CyrusOne Inc.
Q1 2015 Earnings Call Transcript

Published: 7 May 2015

[Operator:]

Good morning, and welcome to the CyrusOne First Quarter 2015 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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 Shafer. Please go ahead, sir.

[Michael Shafer:]

Thank you, operator. Good morning, everyone, and welcome to CyrusOne’s first quarter 2015 earnings call. Today, I’m joined by Gary Wojtaszek, President and CEO; and Kim Sheehy, 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 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 afternoon 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 Wojtaszek:]

Thanks, Michael, and good morning, everyone. And welcome to CyrusOne’s first quarter 2015 earnings call. I am pleased about the accomplishments for the quarter as the team continues to execute on our growth strategy. We continued what has been a trend of solid financial performance for nine quarters as a public company now. Our bookings were very strong, and we are adding new logos at a steady pace to support the growth trajectory of the business. I’m particularly excited about our recently announced acquisition of Cervalis which we expect will have important strategic and financial benefits and importantly for our shareholders is expected to be immediately accretive when closed. Beginning with slide 4, you can see that CyrusOne continues to produce strong results. First quarter normalized FFO and AFFO were up 17% and 27% respectively over the fourth quarter of 2014. Revenue was up 11% for the quarter compared to the same period last year, and adjusted EBITDA was up 8%. We had our third highest booking quarter ever leasing 60,000 colocation square feet with signings generating $18 million in new annualized GAAP revenue, and utilization remaining high despite a significant increase in capacity over the last year. Subsequent to the end of the quarter, we announced the acquisition of Cervalis which as I mentioned earlier, is expected to be immediately accretive and provide many strategic benefits to CyrusOne significantly enhancing geographic and customer diversification and strengthening our product portfolio. Moving to slide 5, we have continue to grow our customer base at a steady pace with total on Fortune 1000 customers growing a compound annual rates of 12% and 11% respectively since our IPO. I’ve cited the statistics several times before but it bears repeating because it is so powerful which is about an estimate of 40% of the NPV of a customer has generated outside of their first lease with us, which is why new logo acquisition is so important as we are still in the beginning stages of a very large secular outsourcing trend. Historically, we’ve seen that on average, more than 50% of new MRRs signed each quarter is from existing customers. A great example of this is the growth we are experiencing in Phoenix. Currently, 98% of that campus is sold out, and its due in large part to the new Fortune 1000 customer we added in Q2 of last year. Since their original contract, they have doubled their space with us, resulting in a need to begin construction on our Phoenix 3 facility. Another example is a large financial services company we also signed in Q1 of last year, which is currently looking to increase their space by approximately 40%. Slide 6 highlights the success we’ve had to maintaining strong investment returns as we deploy capital to grow the company. Since the first quarter of 2013, we have invested almost $450 million into the business, which is a 52% increase in investment and still have been able to deliver a consistently unlevered development yield of between 16% and 19% over this period. We achieved strong yields because of our massively modular approach to designing and building our product, and the fact that we have a large retail colocation business, which drives higher pricing. Turning to slide 7, I wanted to provide an update on that stair step slide we introduced last quarter, which highlights some of the things that we have been doing over the past few years to enhance our yields, incorporating elements of both same-store and new development growth. In the first quarter, 78% of new leases signed on an MRR-weighted basis, including rent escalators with a weighted average rent increase of 2.5%. The second important source of growth is the low cost and high-margin ancillary products and services that are essentially yield enhancers on our existing lease portfolio. I am particularly pleased with the traction we are getting within our interconnection products. Our National IX platform was launched in April of 2013, and since Q1 2013 has grown 77% including 33% from Q1 2014 to Q1 2015 and 8% sequentially. This is growing approximately 200% faster than our overall revenue growth. Additionally, approximately 10% of new MRR signed in the quarter was from products and services that did not include any additional data center space, which helps drive our same-store growth. The next source of growth is lease-up of existing inventory, with both existing and new customers contributing significantly. Existing customers accounting for 76% of the new MRR signed in Q1 2015, our customer base has increased nearly 30% since the end of 2012. Lastly, we have a robust development pipeline with enough shell capacity to expand to 2 million square feet of raised floor and a land bank enabling us to grow to 5 million square feet of raised floor, and what we believe to be the lowest build cost in the industry and a fraction of what our customers can build data centers for. All of these factors have contributed to our growth and we believe will continue to do so, resulting in our ability to deliver long-term value to our shareholders. Turning to slide 8, I wanted to provide a brief update on energy. As you can see, since late January, the price of a barrel of oil has increased by approximately 40% and is now right around $60 per barrel. As I mentioned on our last call, most of the customers that I have spoken to have all assumed a $70 price per barrel of oil, so we are pretty close now to the long-term assumptions. We have seen no noticeable impact from the decline in energy prices. In fact, 2014, our average quarterly bookings range between 125,000, 135,000 per quarter. But in the quarter, in the first quarter of 2015, our energy bookings increased by over 40% to 190,000 of MRR. While I wouldn’t read too much into the quarterly increase in bookings, what I mentioned on last quarter’s call I still believe is true is that growing size on capital are scarce and companies are looking to cut back on CapEx, our product offering becomes even more compelling because we can deliver a solution that is a fraction of the cost of what our customer is going to achieve on their own. Additionally, subsequent to the end of the quarter, we also extended the lease for our second largest energy customer for an additional three-year term on the same pricing metrics. Turning to slide 10. I want to begin by saying that I am really excited about welcoming Cervalis into the CyrusOne family. I’ve known Mike Boccardi for many years, and he, along with the rest of the team, have created a premier financial services data center platform in the New York Metro area. Additionally, I am not aware of any other company in the industry that is more aligned with us in terms of how we engage our customers and the importance of providing superior customer service, which we believe are the long-term differentiators in the industry. Many acquisitions fail because of cultural differences, and I know Mike and his team for so many years, I am confident that we are all aligned on this one. Turning to slide 11. Based on the purchase price of $400 million in Q1 annualized adjusted EBITDA, the transaction multiple is approximately 10.5 times which compares favorably to recent M&A and public trading multiples. We are currently working through financing alternatives as we intend to finance this transaction in a matter that first and foremost takes into account accretion to our shareholders but also credit rating considerations and balance sheet flexibility. We have had positive conversations with their credit rating agencies who appreciate the diversification benefit this transaction will provide. On the one hand, we believe we are currently underleveraged in comparison to our peer group, therefore, we can finance this transaction with all debt. However, if we were to settle for a ratings-neutral solution, we would issue at most a maximum of $200 million of equity. Even under the ratings-neutral scenario, we would expect the transaction to be approximately 5% accretive to normalized FFO per diluted share over the second half of 2015and potentially up to 9% accretive in 2016 based on a lease-up of existing inventory and synergies. As mentioned before, we are still evaluating the appropriate financing mix. But regardless of how you slice it, this is a very