to think that will continue to be steady, but the hyperscale business has to pick it up. And we've got a lot -- much things going on in both Europe and US. And again, it's incumbent upon us, our team to execute and we've got to get it done, but again, we're very optimistic and positive where we stand today. John, you want to talk about your reflections and welcome home.

[John Hatem:]

Thank you, Bruce. Hi, Jonathan. How are you? So you know, I left about a year and a half ago and all I could say is, this business has continued to evolve, and continued while I was gone and it's kind of a constant thing in this business, I've been doing this for a long time. And I think priority for me and the team is really get focused on creating the right products for our customers, whether they're hyperscale or enterprise, right? And make sure we're doing the right thing by our customers and our shareholders. Do what we used to do, right?

[Jonathan Atkin:]

Thanks very much.

[Bruce Duncan:]

Operator?

[Operator:]

Our next question will come from Frank Louthan with Raymond James. Please go ahead.

[Frank Louthan:]

Great, thank you. So, Bruce, talk to us a little bit about if you're little bit with the bookings. What -- what's -- what changed? You had good -- pretty good momentum in the first half. What's changed and what specifically are you -- changes that you make or you're going to put in place with the sales organization or what have you to kind of -- to really pick this up and get the bookings back to where you'd like for them to be?

[Bruce Duncan:]

Hi, well, Frank what change -- well, number one, we said and we've been saying that since last quarter and was in the call, but before that, the hyperscale business is a lumpy business. So it's not, sort of, it's not like the enterprises, it's Steady Eddie, it's very lumpy. Diane, I'm not sure if -- again, we had one of these in the fourth quarter of 2019 in terms of the slow quarter. So I'm not sure that's changed. But, again, business is good and we expect a good fourth quarter. In terms of changes, we've made a couple of changes, I would say, looking at that in terms of drive business. Number one, we have a new head of sale, Brent Behrman is new head of sales. He was -- he ran sales at Digital. He ran sales for Compass data centers. Very good leader, well respected by the team and I'm very, very glad he has taken on this role, and he's taken on the bandit . So I think that's the focus. And the second thing is, in terms of the returns, so, in terms -- that we're looking for, as you saw in my remarks, our view of the unlevered returns, if you will, of 8% to 10%. Again, that gives us doing that -- doing that -- using the leverage we use, we're in a high lever. Our leverage at 5.5 times or whatever, you can get mid-teen returns for the equity. So we think again by being a little bit more aggressive that will help business too, but we're encouraged there's good demand out there, but it's up to us to deliver. And as I had mentioned, I didn't mince words -- I was disappointed in our leasing the hyperscale leasing in the third quarter. I don't plan to be disappointed in the fourth quarter.

[Frank Louthan:]

All right, thank you very much.

[Bruce Duncan:]

Thanks.

[Operator:]

Our next question will come from Colby Synesael with Cowen. Please go ahead, Cowen.

[Colby Synesael:]

Great, thank you. Bruce, you made a lot of management changes in a pretty short amount of time and I know I've fielded questions on that. I know you have as well. What did you see in the just few months that you've been there that pushed you to make so many changes just so quickly? I imagine it wasn't just the trajectory of what you're expecting for 3Q leasing. And then secondly when you think longer term, how do you think about balancing top line growth versus near-term dilution? We're starting to see some of your peers giving some targets in terms of how much they want to be growing their FFO or OFFO per share recognizing that while the demand is out there, they want to be cognizant not diluting investors too much in that near term as they go and pursue some of those bigger opportunities. How are you guys thinking about that? Thank you.

[Bruce Duncan:]

Let's start with the first one in terms of the team. When I came here, I did my listening tour and see what's going on. The team was functioning well as a team in terms of when there were some areas that's we can do better. So to me, I'm very excited about John coming back. John is action oriented. He is focused. He is a proven commodity in terms of -- he's got great relationships not only within the company, but outside the company with our key customers and asking some of our salespeople they would say, if they could've only one person to come into a meeting to close a deal with a customer, it would be John Hatem. So that's in fact -- and I didn't meet John until probably 2 months into my listening tour but I kept hearing, talk to John, talk to John, so I talked to John. We had a number of conversations. And I said it'd be great if you come back as a partner in terms of running this thing and I'm glad he's back, and he is a great teammate. So I think that's great. I would say, Robert, in terms has taken HR, very, very strong person. This is additional responsibility and we've got a good, very good HR group that he is working with, and I think that that's good and we talked about, I think it's a very good leader and he has done this before for a number of companies running sales and we need it again. We underperformed over the last couple of years especially in the U.S., and we need to pick it up, and I couldn't convince the stay, so she is leaving us but with her help and we found a great replacement for and I think you all will be very impressed with . And I think she's she is very good. So yes, there have been changes. We've had changes very quick, but I'm a great believer in if you see something you should execute, make the moves and move forward and get things to happen; so we'll start at the end of this week. As I said, the teams are doing hard work. As it relates to how we view top line and sort of bottom line, I would say you need both. You need growth, you need top line growth, but I think that does come back to looking at how you -- what you deliver on a per share basis. So I think you're going to see more focus on that as well as the top line growth. It will be much more focused on a per-share metric.

