CyrusOne Inc.
Q3 2019 Earnings Call Transcript

Published: 31 Oct 2019

[Operator:]

Good day and welcome to the CyrusOne LLC Third Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Michael, Schafer. Please go ahead.

[Michael Schafer:]

Thank you, Sarah. Good morning everyone and welcome to CyrusOne Third Quarter 2019 Earnings Call.Today. I am joined by Gary Wojtaszek 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.

[Gary Wojtaszek:]

Thanks, Schafer. And welcome to CyrusOne is Third quarter earnings call. Let me start by saying that while we've had some pretty good quarter results over the last couple of years and a few that had larger bookings numbers. I can't recall a quarter that was stronger than this one given the large number of both financial and operational accomplishments. And I'm excited about the position we are in as we begin to look ahead to 2020. Slide 4 shows the growth rates for revenue, adjusted EBITDA and normalized FFO and normalized FFO per share we're all very strong in the quarter and materially above the peer group and broader REIT averages. This was in my view the best leasing quarter in the company's history with $52 million in annualized revenue signed and the most diversification. We have ever had across markets verticals and product types, including a big contribution from Europe. Our backlog is nearly $55 million derisking our growth in 2020. We have development activity across our markets in both the US and Europe in response to the strong customer demand we are tracking. We are also recently acquired 20 acres of land in Iowa connection with the least deliver a unique hybrid cloud solution for enterprises, allowing us to provide the provide the private cloud leg through an architecture that a significantly more efficient than the traditional on ramp compute node network topology. Lastly, as you know, we have been focus for years on getting to investment grade, which will be incredibly important to our future success. Slide 5 provides more color on the leasing results. And then as I just mentioned it was very broad-based in both the US and Europe, there were a couple of larger deals, but the biggest was only 5.5 megawatts and 7 markets had at least one megawatt of leasing , which highlights the benefit of having a geographically well-diversified portfolio.

[Diane Morefield:]

Thanks, Gary, and good morning everyone. As Gary mentioned, we had a great quarter with very strong financial and operational performance. As Slide 11 shows revenue and adjusted EBITDA grew 21% to 20% respectively. Normalized FFO per share grew 18% and as Gary indicated this is a significantly higher growth rate compared to the broader REIT universe. Churn was again low at 1% and we continue to trend towards the lower end of our 5% to 7% guidance range. Turning to Slide 12 NOI grew 18% on an adjusted basis, the decline in the margin year-over-year was driven by higher pass through meter power reimbursements as a percent of the total revenue, which result in zero margin contribution. Adjusted EBITDA grew in line with NOI and the increase in normalized FFO was driven primarily by the increase in adjusted EBITDA as well as lower interest expense. Moving to Slide 13, we maintain a balanced geographic contribution across our markets. With the leasing success we have had in Europe and our continued expansion there. The contribution from those markets will continue to increase over time. The percentage of CSF leased for stabilized properties was down slightly compared to the prior year, but remains high at 88% despite a 16% increase in capacity. Turning to Slide 14. We have a robust development pipeline to support our strong leasing results with projects across a number of our markets in both the US and Europe. The pipeline is 45% pre-leased on a CSF basis, which is up significantly from the prior quarter. The overall portfolio will be roughly 25% bigger on a CSF basis compared to a year ago upon completion of these projects. Moving to Slide 15. As Gary mentioned, we are thrilled that finally achieved investment grade status. S&P it upgraded our issue level rating to BBB-minus a year ago and with Fitch initiating coverage recently with the BBB-minus rating. We now have the 2 ratings we need for investment grade index eligibility to be able to access that market. Additionally, Moody's recently upgraded us to one notch below investment grade. As you know, we've been focused on getting the investment grade for years. And in addition to the obvious financial balance there are also significant strategic benefits. Most importantly, it improves our access to capital, which is critical and a capital-intensive business and ensures that we are able to take advantage of the secular demand trends in the coming years. Unlike the high yield market, the investment grade bond market never shuts down and in periods of economic distress or recession. It will give us the significant strategic advantage since we can be opportunistic and potentially acquire assets at discounted prices. As Gary also mentioned, it's very important to our customers, particularly the hyperscalers but also Enterprise Company to know that they have partners that are financially sound and positioned to support their growth. They also want to know that the providers to ensure their mission critical gear will be would be around for the long haul and financial risk is just as important to them as the security and reliability of the data center infrastructure. It also no doubt will improve our profitability and we estimate that we can achieve savings of at least 100 basis points of an investment grade issuer compared to the high yield market, combined with our build cost advantage this helps insulate us from aggressive pricing decisions by other providers. Turning to Slide 16. We believe we've had an investment balance sheet of an investment grade company for years and now that we have finally reached that status we will continue to manage our leverage in the mid-5 times range to protect our ratings. We ended the quarter at 5.4 times net debt to last quarter annualized EBITDA. We have no near-term maturities and we have nearly 1.3 billion in available liquidity. We executed two swaps in the quarter to better position the business for the long term. First we synthetically converted 500 million of our term loan maturing in March 2023 into more attractively priced denominated debt resulting in a nearly 200 basis point decrease in the average interest rate over the remaining term based on the current LIBOR and forward curves. This better aligns our long-term euro funding requirements with our expected growth in Europe over the next few years. Also as a result of the inverted yield curve, we converted the remaining 300 million of this term loan tranche into fixed rate debt decreasing the interest rate on this tranche to approximately 2.5%, and increasing the percentage of fixed rate debt to 54% at the end of the quarter. As we've mentioned on prior calls, now that we are investment grade. We plan to increase the proportion of fixed rate debt in our capital structure. We had 475 million outstanding on the revolver at the end of the quarter, but 450 million of that and been swapped to euro denominated debt totaling proxy approximately €400 million. We expect to term out that into long-term fixed rate euro market debt by the end of this year. We also plan to reevaluate, we plan to evaluate refinancing $1.2 billion, existing notes maturing in 2024 and 2027 which are at high interest rates and we expect this will generate significant interest savings. Finally, we will also look to recast our credit facility at some point early next year. Moving to Slide 17, our backlog is more than double in size compared to the end of the second quarter to nearly $53 million. This includes approximately 5.5 million in revenue associated with a paid reservation expected to be exercised in the next 12 months. The backlog, combined with the full year impact of leases that have recently commenced provide the nice baseline for continued revenue growth into next year. Turning to Slide 18, we are slightly adjusting our guidance ranges given we are closing in on year end we are decreasing the midpoint of the revenue and adjusted EBITDA ranges each by less than 1%, primarily reflecting a push back and commencement timing for a few deals as compared to our prior outlook. We are increasing our normalized FFO per share guidance midpoint by $2.05 primarily as a result of lower interest expense that we had previously anticipated. Again, this is mainly driven by the impact of the swap that I just described. Lastly, we tightened our guidance range for capital expenditures to the $900 to $950 million range given the projected development pipeline spending for the balance of the year. In closing, we are very pleased with our results for the quarter, particularly having had one of the strongest and broadest leasing quarters in the company's history. Again getting the investment grade was a significant step that was years in the making. And we are now in an excellent financial position to continue to prosecute our business model and expansion plans in the coming years. Thank you for participating in the call, and we are now happy to take your questions.