accretive transaction. Closing is anticipated with the next 45 and 60 days and is contingent upon satisfaction of customer closing conditions. Slide 12 provides an overview of Cervalis, which was founded in 2000 and today has more than 100 employees. The data center platform includes four interconnected Tier 3 data center facilities and two standalone work area recovery facilities located in the New York metropolitan area. The facility is comprised more than 500,000 gross square feet of space, including more than 125,000 square feet of raised floor and over 100,000 square feet of work area recovery space, all of which is leased. An example of work area recovery client is the large financial services company that uses the space as a backup training floor in case of emergencies. Cervalis has approximately 220 enterprise customers with a particular niche serving some of the world’s largest financial institutions. Approximately two-thirds of its revenues generated from customers in the financial services vertical. The company has a strong track record of growth with revenue growing at a compound annual rate of approximately 14% over the last five years and 2014 revenue was nearly $70 million with approximately two-thirds being derived from colocation services and the remainder from interconnection, managed services and the work area recovery products with overall margins comparable to CyrusOnes. As of the end of 2014, utilization was approximately 77% providing an opportunity for lease-up of existing raised floor. In addition, we see tremendous opportunities to accelerate growth and attractively deploy capital given our access to capital and the development yields we are able to generate. I’ll now take a few minutes to talk more specifically about the benefits of the transaction to the CyrusOne. Moving to slide 13, the first strategic benefit of the transaction is customer diversification. As I mentioned, to my knowledge, Cervalis has the largest percentage of financial service companies of any private data center operator in the New York Metro area. Financial service companies account for approximately two-thirds of their annualized rent, which coincidentally is very similar to what CyrusOne looked like five years ago with its high concentration of energy customers. We’re excited about Cervalis’ enterprise customer base for two reasons. First, it immediately doubles our presence in these important services vertical, making it roughly equivalent in size into concentration of our energy customers, which further balances and diversifies our portfolio. Additionally, Cervalis would add 15 new Fortune 1000 companies to our portfolio, increasing our total to 161 Fortune 1000 companies, enabling us to continue with our goal of becoming the preferred data center provider to the Fortune 1000. More importantly, size and scale are especially important enablers to accelerate growth within the financial services industry. Most companies in the industry are regulated by the Federal Reserve, the OCC or the SEC and are required to have at least three data center architecture to provide for adequate disaster recovery. Furthermore, post-Hurricane Sandy, all of the New York financial institutions have been developing more robust data center recovery plans outside of the immediate New York Metro area. We expect that our Midwest facilities can provide Cervalis’ customers with a very effective data center DR solution. I also anticipate some of the customers will look for additional space in Cervalis’ facilities. In fact, last week after we announced the transaction, I was meeting with the customer who is based on the East Coast who mentioned that they could use some additional space from us for DR purposes in Connecticut. Moving to slide 14, another strategic benefit of the transaction is enhanced geographic diversification, which is becoming increasingly important for customers as their IT applications become more distributed. As we’ve seen in our business, 60% of our revenue is generated from customers in multiple locations. Post this transaction, our combined portfolio will consist of 31 data centers in three continents, 10 states and 16 cities. On a pro-forma basis, the New York Metro market will account for approximately 18% of CyrusOne’s revenue. The percentage of revenue from our Texas markets will decline from 61% to 51%, and the percentage of revenue from our Midwest markets will decline from 29% to 24%. Turning to slide 15, the third major benefit to CyrusOne is the strength and product portfolio. Consistent with our model, the primary source of Cervalis’ revenue is colocation services, and nearly 90% of revenue on a pro-forma basis will be generated from the colocation product. All of the Cervalis’ datacenters are interconnected in one of the world’s largest Internet hubs further enhancing the attractiveness of CyrusOne’s National IX platform. As a reminder, the National IX platform was developed to replicate the data center architecture Fortune 100 companies previously had created in order to deploy their IT applications. We are able to deliver interconnection across states and between metro-enabled sites allowing customers to connect multiple sites together at a low cost. The inclusion of the New York Metro area is an important link as we build out our platform, furthering - enabling our colocation business and increasing the stickiness of our customer base. We believe that linking our New York assets with our Northern Virginia facility will provide a very attractive data center connectivity solution for the large and growing media and content companies located in New York, a customer segment we currently do not have a large presence with. Additionally, Cervalis has a high-end managed service product that can be selectively leveraged across CyrusOne’s existing customer base, enhancing the value proposition to our customers and helping accelerate growth. This offering allows us to generate incremental same-store sales growth from existing customers without selling additional raised floor space, providing a new ancillary revenue stream that post-transaction will be about 3% of our revenue. Slide 16 summarizes the financial impact of the transaction to CyrusOne. First, we are purchasing the company at a multiple that is lower than where we currently trade, which generates immediate accretion for our shareholders. Additionally, we believe that our meaningful revenue opportunities for the combined business, utilization that Cervalis’ data center facilities is approximately 70% on a colocation square footage basis, so there is capacity for additional lease-up of existing inventory without any incremental capital investment. Over the last few years, we have invested heavily in our marketing and sales channels, which is one of the reasons why we have been growing so quickly. As Kim will talk about, we recently commissioned our Northern Virginia facility this quarter, a market we do not previously have a presence in, and it is already 71% leased-up. We anticipate that once we add the Cervalis platform, we will be able to leverage our national marketing initiatives to accelerate the organic growth rate Cervalis has experienced in the past, similar to what we just did in Northern Virginia. Additionally, we expect that Cervalis will be able to leverage the great customer relationships that they have created over the years, and sell incremental space in our facilities having the strength of a publicly traded company behind our mission critical facilities will help alleviate any concerns a large enterprise may have had with expanding with the private provider. Lastly, there are going to be natural expense savings associated with the transaction as redundant processes and systems are eliminated. As I mentioned earlier, we expect the transaction to be immediately accretive to normalized FFO per diluted share with at least 5% accretion for the second half of 2015, and potentially 9% based on the lease up of existing inventory and synergies in 2016. Our ultimate financing structure will take into account consideration of several factors including accretion to shareholders, credit ratings impact and balance sheet flexibility. But as I’ve always mentioned, size and scale are very important in this industry for both the customer perspective, as well as the cost of capital perspective. In closing, I couldn’t be more excited about the opportunities in front of us and confident that our future success will be better than what we have already established over the short time as a public company. I am very fortunate to be surrounded by a group of people that I really enjoyed working with and look forward to the 100 new team members that will be joining our company. I believe we are well positioned for continued strong growth as we continue to execute our strategy. And with that, I’ll turn the call over to Kim who will talk more about our financial performance and an update for 2015.