[Colby Synesael:]

Thank you.

[Operator:]

Our next question will come from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thank you and good morning. Bruce, I guess I was interested to hear sort of your sort of hundred-day take and assessment and the takeaways. And the one thing that struck me as sort of new was towards this initiative to increase or improve the U.S. leasing share and I'm keen because it seems like in Europe, you will stay the course and other ways of stay the course. So this change in cadence or strategy, is that the right read that this is the primary shift that you see right away following the first 100 days, and then what do you plan to do sort of implement that change?

[Bruce Duncan:]

Well, I'd say that U.S., again, we've got a big position in the U.S., I mean it's the dominant part of our company right now. Europe at the end of next year it'd be about 20%, but what we need to do again to those shares is to figure out why you're losing share and we have good positions in terms of capacity throughout and we just got to make sure we're focused on getting attention to that capacity. So again it's sales driven. I think the changes that -- what we're doing about, as I mentioned, we have a new leader in the sales area. And we're going to -- in terms of new -- figuring out better incentives to try and get focus on these assets, but there is going to be focused on these assets because we think there's a good opportunity. It's great demand out there, but we've got to win our share.

[Jordan Sadler:]

Sorry, I wanted to clarify my question, because the one thing I sort of missed there was you guys in London again this quarter. The prior management team had sort of actively shifted capital away from the U.S. and toward Europe, and I guess what I'm wondering is will capital, do you think shift more toward, you as a capital allocator, you're making the decision to shift capital more actively back towards the U.S.?

[Bruce Duncan:]

No, no, no, I would -- you should not take that we've got a lot of land in position in the US that we need to maximize, the money we've invested that we haven't got any value for. So we need to get value out of that. In terms of -- if you look at in terms of the new land parcels, we are working on, bought, whatever, I would say we are focusing strongly on the European markets and again, we believe that there is great opportunity there. So don't think that we're allocating new capital to the U.S. and forgetting Europe. I would say the focus is making sure we have all we can in Europe to handle the growth regime there, but in the U.S., we have a lot of capital that's in place or land available that we need to get some traction on that. We've been a little bit weak in terms of finding customers for.

[Jordan Sadler:]

Got it. Thank you. Thank you.

[Operator:]

Our next question will come from Eric Luebchow with Wells Fargo. Please go ahead.

[Eric Luebchow:]

Great, thanks for taking the question, Bruce. Just on the 8% to 10% return requirements in the U.S. So do you think that maybe you've missed out on deals in the past in the U.S., because you weren't aggressive enough on price and you plan to change that going forward, do you think it was more supply related because you didn't have inventory in certain markets like Ashburn last year and I guess as you look longer term, do you think that range is sustainable? Have you seen any signs it's kind of stabilization of pricing in the U.S. given the number of competitors, both public and private? Thanks.

[Bruce Duncan:]

I would say we missed ; I think. In some cases we missed last year whatever because we didn't have product in the market. I would say we missed some this year and last year, because they were too aggressive and we thought that the pricing was too aggressive and we didn't want to play at those rates. And I guess, from our standpoint today as we look at the 8% to 10%. We've put out leverage and get mid-teens returns on your equity and that's -- that's not bad with long-term leases. So I think we're a little bit more aggressive as it relates to that.

[John Hatem:]

Hey, Eric, it's John. I mean, we definitely see opportunity on the development side to kind of maintain yields right with what our -- what our hyperscale customers really need in the space, what their priorities are, and our enterprise customers. So like I said earlier, it's key for us to. On the operation side to make sure we're matching our products for what our customers need, what the rates are in the market, what the competition is in the market, and we have -- we have a phenomenal platform to do that.

