CyrusOne Inc.
Q1 2018 Earnings Call Transcript

Published: 3 May 2018

[Operator:]

Good morning and welcome to the CyrusOne First Quarter 2018 Earnings 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. I would now like to turn the conference over to Michael Schafer. Please go ahead.

[Michael Schafer:]

Thank you, Brandon. Good morning, everyone, and welcome to CyrusOne's first quarter 2018 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 first quarter earnings release along with the first 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 to the most 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, Gary Wojtaszek.

[Gary J. Wojtaszek:]

Thanks, Schafer. Howdy, everyone. Welcome to CyrusOne's first quarter earnings call. We've put up great numbers across the board with one of the strongest leasing quarters in the company's history and revenue and adjusted EBITDA growth of over 30%. Our sales funnel remains strong even with the big quarter and we are well-positioned with capacity across all our markets in the U.S. The closing of the Zenium acquisition is expected this month and we will soon have a presence in four of Europe's largest markets. As slide 4 shows, revenue of $196.6 million was up 32% over the first quarter of 2017 and adjusted EBITDA of $109.5 million was up 36%. Our organic revenue growth was 22% and organic EBITDA growth was similar. These are among the highest growth rates for publicly traded REITs and reflect great execution by the team as well as strong underlying fundamentals. Normalized FFO of $0.85 per share was up 18% compared to last year. Pro forma, including Zenium, bookings for the quarter totaled 32 megawatts of power and 240,000 colocation square feet and the leases will generate $45 million in annualized GAAP revenue. This includes 3 megawatts and 14,000 colocation square feet, totaling more than $4 million in annualized revenue signed by Zenium and over $40 million booked in our portfolio. We also added three new Fortune 1000 customers during the quarter and now have a total of 200, which is a significant milestone, but also means that we have 80% of the Fortune 1000 still to go, which Tesh is feverishly working on. We remain very focused on Europe. And in addition to the sites in London or Frankfurt from the pending acquisition of Zenium, we have additional sites in process in those two cities as well as Dublin and Amsterdam that would increase our capacity in these markets to more than 200 megawatts. We were also active in the capital markets during the quarter, increasing the size of our bank credit facility by $1 billion to a total of $3 billion and issuing approximately $150 million in equity under our ATM program. Moving to slide 5, excluding the leasing by Zenium, we signed more than $40 million of annualized revenue during the quarter, over 50% above the prior four-quarter average and double our guidance of $20 million. We signed 17 new logos. And consistent with prior quarters, our customer acquisition was broad-based, with these companies spanning seven different verticals and deploying across nine markets. The leasing skew towards larger deals, with approximately three quarters of the bookings associated with deployments greater than 500 kilowatts. Our leasing over the last four quarters represents nearly 20% of revenue, implying continued strong future revenue growth into 2019 and beyond. Consistent with prior quarters, the cloud companies again contributed significantly to our leasing in the first quarter, accounting for more than 70% of annualized revenue signed, and this vertical now represents 32% of our revenue. These companies continue to report very strong results, and their growth is accelerating. AWS is now a $22 billion run rate business and grew 49% this quarter, which is up from the 45% growth rate in the fourth quarter and the 42% growth rate in the third quarter. Azure grew 93% and is a multi-billion-dollar business, and Google Cloud is now generating more than $4 billion in annual revenue. The Chinese cloud companies are growing just as fast, if not faster, and are expanding internationally particularly into the U.S. and Europe. We believe demand from cloud companies will continue to account for a significant portion of our growth in the coming years and we are focused on convincing them to outsource 100% of their data center requirements as we can deliver capacity faster and more cost efficiently than they can on their own. Turning to slide 6, our interconnection business remained strong. And as we develop denser ecosystems within our data centers consisting of cloud companies, content providers, carriers, networks, and enterprises, we expect continued robust demand for high-margin cross-connects. There is also a strong demand for SDN-enabled elastic cloud interconnection as enterprises increasingly see multi-cloud solutions. Interconnection revenue of $9.7 million for the quarter was up 21% over the first quarter of 2017. We added more than 1,000 cross-connects in the first quarter and now have over 16,000 across the portfolio, which is one of the largest and fastest growing interconnection product lines in the industry. Moving to slide 7, domestically, we have a balanced mix of raised floor, shell capacity and land to continue to grow the business while deploying capital in a prudent manner. We have approximately 500,000 colocation square feet currently available for lease either built out or under development. Based on our first quarter and trailing four-quarter leasing velocity, we have inventory to cover another two to three quarters of bookings. This is consistent with our strategy of building raised floor to track our late-stage sales funnel to minimize the capital at risk as fitting out data centers accounts for more than 85% of the capital spend. As I mentioned on last quarter's call, we had a record sales funnel at the end of 2017. Even with the strong bookings this quarter, the funnel, which does not include Europe, is up 2% sequentially and more than 40% year-over-year. And we believe we are well-positioned to meet this demand. We have another 2.3 million square feet of powered shell either currently available for development or under construction. Upon full build-out, the shell will increase the size of our footprint in the U.S. by more than 40%, and we have over 300 acres of land that will continue to give us the ability to grow. Turning to slide 8, as you know, establishing a platform in Europe is a top strategic priority for us and is the first step in our larger objective of becoming a global player. The acceleration in demand that began roughly two years ago has continued, and the European market absorbed nearly 120 megawatts in 2017, which included significant demand from hyperscale companies for larger deployments. This has been reinforced by the numerous inquiries we have received as nearly all of our cloud customers and at least 15 of our 20 enterprise customers want us to help them with requirements in Frankfurt and London, as well as in Amsterdam and Dublin. Once the Zenium acquisition closes, we will have approximately 20 megawatts available for lease in London and Frankfurt, the two largest European markets. As I mentioned earlier, Zenium had a strong first quarter, signing 3 megawatts with one of our existing customers who appreciated that we entered into the acquisition with Zenium as this provided them assurances that they would be able to continue to continually grow with us throughout Europe. Given the sales funnel we have established for Zenium, we now expect to achieve our initial 28 bookings plan by the end of the second quarter, which is half the time we originally thought it would take. Additionally, as the second part of our land-and-expand strategy in Europe, we are pursuing numerous opportunities to grow in London and Frankfurt, as well as establish a presence in the other key European markets. We expect to close soon on land in Frankfurt adjacent to the existing Zenium locations, with capacity for an additional 22 megawatts of power. We also have other sites in process in London, Dublin, and Amsterdam that would more than quadruple the size of our European footprint to over 200 megawatts. We are working hard to secure the capacity across these markets to support our customers as they grow internationally. Moving to slide 9, as it has been a little more than six months since the announcement of our investment and commercial agreement with GDS, the leading data center provider in China, and we have been jointly engaged on many initiatives. We are currently in discussions on approximately 15 deals across the U.S. and China as a direct result of this agreement. The deals are with hyperscale companies, as well as enterprises across numerous verticals. You can see in the lower right-hand corner of the slide that GDS's performance has been very strong, with fourth quarter revenue and adjusted EBITDA growth of more than 60%. They have a backlog of nearly $200 million in annualized revenue, which is almost the size of their current revenue, and the value of our investment has more than doubled in a half a year. I'm excited about the relationship, and I believe that as more investors learn about GDS, their share price will ultimately reflect the intrinsic value of the company that William and his team have built. In closing, we are off to a great start in 2018. We have one of the highest bookings quarters in our history, have a record sales funnel that is up 2% sequentially despite the strong sales, have plenty of inventory across the U.S. to meet our demand, and ended the quarter with a really strong balance sheet with over $2 billion of liquidity. Our U.S. operations continue to perform at a really high level and should continue to do so well into the second half of 2019. However, I think the more important thing to highlight is our international expansion. As you saw this quarter, about 10% of our bookings, including Zenium, were generated in Europe, which is a market that we still have not launched in yet. As I explained, we have properties in process in four of the five leading Internet markets in Europe, which we plan to bring online in 2019, enabling us to significantly grow our company beyond the U.S. I expect our U.S. business will continue to aggressively grow in the high teens well into 2019. And as we develop the four other markets in Europe, we should see continued to slightly higher growth into 2020 and beyond. Also, I would like to point out that we are the last data center REIT to report. And as you can see, the industry had a very strong quarter. Aggregate bookings across the data center REITs were approximately $130 million, up nearly 30% from the first quarter of 2017 and nearly 50% from the fourth quarter. Hopefully, this type of bookings performance dispels any notion or fear that the market is slowing down. As I noted earlier, the hyperscale cloud companies that this industry services are putting up tremendous quarters with very high growth rates and I expect that CyrusOne's growth will continue to parallel the growth in the cloud companies both in the U.S. and internationally. There's a very balanced mix of supply and demand, and the industry is allocating capital in a very rational way and I do not see any signs of that changing. I will now turn the call over to Diane who will provide more color on our financial performance for the quarter and update on our guidance. Thanks.