[Kim Sheehy:]

Thank you, Gary. Good morning, everyone, and thank you for joining us today. As Gary highlighted, we had a good start to the year with strong leasing and are excited about the addition of Cervalis. I will provide additional color on our first quarter financial results and give an update on the outlook for the full year. Beginning with slide 18, revenue for the first quarter was $85.7 million, an increase of $8.2 million or 11% from the first quarter of 2014. The year-over-year increase was driven by a 15% increase in lease colocation square feet and additional IX services with both new and existing customers contributing significantly to our growth. Normalized FFO and AFFO were up 17% and 27%, respectively, compared to the first quarter of 2014. This is primarily due to the increase in adjusted EBITDA over the same period, which was driven by the strong growth in leasing. Churn for the quarter was 3.1%, in line with the guidance we’ve provided last quarter. As I said on the last earnings call, this is driven primarily by three customers who terminated or renegotiated leases during the first quarter. One of the three customers exited our Galleria facility as they completed a long-term initiative to migrate all of their equipment into larger space at our Houston West facility. The second customer’s business has declined and they no longer needed as much space and the third customer increased their footprint with us and was given a price reduction to bring them to market rates for the size and multisite development they have with us. These three events accounted for approximately 75% of our churn this quarter. Churn for the quarter excluding the impact of these customers was approximately 0.8%. Our outlook for the remainder of the remains unchanged, with expected churn between 1% and 2% for the remaining quarters. Turning to slide 19, we leased 60,000 colocation square feet in the quarter. The lease is signed for 9.8 megawatts of power with bookings strong across most of our markets as we leased between 1 and 3 megawatts in Phoenix, Houston, Cincinnati and Northern Virginia, and nearly a megawatt in Dallas. Based on square footage, 91% of the colocation square feet lease was to metered power customers with executed leases having a weighted average term of 83 months. As Gary mentioned, 78% of the new leases on a monthly reoccurring revenue-weighted basis have escalators at an average annual rate of approximately 2.5%. The new leases signed this quarter represent approximately $18.2 million in annualized GAAP revenue excluding estimates for pass-through power. This includes approximately $1.7 million of insulation charges. By the end of the first quarter, we have commenced approximately 12% of contracted revenue for leases that were executed during this period. As of the end of the quarter, our total backlog of annualized GAAP revenue stood at $16.2 million. We estimate by the end of the second quarter, we will have commenced leases representing nearly 70% of the backlog. Moving to slide 20. Net operating income was $44.1 million for the first quarter, an increase of $4.3 million or 9% from the first quarter of 2014. This excludes a non-reoccurring charge of $750,000 associated with the forthcoming termination of our Austin I facility lease. We also recognize an $8.6 million impairment charge related to the termination of this lease. We will move customers from this facility into our recently acquired Austin III facility. This was another opportunity to move from a smaller leased facility to a larger owned facility, allowing us to benefit from the economies of scale. The NOI margin of 63% was down 1 percentage point versus the first quarter of last year, primarily driven by the impact of higher electricity usage with meter power reimbursement up $1.7 million. Adjusted EBITDA increased by $3.4 million to $45.1 million, up 8% from last year driven primarily by the increase in NOI. This was partially offset by an increase in general and administrative expenses excluding non-cash compensation due primarily to higher payroll and IT support costs. Normalized FFO for the first quarter was $31.9 million, an increase of 17% from the first quarter of 2014, driven primarily by growth and adjusted EBITDA and a decrease in interest expense, partially offset by an increase in stock-based compensation. The reduction in interest expense was primarily a result of the impact of our open market bond repurchase program in the fourth quarter of 2014 and higher capitalized interests, partially offset by the impact of borrowings on our credit facility to fund our growth. The increase in capitalized interest was primarily driven by an increase in construction and progress and related cash outflows which resulted in more interest being capitalized in the quarter. AFFO for the first quarter was $35 million, an increase of 27% over the first quarter of 2014, driven primarily by the increase in normalized FFO and lower deferred revenue and straight-line adjustments. Slide 21 compares our performance on a sequential basis. Revenue decreased $1.2 million or 1% from the previous quarter as a result of the impacts of churn I mentioned earlier as well as a $1.7 million decrease in metered power reimbursements, driven by a decrease in electricity usage, partially offset by incremental revenue from recent signings. As a reminder, there is a corresponding decrease in property operating expenses as these reimbursements are related to electricity costs that are passed through to our metered power customers. NOI decreased by approximately $800,000 driven by an increase in property tax assessments for capital deployed in 2014, partially offset by an increase in base revenue and lower facility maintenance costs due to timing. The adjusted EBITDA margin of 53% was up 2 percentage points compared to the prior quarter primarily due to lower general and administrative expenses driven by the impact of several items in fourth quarter expenses, including consulting fees and the timing of accounting fees. The increase in normalized FFO was driven primarily by the increase in adjusted EBITDA and lower interest expense, partially offset by an increase in stock-based compensation. The increase in AFFO was primarily driven by the increase in normalized FFO and lower leasing commissions, deferred revenue and straight-line rent adjustments and reoccurring capital expenditures. Leasing commissions were lower as a result of a reduced volume of lease commencement in the first quarter and deferred revenue in straight line rent adjustments were lower as a result of fewer contracts in free rent periods. We expect that in the second quarter, leasing commissions and deferred revenue straight-line adjustments will return to levels that, in aggregate, are more in line with the fourth quarter of last year. Reoccurring capital expenditures were lower as a result of timing and are expected to be higher in the second quarter. Slide 22 shows a market level snapshot of our portfolio as of the end of the first quarter in 2015 and 2014. Utilization is at 89%, consistent with last year despite a 16% capacity increase reflecting particularly strong demand in our Texas and Phoenix market. Our first facility in Northern Virginia came online in January. And as discussed previously, we are pleased with the initial leasing success we have had. Utilization as of the end of the quarter was already at 71% and demand has triggered the construction of a second data hall, which is expected to begin later this quarter. Capital expenditures in the first quarter were $49.2 million, in line with last year’s spending, slightly more than one-third of the spending relates to the purchase of a 166,000-square-foot facility in Austin where construction on 62,000 square feet of raised floor is expected to begin later this quarter. As I mentioned earlier, we have given notice of our intent to terminate our Austin 1 facility lease, and we’ll move customers currently in this facility into the new facility once the construction has been completed. Additional spending is primarily related to the completion of construction of the first data hall at our Northern Virginia facility, and construction of office space at Houston West 3 as well as the initiation of construction of new data halls in our Phoenix and Carlton facilities. Slide 23 shows our net debt and market capitalization as of March 31. Our net debt of $666.4 million increased by approximately $30 million from the end of 2014, primarily driven by continued investments of capital in development activities. Our net leverage as of the end of the quarter remained relatively low at 3.7 times annualized first quarter 2015 adjusted EBITDA. As of the end of the first quarter, we had $321 million of available liquidity. As Gary mentioned, we are currently working through the financing alternatives for the Cervalis transaction, and we’ll provide further details as our plans are finalized. And now turning to guidance, slide 24 shows our outlook for the full year 2015. We are reaffirming the guidance issued in February. Please note that the guidance does not include any pro forma impact related to the Cervalis acquisition. As Gary mentioned, we expect the transaction to be immediately accretive to normalized FFO per diluted share and unit. We expect revenue to be between $370 million and $385 million based on executed leases through the first quarter, and expectations for 2015. We are currently trending towards the lower end of the range driven by a couple of factors. While bookings were very strong, they were skewed toward the latter part of the quarter, impacting the timing of the recognition of revenue compared to our expectations. As I mentioned earlier, approximately only12% of revenue had commenced by the end of the quarter. The pipeline remains strong. However, the timing of the signings and related recognition of revenue will obviously impact full-year revenue. It is still early in the year, and we will provide further information on next quarter’s call. Additionally, metered power reimbursements are trending below expectations driven by lower electricity usage. However, as a result of the corresponding decrease in our electricity costs, there is no impact to adjusted EBITDA. We expect adjusted EBITDA to be between $185 million and $195 million and normalized FFO per diluted share and share equivalent to be between $1.90 and $2. Normalized FFO is trending towards the upper end of the range, primarily as a result of lower interests compared to the original assumptions. We expect capital expenditures to be in the range of $215 million and $240 million with development capital in the range of $210 million and $230 million. I’d like to provide an update on our 2015 development activity, which we show on the next slide. Slide 25 shows current and planned activity by market. As I mentioned earlier, we delivered 37,000 square feet of raised floor and 6 megawatts of power capacity in the first quarter with Northern Virginia coming online and demand has triggered the construction of a second data hall in this market. We have also begun construction on the fourth data hall at our Carrollton facility and a second data hall at our Phoenix 2 facility, adding a total of 92,000 square feet of raised floor and 9 megawatts of power capacity. Strong demand has triggered the build-out of our third facility in Phoenix, which will accommodate two data halls. Lastly, as I mentioned earlier, we expect to begin construction on the new Austin facility later this quarter adding a total of 62,000 square feet of raised floor and 6 megawatts of power capacity. By the end of the year, before taking into account the impact of the Cervalis acquisition, we expect to have a total of approximately 1.5 million square feet of raised floor online with another 1 million square feet of powered shell available for future development. In closing, we are very pleased with the results of the first quarter, and the performance is a reflection of the team’s hard work in executing our plans. As always, we remain focused on the customers. We understand that excellent customer service is central to our success. Thank you for your time today. This concludes our prepared remarks. Operator, please open the line for questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. We have a question from Emmanuel Korchman from Citi. Please go ahead.