[Operator:]

The first question comes from Frank Louthan with Raymond James. Please go ahead.

[Frank Louthan:]

Great, thank you. So I guess question you still may not comment, but you say you're not pursuing a sale. Just curious, does that mean you're not entertaining offers or definitively not for sale? And then can you comment a little bit on the revenue trajectory for the back half implies kind of flat to down for revenue. Can you give us some color on what's driving that?

[Gary Wojtaszek:]

Frank, so my comment on the -- on the market rumors with just felt it was appropriate to come out with a statement, but that's all I have to say on that at this point. With regard to the revenue look, I think we had a really strong quarter going to get you, on the guidance for the quarter, but for the second, for the last quarter. But in general, I mean we are up around 18% 20% year-over-year of that our organic growth was about 14%. So it was really strong for the quarter. We took down our guidance a little bit just to some of the delayed installments and bookings for the quarter, but we feel really good about where we're sitting right now, particularly as we head into 20 with me have the strongest backlog and a really long time.

[Frank Louthan:]

Just to clarify on your comments on what you said that you expect to see some more of the hyperscale activity in the back half. I think the market was maybe looking more front half. Does that mean bookings or is that mean actual starting to get the revenue from what you've been booking or how should we think about that?

[Gary Wojtaszek:]

Yes, we're still not there in terms of calling the turnaround for that market. I mean we're seeing clearly more activity and particularly this quarter for us in Europe in particular. But at this point, we don't see that same frenzy, really kind of turning around if it does, that would be great. But we feel more that it's probably a second half issue than it is a first half issue, and I'm talking about bookings not revenue.

[Diane Morefield:]

And Frank, clarify if your comment on revenue being slightly down compared to second quarter. Remember, we had 17.5 million in equipment sales in the second quarter and only about 2.5% this quarter. So that was really the swing if you're looking at that trend.

[Frank Louthan:]

Okay, thank you very much.

[Gary Wojtaszek:]

Yes. We had called that out last quarter so people would know about that.

[Operator:]

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

[Simon Flannery:]

All right, thanks very much. Good morning, Gary. On Council Bluffs interesting concept, can you just give us a little bit more background about how this all came about and what visibility do you have into the demand profile or pre-leasing to get you committing to that build is this and is this a model that you could move into other markets with similar profiles. And then just quickly on the paid reservation, is this some a client a customer option to take this space. And is this something we're starting to see more than what, what gives you the confidence that they will execute that so, and I think color on that be great.