[Diane M. Morefield:]

Thanks, Gary, and good morning everyone. As Gary highlighted, we had a really great quarter and remain well positioned for the balance of this year and into 2019. As slide 11 shows, our revenue, adjusted EBITDA and normalized FFO each grew over 30%. The company's growth continues to be driven primarily by strong leasing as well as our interconnection business growth. Additionally, during the quarter, we received approximately $5 million in lease termination fees. These fees related primarily to a reimbursement for capital expenditures made in connection with the delivery of an initial deployment for a customer that subsequently migrated from that location to another CyrusOne facility. The lease term fees increased normalized FFO per share by approximately $0.05, and we do not have any additional lease termination fees included in our outlook for the remainder of the year. As Gary mentioned, organic revenue growth, excluding the impact of these fees and the contribution from the Sentinel assets in January and February was 22% over the first quarter of 2017. Churn for the quarter was 0.5%, the lowest quarterly results since the fourth quarter of 2015. Despite this unusually low churn, we still expect full year 2018 churn to be in the 6% to 8% range based on some significant known churn related mainly to non-renewing leases that will be occurring in the remaining quarters. Turning to slide 12, NOI grew 33% in the first quarter, driven primarily by the increase in revenue. The adjusted EBITDA margin was up 1.6 percentage points to 55.7%, driven largely by revenue growth without a commensurate growth in overhead and the $5 million in lease term fees. Normalized FFO increased 34% while normalized FFO per share grew 18%. As the chart at the bottom of the slide shows, the net impact of the adjustments to normalized FFO to arrive at AFFO was slightly negative in the first quarter, in line with the net impact in the fourth quarter. Please note that we now include straight line rent and deferred revenue adjustments as separate line item in the adjustments to normalized FFO in our supplemental disclosure. Slide 13 provides an overview of the portfolio by market. We have significantly grown our footprint over the last year to meet the demand we are seeing across our markets. Our portfolio is very balanced geographically and will be further diversified with our expansion into Europe. The table on the right shows that CSF leased for stabilized properties as of the end of the quarter was 92%, the same as in the prior year period. While total CSF leased declined 2 percentage points year-over-year, it still reflects strong underlying demand, considering that CSF capacity increased by 35% over the same period. Additionally, total CSF leased is up 3 percentage points compared to the fourth quarter of 2017 even with more than 80,000 square feet of raised floor coming online. This sequential increase reflects conversion of our late-stage funnel into signed leases in the first quarter. Slide 14 summarizes our development pipeline as of the end of the quarter, which includes projects in Dallas, Northern Virginia, San Antonio and Phoenix that will deliver a 132,000 colocation square feet and 36 megawatts of power capacity. Approximately 40% of the colocation square footage is pre-leased. As Gary mentioned, even with one of the best leasing quarters in the company's history, we have a record late-stage sales funnel that is up more than 40% compared to a year ago. This capacity, combined with the available capacity that has already been built out, positions us well to meet the demand from the sales funnels. Upon completion of the projects in our development pipeline, the size of our portfolio will have increased more than 40% from a year ago to nearly 3.5 million square feet of raised floor. And the Zenium properties will add another 260,000 square feet to the portfolio upon full build-out. Moving to slide 15, as we previously announced, in late March, we closed a new $3 billion credit facility to support our domestic and international expansion plans. The facility consists of a $1.7 billion revolving credit facility, which includes a $750 million multi-currency borrowing sublimit and term loan commitments totaling $1.3 billion. The term loan commitments consist of $1 billion five-year term loan, which includes a delayed draw feature, allowing us to draw $300 million over the next six-month period and a new $300 million seven-year term loan. We also decreased the interest rate margins on the revolver and five-year term loans by 10 basis points. Additionally, the credit agreement contains an accordion that allows us to obtain up to $1 billion in additional revolving or term loan commitments in the future. As you can see on the bottom of the slide, this new facility extended our weighted average remaining debt term to approximately 6.5 years. We have no debt maturities until 2023, and our debt maturity schedule is very balanced thereafter. Turning to slide 16, we continue to maintain a really strong balance sheet and a very conservative capital structure. We ended the quarter with leverage of 4.5 times, a fully unencumbered asset base with a gross book value of $5.3 billion, and available liquidity of approximately $2.2 billion at quarter-end. This gives us substantial financial flexibility to fund growth opportunities and achieve our strategic objectives over the coming years. We also raised approximately $150 million through our aftermarket equity program during the quarter, and on a market cap basis, shareholders' equity represents 71% of our total enterprise value. Our fixed floating interest rate mix is currently more weighted to fixed rated debt at roughly 55%-45% fixed to floating at quarter-end. S&P recently upgraded its outlook on CyrusOne from stable to positive, and our issue level credit rating is one notch below investment-grade, which leads me into slides 17 through 19. As most of you already know, one of our top strategic and financial imperatives is to become an investment-grade issuer, which will both enhance our access to and will significantly lower our overall cost of capital. These slides show how we compare with already rated investment-grade REITs of a similar size and across various financial metrics. As you can see, within this group, we have the second-lowest leverage, the highest EBITDA growth, and the second-lowest payout ratio. We continue to meet and speak with the rating agencies on a frequent basis and we believe that over time, the ratings will reflect what, in our view, is currently an already investment-grade credit profile. Turning to slide 20, our revenue backlog as of the end of the quarter was $39 million, nearly doubling in size from the previous quarter, reflecting the strong leasing during the first quarter. As shown on the bottom chart, we anticipate most of this revenue will commence over the next couple of quarters. The expected EBITDA contribution from this new revenue will further de-leverage the business once it commences. On a pro forma basis, it would reduce our leverage as of the end of the first quarter to approximately 4.3 times. Moving to slide 21, we are reaffirming our guidance for 2018. As noted earlier in my comments, we do not anticipate any further lease termination fees and have projected much higher churn for the balance of the year. Therefore, we remain comfortable with our guidance ranges at this point in the year. In closing, we are very pleased with our results for the quarter, and we look forward to the opportunities ahead of us, particularly as we begin our international expansion. Thank you all for participating on our call, and we are now happy to take your questions. Operator, please open the line for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question comes from Frank Louthan with Raymond James. Please go ahead.

