QTS Realty Trust, Inc.
Q2 2017 Earnings Call Transcript

Published: 26 Jul 2017

[Operator:]

Good morning and welcome to the QTS Realty Trust Inc. Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Stephen Douglas, Vice President of Investor Relations. Please go ahead.

[Stephen Douglas:]

Thank you, operator. Hello, everyone and welcome to QTS's second quarter 2017 earnings conference call. I am Stephen Douglas, Head of Investor Relations at QTS and I am joined here today by Chad Williams, our Chairman and Chief Executive Officer and Jeff Berson our Chief Financial Officer. We are also joined by additional members of our executive team who will participate in Q&A. Our earnings release and supplemental financial information are posted in the investor relations section of our website at www.qtsdata centers.com under Investors tab. We also provided slides and made them available with the webcast and on our website, which we hope will make it easier to follow our presentation today. Before we start, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a certain number of risks and uncertainties as described in our SEC filings and actual future results may vary materially. Forward-looking statements in the press release that we issued yesterday, along with our remarks today, are made as of today and we undertake no duty to update them as actual events unfold. Today's remarks also include certain non-GAAP measures, including FFO, operating FFO, adjusted operating FFO, MRR Return on Invested Capital, EBITDA and adjusted EBITDA. We refer you to our press release that we issued yesterday and our periodic reports furnished or filed with the SEC for further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. These documents are available on the Investor Relations page of our website. And now I will turn the call over to Chad.

[Chad Williams:]