[Gary Wojtaszek:]

Sure. Yes, I'll take the first part of the question Simon. So, yes, so this is a really interesting development for us, we've been talking for a while now. In terms of where we see the data center network topology changing, so that the nexus of that for the next wave of this is more going to be focused around the compute and storage nodes as these datasets get bigger and bigger and data becomes where the new gold is and people start trying to monetize that you're going to need larger and larger facilities for people to action upon that particularly AI being one of the great applications there. What we've done in that and that location as we're bringing on 4.5 megawatts of capacity, it's half of that capacity is sold out. The location of it is right along the 41 parallel that is the major East West Internet hubs and that's why a lot of the big hyperscale datacenter companies are located along that parallel across the country from Salt Lake back East. So what we're looking at doing there is putting a data center in close proximity to some of the hyperscalers bypassing an interconnection of and allowing those enterprise companies to do a hybrid deployment where they would put a lot of their managed equipment in our facilities. But then connect up to hyperscale data centers in close proximity. This is something that I think is going to continue to expand over time as the datasets get larger and larger. We've been working on a number of different initiatives in Houston in particular for our oil and gas customers because what we're seeing is that the data sets that they're dealing with are just so massive that it's not really efficient for our customers there to put that data into a cloud, because the ingress and egress fees going moving that data from back and forth to the cloud is really prohibitively expensive. So we're, we're expecting this type of topology to happen more and more as a datasets get larger over time. And I'll turn to second part of the question over to Diane.

[Diane Morefield:]

Yes. Regarding the paid reservation we included in our book into the called it out that at this point, it is just paid reservation, it is with one of our top customers and its contiguous to an actual lease that will be commencing next year. So we feel it's a high probability that they would actually take this space and it is that there are options.

[Simon Flannery:]

Thank you.

[Operator:]

Our next question comes from Jon Atkin with RBC. Please go ahead.

[Jon Atkin:]

Thanks. So yes, on the Council Bluffs topic, you've got Quincy. And then I give, I guess you've got like ag report A7 and do we think about those three in kind of the same vein around single-tenant or at least maybe multi-tenant hyperscale type server farm deployments. Is that in essence what you're trying to do in all three locations?

[Gary Wojtaszek:]

No, actually the port facility and the Netherlands in Quincy was really more single-tenant hyperscale focused, that's what we believe will obviously saw to anyone, but the original underwriting was based on the hyperscalers or choosing those locations. The Council Bluffs investment here is very different this is to really establish an enterprise focused data center going after the hybrid market with enterprise customers going in as well as cloud cross -- linking up to cloud customers data centers, so that they can get in close proximity to the hyperscalers compute and storage nodes.

[Jon Atkin:]

Got it. And. And then just a couple of kind of cats and dogs but JEDI contract and it's been awarded. But there is quite possibly a challenge coming in, and I wondered to kind of what read is having a significant presence in Northern Virginia on how that might affect the sector.

[Gary Wojtaszek:]

Sure. Okay. We'll see how this will work out. I mean the government works at a pace that is really, really slow. So I'm. I probably have a better shot of growing here before that deal actually gets it's closed. But I think we're in a good position. I mean clearly Microsoft won that contract that is really good, particularly given that we're a big customer of ours, so we think we're positioned really well. We've got about 130 megawatts of capacity that we are bringing under shell online. So we'll be able to handle that. To the extent that we were to win it, but I think in general, it's a really good healthy sign for the Northern Virginia market whether we get it or someone else gets it just means that a lot of the supply that is has been deliver there is going to get utilized, which I think is better for the market overall because as I've said I thought and still do that the Northern Virginia market is a bubbly market. I think that is there's too much capacity there is over overbuilt. So I think it's going to take some time to work through all the capacity that has been brought online.

[Diane Morefield:]

We have tremendous capacity, though, whether it'd be shallower to build out shell on three different campuses to be able to accommodate if there is leasing related to that contract.

[Gary Wojtaszek:]

Yes. And in the past we federally built data center so high security data centers. We have a lot of experience building out those facilities as well.

[Jon Atkin:]

Related to that. I was wondering if you have any sort of updated observations on the behavior unlisted entrants in markets such as Northern Virginia or even Phoenix or elsewhere in terms of pricing that they're showing two customers or their pace of development is any of that change.

[Gary Wojtaszek:]

Yes. So I think the pace of development has definitely slowed down, which is good. I think some of the pricing numbers that you're seeing tossed around is what people do when they are overextended that are willing to take pricing that to me is just ridiculous. I think what you've seen in our pricing this quarter was really strong focus on appropriate return on capital we walked away from a number of deals that we thought were just ridiculously mispriced. Our hope is that some of the folks that were coming in and speculatively building out some of these facilities will stop that and we think that if the continued hyperscale kind of slowdown in purchases continues. We think that there is going to be some of those other smaller players that are going to probably take a different strategic choice to go forward.

[Jon Atkin:]

And then any update on Santa Clara.