[Frank Garreth Louthan:]

Great. Thank you. Can you give us a little more color on Amsterdam and Ireland projects, kind of where are you so far there, if you already identified and acquired land and so forth? Give us a little bit of color on that. Thanks.

[Gary J. Wojtaszek:]

Yeah. Hey, Frank. So we've got properties under control in both of those markets, we have two in Dublin and one in Amsterdam, and so we're just going through the permitting process as part of that and we would close on those once we get the final okay from the local authorities in terms of what we're trying to deliver on that – on those sites. We're expecting that the next couple of months, we'll be able to close on that and then deliver capacity next year.

[Frank Garreth Louthan:]

And how sizeable are those? I mean, what are you looking to enter those markets with in terms of capacity, and where you see that fitting in?

[Gary J. Wojtaszek:]

Each of those, we're estimating that we're going to be able to deliver a little over 50 megawatts in each of those markets.

[Frank Garreth Louthan:]

Okay. Great. Thank you very much.

[Gary J. Wojtaszek:]

Yeah.

[Operator:]

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

[Robert Gutman:]

Hi. Thanks for taking the questions. So I was wondering if you could clarify related to the termination fee – the lease related to the termination fee, how is that reflected in reported leasing and churn?

[Diane M. Morefield:]

Sure. It's actually not in churn because it was a migration. So the customer didn't churn out of the portfolio. But because they migrated to a different data center and we had covered some significant special CapEx for that customer when they originally took the space in the center they were moving out of, we did require a lease termination fee in order to cover our costs that we had incurred. So it's not in the churn number nor is it in the new bookings because it was a straight migration.

[Robert Gutman:]

Thanks.

[Diane M. Morefield:]

It was just a reimbursement, really, for our CapEx.

[Robert Gutman:]

Got it. Thanks. So one follow-up, with the additional – with the 3 megawatts leased to Zenium upon close, does that impact your prior guidance on expectations? I think you'd been around...

[Gary J. Wojtaszek:]

Yeah.

[Robert Gutman:]

...$18 million of EBITDA and a $33 million-ish for next year?

[Gary J. Wojtaszek:]

Yeah. I mean, what it does impact, Rob, is that we are – the underwriting that we did, where we said we're going to have a certain level of bookings this year, we're basically completing that. We expect by the second half of this year, we will have completed the underwriting that we had assumed we'd do in a full year. So, that business is progressing really well. The start times are basically going to be the same, so it's not really going to impact next year's number yet. However, we still have the second half of this year to drive more sales and we expect we're going to be doing really well there.

[Diane M. Morefield:]

And, obviously, what we reported on Zenium was pro formas if we would have owned it in the first quarter, it's what they actually did, but, yeah, we – and built into our guidance is still the same that we built in originally for Zenium because we anticipated a closing in the second quarter, which we still think is on track.

[Gary J. Wojtaszek:]

That's right.

[Robert Gutman:]

Great. Thanks.

[Operator:]

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

[Richard Y. Choe:]

Great. Thank you. In terms of the churn, can you give us a little bit more color on what's driving it? And given how low it was in the first quarter, kind of how should we think about it through the year? Is this something we should be worried about? And then I have one follow-up.

[Diane M. Morefield:]

Sure. Yeah. Again, it was very low in the first quarter and that's not sustainable. As we look out on the year, we know what leases are renewing. And this year, we have a couple big leases that we know are churning for a variety of reasons, M&A, other reasons. So, that's why the 6% to 8% is where we anticipate, in a full year, the churn to be. So, you're going to see that, the churn numbers over the next three quarters go up significantly from the 0.5%.

[Gary J. Wojtaszek:]

But right in line with...

[Richard Y. Choe:]

Yeah.

[Gary J. Wojtaszek:]

...6% to 8%....

[Diane M. Morefield:]

6% to 8%, total.

[Gary J. Wojtaszek:]

...that we've been modeling for a year or so....

[Diane M. Morefield:]

Correct, right.

[Gary J. Wojtaszek:]

...I mean, you get quarter-to-quarter variations of it, but I wouldn't read anything more through that than...

[Diane M. Morefield:]

Right.

[Gary J. Wojtaszek:]

...just the seasonality or the quarter-to-quarter changes.

[Richard Y. Choe:]

And then in terms of the bookings result, is this just execution or is this kind of a change in terms of how CyrusOne is viewed in terms of being more global or international of a player, are you seeing this strength because of just the existing business or do you think there's this different view that you're more of an international player?

[Gary J. Wojtaszek:]

Yeah. So, I mean, it's a good question. So $40 million of that, a little over $40 million is just for the U.S. business, which, I think, compares very favorably relative to the competitive landscape given that a lot of our competitors are big global players, and we're putting up really big numbers. So, we continue to punch well above our weight. And with the booking that we did that quarter, that's roughly 20% of our trailing 12 months revenue. So, from an organic perspective, that's – I think everyone – the reach-through on that should be that this company is performing at a really high level. I think what you see in some of this in the fourth quarter is really reflecting of lower bookings that we had in the fourth quarter that fell into the first quarter. So, there's some of that in there. But that said, in spite of a record booking quarter for us, we are sitting on a funnel that has actually increased 2% sequentially. So, we feel really, really good about where the bookings are going to go into the second quarter and third quarter. So we feel really good about what we're going to be able to do in 2018 versus what we did in 2017. Just to put it in perspective, the bookings this quarter, exclusive of Zenium, was roughly about 40% of the bookings that we did in all of 2017. So we've got three more quarters ahead of us, and we've got a really big funnel, and I expect that we're going to close a number of those really big opportunities as we head over the course of the year. So we feel really good about 2018 and, more importantly, 2019. And I think my comments, what I was talking about in the Zenium acquisition, is going to set us up really well in the second half of 2019 and into 2020 because I fully expect that we're going to basically export the same success we've had in this country in terms of organically growing our business, attacking those customers, convincing them to do more and more work with us as we develop our portfolio in Europe. So we feel really excited about second half of 2019 and into 2020.