Thanks, Stephen. Hello and welcome to QTS's second quarter 2017 earnings call. The second quarter represents a strong performance from QTS’s integrated platform across our diversified set of solutions, customers and facilities. Hybrid IT combined with a growth in demand from hyperscale companies continues to transform the data center landscape and serves as the foundational driver underlying our strategy of offering and the integrated platform of flexible data center services across scalable, megadata center infrastructure. On Slide 3, data center customer demand continues to grow, driven in part by the hybrid nature of today’s IT. Since our interception, QTS’s business model has been built with the hybrid as our foundation and the concept that now every data center requirement or application fits into a single, infrastructure solution. Our integrated services platform enables us to deliver hybrid data center solutions to our customers in a way that is truly differentiated. The ability to support customer’s future IT infrastructure roadmap by providing the flexibility within our products affectively derisk their cloud journey. And this capability has proven to be a powerful differentiator for us in the market and something we will continue as we move forward. As the movement towards hybrid IT solutions has taken shape, one trend we have increasingly noted is that more of our C2 co-location agreements with customers now include some element of C3 services component. The C3 services component could be anything from a dedicated private cloud to managed AWS public cloud or simply a managed services like smart hands and eyes or secured storage of customers incoming server deliveries. When we went public approximately 40% of our revenue was generated from customers using more than one of C products. Today, that percentage is north of 60% and growing as hybrid IT becomes the norm. For our C1 and C2 space and power customers, they are also taking the C3 contribution reflects a 35% increase in our overall spend with us. That [ph] revenues we would not have had the opportunity to capture if we did not have the broad service capabilities that we do. We view our C3 product as another lever we have to our business to sell what we refer to as the cubic feet allowing us to drive incremental value on top of the space and power for our customers as incrementally higher returns on capital. To capitalize on this trend towards hybrid IT and integrated services, we continue to drive innovation in our data center solution set. During the second quarter we made a number of significant enhancements through our hybrid solutioning. That positions our business well to continue to take advantage of this growth and demand. Early in the second quarter we announced the official launch of our Service Delivery Platform or SDP, the industry’s first fully integrated service delivery and orchestration platform. Effectively SDP represents QTS’s big data approach to integrated, hybrid data center services. SDP enables customers to access and interact with the information related to their specific environment by aggregating metrics and data from multiple sources into a single operational view. This provides customers the opportunity to view, manage and optimize resources on-demand for one location even from mobile devices. The value of data is only increasing and our customers want access to the information surrounding their environment to enable more advanced decision making and operational flexibility. SDP facilitates that and does so in a cloud like experience which is something customers increasingly expect from our service providers. In fact, SDP was sided as a key differentiator in a number of our customer wins during the second quarter. Since our official launch of SDP launch earlier this year, we received significant feedback from our customers and prospects that our platform is well ahead of anything that is available in the data center sector today in terms of its capabilities, sophistication and innovation. QTS’s service delivery platform now functions as a primary customer interaction tool and will continue to enhance its capabilities to drive increased value for our customers and further align QTS with our customer’s hybrid IT strategies. Since our last earnings call, we have also announced partnerships across our mega data center footprint with two of the leading cloud based network exchange providers. PacketFabric and Megaport as part of QTS’s multi faced approach to expand our carrier neutral cloud ecosystem. Through these software defined networking platforms we are able to offer customers real time visibility and control of their network infrastructure. Seamlessly integrated using QTS’s application interface and web portal, customers are able to instantly provision terabytes of capacity to any other network or cloud service provider connected by the platform. Leveraging next-gen cloud based technology from Packetfabric and Megaport allows QTS to expand our connectivity platform and further enable our customer’s diverse hybrid IT strategies through our service delivery platform. We are pleased with the enhancements we've made to our product portfolio over the past three months. We believe, we have laid the groundwork to maintain our leadership in hybrid data center solutions and look forward to extending our differentiation through our focus on innovation and customer service and execution. Next on slide four, we continue to view the enablement of hyperscale customers as another critical element of our growth strategy and overall hybrid data center solution set. As the data center industry has experienced over the past two years, there is a subset of large customers whose businesses are growing in ways they are increasing their IT demand at a significant rate. And this is resulting in requirements for significant amount of supporting IT structure. These are sophisticated multinational companies in a fast-growing cloud, big data and social media vertical that are able to lay out comprehensive multiyear IT infrastructure roadmaps. Through QTS’s national platform of megascale data centers we are able to satisfy the needs of these hyperscale customers through both large whole sale capacity deployments as well as through smaller blocks of space that are scalable over time to meet their more immediate needs. During the quarter, we announced the latest development in our hyperscale strategy with the introduction of Hyperblock. Each individual QTS hyberblock represents approximately a 2 megawatt deployment, engineered specifically to meet hyperscale speed, flexibility, infrastructure, visibility, economic and operational excellence. We are committed that we can deliver hyperblock capacity in any of our mega data centers across the country in 120 days or less, and in some cases shorter than 30 days. We believe this is a powerful message to the hyperscale community, both in terms of speed to deliver and commitment to innovate. As hyperblock customers will typically sign up for multiple options or rights of first refusal. It also gives up enhanced visibility in the future incremental growth with these customers. We look forward to continuing to augment our hyperscale strategy to tactically take advantage of continued growth in demand from this critical customer vertical. Today four of the five largest cloud service providers are customers of QTS. And we remain an active dialogue in addition to ongoing conversation with a number of other C1 hyperscale customers, regarding their future incremental capacity requirements. The hyperscale vertical is one on which we have participated in the past and look forward to continuing to grow our relationships with these companies increasingly over time. These conversations are in various stages and cover multiple markets; both existing as well as new and cover a range of capacity sides requirements from incremental 2 megawatt hyperblock expansions to significant customized multi-megawatt decisions with others. Hyperscale