[Gary Wojtaszek:]

We're continuing to develop that property that is going to be the largest data center campus in Northern Bridget -- I mean in Santa Clara, we won't have property online near to sell until the end of next year at the Early.

[Jon Atkin:]

Thank you very much.

[Operator:]

Our next question comes from Robert Gutman with Guggenheim Securities. Please go ahead.

[Robert Gutman:]

Hi, thanks for taking my question. So 23 million enterprise. You had mentioned last quarter, I believe a 5 megawatt deal that had been signed after second quarter end. I you were saying San Antonio with another potential 5 behind it. And I'm wondering if that seems to be part of it, plus if you add in the. think you said 2 or 2.5 megawatts in Iowa, I'm assuming you're counting that as enterprise 2. No, that's not being counted as enterprise.

[Gary Wojtaszek:]

No, that not.

[Robert Gutman:]

Okay. But then in total was all the enterprise in the US, or is any of that in Europe.

[Gary Wojtaszek:]

Yes, was a little bit in Europe, but it was predominantly US and you're spot on for San Antonio. That was a big win for us at the beginning part of the quarter and again there, I mean, this is just kind of a validation of how important that investment grade rating is. While we didn't have it then, we spent a lot of time with that particular customer with going through financial diligence on us. They wanted to make sure that there was a partner that they are working with. It was going to be around for a while and they decided to go with us and this was what we were added capacity, so we agreed to go build this facility for them and they decided that it was a no interest to wait for us to go deliver that facility, basically because they like to our financial position versus some of the other folks that they were looking at. And that's why we're really excited about what the IG rating will do for us. More so in the future as the likelihood of recession kind of comes further interview we're heading into that and with a stronger balance sheet is something that I think is going to be much more important for our customers go forward.

[Robert Gutman:]

Great, thanks. One other. Sorry for that.

[Gary Wojtaszek:]

And as Gary said this in his formal remarks, but it was such a such a broad leasing or bookings quarter and yet there wasn't like one huge deal that student, the largest fleets of the was 5.5 megawatts, almost 80% of them MRR with greater than 500 kilowatts. So is a nice broad blend of between the 500-kilowatt and 5.5 megawatts and of the ones over 500 kilowatt and roughly 25% of that was enterprise. So again, really, really nice mix that we hope to see continue.

[Robert Gutman:]

Great, thanks. Can you also just update us on the near-term availability for leasing in Europe based on what you've delivered and what's coming online near term?

[Gary Wojtaszek:]

Sure. Yes, we've got plenty of capacity available and more coming online in London. Frankfurt is our tightest market. We're effectively sold out. We are bringing on capacity that will have online there. Right around June, July next year, we'll have a couple of megawatts available to sell after that we're looking at securing another property there. Amsterdam will have online at the end of this quarter at 4.5 megs of that we sold out a couple of megs, of that 3 or so megs of that already. So we've got a little bit left. Still working through some of the nitrous oxide emission issues in Amsterdam, Netherlands as well as the moratorium in Amsterdam. But we think we're in good position there. Dublin is coming online and we'll have plenty of capacity there and that will be delivered I think in the third. Beginning in the third quarter of next year as well. So we feel like we're in a really strong position heading into next year. Our hope is that the spreads issue get settled out and people get back to buying. London has obviously been the weakest market in Europe and I think to a big degree it's because of all of the concerns around Brexit.

[Robert Gutman:]

Great, thanks.

[Operator:]

The next question comes from Erik Rasmussen with Stifel. Please go ahead.

[Erik Rasmussen:]

Thank you. Maybe just on the European topic. And then you've kind of talked a lot about the development and some opportunities in a lot of those markets and bringing our capacity. But looking at then sort of CapEx. So this year -- this quarter you bumped it up a little bit, how should we be thinking about the level of CapEx heading into 2020 obviously measuring future demand and having capacity and land, bank availability to kind of meet a lot of that future demand in some of the things you just talked about?

[Diane Morefield:]

I'll take that one. So we're not in a position to give guidance for 2020 on any of the metrics, including CapEx and we will do that on our February earnings call and clearly our capital spend is based on the success of our leasing and we clearly had a very strong lease or bookings quarter which we'll factor into our capital budget going into next year. I think it's important to point out also we remain committed to continue to grow in our 4 European markets as well as Santa Clara. But we'll give guidance in February.

[Erik Rasmussen:]

Okay. And maybe then my follow-on on the leasing front, it seems like deal sizes are increasing and I think in the slide deck it seemed like a good percentage over three quarters or greater than the 500 KW. Is this a sustainable number or do you think deal sizes revert back to maybe closer to the average? Maybe just any sort of color there would be helpful.