[Richard Y. Choe:]

Great. Thank you.

[Operator:]

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

[Simon Flannery:]

Thanks a lot. Good morning. Gary, a great – coming back to the bookings, obviously a great quarter. Can you just talk about the competitive environment? It looks like you're continuing to win more than your fair share of the large deals. And how does it look in terms of all this new supply coming in and the IRRs you're getting on those deals? Thanks.

[Gary J. Wojtaszek:]

Yeah. Look, I mean, we play to win, right? It's a really fun organization that I get to work in every day, and it's very competitive. But in spite of us doing well and punching above our weight relative to our size, I think the broader point, though, is that the industry is doing really well. I mean, collectively, all the data center REITs did $130 million of bookings, which is up 50% from the fourth quarter and 30% from a year ago. So all the concerns about supply and new participants and all of that, to me that is just completely blown out of proportion because everyone put out really, really strong quarters. I mean I think two of my competitors put up record quarters, the strongest quarters that they've ever had. And while ours was really good, it wasn't the strongest we've had and I think that's a really good indication of just how strong the industry is doing. With regard to the returns, we're seeing pretty similar type returns as we've seen historically. And some of these bigger deals that we've done this quarter, they're in the high 13% type returns and I think that really goes to the point that we continue to design cost out. So if you looked at the average pricing that you saw in our results this quarter, it was down from what you've seen historically, a big portion of that pricing differential is associated with mix. But if you look at the returns on those assets that we're delivering, you'll see a lower price, but you'll see also a commensurate lower amount of capital that we're putting against it because of two things

[Simon Flannery:]

Great. Thank you.

[Operator:]

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

[Colby Synesael:]

Great. Thank you. Two questions, if I may. One, I was hoping you talk about what you're seeing in San Antonio specifically? It looked like you had some good leasing traction in that market in the quarter, and remind us what's your available land and capacity then what you might be looking to do. And then secondly, you raised, as you mentioned, about $150 million on the ATM. If I remember, last quarter, you suggested that you thought your stock was weak, and at least I took the impression that you probably weren't going to do something this quarter but you obviously did. What does that say? I mean, does that imply – what does that imply about how you feel about your own stock at these levels, and what's the likelihood that you'll continue to utilize the ATM almost regardless of where the stock is? Thank you.

[Gary J. Wojtaszek:]

Sure. Yeah. I'll – Diane can comment a little bit more on the ATM. But just in general, I think the takeaway should be that we have a lot of good opportunities in front of us that are going to require additional capital to satisfy, and we don't want to put our balance sheet at risk. So, we've always been very thoughtful in terms of making sure that we can bring on a balance sheet and the capital to fund all our needs. And we know that we're going to be closing the Zenium transaction in short order and that's going to require pretty substantial amount of capital commitment. Diane can provide more color on that. With regard to what's going on in San Antonio, it's goodness, right? I mean, we have been doing really well in that market, and it's one of our largest markets in aggregate across our portfolio. It was actually probably the second strongest market from the bookings perspective this quarter behind Virginia. And I think it's just a reflection of the strength that CyrusOne has in the great State of Texas.

[Operator:]

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

[Eric Luebchow:]

Hi. Thanks for taking the question. Just curious if you can maybe provide an update on the landholdings in Atlanta and in Quincy, if you're kind of tracking any potential anchor tenant deals there and how the sales funnel looks?

[Gary J. Wojtaszek:]

Yeah. Hey. We have like 50 acres in Quincy and 40 acres in Atlanta. And, as we mentioned before, we're talking to customers about taking those down but we're not looking at standing anything up until we get a hard commitment from those customers.

[Eric Luebchow:]

Got you. Thanks. And then, just one more, a couple of your competitors this quarter signed some powered shell leases, which they kind of expect to convert to a turnkey over time. Just curious if you're seeing any increased demand for those types of solutions and would that be something you'd be willing to pursue given all the powered shell you currently have available in your portfolio?

[Gary J. Wojtaszek:]

Yeah. It's all dependent, right? I mean, depending on the customer, depending on the terms and depending on that available inventory, will all go into the mix, right? I mean, we're not interested in kind of tying up a lot of valuable real estate if – in a market where we're doing really well, we make significantly better returns on doing fit-outs on a complete building, and wouldn't want to give up a lot of capacity in a market where we're running tight. So if it's a bigger market just like the ones that you mentioned like the Atlanta and Quincy, that's something that we would definitely consider doing there because we have nothing currently, and that's an easy way to get in. So it's all dependent on the customer, what they want and our available inventory and how we think about that.

[Eric Luebchow:]

Okay. Great. Thanks for the question.

[Operator:]

Our next question comes from Sami Badri with Credit Suisse. Please go ahead. Sami Badri - Credit Suisse Securities (USA) LLC Thank you for the questions. I just wanted to get some color on the customer spending dynamic in 1Q 2018. Was tax reform being passed at the end of 2017 a key factor for why 1Q 2018 signings and general bookings strength was so good for CyrusOne and some of the other data centers?

[Gary J. Wojtaszek:]

No, I think – look, I think what you heard from everyone's commentary in the fourth quarter and in the first quarter here was really these are just – it's just the natural gyrations of the business, right. I think everyone would have liked to have seen a stronger fourth quarter bookings number, including ourselves, and I think what you saw in this quarter is just kind of like a make-up for that. That being said, what I would point out is a lot of this is just expectations, right? In aggregate, in the fourth quarter, the bookings for that group were up 15% from a year ago. So that's a really good indication of the strong underlying organic growth and the bookings this quarter for that same group versus a year ago was up 50%. So, that should not be a surprise to everyone. Everyone is doing phenomenally well, whether it's Oracle, Facebook, Microsoft, Amazon, Google. I mean, these guys are all putting up tremendous numbers and continuing to do well, and this entire industry should continue to do well as the cloud continues to develop. I mean, the cloud business is only – maybe it's up to 10% market share of $1 trillion spend and that's going to get up to about a 60% market share. So we are in the beginning stages of a cloud transformation that is going to take at least five or six years to be completed. So we feel really strong about what's happening. Sami Badri - Credit Suisse Securities (USA) LLC Got it. Then, my other question is for specifically in regards to GDS. Would CyrusOne ever consider investing further into GDS to get APAC or specifically China exposure instead of relying more on maybe hyperscale deals coming from Chinese hyperscalers into the U.S., like would you consider a follow-on investment in GDS?

[Gary J. Wojtaszek:]

No, not so much a follow-on, I mean, but we want to work together jointly. I mean, the cooperation and the level of ongoing work streams that we have between both companies has really been impressive. I mean, we've got the stuff on the sales and marketing side that we've been talking about publicly, which is probably more important for everyone on this call. But beyond that, we've been working on supply chain commonizations, working on how they build, how we build. We've been working on appropriate BMS systems to work together more seamlessly as we accelerate and push customers back and forth. We expect that we're going to be closing a number of really large Chinese cloud companies in here and in Europe. And so that relationship is going really well. So I think GDS is a phenomenal business, and they're clearly growing at the fastest rate in the industry. And I don't think that anyone really fully recognizes the value inherent in that business, and so they're going to continue to do well. But I think we got out of that relationship, what we wanted was a really good strategic relationship with a fantastic partner in China, and eventually we're hoping to go all around the world. So maybe we'll do bigger things together in Asia on a joint basis. But for the time being, we have no more intention to burn any more capital in them, but we do want to help make them successful. Sami Badri - Credit Suisse Securities (USA) LLC Got it. Thank you.