[Emmanuel Korchman:]

Hey, everyone. Just a few questions on the Cervalis deal. Firstly, I don’t think that you gave us - unless I missed it. Did you give an NOI number from that portfolio?

[Gary Wojtaszek:]

No, we didn’t, Manny.

[Emmanuel Korchman:]

Do you care to give one now?

[Gary Wojtaszek:]

No. The reason that we have it is one of the closing conditions that we’re going through is that we need to restate their financials so that we can pull them into our SEC reporting package. So, we were hesitant about sharing any of the detailed information about that. We feel pretty confident about the 5% accretion for the remainder of the year though.

[Emmanuel Korchman:]

And just thinking of the deal for a second, is the entire team staying on, including the management team?

[Gary Wojtaszek:]

Yeah. I mean, at this point, we’re going to work through everything. But we’re not looking at tremendous amount of synergies from that. I mean we’re really focused on driving revenue growth from this transaction, so we need a lot of the folks to help us achieve the assumptions we have in our plan.

[Emmanuel Korchman:]

Gary, are there four or six facilities however you want to think about it, are they under leased?

[Gary Wojtaszek:]

They’re all leased.

[Emmanuel Korchman:]

So how much are the capitalized lease obligations there?

[Gary Wojtaszek:]

Well, that’s one of the things that we’re going to be working through as we go through the restatement process.

[Emmanuel Korchman:]

And are the landlords other public datacenters or who are the landlords there?

[Gary Wojtaszek:]

No, no, they’re all privately owned real estate holdings.

[Emmanuel Korchman:]

And last one in Cervalis and then I’ll switch to different topic. Was there any consideration giving stock to the management team or to the owners rather than doing a cash deal?

[Gary Wojtaszek:]

Yeah, I mean that came up. But ultimately they decided they just want it all cash.

[Emmanuel Korchman:]

What are the terms of the leases? How long did they go, what are the rents?

[Gary Wojtaszek:]

Yeah, we can control all the properties up until like 20, 40 or so. So we’re comfortable that we’ll be able to control these properties for a really long time.

[Emmanuel Korchman:]

And then just quickly on Austin, do you need permission from your customers to move them into new facility?

[Gary Wojtaszek:]

Some we have permission, but we’re expecting that all of them are going to go with us. That was actually the reason why we acquired the other facility in Austin rather than building out an existing facility on the property that we own there just for a quicker time to market.

[Emmanuel Korchman:]

And is there any duplication in their equipment and if you get done, are you covering the costs for that?

[Gary Wojtaszek:]

Yeah. We have assumed a $700,000 costs associated with the transfer of those customers from the loan facility to the other.

[Emmanuel Korchman:]

And that’s beyond your lease exit cost? So that’s just a - that’s a separate cost?

[Gary Wojtaszek:]

Yeah. That’s right. Yeah.

[Emmanuel Korchman:]

Okay. Thank you.

[Gary Wojtaszek:]

Yes.

[Operator:]

And our next question is from Ross Nussbaum from UBS. Please go ahead.

[Ross Nussbaum:]

Yeah. Thanks. Hey, guys. I guess my first question is just on the timing of the lease signings. In the first quarter, I think you said that you thought they occurred slightly later than you originally expected. I guess, what was the big surprise? I mean, your last earnings call was certainly at least past the midpoint of the first quarter. So were there some just sizable leases that just dragged out a little longer than you thought to get done?

[Gary Wojtaszek:]

Oh, yeah. I mean, just about all of the lease signings pretty much happened in March. I mean, we probably had about 20% of the signings in the first two months. We got agreements and approvals on these things are only in the quarter that just took forever to get them signed and committed.

[Ross Nussbaum:]

So there’s nothing inherently going on in the core business that has negatively surprised you? It’s just simply you had a couple of leases just got delayed, if you will?

[Gary Wojtaszek:]

Yeah. No. This is actually one of our strongest booking quarters ever. It’s actually our third strongest booking quarters ever. So...ye

[Ross Nussbaum:]

Yeah. I think what people are trying to probably reconcile, and I think that’s probably what the stock is trying to reconcile today is the strong leasing quarter against the lack of a core guidance raise, and sort of the disconnect between those two. But it sounds like it’s really just a little bit of timing related, otherwise, you would’ve raised the guidance.

[Gary Wojtaszek:]

I think there’s more complexity in it, right? We had - operationally, a really strong quarter on the bookings front. We came in a little late on revenue but well above where we are expecting on FFO. But that’s where we sat at the end of the first quarter, given that we’re going to be closing very material transaction in the next 60 days. It didn’t feel appropriate to reset guidance expectations to only reset it again once the new asset is rolled into our numbers. What we’re planning on doing is at the end of the next quarter, reset that for our baseline assumptions for our core business, pro forma them for the Cervalis acquisition.

[Ross Nussbaum:]

Okay. That’s helpful. And then on Cervalis, can you just walk us through a little bit maybe on the history in terms of how widely - I assume this is reasonably widely marketed. Were there other portfolios out there that you thought about, other markets? Why New York versus California? Why this one and sort of a little bit more in history?

[Gary Wojtaszek:]

Yes. Well, I mean, we’ve known Mike and the team there for a really long time, and they’ve built up a really similar business to what CyrusOne looked like five or six years ago, where they have this phenomenal customer base focused on the largest financial services companies in the New York Metro area. Very similar to what we had done with our presence in the oil-and-gas space. And so, they were like a perfect fit in terms of these high-end enterprise customers, and they basically dominated that space in terms of their presence in financial services, [indiscernible] is like the same company, we’ve known them for a really long time. We are fortunate that we are finally able to get a deal done here and basically join the teams together. We think on a combined basis now that we’re going to basically accelerate their revenue growth very similar to what we’ve been able to do when we first acquired Cyrus. We were hoping to kind of recreate the same success we’ve had over the last couple years. I mean I think it’s interesting. I mean in the last couple of quarters, I think there’s been a lot of activity going on, and actually in the last 24 hours, there’s been a lot of new M&A activity announced. And I think that’s consistent with what I expected last year. I think size and scale absolutely matter in this space, and I think we’re going to see more of that as the year progresses.

[Ross Nussbaum:]

Good. Thanks, guys.

[Operator:]

And our next question is from Jordan Sadler from KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thank you. Just a clarification follow-up to a previous question regarding the capital leases. So, the $400 million purchase price for Cervalis, is that subject to adjustment in hindsight as you assess what the value of the liabilities are?

[Gary Wojtaszek:]

No. That $400 million is a cash price for that business as is.

[Jordan Sadler:]

Well, I get the cash price, but then there’s going to be an assumed liability piece associated with it, not to get too technical here, but I guess your $400 million does not include some earmarked for assumed liabilities?

[Gary Wojtaszek:]

No. No. That does not.

[Jordan Sadler:]

Okay. And I guess capital leases would pertain to potentially, depending on the term of your leases, the leases of the facilities themselves but also they own the improvements in the four data centers, correct or no?

[Gary Wojtaszek:]

Yes, that’s correct.