[Gary Wojtaszek:]

This quarter, in my mind was really, really good because of the broad amount of deals we did. So as I had mentioned to one of the earlier callers, our biggest deal in the quarter was only 5 megs. And typically when we've had these type of record quarters has always been a really big deal like a 20 or 30 meg type deal that is really skewed. What was great about this was that the biggest deal was 5 megs. We did a megawatt in several different markets across the country and in Europe, so it shows about the diversity of that. The other thing is that our IX business was really strong. That was up 24% year-over-year, which is a really, really great number. It's a $50 million run rate business. The other thing is just half of that sale this quarter was for the enterprise. $23 million in enterprise bookings was by far and away the biggest quarter we've ever had. So that was a really strong quarter without the typical hyperscalers in there. We had some hyperscalers in there, but they are taking small amounts of capacity. That's why we think we're positioned really well for next year. We expect that the hyperscale market is going to turn around. And given where we're sitting from an inventory perspective we're going to be able to respond quickly to close a lot of those deals that we expect are going to come back around.

[Erik Rasmussen:]

Thank you.

[Operator:]

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

[Colby Synesael:]

Few questions. One is I know you're not obviously giving guidance for 2020 but Diane, in the past, you had mentioned on calls this quarter that you guys generally expect to see mid single -- mid teens revenue and EBITDA growth next year and I believe low double-digit FFO per share growth. I'm wondering if you could at least just reaffirm that. And then secondly, you talked a lot about pricing, which I greatly appreciate. I know that you guys aren't chasing those deals and as a result, you walked away from some you mentioned this quarter. But I'm curious what your expectations are as it relates to renewal spreads on your current business, call it over the next year. I can imagine, many of those customers are going to look for a reduction in price and then you're either going to have to go and match what they're asking for or risk then potentially leaving. So I'm curious how you're going to approach that. And then lastly, just curious with the company's interest is in terms of expansion outside of Europe. You've obviously done really well, kind of following the bouncing ball, if you will. Curious how important it is to be in even more markets over the next, call it medium-term as you're going to call it 2020 and 2021. Thank you.

[Gary Wojtaszek:]

Sure, I'll take the last two questions then Diane take the first. But with regard to where we're going to go in new markets. I mean we continue to look at different markets throughout Europe. When we went into Europe, we went in to build a big presence there. We're in 4 of the key markets right now. There is clearly one of the other flaps that we're not in now. So you should look for us to continue to look for expansion there. And a couple of the other markets as we build out our portfolio. Again, it's all relative to the customer demand that we're tracking. The conversations that we're having with customers and that really kind of dictates where we go and the pace at which we're going to deploy that capital. With regard to pricing, look, this is -- on renewals, that has been a trend that we have seen for many, many years and we've been managing through this for -- since we've gone public. Having this concern about other people coming in and lowering the price, something that you've had to deal with. The reality though is that it's really difficult for customers to move. Well, the rental cost that we're going to charge them for the space is 1 part of their overall bill of material that they're paying each month. It's actually probably the most insignificant part relative to all the other expenses that they have for that data center. And so while they could potentially get a lower price elsewhere, there is a lot of risk in moving it and a lot of additional capital required to do it efficiently and we kind of manage through that. I think for some of those companies that are out there offering that pricing, which I think is pretty remarkable, I think those companies longer term -- aren't in business for the long-term because it's hard to sustain adequate returns at those levels. And I think the concern that I have for the customers that went in there is whether they have a partner that is going to be around for the long term. Clearly, we've been focused on the long term since we bought this business. That's why we've never taken short term decisions and stretched our balance sheet. We've always maintained really solid leverage in order to get the investment-grade rating because we're building this company for the long term. So you're going to win some deals are going to lose some deals, but I think what you saw this quarter is, we've won more than our fair share of deals and took a tremendous amount of market share, even when we walked away for some of those deals that were pretty ridiculous

[Diane Morefield:]

And on our actual renewals that signed this quarter, it was basically flat. Up a little.

[Colby Synesael:]

Is that GAAP or cash?

[Diane Morefield:]

That is GAAP.

[Colby Synesael:]

With cash the same?

[Gary Wojtaszek:]

Probably down. I don't know. We need to look at that, but it's probably down. I don't know what the duration of those were.

[Colby Synesael:]

And then on the guide, the color for 2020. It just reaffirming what you said before.

[Diane Morefield:]

So for 2020, we're not giving guidance. And obviously, so much of what will drive it is 1 lease has commenced. Bookings were lighter in the first half but it has picked up so that will come in over time next year. So it's -- we're just not in a position to give guidance for 2020.

[Colby Synesael:]

Okay, thank you.

[Operator:]

The next question comes from Sami Badri with Credit Suisse. Please go ahead.

[Sami Badri:]

Hi, thank you. I just have some quick ones and then I have some other questions. The quick ones are what were the percentage of revenues from direct efforts with your sales force to customers versus what came in through value-added somewhere in the quarter?

[Gary Wojtaszek:]

100% this quarter.

[Sami Badri:]

100% direct. Okay. The other one is how many cross connects did you guys have at the end of the quarter?

[Gary Wojtaszek:]

I don't know.