[Operator:]

Our next question comes from Vincent Chao with Deutsche Bank. Please go ahead.

[Vincent Chao:]

Hey. Good morning, everyone. Just a quick question. Last quarter, we talked about the CapEx plan and how about $500 million of it was slated for U.S. success-based CapEx. Just curious, given the big booking quarter here in the first quarter, how much of that $500 million has now been earmarked based on signings?

[Diane M. Morefield:]

Yeah. Well, we actually had spent in the first quarter about $110 million of the $500 million. So, if you track that, we're pretty much in line with roughly 25% of the $500 million that's been spent in the first quarter. So, we still think that overall number is a good number in our guidance.

[Vincent Chao:]

Okay. So, I guess, of the bookings that were signed, is there more included in the remaining 80% of that spend?

[Diane M. Morefield:]

Well, no. Again, when we guided for the full $500 million of U.S. CapEx spend, we knew at the end of the year and going into the quarter what our sales funnel looked like and in which markets, which is why we are building out the capacity in the various markets that match that $500 million. So, it's all in line with our sales funnel and the bookings for the quarter.

[Gary J. Wojtaszek:]

Yeah. Think of it this way, Vin, in that – look, heading into this year, we were planning on and expecting that we're going to have to deliver more in bookings, say, roughly 20%, 25% more in bookings in 2018 than we are planning on doing 2017. So, we had a really strong quarter here in 2018, well above the 25%. It was more like 50%. So, we're feeling really good. So, think about that as kind of like de-risking what our objective was for 2018. The other thing you should consider then is the point that I'm mentioning in that, our funnel is just as strong. So, if we have another blowout quarter like this, then you should expect that we're going to be bringing on more capital to build out for that capacity.

[Vincent Chao:]

Okay. Thanks for that. And then, just curious if you could provide some color on timing of the – it sounds like you know about some churn events that are going to happen, that are going to pick up the churn level from the current rate. And can you give us a sense of the nature of that churn? I think you mentioned consolidation or M&A was one reason. I'm just curious if there's others that are just people are moving out or if there's a bankruptcy situation or anything like that.

[Gary J. Wojtaszek:]

No. One, as Diane mentioned, the M&A; the other one was like their businesses not doing particularly well and they are looking at cutting back their costs. So they're reducing their data center footprint globally.

[Vincent Chao:]

Okay. And – yeah, that's it for me. Thanks.

[Diane M. Morefield:]

Thanks.

[Operator:]

Our next question comes from James Breen with William Blair. Please go ahead.

[Jim D. Breen:]

Thanks. Probably more for Diane, just as you looked at your credit rating and you put the sheet up, a couple of slides with the comps to some of the investment grade guys, any thoughts sort of on an absolute basis how your borrowing cost could change if you were potentially to get upgraded to investment grade at some point this year? Thanks.

[Diane M. Morefield:]

Well, yeah. And we have not built that into guidance because getting to investment grade is not within our control other than continuing to manage the balance sheet prudently and have open communications with the rating agencies. But in the investment grade bond market, it's minimal of probably 100 basis points, if not more, on the interests cost when you can issue in that market versus high yield. Our pricing grid for our credit facility goes down once we get to investment grade. And you typically see REITs that have investment grade ratings have higher multiples that their stock trades on. So, I think you get the advantage across the board and, of course, the high-grade market, the investment grade market. Bond market never shuts down in any kind of capital market cycle. So that's another advantage. And again, I think our point on those slides is if you look at all these metrics compared to our already investment grade REITs, we're there. We're there on the metrics that the rating agencies use. So again we don't control when we get to those ratings, but we do control continuing to have a conservative balance sheet that would get us there eventually.

[Jim D. Breen:]

Great. And then – go ahead.

[Gary J. Wojtaszek:]

And maybe just going back, I mean that's why you saw us – we brought on another $150 million in the ATM. It's really because we're building a business that is built for the long run. And particularly in light of what we're trying to do in Europe, we want to make sure that we have a really strong balance sheet as we head into that. And so we don't want to be short sighted in terms of just kind of leveraging up our balance sheet. Given the funnel that we're tracking, it's going to require a lot more capital. We want to be prudent in that. And while it's not the greatest thing to do to issue equity at the prices where it currently is because we think it's significantly undervalued, we do think that in the long-term, it's the right thing to do and eventually we will be rewarded for that.

[Diane M. Morefield:]

Yeah. And if I look at the return on equity, even at these share prices, the return on our equity is probably in the mid-30% range assuming our mid-teens yield and what that equates to in EBITDA. So again, to Gary's point, it was not a lot of equity. It was $150 million that we dribbled out that helped manage our balance sheet and the returns on that equity are phenomenal for any company but particularly for REITs.

[Jim D. Breen:]

Great. And then just on Zenium, I saw that they sort of finished the second data center in Frankfurt, and they expect to break ground in the third and the fourth quarter. Was that sort of in your expectations for what they could contribute to you guys in 2019? Thanks.

[Gary J. Wojtaszek:]

Yes.

[Diane M. Morefield:]

On 2019?

[Jim D. Breen:]

Yeah.

[Gary J. Wojtaszek:]

Yeah.

[Jim D. Breen:]

Great. Thank you.

[Operator:]

Our next question comes from Amir Rozwadowski with Barclays. Please go ahead.

[Amir Rozwadowski:]

Thanks very much, and good morning, folks.

[Gary J. Wojtaszek:]

Hey, Roz.

[Amir Rozwadowski:]

Just wanted to follow up, Diane, actually on the comments on funding requirements. It doesn't seem like you're ruling out any potential for using equity going forward if you continue to see sort of a healthy pipeline of business that you're seeing at the moment.

[Diane M. Morefield:]

Again, I think we're really transparent that we're managing the balance sheet in the 5 times range, but we will go over 5 times from time to time. Liquidity clearly is not an issue. We're sitting on $2.2 billion of liquidity. So for funding Zenium and CapEx, we're in really good shape. So we're – I don't know – more to say on that, that other than we give you the pieces, and we don't ever have any requirement to issue equity any time soon just because of our liquidity.

[Gary J. Wojtaszek:]

Yeah. And, Roz, just on that, I mean, last quarter, we provided a nice bridge, I think, in terms of the FFO per share forecast and showed what our business would be in 2018 without any of these investments. And then we walked through a series of investments in terms of additional land, the Zenium acquisition, additional capacity. There was probably like four or five different categories, and we showed how our EPS would be diluted by each of these investments that we're making. Maybe it wasn't clear to folks, but just to be clear, it's like underlying those assumptions, those additional investments that we've made, we've assumed that we were going to be – that's done at our existing leverage ratio, so that they were done on a leverage-neutral basis implying that we would be bringing on additional equity associated with each of those dilutions. So, that was the underlying assumption. So, if that wasn't clear, you should maybe take a look at that and you get some sense for the amount of equity that we had assumed in that guidance.