[Jordan Sadler:]

Okay. Okay. Thank you for that. And then I guess the other question I would have is strategically, I mean, I know you’re just not even through with this transaction but I’m curious because there is another - other activity in the market this morning and I’m curious what your appetite is more globally or internationally given that there seems to be potential for some change to what’s going on overseas today with some of your European competitors or peers?

[Gary Wojtaszek:]

Yeah. I’m not surprised by that activity. I’ve expected that this was going to start. And I think in the last couple of quarters, we’ve seen that. With regard to our focus, I mean we’re really focused on this deal right now, and making sure the integration goes smoothly. From an international perspective, one of the synergies that we expect to get out of this is that outside of New York, London and Singapore are arguably the other large financial service centers of the world and we have presence in both of those. So we’re expecting that we’ll be able to drive some additional revenue synergies from having those locations and tying it into Cervalis’ customer base as well.

[Jordan Sadler:]

Okay. Last one on Cervalis, you did say that the accretion was on a ratings-neutral scenario, and I was just curious if you could define that for me. That’s different from leverage neutral, but its ratings neutral.

[Gary Wojtaszek:]

Yeah. What we were trying to do because there was clearly concern once we announced this transaction, there’s been lots of questions that we received from a number of investors and analysts on this. And the way we are trying to frame this up is that if we were to issue $200 million of equity, we feel very comfortable that there will be no ratings impact to our balance sheet and our cost of debt as a result of that. So, what we wanted to do is say okay, worst-case scenario, if you raise $200 million, what would your accretion be? And that’s where the 5% or $0.05 up increase would be in this year, assuming that you did $200 million of equity. And we thought that that was providing a little more clarity to the market and take away some of the concerns that people are having in terms of how actually they think about it from a modeling perspective. That said, I think when you look at our FFO performance this quarter which was really strong, as Kim mentioned, we expect that that performance is going to continue for the remainder of the year. When you think about that plus the accretive nature of this transaction, and I think it’s a pretty interesting story as we head to the second half of 2015.

[Jordan Sadler:]

Is your goal post-transaction to be B+ rated by S&P or are you working toward something stronger than that or...

[Gary Wojtaszek:]

No. And B+ is fine. I mean, long term, what we’re really focused on is making sure that we are on at the right path to ultimately investment grade, right? Our focus has always been long term. In the capital-intensive business, you need to have strategically - focus the importance on being investment grade because right now, we’re still early on in the growth phase of this industry cycle. There’s a lot of action going on and activity. Longer term, as this matures, and I’m talking several years, you want to be in a position that you can have a really strong credit rating to support the continued growth at that point in time.

[Jordan Sadler:]

That makes sense. Thank you.

[Operator:]

And our next question is from Amir Rozwadowski. Please go ahead.

[Amir Rozwadowski:]

Thank you very much, and good morning, folks.

[Gary Wojtaszek:]

Hey, Amir.

[Amir Rozwadowski:]

I wanted to follow up on a couple of the questions that were asked previously. Looking at sort of the joint footprint that you have sort of post this closing of the Cervalis deal, clearly a reduction in sort of exposure to the energy markets as you’ve mentioned. And an increased exposure to financial services, but if I look at the footprint right now, it does seem as though you’ve got less overlap versus some of your peers. How do you think about further consolidation in the U.S. market given sort of where you’re situated right now? Is there a goal to tap into potential other areas where there’s less of a footprint? Are there opportunities for you to provide additional footprint to other players in the U.S. market? How should we think about that?

[Gary Wojtaszek:]

Yeah. It makes a lot of sense, right? I mean, scale and size is a tremendous opportunity in this business. And I think as you point out, we’re fairly unique in the space, and that we don’t have much of an overlap with many of the other publicly traded companies. So, I think on a combined basis, that’s an attractive portfolio. You get great leverage from all the sales and marketing investment that you made historically and currently because what we’ve seen is that customers are actually going into multiple sites. As the IT kit gets more distributed and those applications get pushed to the edges of the network, having a portfolio that includes multiple sites around the U.S. of highly connected facilities, as well as bigger, larger facilities are depending on what customers are trying to solve for in terms of the applications that they’re deploying, I think makes a lot of sense. And to the conversation I was just having with Jordan, I think ultimately, if you’re focused on maintaining a glide path towards investment grade, I think that also is going to be very complementary to the scale benefits that you’re going to get when you combine larger organizations. And our initial conversation is with the rating agencies on this transaction, they’ve looked at this as a really important trade because of the diversification benefits it will provide us in geography and customers, and then that also is going to translate into their willingness to go forward in terms of receptiveness to the amount of leverage you can put on these facilities. So I think long term, consolidation is going to happen. I thought some of the interesting announcements over the last 24 hours have been, I think, a really strong indication of what’s going on. I think broadly, if you look back over the last year, what you see is that almost all of the assets that have traded out there have all gone to strategics really kind of pointing to the maturation of this industry because if you contrast that with the five years prior, most of these assets have traded a bit part of them anyway to a bunch of other private equity companies buying assets that other private equity companies were looking to sell. I think, as you see when strategics get in here, I think it just points to the broader maturization of the industry. And I think we’re in a pretty good position to take advantage of that.

[Amir Rozwadowski:]

Thank you. That’s very helpful. And then if I think about another element that you’d mentioned sort of that ability to service customers on a broader basis given the increase and improved footprint that this type of transaction offers. Do you see a lot of sort of opportunities now that you’ll have sort of this Northeast footprint in terms of bolstering sort of nationwide customers and so forth and how much of that is factored into sort of your expectations around the upside to the transaction.

[Gary Wojtaszek:]

Yeah, it’s unbelievable. I mean outside of - our presence and we just kind of back up a couple of quarters. We’ve been talking about expansion into the Northeast and that was the reason why we first went to Northern Virginia because that was the number one location that we were seeing a lot of demand from customer - existing customers and other customers that approached us wanting us to go there. And we just launched that this quarter, and we’re 70% sold out there. So, we feel really good about that. The second opportunity that we’ve had from customers has been in the New York area. In terms of our customers wanting locations over there, and that’s something that we’ve been looking at for a number of years and we’ve been hesitant about getting in there because what we’ve seen in that market is that it takes a really strong relationship with those customers particularly the financial services companies because they’re very leery about outsourcing and buying into an existing platform that Mike and the team of Korea is phenomenal because it takes - it’s taken them more than a decade to build the relationships up with those customers to the point now where they are looked at as the premier financial service provider in market. So we believe that we’re going to basically accelerate their organic sales growth in their markets very similar to what we just achieved with Northern Virginia. But on the flipside, as those companies are looking to expand, and as I mentioned, every company that is a critical financial services provider is required by the Federal Reserve or the OCC or the SEC to have a really robust financial - I mean, have a really robust datacenter footprint for DR purposes. We are fully counting on the fact that those customers are going to want to expand with us into other parts of the country particularly in the Midwest and Ohio where we’ve seen a lot of interest from companies in that area. We expect that we’re going to accelerate the growth that we’ve had in our portfolio by leveraging the great relationships that Mike and the guys have had with the folks in the New York market. The 5% accretion or the $0.05 up for the second half of this year assumes none of those synergies for this year. So the additional synergies that we would expect is going to be added to that, and that’s why you see even higher accretion in terms of our 2016 number, up about 9% versus what we had previously assumed.

[Amir Rozwadowski:]

Thank you very much. Actually, the color is very helpful.

[Gary Wojtaszek:]

Sure.

[Operator:]

And our next question is from Jonathan Schildkraut. Please go ahead, from Evercore ISI. I’m sorry.