[Sami Badri:]

Okay. The longer question is you mentioned -- in your prepared remarks, you mentioned European leasing was driven by U.S. hyperscale. Is this tracking above or below your expectations? Because I know the metric or the hurdle rate, we were discussing a while back was about 70% of potential activity in Europe was going to come from U.S. hyperscale customers or just U.S. customers. Are we above or below the 70% hurdle?

[Gary Wojtaszek:]

We're above. So Sami, when we went into Europe we assume that 100% of -- basically 100% of all of our underwriting assumed all the growth there initially was going to come out of the U.S. relationships that we have and predominantly hyperscalers. That's turned out to be exactly the case. However, what we've also mentioned is that we are planning on building out an enterprise focused sales force attacking the market that is difficult to do. It's a really long sales cycle and we have really done a nice job in building out that portion of our sales funnel in the enterprise space. We expect that we're going to continue to do work there and eventually, that's going to turn to the nice business, but that was never our underwriting going in. So far it's turned out exactly as we anticipated. It's mostly U.S. hyperscalers there.

[Sami Badri:]

Great. Got it. Thank you. And then last question for you is on Page #8 regarding the development yield. So if we were to look at these development yields and we split this up into 2 buckets colocation or traditional power and cooling and interconnectivity in IX, what percentage of revenues for these facilities is coming from IX as of the last quarter as of these high point development yields?

[Gary Wojtaszek:]

Yes. So 5% of our overall revenue is IX, so you can get some flavor for that. So if it's broadly distributed probably there's less of an IX component in Austin than there is in some of our other facilities. So it's not really a big driver. The bigger driver is just kind of the blended basis between the enterprise companies and the hyperscalers that we put in those facilities.

[Sami Badri:]

Got it, okay. Thank you.

[Operator:]

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

[Nick Del Deo:]

Hi, thanks for taking my questions. First, Gary, can you expand a bit on what underpins the view that hyperscale will come back in the second half 2020? Is that just based on customer discussions and then describing the road maps or are there other inputs? And are you talking globally or just the U.S?

[Gary Wojtaszek:]

It's predominantly a U.S. commentary. We are seeing really strong demand in Europe. Not of the same scale that we are seeing in the U.S. So the commentary is predominantly associated with U.S. demand and it's based on just conversations. We spent a lot of time meeting with all the customers sitting down with them, talking to them about their needs, where they're going to need it and the art comes in terms of trying to understand like how focused they are on needing capacity quickly. And while there is a lot more conversations about their need for capacity in different markets now it's not nearly at the pace it was a while ago and. And so we're still not ready to call that that market is going to turnaround anytime soon. If it does, that would be great but we're not planning on that for 2020.

[Nick Del Deo:]

Okay, got it. And then maybe switching gears a bit. You oftentimes complained that the market kind of systematically under-appreciate the value of your expansion opportunities. As far as part of what fueled expectations you might want to go private. I guess are there rules of thumb that you use yourself to assess that expansion option value when you think about what your stock is worth that might be worth sharing?

[Gary Wojtaszek:]

Look, we've got about close to a billion dollars of investments on our balance sheet. If we take the SIP and some of the GDS investments that we have there. And so that's roughly $10 per share. And so if you think about that relative to whatever number you're going to put. If you put a 15% return on it you're looking at a 15% return on $1 billion of investment that's a substantial amount of growth. Relative to we generate roughly $600 million of NOI 15% to 25% up. So you're looking at a pretty substantial potential value creation on that even on a growth-adjusted basis. Even if you just look not a book basis it's worth $10 a share. So I don't know how people value. I think in general -- I think most dedicated real estate investors do not ascribe a lot of value to developments. And I think that's with good reason because most real estate asset classes, don't really have the networking effect associated in their business that we do. If you look at our business, 75%, 80% of our business is generated from customers that are in more than one location and what we have seen since inception has been, once you get a customer in the door, the growth rate that you could see from their customer is over 20% CAGR. So I can see in some other real estate industries why there's not really the same networking effect, so they don't ascribe a lot of value to the development business. That is absolutely not the case in this business at all. When I think about our business and the development aspect of it. That's where I see all of the potential value creation coming from. We're sitting here in a position now and what we've just demonstrated this quarter is we just launched into Europe and we just leveraged all of our U.S. relationships with all of our customers over here after having gone into that entirely new confident in one year and it's and it's played out exactly as we envisioned and that's why we were comfortable going into 4 different markets there because that's exactly how the company has been built from the ground up since inception. We started in 1 market in Houston or Cincinnati and just kept growing methodically organically over time and we've built a really nice business. And so we expand in these other markets. We did it with the expectation that we're going to be able to bring our customers there. Turned out to be exactly true and that's why we feel really confident about our ability to continue to deliver capacity and make the returns that we've done over a really long sustained period of time.

[Nick Del Deo:]

Got it. Thanks, Gary.