demand has largely been concentrated in only a handful of markets. While we currently have scale capacity in some of these markets like Dallas and Chicago, we do not in others like Silicon Valley in the Pacific Northwest. Northern Virginia is another market that has seen significant hyperscale demand over the past several years, and while this is a market where we have significant existing presence with over 250 customers across our Northern Virginia campus, we do not currently have capacity there to support hyperscale deployments. We will continue to evaluate potential expansion in new markets to support our long-term strategy, as we do with all capital projects as part of our balanced approach to achieving our overall growth in capital return objectives. Turning to the quarter leasing performance on slide five, for the second quarter we signed new and modified leases totaling approximately $13.3 million of net incremental annualized rent, which included a 2 megawatt hyperblock lease signing with one of the largest cloud service providers in the world as previously disclosed. There was more than 20% above our fourth quarter average. Our Q2 leasing performance included 44 new logos which represents a 20%, 26% increase over the second quarter a year ago. Our leasing performance in the second quarter reflects healthy demand across our product portfolio, in particular, the Dallas market remains a significant growth driver for QTS and we are pleased with the continued ramp in newer markets like Chicago and Piscataway New Jersey. As we discussed last quarter, leasing volume particularly on the wholesale side can show volatility in certain quarters as customers do not think about the buying decisions in a specific 90 day window. However, and looking at our leasing performance on the trailing full quarter basis we continue to demonstrate a strong positive trajectory our aggregate leasing for the trailing four quarter period including the second quarter is up 17% versus the trailing four quarter order period a year ago, and we remain encouraged by the outlook for our continued leasing strength, which is informed by strong pipeline of demand across our product mix and positive competitive dynamics across our footprint. Our strong leasing performance continues to enhance our visibility in the incremental growth embedded in our business. We ended the second quarter with a backlog of signed but not yet commenced annualized revenue of approximately $40 million. Lastly, churn during the quarter came in 1%, which is in line with our full-year churn expectation of 5% to 8%. Pricing on new and modified leases signed during the quarter was up 45% compared to our prior four quarter average, driven by strong pricing in both our C1 and C2 and C3 businesses as well as continued growth in C3 leasing. As I discussed earlier, consistent with our strategy in hybrid IT, we’re continuing to see our growing number of our deal includes C3 services component, particularly on the C2- Colocation side. This is in part driven higher pricing per square foot, as evidence of this few years ago our C2, C3 new leasing pricing averaged approximately $1100 a square foot. Over the past year, including the second quarter our reported C2 and C3 new leasing pricing has averaged more than 1600 per foot or approximately a 50% increase as compared to 2014. During the second quarter of 2017, our C2 and C3 pricing reached nearly 1900 per square foot, representing approximately 75% increase in just three years time. And while $1900 per square foot should not be viewed as the new norm we do believe it demonstrates the value of our services attached approach to data center services. For renewals on a like-for-like basis where customers renew contracts without a change in square foot, we experienced renewal rates increase in the second quarter of 1% versus the pre-renewal rates. This is consistent with our expectation of low to mid single-digit renewal price increases. Overall, we are seeing positive pricing in the market, pricing may change based on product mix but for comparable products across the market we continue to see strong market dynamics, support pricing in core QTS locations. Next on to slide six, I’d like to highlight some of the key customer wins during the quarter. While we are in discussions with a large number of hyper skill companies regarding in some cases significant multi-megawatt capacity requirements, we continue to see a trend towards hyperscale companies taking multiple smaller block deployments over a period of time to reduce risk and increase agility. As previously announced, we are pleased to sign a 2 megawatt C1-hyperblock leased in our Irving Texas mega data center with one of the largest global cloud service providers. The lease also includes an option for 2 megawatts of additional future expansion. Our relationship with this customer began in 2016 and now including the latest expansion their footprint with QTS represents 10 megawatts of hyperscale capacity, and this customer continue to grow with QTS is a strong testament to our teams commitment to service excellence and value of significant visible growth capacity provided by our mega data center facilities. This customer like many hyperscale customers is seeing significant growth in their business and we are pleased to be partnering with them to continue to support their ongoing growth capacity needs. Next, during the second quarter, also in Irving we signed a new C1 logo to a five-year contract representing a little over after a megawatt of capacity. This customer a large multinational Fortune 500 commercial insurance company will be also relying on QTS to provide a variety of connectivity solutions and various C3 managed services including smart hands and eyes and secured storage and delivery. This customer chose QTS based on the quality of our facility and on-site operational staff, in addition to our enhanced focus on security and compliance. As a global insurance provider ensuring the security of their data was primary concern and QTS’s unique ability in this area with a key differentiator. In addition, a key criterion to their evaluation of outsourcing providers was that their chosen partner needed to offer cloud services. Every enterprise customer is in a different stage in terms of their valuation of how cloud technology fits into their respective infrastructure staff. Although customers may not initially sign up for cloud services upfront, we are able to offer the flexibility to a visually moved portions of their C1 and C2 space and power infrastructure within QTS to our cloud product as their capacity and needs for IT strategy evolved We continue to see evidence of this flexibility being a clear differentiator for us within our industry and it is certainly a factor in us winning over this particular customer. Also during the quarter, we signed a contract with new C2 and C3 customers, Fortune 1000 defense contractor representing total annualized MRR of over $1 million. We will be providing this customer with a fully managed private cloud out of our Vault campus in Dulles, Virginia. In addition to a disaster recovery cloud solution through our site in Irving, Texas. C3 contracts are typically two to three years, yet this customer was comfortable signing up for a five-year term due in large part to the flexibility afforded within QTS facilities to move between our products as infrastructure needs potentially change over time. In addition, our ability to offer FedRAMP compliance cloud solutions through our QTS government cloud was another meaningful differentiator for us in winning the deal. Overall, the customer activity we experienced during the second quarter continues to support our hybrid IT strategy and the value of our highly compliant integrated services platform delivered across our megadeal footprint. With that, I’ll now turn it over to Jeff Berson, our Chief Financial Officer to discuss our financial results, development pipeline and the outlook in more detail. Jeff?