[Eric Luebchow:]

Thank you.

[Operator:]

Our next question will come from Nick Del Deo with MoffettNathanson. Please go ahead.

[Nick Del Deo:]

Hi, Bruce with the basis of competition for hyperscale deals is shifting even more towards pricing or the returns that operators are willing to accept. How well positioned do you feel you are to compete on that dimension? Do you think that the scale of your biggest competitor gives them any sort of structural leg up? And how much more volume do you think you need to drive using the new return target to create a similar amount of value, as you would have under your old targets?

[Bruce Duncan:]

Well, I would say a couple of things. I would say, I think we have a big enough scale to take care of our customers. We can't be everywhere where they are. But when you look at what's going on -- when I look at, when we look at like Northern Virginia, there are lot of people there that are international who are competing against us who don't have a lot of footprints and they're getting deals done. So it's not like the customers are saying, we're not going to do business with you, because you don't have an international footprint. So for us, again, we've got great relationships with many companies, and we have those relationships, because we've been able to deliver and meet their expectations on many fronts, not just price, price is really the last thing. You got lots of other factors and are very important factors, and sometimes I would think relationships you're getting better pricing and they want to business but you feel very competitive. So, and we're seeing that. Yes, so Nick on the dynamic with the platform that we have that we've developed over decades here right to really initially focus on the enterprise and the things of the hyperscalers need in the space, I mean there -- it's not a commodity. We talked about -- about being a commodity business, but it's not really, I mean these guys have requirements just like they have requirements for their own facilities that really fit into a platform that we can deliver, right. And the larger players in the space can deliver.

[Nick Del Deo:]

All right, thank you.

[Operator:]

Our next question will come from Sami Badri with Credit Suisse. Please go ahead.

[Sami Badri:]

Hi, thank you. Thank you for the question. I want to go back to the 8% to 10% yield and maybe, Bruce, just to get an idea on how you think about this number, in this a year of one, type of number as right when the facilities up, hence a certain utilization rate and then you get that into 10% or is that, is that like for the life of the deal or a certain period of time like 3 to 4 years and that's part one of the question? Part 2 of the question is do you see the European leasing dynamics being in line to that range below or above and the same framework against the U.S. dynamics, it would be very helpful for us.

[Bruce Duncan:]

That 8% to 10% yield is really a stabilized yield, getting it up build and lease it over time, as you know these usually whatever. In terms of how we compare that to the U.S. to Europe, I would say right now Europe has a little bit more favorable economics to the U.S., but that can change over time. But right now it's a better environment to invest in what we're seeing like in Northern Virginia.

[Sami Badri:]

Got it.

[Diane Morefield:]

The long-term, there is typically some ramp, but even for the hyperscale they tend to ramp fairly quickly. So yes, we underwrite sort of going in, average and ending yield, but the stabilized is what we're saying that range.

[Sami Badri:]

Got it. Got it. And then maybe just a follow-up. It sounds like there is some productivity in the background there I think is going on in the pipeline. How should we be thinking about your CapEx in 2021 because some of your peers are already alluding to a pickup in CapEx spend that looks very similar to 2020 in 2021. And I guess that ends up translating into some of your per share economics of your per share metrics. But we just get an early idea on what we should be modeling or thinking about from a CapEx perspective?

[Bruce Duncan:]

We look forward to give you that in our fourth quarter call in February of '21.

[Sami Badri:]

Got it. Thank you.

[Operator:]

Your next question will come from Ari Klein with BMO Capital Markets. Please go ahead.

[Ari Klein:]

Thanks. Given all the changes at the top, what are you seeing from employee attrition standpoint, particularly on the sales front? And what kind of heavy lifting does there need to be done there from maybe hiring standpoint as well?

[Bruce Duncan:]

We've seen people leaving in the sales front. I think people are pretty energized having Brent in that position. So right now, I think it's good.

[John Hatem:]

Yes. And, Ari, I mean for myself coming back, I mean, the team I left here year and a half ago is here and that was the team that helped drive a lot of our success historically. They are excited about the new leadership. I mean they're excited on back and excited to work with Brent and team and everybody to kind of get back to winning.

[Diane Morefield:]

And I would echo in on the finance across the organization, we have very minimal attrition and look, I think, being recognized particularly people are in the real industry, the data center industry is a great place to be. There is a lot of other industries.