[Operator:]

The next question comes from Ari Klein with BMO Capital Markets. Please go ahead.

[Ari Klein:]

Thanks. Gary, Can you talk to the visibility you have in the pipeline and the timing on deals? It doesn't seem like you were expecting this kind of leasing performance just 90 days ago. So what kind of played out differently than you were expecting?

[Gary Wojtaszek:]

Well, some of the areas we had a really bad quarter last quarter. That was weak quarter for us. We have $13 million in the quarter, which was the lowest we've had in several years. Fortunately, we closed that one deal right at the beginning of July, so if you look at that it was like a $26 million quarter. So if you back off the 13 from the 52, we're up about 50% above where we are expecting to be and that was again, it's just the number of deals that we were focused on trying to close. I think got accelerate. I would not expect and no one should assume that this level of performance is going to be repeated again next quarter. We feel good that we're basically ahead of our annualized bookings number which was between $80 and $100 million for the year, but we expect next quarter is going to get back down to much lower number than it was this quarter. Worked out well that everything kind of came together this quarter and we closed a really a big number of deals.

[Ari Klein:]

Got it. And then I think you mentioned potentially building more enterprise in IX focus data centers in Europe. To what extent can you look for acquisitions there versus development.

[Gary Wojtaszek:]

Look, it's difficult. There's not many properties out there or platforms out there that you can acquire and that's why we're going the organic path. It's a little slower, but we know the returns that we're going to make on it are going to be better. We can control the quality of the product and the whole integration to our system. It's a lot easier when you do it from the ground up. Clearly, we'll look for other assets that become available but the reality has been a lot of these deals have just gone at multiples that are just not attractive to us. They're really, really expensive and we can't afford to play at that level. And we've decided to take a pass on that. We saw it last year. We were under a lot of pressure in the first quarter last year, predominantly because of the Zenium acquisition, which was very dilutive, as well as some of the expansion that we're doing. What you just saw this quarter, is that our revenue for Zenium is up 80%, our EBITDA is up over 100% and we're now starting to get the benefit of that acquisition with those assets that we acquired plus with the additional organic developments that we're putting around it to complement it.

[Ari Klein:]

Thanks.

[Operator:]

The next question comes from Richard Choe with JPMorgan. Please go ahead.

[Richard Choe:]

Hi, I just wanted to clarify a little bit given the I guess the bookings this quarter of a backing out the earlier deal and the strength in Europe. Can you kind of go back to what the enterprise business in the U.S. is looking like and what you're seeing there? And kind of the follow-on with that can you sustain I guess given the new business mix and with hyperscale being pushed out the $20 million to $25 million in bookings, a quarter or does that need to be reset downward?

[Gary Wojtaszek:]

No, I think the $20 million to $25 million a quarter is a good estimate that we should be able to continue to deliver on. I think once the -- once some of the hyperscalers come back in the market again, I think they're going to get quarters like this one, where you're going to get a big deal and it's going to pop. And it will basically go over that number. But if you look over the last 4 or 5 quarters we've been putting up that $20 million $25 million per quarter And that has been predominantly focused on the enterprise business. We've had record quarters and enterprise sales over the last couple even in spite of just kind of muted demand from the hyperscalers. So once the hyperscalers come back, I think we'll be able to do above that, but we're not willing to call that turnaround just yet.

[Diane Morefield:]

And again, it varies so much by quarter just comparing second quarter and third quarter. So you can't -- that's why we say more of the baseline of the $20 million annualized just feel pretty reasonable.

[Richard Choe:]

And I guess asking along with that, but the pipeline for the enterprise deals in the U.S. remains robust. Or is it more in Europe or can you give a little differentiation there?

[Gary Wojtaszek:]

The enterprise deals are almost all predominantly in the U.S. We've got that funnel building in the U.S. for the enterprise business, but to date all the bookings for the most part on the enterprise, have been in the U.S. In aggregate -- I didn't even actually mention this in my point. But our funnel is -- I didn't even have it in my prepared remarks, but our funnel is down a couple of percent 2% or 3% versus last quarter and it's down around 14% or so from last year. So typically I'd give that in my prepared remarks, but I forgot to do that. I'll give you some color on the quarter from a funnel perspective.

[Operator:]

The next question comes from Michael Funk with Bank of America Merrill Lynch, please go ahead.

[Michael Funk:]

Hey, good morning guys. Thank you for taking the questions here. A couple of quick ones, if I could. We've been hearing that due to some kind of the trade tensions maybe there were some slowdown or delay in some of the deals coming from Asia over into the U.S. for some of the hyperscale guys over there. I wonder if you're still seeing that and if you expect a recovery there in 2020?

[Gary Wojtaszek:]

Hey, Mike. We absolutely have, I mean that business was going really strong. It's dramatically slowed down over the last couple of quarters. Your guess is as good as mine as to when both governments can work out a trade deal. I've always been an optimist. I've always thought both of the presidents are very commercial. so I think they both want to get a deal done. So I'm hopeful that they will.