[Amir Rozwadowski:]

No. That's very helpful, Gary. And then, if I could switch gears in talking about sort of the activity levels on the cross connect side, you had mentioned that if we go back to 2011, you had an average of sort of three and that's risen to about 16 right now. Can you talk to us about sort of the stickiness and the further ability to expand that? Because clearly, there's been a lot of discussions on whether or not we're seeing software-defined interconnection sort of change the opportunity set in that type of opportunity for you guys or for the industry in general. But really, it seems like that growth is pretty strong and would love to hear your thoughts on the ability to continue to drive that growth.

[Gary J. Wojtaszek:]

Yeah. It's really strong. I mean, it's up by 21% on a revenue basis, and in terms of the average number of cross connects per customer, has increased fivefold over the last couple of years. And the other thing that we're seeing in the last year is that the SDN networks, particularly in Megaport, are exploding. We've seen 500%, 600% increase in the amount of business that we're doing with them. That model is really interesting and it's enabling a lot of enterprise customers to connect to the cloud companies via our data centers. So, Vince and the team at Megaport have done a fantastic job really kind of marketing that program and getting more and more customers signed up to that offering, and we're one of the beneficiaries of that. We expect that as our business continues to grow, so if you think about us, we're not your traditional interconnection company. However, as our campuses grow to really massive size, just the scale of the number of customers on our campuses as well as all of the cloud companies that are deploying there are really providing us an opportunity to sell more and more cross-connects. We believe that over time as the hyperscale companies outsource more and more and build bigger cloud nodes, that is fundamentally going to change the network topology across the world, and we think that we're going to be one of the beneficiaries of that, just given how strong a relationship we have with all the cloud companies.

[Amir Rozwadowski:]

That's very helpful. And then – and last question from my end, you, obviously, highlighted, as more and more of the cloud folks continue to outsource some of their needs, there's a lot more opportunity available. Any change in the conversation with those folks that suggest a preference for insourcing versus outsourcing at this point or really has nothing changed from that perspective?

[Gary J. Wojtaszek:]

No. Well, I guess it depends how you look at it. So we are basically focusing on helping companies outsource everything, right? There's going to be some of that stuff that they do on a outsourced manner in our facilities that they will continue to manage on their own and then with a bigger portion of their IT kit being migrated over to the cloud. So we think longer-term, I mean, if you look really far down the road, I mean, a vast majority of all of these enterprises will eventually move everything to the cloud. But for the next several years, there is going to be this hybrid model where they're going to do a big proportion of their compute on their own manage basis in our facilities and then substitute or complement that with a multi-source cloud strategy, typically all the enterprises that we deal with are doing dual source cloud providers.

[Amir Rozwadowski:]

Thanks very much for the incremental color.

[Gary J. Wojtaszek:]

Sure.

[Operator:]

Our next question comes from Jon Petersen with Jefferies. Please go ahead.

[Jonathan M. Petersen:]

Great. Thank you. So in terms of the pricing this quarter and it was kind of brought up earlier is one of the – on the low end relative to deals you've done in the past, you mentioned high 13% return still on those deals. How does that compare to maybe two or three years ago the returns you were getting?

[Gary J. Wojtaszek:]

Yeah. It's down about 200 points from two years ago, but these are also – we expect that we're in the process of rolling out another new design, where we're looking at lowering our cost to build further. And so we expect that we're going to be able to maintain that yield, maybe go up a little. However, I would say the one thing is we are starting to see some increases in costs. I mean in some markets, the labor costs are getting tight and we definitely saw an increase in commodity prices. And so some of the underlying costs are going up. And so while we would have expected all the cost out initiatives that we focus on to really contribute to our bottom line, right now, we're looking at basically that's allowing us to stay in the same position. So we're covering some of those price increases or cost increases in labor and commodities with the engineering reductions that we've been making to just stay at the same cost point as we were a year ago.

[Jonathan M. Petersen:]

Okay. That's helpful. And, I guess, if I think about kind of your per share FFO growth, clearly kind of compressing yields are going to require you to do more volume in terms of leasing deals to kind of make up the difference, I think, in terms of getting to the same per share growth that you've got in the past. I think in an answer to Vin's question earlier, you talked about how you'll have to do 25% more leasing next year. I wasn't sure whether that's to keep up with just kind of the growing base of the company or whether that also kind of factors in maybe the compressing spread between your cost of capital and yields.

[Gary J. Wojtaszek:]

No. I mean, every year, we always set out bigger objectives for ourselves. So we're looking at always kind of driving the business. And if you think about it, as the company scales and becomes larger, right, you should expect to be able to do more, right? I mean, we've always assumed that if I have one facility in one market with just a handful of customers and then I expanded into two markets with some additional customers, I should be able to sell more. And so we drive the sales teams to do more every year as part of that. So it's not so much that we're pegging what our – the underlying per share growth rates are, but we're driving the business from an operating perspective that we fully expect that we should be able to do more. And one of the things that I've always said historically is that – and this is the most important leading indicator for us is that if you get a new logo in, the value of that new logo, 40% of the NPV of that is in the tail of the business that you don't have on day one. So what you saw last year was we had a number of record new additions to our portfolio. This quarter, we added 17 new logos as well as three new Fortune 500 companies. And what we've seen historically is that those companies typically grow at over 20% CAGR. So assuming we sold nothing, I would expect that those new customers that we signed up this past year that they will be mining more from us next year. And so we baked that into our plans, and that's how we've always done it. And that's why we think that once we get into Europe, it's really just going to accelerate the number of opportunities that we can sell to customers in. And so when we look at like what Zenium did, I mean, Zenium has been a fantastic company, and Franek has built a great franchise there in a short amount of time. We expect that we're going to be able to replicate what he's done in a much faster amount of time because we have a huge book of business and 1,000 customers in the U.S. that we're going to be selling into Europe. And so if you think – and this is why the opportunity that we're working with GDS works so well because all of our customers would like to get into China, and we're now partnering with William and the team there. And we're going to be really successful in driving more business into China. So if you just kind of think about CyrusOne as just like a sales and marketing engine, which got great distribution capabilities, to the extent we have more – a larger portfolio, we should be able to sell more, and we should be able to scale our operating costs significantly better because we're not going to need to add as many salespeople as we currently have over the last couple of years.

[Jonathan M. Petersen:]

That's really helpful. And just one more maybe quick question on GDS, you guys said on slide 9, there's 15 deals, I guess, between U.S. and China on kind of, I guess, both sides of the ocean. Can you give us any indication if that's more weighted towards the U.S. or towards China?

[Gary J. Wojtaszek:]

It's about half and half. But this quarter, in our second quarter's earnings call, you should expect us to hopefully put some Ws on the board.