[Bruce Duncan:]

Amen.

[Diane Morefield:]

Bruce and I have both worked in some of those that are much more stressed. So I think people are excited about working for CyrusOne, our platforms, some of the changes have been reenergizing and this is a creative industry to be a part of. So I don't -- I don't think people are jumping ships. I'm not the smart one in the room, I guess.

[Ari Klein:]

Good luck moving forward -- but then just -- Bruce you highlighted the mix of asset markets and markets in your focus -- one of the focus areas. Can you just elaborate a little bit on what that would mean? Are there markets in the U.S. you'd potentially exit or additional markets you'd consider entering?

[Bruce Duncan:]

I think, we're looking at everything in terms of where we might slim down, where we might exit, we might go into. But yes, there is a lot that we're going to look at, so again we'll be back to you, but again the team is going to be all over that, in terms that when we start together as a team as of Friday.

[Ari Klein:]

Thanks.

[Operator:]

Our next question will come from Simon Flannery with Morgan Stanley. Please go ahead.

[Simon Flannery:]

All right, thank you very much. Good to hear the commentary on the fourth quarter. Leasing, outlook, could you just take us out a little bit more on the medium term and what really has happened in a post COVID environment in terms of digital transformation? What are you hearing from the hyperscalers and the enterprises in terms of how they're thinking about the medium-term demand and the sustainability of the strong leasing the industry has seen in 2020? Thanks.

[Bruce Duncan:]

I would say the hyperscalers are very encouraged in terms of -- they look at their business they think -- this is -- there is great growth over the next -- next few years and they're planning accordingly. So we're very encouraged. It's broad based.

[John Hatem:]

Yes. Simon. I mean the second -- just coming back in from the time I was away, I mean the demand is real. COVID is logically just kind of pushed the demand for technology up which obviously we're an underlying foundational component of that. So it's good. I mean, even the enterprise customers that we talk to, it's amazing that we still keep conducting business and everything keeps running and whether people are home or on sites, the demand is real and thank you know the capacity that was kind of stored like what the hyperscalers thought they had was going to last them a couple of years was kind of being consumed and they're looking for growth.

[Simon Flannery:]

And any change in their desire to in-source that or outsource?

[Bruce Duncan:]

Yes, on the insource versus outsource. I mean this has been a constant theme for years with the hyperscalers, and I mean, I think they come out and talk about -- they target like a 50% build versus those of lease and you see some variance right between some of the hyperscalers, some of that based on timing, but haven't heard anything that would change that assumption.

[Diane Morefield:]

On the fact that they find very long-term leases is that they are going to maintain a good portion of their data center footprint obviously in third-party facilities.

[Simon Flannery:]

Thank you.

[Operator:]

Our next question will come from Erik Rasmussen with Stifel. Please go ahead.

[Erik Rasmussen:]

Yes, thanks. First, Diane, best of luck in your retirement and certainly nice working with you, if this is in fact your last call. Maybe just for Bruce, you're getting back again to some of the priorities. But are you worried that you may have lost too much momentum and maybe miss some of the hyperscale cycle at this time around, especially in the U.S. in the key markets like Northern Virginia? And then how does that new yield range of 8% to 10%, what does that do to invigorate sort of the discussions with customers and how they been receptive to that? Thank you.

[Bruce Duncan:]

Again, I think we -- we had a quarter that we -- the missing quarter I would say in terms of hyperscale begins. But again, as we say it's lumpy to the conversations in the staffing, if anything, it's just -- it's pushed into the next quarter. So I would say that I don't think we missed. We may have missed some business over the last 18 months on pricing in not having -- having product available, but I don't see that as an issue going forward and I think that from our standpoint, we think we've got a great product. We think with John, coming back better product and I think that with the relationships with our customers and being a little bit more flexible in terms of on pricing that we should be able to continue to show some pretty good growth. But again, it's up to us to deliver.

[Erik Rasmussen:]

Thank you.

[Operator:]

Our next question will come from David Guarino with Green Street Advisors. Please go ahead.

[David Guarino:]

Thanks. Hey, Bruce, this one is for you. I'm just kind of wondering given your real estate background and I'm sure you've been monitoring the supply picture given all the new interest in capital we've seen from product companies since that you just kind of started. So I guess how do you think about the supply landscape and how you think that will evolve within the next year and could we possibly see a distribution of the leasing price shift away from CyrusOne to some of those new competitors?