[Michael Funk:]

And then, Gary, back to your earlier comments about not pursuing anything at this time. I appreciate you wanted to clarify things, given all the press, but just wondering if you were trying to take control the narrative in front of what might be a kind of a history of deal, one that we just announced recently. And if your comments about taking a pass implies that you have been part of a process and have been looking at maybe just stepped away because the valuation as you noted. Then kind of in the second part of the to the question, I guess would be your comments imply that you're not open to a sale cause I've always kind of thought, I guess any companies for sale at the right price or just that there is not a process going on right now?

[Gary Wojtaszek:]

Look, Mike. I mean is there were so many news releases that got out that we felt it appropriate to kind of put out the statement to kind of bring some clarity to that. I think my comments in there were pretty much spot on. And that's really what we wanted to get across to everyone.

[Michael Funk:]

Okay, thank you for clarifying. And then final question, we're going to call it starting here in a second. Just on capital needs, Diane, how do potential JVs fit into your capital needs? You've kind of commented on the potential need to raise equity in the last few quarters, saying that you don't have any need to the near term. Just wonder if you could update that commentary.

[Diane Morefield:]

Nothing really to comment on in the JV category and as I mentioned in my prepared remarks will continue to manage our leverage in the 5.5x range, that's what we've committed to the rating agencies in order to protect our investment-grade and I think it's fair to say that as we've done in the past, we expect to opportunistically utilize our ATM to issue equity to manage to that leverage range and fund the development pipeline depending ultimately on what are our capital expenditure needs are.

[Michael Funk:]

Great, thank you, guys. So much for the questions and we'll see you in a few weeks in LA.

[Operator:]

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

[Jordan Sadler:]

Thanks. Sorry to press on this, but I feel like it's really not entirely clear. You've said you're not currently pursuing a sale. But is it fair to say from your commentary that your assess some offers and ultimately decided it's just better to be a public company?

[Gary Wojtaszek:]

I think in the last quarter, we got same questions. And we told everyone there was no comment on it. There were a bunch of subsequent news reports and releases and speculation on it. We wanted to provide some clarity, which was what we attempted to do again to say basically no comment on it, but actually more affirmative to say that there is no deal here. I don't think we could be any more clear than that.

[Jordan Sadler:]

Okay. Right now, running a process. And then, I appreciate that. And then in terms of any other comment on the different M&A transaction that was in the market this week. Any thoughts on sort of how that might impact the competitive dynamic in Europe.

[Gary Wojtaszek:]

I think that's a great deal. I think Bill got a really great asset there and it was great to see Dave willing to do that. I think in general, losing Dave ultimately as a competitor is good for us. Right. I mean, he is a great competitor in the market and having one less company in the European market is going to be good I think for us. I think in general what you saw when Digital acquired Dupont and it was one less player in Northern Virginia that we benefited by that. I'm expecting that we'll continue to do well in Europe basically because a lot of the customers want to spread around their purchases so that they don't want to be so weighted to a particular player. I think in general is going to benefit us. But I think also that digital is going to do phenomenally well. Interxion is a fantastic asset.

[Jordan Sadler:]

To your comment. And then just Diane back to the financing and funding. You guys spend a lot of time on the investment-grade rating. Congratulations. How do you -- have you communicated your perspective funding of growth to the rating agencies? In other words, what's the expected mix of debt and equity, and what's the upper end of the net debt to EBITDA threshold?

[Diane Morefield:]

As I said we committed to managing in the mid 5x range and that's what they expect from us. So the math works out to pretty similar capital structure regarding percent of equity and percent of debt to our current balance sheet because we ended the quarter at 5.4x net debt to EBITDA. Now overtime, obviously, our EBITDA grows so we create more leverage capacity through that, but as far as where we're managing to, that's where we're managing to.

[Jordan Sadler:]

So it sounds like you've softened up a little bit on the view toward equity right. I feel like earlier in the year or are you kind of maybe it was the stock price. If you guys kind of waved it off and said, look, we don't need equity. We're going to internally fund. It doesn't sound like you're saying that right now per se, or am I missing it?

[Gary Wojtaszek:]

No, I think either way. And I mean on that. George. So getting investment grade is something that we are absolutely going to protect. There is only 400 companies that have an investment-grade rating and now we're going to be one of them. And so the strategic importance of having that particularly as we head into an economy that is kind of slowing down is going to be really important. So you should assume that we're always going to do the right thing for the long-term interest of the company. And then if that requires getting equity in there that's what we'll do.

[Jordan Sadler:]

Thank you for the time.

[Diane Morefield:]

You're welcome.

[Operator:]

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

[Gary Wojtaszek:]

Great. Everyone, thanks for joining the call. We'll see you in a couple of weeks at if you have any other questions, don't hesitate to reach out to Schafer or Gary, they're here. Take care.

[Operator:]

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