[Jonathan M. Petersen:]

Great. Thank you.

[Operator:]

Our next question comes from Jonathan Atkin with RBC Capital Markets. Please go ahead.

[Jonathan Atkin:]

Yeah. So putting Ws on the board, I had a question maybe related to that. So in a market such as Virginia, what are you seeing in terms of the turnaround time to develop new capacity? It seems like some of your peers are turning land into technical space fairly quickly. And are you seeing further room for improvement in that or are you pretty well optimized in terms of speed to deploy at this point?

[Gary J. Wojtaszek:]

We can always go faster, Jonathan. I mean, it's – while I think we've done a really good job on the supply chain, I still think that we're just C players, right? I mean, world-class manufacturing companies can – like General Motors can develop 2,000 cars in a day, right? That's got to be the objective that we're looking for in here. So, while we've been pretty fast and we can deliver at low cost and quick time to market, there's a lot more opportunities to do more and we're always focused on that.

[Jonathan Atkin:]

Okay. And then just from a head count standpoint, if you were to expand into some non-Zenium markets in Europe, how do we kind of size the head count requirements that would take you into, say, Amsterdam or other markets?

[Gary J. Wojtaszek:]

It scales really well, right? I mean, if you think about – so all of the sales and marketing and all of the distribution investments have dominantly been made in the U.S., right, because the vast majority of all the sales that we're anticipating that we're going to be doing in Europe are going to emanate out of the U.S. We will supplement a couple of sales folks in Europe, but there's sales folks at Zenium currently. But, say, we add one or two sales folks per country, it's really going to be de minimis. And once you stand up a facility you're looking at staffing of a dozen or so folks and so we'll be able to bring those online I think pretty efficiently. I mean, the size of the deals that we're talking about to customers are pretty substantial, so we expect that once we deliver those facilities and bring them online, they're going to be contributing, I think, right away.

[Diane M. Morefield:]

Yeah. And just from a...

[Jonathan Atkin:]

All right.

[Diane M. Morefield:]

...SG&A standpoint, obviously, as our revenue continues to grow, as a percent of revenue, you're going to see that come down pretty significantly because the corporate office, on the margin, shouldn't grow anywhere near the trajectory above our revenue growth. And we will continue to centralize capital markets, so we will handle all the financing centrally and don't really need to expand our group here.

[Jonathan Atkin:]

Okay. And then just from a nuts-and-bolts standpoint on renewals, so leases that rolled and got renewed, can you comment on gap in cash spreads that you saw?

[Gary J. Wojtaszek:]

Yeah. It's pretty much the same that we've seen over the years, Jonathan. It depends on – for a like-for-like, it's roughly the same. What you've seen historically, though, is as customers expand and they buy more from you, the pricing that you're giving to them goes down. And so you see continued price degradation over time commensurate with the amount of space and capacity that they're taking. And to the extent that they move into other facilities, you're willing to give them further pricing discounts because what you're trying to do is develop a bigger relationship with them. The other thing that you're looking at, too, is like the amount of cross-connects that we're now getting into with some of these customers is enabling us to give price reductions on parts of the business because we know we're making it up in other parts of the business. The other thing that's going on behind the scenes is the amount of power admin that we're charging customers. That 7% charge is now, I think, it's like in 15% of our business, up from zero when we first launched that. So that's going on. And then the other thing behind the scenes is the price escalators and part of our aggregate portfolio is now around 70% of our portfolio now. So there's several different price inflators going on in the background but are not directly related to price-per-kilowatt or price-per-foot type pricing. And that's intentional, right? I mean we're charging for services. We're charging for a bunch of other things that we didn't do previously.

[Jonathan Atkin:]

And then finally, late-stage sales funnel, you talked about it being kind of at elevated levels, and I wondered is the mix of demand any different. Or is it just bigger deals or is it greater numbers of deals from more logos that would characterize that compared to what you've seen in the past?

[Gary J. Wojtaszek:]

We're seeing both, right? I mean like the fourth quarter was one of the strongest new logo bookings quarter ever for us. We had a really strong new logo bookings this quarter as well. And then in line with that, the size of the deals that we are working on are getting really large and everyone is really struggling with this. I mean, in my prepared remarks, we talked about Azure growing at 93%, right, I mean, if you just kind of back-solve for how many megawatts of capacity is required to hit that type of growth rate, it's enormous, right? I mean these are – all those guys are spending billions and billions of dollars of CapEx trying to meet their continued demand, and I think you see us as well as all of my peers doing a really great job, helping each of those customers out as they deliver that capacity. So we're seeing both in our business.

[Jonathan Atkin:]

Thank you very much.

[Gary J. Wojtaszek:]

Yeah. Thanks.

[Operator:]

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

[Nicholas Ralph Del Deo:]

Hey, thanks for taking my questions. First, in Europe, you seem to be leading with hyperscale customers as anchors for your builds. Your plan to build up an enterprise business in that market like you have in the U.S., do you think customers can port over like they do in the hyperscale side or would that require more a local sales effort?

[Gary J. Wojtaszek:]

Yeah. Absolutely. I mean, we expect that – prior to that, the diligence that we've done in our existing portfolio talking to all of our customers about their demand, we've gotten really good insight outside of the cloud companies for our customers wanting to expand in Europe. So, we think that we're going to be able to do that quite successfully over there. I mean, if you look at one of the great operators in the business, one of our big interconnection peers that starts with an E, they built up a fantastic franchise around the world and they've been really just kind of big order takers as they built out this great business internationally basically because they were the largest player in the U.S. And we expect that – our business is different than theirs, but we expect that the success that we've had in the U.S. attacking the enterprise historically and then more recently with the cloud companies, we're going to be able to export that same success over to Europe, because for the most part most of the companies still have not outsourced their data centers. Most of their data center work has been done in-house and we expect that as we've been able to convince all of the enterprise customers in the U.S. to outsource the primary data center needs to us, we expect that we're going to do the same for the local European enterprises, as well as take advantage of our U.S. customers that are going to expand in Europe as well.

[Nicholas Ralph Del Deo:]

Okay. That's helpful. And then, maybe one follow-up, whether they say so or not, a lot of your competitors and I guess new entrants for that matter, too, seem to be emulating a lot of what you've done on the construction front. In your view, is the gap there versus the competition widening, narrowing, staying about the same? How do you think about that?