[Jonathan Schildkraut:]

Great. Thanks for taking the questions. I guess two if I may, Gary. First, the company has talked about adding one to two markets a year. This is fairly large acquisition in Cervalis, and I guess you can argue it has more than one market considering not all the assets are really in New Jersey. But as I look at your map, there’s still - the U.S. map - there’s a still a pretty big blank space on the West Coast. So maybe give us your updated thoughts on the national footprint, and any expectations for further market expansion in 2015. And then I’ll come back with the second question.

[Gary Wojtaszek:]

Yeah. Thanks, Jonathan. I think - it’s very similar to what I mentioned earlier in terms of like what the M&A opportunities are. In our view, this is a really ubiquitous infrastructure offering. It’s very similar to the wireless towers where success there is defined as the ability to have products around the country as they sell to their customers. We expect that the data center industry is going to morph in a very similar way. And so having those locations in the various parts of the country is critically important. When we think about the opportunity here, we think that there’s going to be opportunities for us to put in additional capital in those markets where Cervalis is currently actively managing. We expect that we’re going to be able to accelerate the revenue growth in that as we plug them into our network. So we think about the synergies here, we expect that we’re going to be putting more capital in the New York Metro area as we build out that platform, but when we think about it from a risk adjusted basis, it’s significantly de-risked because Mike already has 220 customers, and as I was alluding to in my talking point, what we know is that 50% of our growth every quarter comes in more existing base. So if we have an opportunity to put capital in those markets and further accelerate our growth there, we plan to do that. And so that’s really going and accelerate that. Clearly, when you look at our portfolio and you kind of draw rings around each of our facilities within that 5 millisecond latency that we’ve talked about, there’s big holes in the portfolio somewhere firmly down on the Southeast as well as on the West Coast. Ultimately, we think you need to be in those places around the country, but we’re going to basically tamper our growth in those markets relative to our financial performance. Coming out of the third quarter last year, when we started talking about wanting to slow down our organic growth and what we kind of highlight it on last quarter’s call, was basically we felt that a lot of investors aren’t really appreciating the inherent accretion that we’re going to generate through all of the investments that we’ve made in our portfolio over the last couple of years. And what we are trying to highlight in the last quarter’s call is that each incremental dollar of capital that we’re investing in our existing facilities comes with it at a really high return. We expect that that’s going to continue, and what we wanted to do is just take this opportunity, roll this company in, see what our results are and then go back on our plan of expanding into different markets. We’ll think through about whether we do that organically or whether there’s another opportunity for a company like Cervalis to join the team and expand our opportunities set that way.

[Jonathan Schildkraut:]

All right. That’s super helpful. I guess my next question has to do with the architecture of the data centers at Cervalis and I apologize if you’ve covered this but I’m not sure I heard it. I’ve looked at your assets and I know that you guys have a collection of different assets, but I consider primarily shared infrastructure that is the floor space, the back end redundancy is generally shared amongst the customers on the floor. In my experience, financial services have been a little bit more sensitive to sort of dedicated versus shared infrastructure particularly as it applies to sort of a back plane. And I was just wondering if you might give us a little color on what Cervalis’ infrastructure looks like and whether having dedicated resources or lack thereof will be necessary in terms of driving incremental business from that customer base into your other assets. Thanks.

[Gary Wojtaszek:]

Sure. Yes. So I mean pro forma for this transaction, financial services will account for 20% of our revenue. So it will really kind of round out and broaden our portfolio equivalent to our presence basically in oil and gas and slightly less than we have in IT. And 100% of that business in both Cervalis and us is all on a shared infrastructure. That’s the only product that we have never sold to customers, not the only product that Cervalis have ever sold to customers. And I think having that dedicated infrastructure, I think it’s important for some folks, but I think it’s less of a problem or less of a concern from customers overall. At the end of the day, as this industry matures, people are really much more focused on the service delivery requirements of what they’re buying, right. So they expect a product that is going to give them five or six times levels of service or three or two levels of service and as they become more astute purchasers of this product, they’re realizing that they’re willing to go on different resiliencies for the applications that don’t have the same level of criticality it needs. And so we don’t intend to go down this path of doing dedicated services for folks. If they want us to build something on a dedicated basis, we’ll do that but generally, when we get in those conversations with those folks, we can convince them that it’s really not worth the extra expense to have a dedicated infrastructure when essentially, we’re going to give you a lot more flexibility with the same resiliency in our shared backplane solution.

[Jonathan Schildkraut:]

All right. That’s great. So Gary, I just want to ask one more question if I may. You guys talked about a 10.5 LQA adjusted EBITDA multiple on the acquisition and I guess my assumption had been at enterprise to EBITDA multiple. But what you’ve laid out in terms of the purchase price is an equity value purchase price in - and I guess maybe that’s why we’re getting a bunch of questions about the capital leases to figure out what the enterprise value is here? Could you just add a little color or clarification around what this multiple actually is?

[Gary Wojtaszek:]

Yeah. It is basically our estimate for what we believe the EBITDA of this business is going to be relative to the $400 million purchase price. We’ve been - I realize everyone’s kind of a little frustrated about not having the numbers, but we know we are going through a restatement with them. One of the things that we’re going to be looking at is not so much capital leases, but there’s other types of liabilities associated with 97-10 leases, which puts a liability on your book. It’s not a capital lease, it’s something else. But rather than kind of putting numbers on a page that we knew that were going to be incorrect, going to restated accurately in the next six weeks we chose not to do that. That’s why we try to provide really tight guidance in terms of what we believe the FFO impact is on an accretion basis because we think that ultimately is a cleaner number. And I think people can more easily model that into their models.

[Jonathan Schildkraut:]

Okay. So this is a price to LQA adjusted EBITDA number or this is an EV to LQA number where we don’t know the enterprise or the EBITDA?

[Gary Wojtaszek:]

It’s a price to an EBITDA multiple.

[Jonathan Schildkraut:]

Okay. Thanks, Gary, thanks, team.

[Operator:]

And our next question is from Stephen Douglas from BOA Merrill Lynch. Please go ahead.

[Stephen Douglas:]

Great. Thanks for taking the questions. First, are there any specific customer concentrations or years of significant lease expirations on the Cervalis portfolio? And then related to that, can you provide any details on what the return profiles look like historically? And then second, it looks like Cervalis is a small kind of managed hosting in cloud services offering and I’m wondering how you guys are thinking about that business given - I don’t think it’s something you’ve historically offered directly. Thanks.

[Gary Wojtaszek:]

Yeah. Yeah. On the leases, I mean they are, your classic colocation company typically they’re entering into three year type of leases. So similar to us. Most of that turn or most of the exploration of those customers comes up in that three year period. We have about 20% of their business today that is greater than three years. So pretty similar to I think what you’d see most colocation businesses. With regard to the churn, very similar to us. They’re about 0.6 per month. So we are roughly 5%, 5% and 6% annually. So pretty consistent with the churn numbers that we’ve had over the last couple of years.

[Kim Sheehy:]

In managed service?

[Gary Wojtaszek:]

In the managed service. Yeah, I forgot about that. So yes. S they have a small managed service business that is that they basically sell the customers as kind of an add on. It’s not something that they lead with but it’s something that is really complementary to the co-location business that they offer to customer as of convenience. On a combined basis, that business will be about 3% of our revenue. This was something that historically, we’ve never done before. So we expect that there’s going to be synergies in that product set as they basically offer that to broader customers on our side. We may won or may not. I mean it’s not something that we’re going to be focusing on in terms of pushing that product. But if it’s something that customers that do want to take, we’d be willing to offer that to them.