[Bruce Duncan:]

That's interesting. I would say we are seeing again. I was in Northern Virginia, a few weeks ago in terms of demand, new supply there with IOP, but there seems new money coming into it. Again, I think it's a function of coming in there, because there is demand and as long as there is demand and demand and the price that people can -- get people returns, you're going to continue to see that supply. So I think the one thing that -- CyrusOne has a lot more to offer than a lot of these new players. We have a platform. We have a platform with people, we can deal with all of these different issues, which is their front and center, safety, security and they go through -- they want to make sure this is important to them and they want to make sure that they know people who have a proven track record. So I think that's a big plus. John, anything you want to add?

[John Hatem:]

Yes, I mean we've seen it through the years, right, David, I mean where some small players have come into the space, they'll get a deal from hyperscaler and sometimes that hyperscaler doesn't get another bit of business or they look somewhere else. Like Bruce said, it's not all about price for these folks. Obviously it's important, all right, and they have to keep making money, but it's the platform. I think that's super important for us larger people in the space.

[David Guarino:]

It's helpful. Makes sense. And then just as a follow-up, if you can talk about pricing and I appreciate the disclosure on what hyperscale yields are today, but one of the questions we constantly get asked and we're trying to figure out is how low can we see yield go before -- it just doesn't justify starting development projects and maybe just kind of give us some color on how you think about where yields could go before you guys were just kind of throw on the towel on new projects?

[Bruce Duncan:]

Well, I mean, I think if you look at yield -- if you look at yields that are in the 6% percent range and you put 50% leverage on it, whatever you probably like a 9% or 10% yield with return on equity, which isn't that exciting in terms of trying to do that. So that, and again, it depends on how much leverage these private guys who put on more leverage, if they could -- if the banks will do it, and at some point that will stop. So for us, we think that -- we think there's plenty of business around that we can do in the 8% to 10% range. And again it's come to want us to make sure we can find the big customers that transact these rates, because when you put 50% leverage on and still a return on equity of 15%.

[Diane Morefield:]

Yes. And we're still -- again very steady business from enterprise, because almost all our data centers are co-location. So, a blended -- that helps the blended yield going into the higher side, because the smaller deals are not priced as aggressively as the large long-term hyperscale.

[David Guarino:]

Thanks. That's great. Diane, it's been great working with you.

[Diane Morefield:]

Thanks.

[Operator:]

Our next question will come from Matt Niknam with Deutsche Bank. Please go ahead.

[Matt Niknam:]

Thank you for taking the question. Bruce, you talked a bit about wanting to sort of close that valuation gap with peers. And so, I'm wondering what do you see the next steps or milestones in helping close that gap with peers? And now that you've got the pieces of the management team put in place, how should investors think about the timeline before these new pieces kind of gel together to help CONE better improve leasing share and enhance returns. Thanks.

[Bruce Duncan:]

Again, as I said in the remarks, we will be looking at a lot of different -- different components in terms of capital allocation, portfolio mix, and although it is with the team together, my hope is that we can do this in fairly short order so that by next time we're together, we'll have a real a plan in terms of what we're trying to accomplish and where we're going, so I would -- we're going to be .

[Matt Niknam:]

Just one follow-up also, in terms of the lighter leasing volumes in 3Q, particularly around hyperscale, it sounds as though the demand side is still there. The customers are still pretty active, and it seems like it was a little bit more in terms of company-specific issues, but I'm wondering, have you seen any signs of hyperscale customers entering more of a digestion phase after a very strong first half of the year?

[Bruce Duncan:]

No. But we think that there -- we think the appetite is still very strong.

[Matt Niknam:]

Great, thank you.

[Operator:]

Our next question will come from Michael Rollins with Citi. Please go ahead.

[Michael Rollins:]

Thanks and good morning. And I've also got Michael Bilerman on the line and we each have a question for you this morning.

[Bruce Duncan:]

Try and get it in, go ahead, go ahead.

[Michael Rollins:]

So I'm just curious, if I look at the rent schedules, it looks like domestic rents were up about 2% year-over-year and presumably within that the hyperscale is growing, can you unpack what's happening a bit whether it's by region or customer vertical, in terms of where some of those headwinds on domestic rents may be and I'll turn it over to Michael?

[Michael Bilerman:]

I'll let you answer that one and then I'll come back on at the end.