[Gary J. Wojtaszek:]

It's a great question. I think it's great that they're kind of mimicking us. But if I see them wearing cowboy hat, then I know for sure that that really got their eye on. Look, I don't know exactly what our peers have done. I think historically we have been sticking to our knitting, we've always talked about being low cost producers, focusing on supply chain, focusing on cost out, all with the focus of ensuring that we maintain high yields. It's great to hear people saying that now because historically, that's not been the case. Most people historically have just said, we don't believe what they're saying and they make up all sorts of reasons why that's not the case. So I think everyone's realized now that maybe what those guys in Texas were saying was true. So I don't really spend a lot of time focusing on what my competitors do, I focus on what I can do and what I can do is basically drive more cost out of my design and I can go faster in my supply chain. And I think ultimately, if I continue to do that and prosecute advantage that we have and we do it more in scale, I'll be able to have more repetitions than the other guys and I'll be able to further enhance my lead versus the competition. Because when you look at the amount of capacity that we have developed in this country, we are the leader. We've developed more data center space in this country over the last couple of years than anyone, including all of the big cloud guys. The number of repetitions that we're able to do basically and helps us to kind of continue to drive down our cost because we learned from that we get more efficient. And you kind of see that in Tesla's example, right? I mean, Tesla's got a fantastic product. And as they hit really big scale, he's going to be able to drive down his unit cost over time, and we're going to be riding that same type of cost curve. And so we expect that we're going to do the similar types of things in Europe as well.

[Nicholas Ralph Del Deo:]

All right. Thank you, Gary.

[Operator:]

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

[Jordan Sadler:]

Great. Thank you, and thanks for hanging in there. Question just coming back to the pricing and the returns in the quarter, I noticed the price per kilowatt is down substantially from the prior four-quarter average, and I'm curious is that a function of the types of the mix in terms of customers who were signing, or is it partially concessions being given to larger customers, or is it just competition in the market, and maybe just some color on that?

[Gary J. Wojtaszek:]

Yeah. No, it's a good question, and I tried answering that in some of the other questions. But the biggest difference is predominantly mix, right? So, as you saw a higher proportion of the hyperscale deals than we did enterprise, the aggregate pricing that they get is significantly lower. So that's the biggest driver in here. But when you think about like what we're doing for the hyperscale, and I think this was Atkin's question, what we're doing is the pricing that they're getting is lower than it was historically. However, the price in and of itself is somewhat irrelevant unless you understand what's included in that sale. So what we're delivering on a capital side is different, right? We are able to engineer things differently for those customers. And so then we would offer them a lower price. Similar on the service level, some of those customers are not requiring the same level of service that we provide in some of the other solutions, so we'll transfer that price savings or cost savings onto them as well. So in aggregate, the returns on that are still in that 13% range, which is down about 200 points from where we were two years ago. So still really nice returns. But it's not – I wouldn't – the pricing may be lower but the returns, given what we're providing the customers, are still pretty attractive.

[Jordan Sadler:]

And do you think the 13% is sustainable going forward or because you're continuing to offer better pricing, more competitive pricing to customers, it has to grind a bit lower over time?

[Gary J. Wojtaszek:]

I don't know – it's all going to be – it's all market kind of driven. I mean – but we've been very focused on making sure that we're maniacally focused on driving cost out of our solution. So we spent a lot of time with all of our partners on this, working with them on engineering products and services that we're purchasing from them to get to the point where they can make money, we can make money, but we all collectively do so at a lower cost. So there's a lot of effort that goes on in our company behind the scene that people are not really clued in on. I mean, even like my point earlier about some of the other work streams that were going on with the GDS guys, right, part of that is we're working with their suppliers in China and figuring out, is there ways that we can replicate some of the things that we've been doing in the U.S. here with utilizing the suppliers that the GDS guys are using? We're working on trying to commonize both of our design so that in aggregate, we're buying considerably more than anyone else. So GDS and us do the exact same construction build everywhere. That's a substantial amount of building opportunities that we have that should translate into lower cost.

[Jordan Sadler:]

Okay. And then, a question on the guidance for you, Diane, I know it was the $0.05 of termination fee. I was curious if that was embedded in the original guidance, number one. Number two, given the beat, right, the $0.85, it looks like you only need to do $0.79 a quarter going forward to hit the midpoint, which is a fair bit below considering the incremental commencements you have going on. So any insight you could offer there?

[Diane M. Morefield:]

We anticipated the lease termination fee because we were in negotiation on that particular situation. Yeah, so that's $0.05. That's not going to be repeated in future quarters. We clearly, obviously, we did raise some equity in the first quarter. We have higher interest expense that affects NFFO per share, given funding the CapEx development as we go. So I think it's a variety of things that would bring down the NFFO per share in future quarters. And as you know, we had a great leasing quarter but that doesn't really start showing up in numbers until as the year progresses.

[Jordan Sadler:]

Is there a capital mix that's baked into the guidance in terms of maybe a target leverage by year end or...

[Diane M. Morefield:]

Well, yeah, we again manage to the 5 times leverage generally throughout the year.

[Gary J. Wojtaszek:]

Yeah, hey, Jordan. That was Amir's question. So like when we were giving that bridge in terms of the FFO per share dilution for the various investments we were making, underlying that was the same capital structure so that each of those investments were going to require additional amount of equity being brought on to provide that. So we want to make sure that we were – so that the EPS or the FFO per share numbers were accurate. So there's definitely implied equity going on. So that said, I mean, we're sitting in a really strong position, and we just gave this guidance out not that long ago, so I think that in the second quarter's call, we will tighten that up, but we're feeling really good about where we sit for this year and actually into 2019 and 2020.

[Jordan Sadler:]

I appreciate that. I guess, what we're both probably focused on is it seems like you've got $0.5 billion for Zenium to close and another $700 million plus from the CapEx. You've got $1.2 billion of spend left in the year. And so, you did a little bit of equity in the quarter, but I guess we're trying to figure out how you get to fund the rest of the full year. But I guess, it's just a mix of all the pieces, cash flow plus some debt plus maybe some more equity.

[Gary J. Wojtaszek:]

Yeah. That's correct.

[Jordan Sadler:]

Okay. Thank you.

[Gary J. Wojtaszek:]

Great. Thanks.

[Operator:]

Our next question is from Stephen Bersey with MUFG Securities. Please go ahead.

[Stephen Bersey:]

Hey. Thanks for taking my question. So just wondering as you do ramp up in Europe, just wondering if you're seeing any differences on how those customers deploy in Europe versus the U.S. Any differences in the speed they deploy when they start to initiate the engagement or roll it out? Are there any big noticeable differences?

[Gary J. Wojtaszek:]

Yeah, the biggest difference is just the size of the deals. I mean, the size of the deals in Europe, and this is more of a commentary on the hyperscale players, are where they were in U.S. like three years ago. So they're smaller-sized deals like 1 to 3 megawatts, or buying in smaller increments or taking that down. So it's not – they're not at the same pace as they are in the U.S., but we expect that that's going to change. I mean, I think, in Europe last year, they only did about 120 to 150 megawatts of capacity, so that amount of capacity was done in Virginia this past quarter. So the size of this has not really hit that really thick fat part of the curve, but that's why we're excited to get there because we're going to be planting a lot of seeds for the biggest markets through Europe, and we expect that that's going to give us a significant stronghold in that market to really accelerate our growth in the back half of 2019 and into 2020.

[Stephen Bersey:]

Great. We'll end it there given the time. Thanks.

[Diane M. Morefield:]

Thank you.

[Gary J. Wojtaszek:]

Thanks a lot.

[Gary J. Wojtaszek:]

Thanks, everyone. Appreciate your time today. See you in NAREIT in a couple of weeks.

[Operator:]

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