[Stephen Douglas:]

Thanks, Gary.

[Operator:]

And our next question is from Simon Flannery from Morgan Stanley. Please go ahead.

[Simon Flannery:]

Great. Thank you very much. Gary, coming back to Cervalis, I know you sort of referenced synergies but I don’t know if you actually went into any detail on - particularly on the cost side, what sort of things we should be looking forward to get to that synergy number and what’s the timeframe for that? And then Kim, the leverage is three, seven, I think a lot of the peers somewhere in the five times. Is that the sort of run rate leverage that you might sort of target over time? I know some of it sort of dumped from a rating perspective, but what do you think is the sort of target leverage we should be thinking about.

[Kim Sheehy:]

Yeah, the same Simon. I mean I think that leverage target is what we’re thinking. We are still obviously, talking to the rating agencies to make sure we’re comfortable in line with them but I think post the closing and as we invest capital going forward, that’s a good target.

[Simon Flannery:]

Okay. Thank you.

[Gary Wojtaszek:]

Yeah. And Simon, we didn’t specifically call out what the synergies were but we expect that there’s going to be some expense savings as redundant processes and systems are eliminated as well as revenue synergies as we lease up their facilities currently. So in the 9% accretion number, the lift that we expect from next year, the delta there from the 5% to the 9% is the additional synergies that we expect to generate through the revenue and the costs.

[Simon Flannery:]

Okay. And what would you do with sales force, I don’t know how many [ph] quarter-bearing reps, and would you keep all of them or?

[Gary Wojtaszek:]

Yeah. They’ve got about four folks there. Yeah, we’re planning just kind of keeping all of the existing folks in place there. We are going to then alter our marketing program but we have to do this post SHR approval and everything else. But we expect that we’re going to get a tremendous amount of marketing lease generated and be able to flip those over to their folks. I mean historically, very similar to what we look like in the year’s past, and you know marketing spend was only about $300,000 a year, so not a tremendous amount of marketing dollars. They spent most of their marketing efforts on [ph] shoe leather just basically calling on folks. So we expect that we’re really going to be able to accelerate their revenue growth post this transaction that they were able to do historically.

[Simon Flannery:]

Okay. Thank you.

[Operator:]

And our next question comes from Vincent Chao from Deutsche Bank. Please go ahead.

[Vincent Chao:]

Hey, guys. Most of my questions have been answered here, but maybe taking the leverage cash structure question in a different direction for Cervalis. You talked about being credit ratings neutral, but you are improving your geographic diversification and you’re improving your industry diversification on what should be favorable for from a rating agency perspective. Is there any consideration is it just even maybe is not even possible, but any consideration to reduced leverage and possibly move closer the investment grade rating on the back of this, or is it just you’re already low enough that that won’t really move the needle with the agencies?

[Kim Sheehy:]

I think that’s right. I mean, with all the added benefits of the acquisition strategically, the rating agencies are looking at their leverage on kind of targets and expanding those within our ratings range. So I don’t think we would want to try to decrease leverage because of we want to make sure we see the accretion on the acquisition. So we wouldn’t want to do more equities.

[Vincent Chao:]

Okay.

[Gary Wojtaszek:]

And I think, Vince, you know, right now, I mean if you just look at our numbers from a financial perspective, I think we would be investment grade, but from the fact that we lack scale, right? So, I think some of the earlier questions in terms of where the industry can go to, I think if you were to combine us with any of our other kind of similar publicly traded companies, I think that company on a combined basis would immediately be investment grade.

[Vincent Chao:]

Okay. That’s helpful. And then just on the 5% accretion, what kind of - so that’s assuming $200 million of equity. What kind of interest rates are you assuming in that 5% accretion number?

[Gary Wojtaszek:]

Around 5.5%.

[Vincent Chao:]

About 5.5%? Okay. And then that’s normalized FFO. Is there any - I’m assuming that’s 5% of cash accretion. Is there any sort of embedded mark-to-market or any sort of the GAAP accounting - purchase accounting treatments that are normally associated with deals like this embedded as well?

[Gary Wojtaszek:]

We don’t know. I mean we’re going through this whole restatement process now, so we won’t know any of that until after this is all done.

[Vincent Chao:]

Okay. And then just the last question for me, different topic going back to Austin. You sounded pretty confident that you’ll be able to relocate your tenants from Austin 2 into Austin 3. Just curious, what really gives you that confidence? And should we expect any sort of elevated churn even if they move over? Will there be any concessions or will there need to be any concessions on rent to get them to move?

[Gary Wojtaszek:]

I think we basically - have been talking to our customers are part of this explaining to them what the situation was with the building and why we needed to get out of that earlier. And I think all the conversations that we’ve had so far have been very constructive. And we’re expecting that they’re all going to move. The reality is, is that we’re going to get out of that facility, so they have to move. And this facility is literally like not even a mile down the road. And it’s interconnected on our IX. So we’re going to be able to kind of do virtual migrations for them from one facility to another, which is going to really help them move out of this facility into ours. If we’re going to go outside of us, I mean that would be really difficult and costly move for them and expose them to a lot of risk. So we’ve been working pretty closely with them I mean. I’m expecting that they are all going to, maybe some may not but at this point, we’re expecting that they’re all going to migrate.

[Vincent Chao:]

Okay. Thanks a lot.

[Operator:]

And our next question is from Colby Synesael from Cowen & Company. Please go ahead.

[Colby Synesael:]

Great. Two questions, one on guidance and then the other on Cervalis. As it relates to guidance, can you tell us what your expectations are for capitalized interest for 2015 now versus what they may have been when you initially give guidance. And then as it relates to guidance. You’ve mentioned some customers are consuming lower meter power than previously anticipated. Can you explain why that this seems like a weird phenomenon. And then as it relates to Cervalis, you noted that they’re growing for the last five years, a compounded rate of 14%. Just curious of more recently growth has been decelerating or accelerating and regardless of which way what.

[Gary Wojtaszek:]

Yes. I can answer the last question on the Cervalis. Yes. So, 15% over the last couple of years, I think last year, I think they were like the 12% or 13% or something like that. So, pretty consistent with the growth over the last couple of years. Kim can talk to the capitalized lease question.

[Kim Sheehy:]

Yes. Colby, we’re expecting about $1 million of additional capitalized interest for the year versus where we were predicting last quarter. And then on the meter tower, the decline this quarter was a combination of things but we would expect that to continue to increase from this point forward that was seasonally low this quarter as well as we did have some usage by certain - some customers that was lower, but we would expect to see that to the increase from this quarter.

[Colby Synesael:]

Okay. Great. Thank you.

[Gary Wojtaszek:]

Yeah. But on that point, Colby. I mean this is one of the things last year where we still are a really big increases in towered revenue and that’s why last year when our revenue was really increasing a lot, we were not seeing any type of big uptick in EBITDA. We talked to it on a couple of calls and that’s why last quarter, coming out of last year, we’ve wanted to breakout what the power of component of that revenue was because it was I think really causing a lot of confusion in terms of people trying to model it. And so what you saw in this quarter in the earnings supplement, we’ve wrote that out and what’s interesting is that this is the lowest power revenue reimbursement that we had in the last year. So it’s gotten now pretty dramatically. I think it’s a combination as Kim mentioned this, seasonally it’s colder in the winter so you use less. We’ve been really focusing on making improvements in our power efficiency. And then I think it’s just the vagaries how customers are using their applications and how hard they’re running them.