[Diane Morefield:]

Yes. Because we might forget it by the time we get to your questions. The U.S. revenue that has run obviously is churned in the U.S. and again really from our hyperscale, I'm sorry, so that backwards from our enterprise customers. The enterprise customers, particularly in some of our legacy assets, those leases were written a long time ago and different point in the market as far as market rates. So that's definitely the headwind. Obviously, we're still -- increase in revenue in the U.S., but not to the extent of Europe, just given the European growth, new assets, we're building there and there is more pricing power in Europe and we have zero churn in Europe. So that's really what's driving -- in the markets that have been under the most pressure in our portfolio is certainly Houston and that's as much about just the concentration of oil and gas customers there and then some in Cincinnati and a bit in Dallas, but generally that's what -- that's their demand. I'm sorry, that's the pressure, so.

[Michael Bilerman:]

And Bruce, it's Bilerman. Thank you. It's good to be back on CyrusOne calls after a multi-year absence. So thank you for that.

[Bruce Duncan:]

Welcome home, Michael. Welcome home.

[Michael Bilerman:]

Thank you, Bruce. So I want to go to the 100-day listening tour, and you listed a wide variety of constituencies that you spoke with -- pretty wide-ranging in terms of people, in getting their views. The last bullet on slide 9 where you talked about the valuation gap, you sort of talked about turnover -- management turnover, the leasing, consistency and execution and communication. And it appears as though you've already addressed a lot of those to try to move forward. What I want to know is how consistent was the feedback across all of those constituencies you spoke to? And what are these some -- when you say other factors, what would some of those other factors be to address overall?

[Bruce Duncan:]

I would say that the feeling about the company is that we said a lot of different things, and did a lot of different things that were not just consistent with what we said so that it wasn't clear what -- what was the priority and where we're going and so the market really didn't understand what the program was.

[Diane Morefield:]

I think it was that but also having said that, I think there were a lot of things that were done right. I think you know the Company was always pretty good at seeing where the puck was going and being ready to hit the hyperscale customers when we were in enterprise based and certainly the Zenium acquisition and having a footprint in Europe has proven to be very success. So, but I think the other thing that's always been prior pressure on our multiple discount is just the level of CapEx, as compared to our size and particularly when we were smaller. We are consistently spending more capital than even our revenue and that I just thing was a bit of a risk factor, that again depressed our multiple at some level.

[Bruce Duncan:]

In terms of the amount of development and also the amount of equity we issue.

[Diane Morefield:]

Right. And there is a lag when you're doing that much development even one is pre-leased. There's certainly a lag before it shows up in your financial metric. So I think it was just a combination of a lot of things, but I think we should not lose sight. That is a great platform in the company's still a lot of things, right.

[Bruce Duncan:]

One of that in a very good point, again it's a very good company, and we've got a great platform. And again, it's incumbent upon us to take it as a team and move forward.

[Diane Morefield:]

And they hired me four years ago and that was brilliant.

[Operator:]

Our next question will come from Richard Choe with JP Morgan. Please go ahead.

[Richard Choe:]

Hi, I just wanted to follow up a little bit. And given your, I guess pre-stabilized capacity and the development table if things are continuing, where I assume the development table change but if things weaken is there the ability to pull that back. And maybe just give us a little color on how you look at the current development table because it is kind of substantial for 4Q and 1Q, just to get a sense there.

[Diane Morefield:]

Yes, our developments are obviously geared towards our successful leasing and our backlog. So and as we mentioned the development currently under development and table of the supplemental disclosures roughly 60% leased on a square footage basis but almost 70% of the megawatt. So that can vary quarter to quarter. This is a really strong pre-leasing statistic for what we are spending capital on. So we're pleased with that. But then part of our CIP is shell because we do want to build shell and we mentioned that there were times, particularly in Northern Virginia that we didn't have shell capacity, be able to meet the timeline for some of the larger deals that were getting done. So we do have shown in all our key markets as well. And then we build out obviously, the data halls as we pre-lease. So I think we're in good shape with our current development capital, and again, we increased the total for the year, but that was really with the land purchase we made in London in the third quarter.

[Bruce Duncan:]

Richard, I mean, to add to that, I mean 20% of that cost when we think about a build is the land in the shell. And the 80% is kind of that data center fit out right which is in our platform in the US like we could kind of shuffled that wherever we need it, wherever the actual leasing happens which is us an advantage to move quickly and alleviate the risk of those things on the capital side.