[Operator:]

And our next question is from Fred Moran from Burke & Quick. Please go ahead.

[Fred Moran:]

Thank you. Kim mentioned that the one customer had cut to market rates. Is there additional vulnerability for customers to be cutting to lower market rates going forward? And then general, what do you see as the trend for renewal pricing rates?

[Gary Wojtaszek:]

This has been something that we’ve been talking about for the last two years or so. So, our business has absolutely teams from a lot of companies - a lot of customers that had small footprints with us, and they’ve expanding in taking down larger footprints with us, and they have multiple locations. So we’ve been working through the mixed shift issues with customers over the last couple of years as they’ve grown. And so, as customers expand and maybe more with you and they expect pricing discounts relative to what they’ve done historically. So we’ve been working through this the last couple of years, and it all depends on whether they’re going to grow with us or they’re going to stay the same. I mean generally, for the same type of product set, the pricing is pretty much unchanged. It goes up a little, it goes down a little. Bu the bigger mix shift from a price perspective is when they go from a smaller footprint into a bigger footprint into multiple facilities and take some other services with it.

[Fred Moran:]

So, Gary, in general, is the trend kind of flattish going forward for renewals?

[Gary Wojtaszek:]

Yeah. I think I mean what we’ve said in the past has been down 2%, up 2%. That’s pretty consistent with what we expect.

[Fred Moran:]

Thank you.

[Operator:]

And our next question is from Frank Louthan from Raymond James. Please go ahead.

[Frank Louthan:]

Great. Thank you. You mentioned that potentially some business from your existing base maybe coming to the Cervalis facilities and maybe vice versa, can you quantify what you think sort of the next 12 or 24 months upside is from additional business that you think you can capture from both basis wanting to diversify a little bit?

[Gary Wojtaszek:]

I mean, roughly speaking, we’re thinking that we’re going to be able to generate about 4 megawatts of incremental business between the companies. So we’re thinking about more megawatt terms in terms of where we expect to drive this business between the two.

[Frank Louthan:]

All right. Great. Thank you.

[Operator:]

And our next question comes from Charles Croson from Jefferies. Please go ahead.

[Charles Croson:]

Hi. This is Charles standing in for Tayo. Thanks for taking the question. Just on Cervalis again, I was curious if you could talk about the lease of opportunities, I mean you’re at 77% utilization right now. And t hen on top of that, can you talk about whether there’s a significant capital refresh that you need to do to increase that utilization? Thank you.

[Gary Wojtaszek:]

Yes. So the 77% is basically in place of facilities that have been built out. And so there’s no additional capital required to lease that up. That is roughly on a gross basis, it’s roughly about 125,000 square feet of space currently built out. They have total to go up to about 180,000 or so. That would require a little additional capital to build that out. Consistent with what we’ve talked about historically, once you have everything in place, I mean the incremental amount of capital comes in a much lower cost per megawatt than your average, we expect that to be the same. Outside of that, as they want to expand their facility, we would put in larger facilities, putting in facilities that are pretty consistent with what we built also around the company and to about a $7 million megawatt build there.

[Charles Croson:]

Okay. That’s helpful. Thank you. And then just kind of leading on that, do you have a - you gave the FFO accretion percentages. Do you have an AFFO percent?

[Gary Wojtaszek:]

Pretty similar.

[Charles Croson:]

Okay. And then, sorry if I missed this, did you mention sort of a run rate in terms of what you expect integration cost will be?

[Gary Wojtaszek:]

No. We didn’t. We didn’t provide that. We don’t think that there was going to be a lot of integration cost.

[Charles Croson:]

Okay. And then switching gears here as my last question on the Austen facility. Do you have a timing of when that will be completed? And then the lease up of the space that tenants - your existing - there seems to be a space there that will be vacant that’s not going to be a part of the tenants that moved over. Can you talk about the lease up opportunity there, too, please? Thanks.

[Gary Wojtaszek:]

Yeah. I mean we’re expecting that the customers that we have in our Austen I facility are going to the Austen III facility. The Austen III facility will be completed by end of the third, beginning of fourth quarter of this period.

[Charles Croson:]

Okay. All right. Thanks. I’ll hop back in the queue.

[Operator:]

Our next question is from Matthew Heinz from Stifel. Please go ahead.

[Matthew Heinz:]

Hi. Thanks. Just sort of passing though the component of revenue. It looks like the interconnection piece is really accelerating nicely there. I’m just wondering if you could talk about the nature of customer demand you’re seeing for that product and that might give you confidence or what might give you confidence that the current trajectory is sustainable there.

[Gary Wojtaszek:]

Yeah, Matt, Gary. So, I mean, it’s growing really, really quickly. I mean, it’s growing, and we grew 33% in the quarter, so twice as fast as our base revenue is growing. We expect that that’s going to continue to grow that way as we’ve mentioned earlier. That product offering, what we’re doing there in terms of some of the product service is really a new product out there, so it takes a very growing sales cycle, some educational selling process. But as customers become more comfortable with it and understand how to use it, we expect that it’s going to continue to grow. So, longer term, we’ve always assumed that that’s going to grow at a much faster rate than our core data center business is growing. And I think the results, since we launched it eight quarters ago, has really kind of proven itself out. I think we’re up about 80% from where we were prior to launching it.

[Matthew Heinz:]

Okay. Thanks for that. And I assume [ph] Josh’s higher bonus accrual is factored into the guidance for this year then?

[Gary Wojtaszek:]

That’s right. Should have been copied to the e-mail I sent him last night.

[Matthew Heinz:]

Well, in all seriousness, going back to Cervalis, how should we think about the pricing economics or maybe the MRR per foot on the work area recovery space relative to colo? And is this a business that you would look to grow and invest in going forward, or maybe just sort of leave it alone?

[Gary Wojtaszek:]

Yeah. Yeah. This is something that we’re going to look to invest in and grow. So, when you think about it, it’s very similar to what we’ve seen develop in our data centers over the last couple of years. We’ve been building out roughly 15% office space attached to every raised floor space that we’ve been building in our facilities. What Mike and the team have done there are is really taking it in a one step further in terms of creating financial services platform that provides them with a multitude of different services. So, if you look at all the technical stuff that they’re doing on the data center side, layering into that some of the [ph] manic service offerings that they have, they’re really trying to be the one-stop shop from the technical side for these customers and help them think through their challenges. The nice complements has been this workforce recovery where they’re basically creating alternative trading floors for these companies so that in a case like a Hurricane Sandy, they can move out of, say, downtown Manhattan and move out to one of Mike’s facilities. We think that that is a really smart way of going after that market. And it’s a further kind of product set that rounds out what they’re doing on a technical side. And we expect that that’s going to continue to grow. We also expect as they look elsewhere as I mentioned that we’re going to be able to leverage some of our facilities in the - particularly in the Midwest to sell to those customers as they build out more robust DR footprints.

[Matthew Heinz:]

Oh, that’s very helpful. Thank you.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to Gary Wojtaszek for closing remarks. Please go ahead, sir.

[Gary Wojtaszek:]

Thanks, everyone. We appreciate you taking the time and listening to us today. I know there was a lot of material that we covered. We’re always open for any questions that you may have or additional follow-up information. We’ll be taking calls after this today. So, please, don’t hesitate to reach out. We’re really excited about the transaction. Expanding the presence in your New York is going to be a great opportunity for us and for Cervalis to both grow our customer base and we’re excited about the accretion benefits those deals are going to immediately bring to us. Thanks a lot. Talk to you soon.

[Operator:]

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