[Richard Choe:]

Great, thank you.

[Diane Morefield:]

Okay.

[Operator:]

Our next question comes from Tim Long with Barclays. Please go ahead.

[Tim Long:]

Thank you. Maybe one and then just a real quick follow-up, just talk a little bit about the enterprise in the quarter, could you just give us a little color on kind of new logos compared to existing customers and kind of macro-COVID impacts in that part of the business. And then just the Q4 churn going higher, anything specific to that and is that more short term in nature? Thank you.

[Bruce Duncan:]

Michael, why don't you take the first one and I'll take the second.

[Michael Schafer:]

Yes, we -- the vast majority of the leasing with enterprises in the third quarter was with existing customers. We added I think eight new logos. We did $9 million leasing again as you see in our deck. The vast majority of the leasing in the quarter was with enterprises, and that $9 million is in line with historical trends. So for the most part, the leasing with enterprises in the third quarter was consistent with what we've seen over the last couple of years. Obviously, hyperscale we got to do a better job of. And with respect to the churn in the fourth quarter, there's nothing unusual about that. If you look at our expectation for the year, the range of 5% to 6%, we brought down the upper end of that range, but that level of churn for the year is consistent with what we've seen historically. It just so happens to be weighted towards the fourth quarter, but nothing unusual to call out.

[Tim Long:]

Okay, thank you very much.

[Operator:]

Our next question will come from Michael Funk with Bank of America. Please go ahead.

[Michael Funk:]

Yes, thank you for extending the call for me. I appreciate it. A couple if I could, first, Diane, for you, a bit of a historic question. Looking back and your comment earlier about messaging being one of the things you heard from the constituents, in January this year you put an 8-K out talking about a pullback in hyperscale activity. I thought a more kind of tempered expectation that you turned around and recorded a near-record first half of the year and then obviously the dip back in 3Q. So is there a change in visibility or sales cycle on the hyperscale side?

[Diane Morefield:]

I don't recall us in the first quarter talking about pullback in hyperscale going into 2019, particularly in Northern Virginia. I recall, we did say that we thought the hyperscale activity in Northern Virginia, 2019 over 2018 would be down and it was in fact down by 50%, but that was last year.

[Michael Funk:]

Yes, the 8-K you put out in January, I thought you said that when you announced some of the headcount reductions in January, I thought you said that you expected maybe lower expectation. I can double-check that, but --

[Diane Morefield:]

I think it was more referring to slow down from 19 let us do the rightsizing of our headcount and we had to grow in Europe, and so the headcount reduction was primarily in the US. So I think it was more of a reflection of the slowdown in 2019 than what we thought 20 was going to be, so I'm sorry for that, if that was a confusing passage.

[Michael Funk:]

Okay.

[Diane Morefield:]

But, yes, I think that, again -- and Bruce and the team will continue to lock -- look at the cost structure, but like any good business, you're always looking at your cost structure and if there's things you can do on the margin there.

[Michael Rollins:]

But no change in the sales cycle from hyperscale enough that you've seen?

[Bruce Duncan:]

Michael, the only thing that's really changing is the size -- which goes to more lumpiness in business. That would be…

[Michael Rollins:]

If I can squeeze one more in, I know we're going longer, just squeeze one more quick one in for Bruce. So you're listening to -- I'm assuming or expecting you also talked to some of the larger customers, and wondering what you heard from them on the reasons that you didn't get the share you deserve on the hyperscale side?

[Bruce Duncan:]

I would take the question is whether you have the product or they want it. And in some cases, we don't have the product where they have, other times maybe your prices or maybe someone else is something that is different than you, that's beneficial for what they want or it's more attractive in terms of where their other facilities are, and it fits better than where our facility is. So I think location is a big part of it, but I think our customers -- talking to our customers, I think they're very happy with the performance of what we've done to them, not just on the initial leasing, but more importantly day in and day out, dealing with issues, be it COVID, be it security, be it safety. It's important to them and we -- team under John's leadership now in terms of operations, it's all over this.

[Michael Rollins:]

Okay, thank you very much, Bruce. Thank you, Diane.

[Operator:]

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

[Bruce Duncan:]

Thank you, operator. Again, thank you for joining us for this call, we appreciate it very much. We appreciate your interest and we look forward to continuing our conversations and if you have any questions, talk to Di, Michael, myself, and we look forward to it. Thank you.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.