[Jeff Berson:]

Thanks, Chad and good morning. Moving on to the financial results on slide eight, for the second quarter 2017 we reported total revenue of $107.9 million. Adjusted EBITDA of $49.2 million and operating FFO of $35 million. Operating FFO for the second quarter includes a non-cash tax benefit of approximately $1.4 million. For the second quarter we achieved an annualized unlevered return on investment capital of 13.6%. As we have discussed on previous calls, we expect our ROIC to remain below our 15% fully stabilized target over the course of 2017 and ramp overtime. Next on slide nine, during the second quarter we brought an aggregate of 19,000 square feet of raised floor online in Irving and Fort Worth, Texas. As of the end of the quarter, our totaled built out raised floor with nearly 1.4 million square feet which represents just over half of the total powered shell raise floor capacity of 2.5 million square feet in our existing facilities, not including land that we own adjacent to our mega data centers. Over the balance of 2017, we anticipate bringing online an additional 103,000 square feet of raised floor, which includes 14,000 square feet of raised floor in Chicago as part of our continued ramp in that market and 39,000 square feet in Dallas between our Irving and Fort Worth, Texas facilities to support continued strong momentum we’ve been experiencing. We also currently anticipate bringing online additional capacity in Atlanta, Piscataway, Santa Clara and Northern Virginia. Turning to slide 10, I’ll review our resulting balance sheet and liquidity position. Our total debt outstanding, including capital leases as of quarter end was just under $1.1 billion. Pro forma for the forward interest rate swap agreement that we executed during the second quarter covering 400 million of our credit facility term loans which become effective in January 2018, approximately 68% of our total debt outstanding as of June 30, 2017 was subject to a fixed interest rate. Our second quarter ending net debt to annualized adjusted EBITDA was approximately 5.3 times consistent with last quarter. As of June 30, 2017 we had a total of approximately $495 million in liquidity in the business made up of availability under our credit facility in cash on hand. As a reminder, earlier this year, we announced that we had established a $300 million after market equity shelf registration. The ATM provides us an additional efficient means of raising capital in a moderated and disciplined process and provides the potential opportunity to tie our funding requirements to our development capital spend on a near just-in-time basis. During the second quarter, we issued approximately 750,000 common shares through our ATM program representing $39.4 million in net equity proceeds at an average sale price of $53.60 per share. We are comfortable with our current leverage level in light of our strong booked-not-billed backlog and will continue to evaluate any future usage of our ATM program as part of a broader balanced capital allocation strategy. Overall, we remain pleased with the strength of our balance sheet position, including attractive interest rates and a strong balance of fixed to floating rate exposure, no near-term debt maturities minimal, secured debt and significant available liquidity. As always, we’ll continue to monitor market opportunities to drive incremental efficiencies in our capital structure. Finally, onto our 2017 outlook on slide 11. As a result of lower than expected utility recovery revenue, which passes through directly to lower operating costs as well as a slower start to the year in terms of leasing volume in the first quarter we expect our 2017 revenue growth to be at the lower end of our revenue growth outlook of 11% to 13%. However, given the fact the utility recovery revenue correlates directly to cost savings as well as continued cost efficiencies in the business we remain comfortable at the midpoint of our 2017 adjusted EBITDA guidance of $203 million to $211 million. In addition, we are raising our OFFO guidance by $1 million at the midpoint to a range of $152 million to $158 million reflecting an updated tax benefit assumption in excess of $4 million, up from approximately $3 million previously. We are also raising our OFFO per share guidance by $0.02 at the midpoint to $2.66 to $2.78 per share. Our churn expectation for 2017 remains at our historical target of 5% to 8%, however, as we have discussed previously, we continue to expect to end up at the higher end of that range this year due to one off churn that occurred at the beginning of the year. Lastly, 2017 guide for capital expenditures is unchanged at between $325 million $375 million. Overall, we remain pleased with our operating results in the quarter, we are also encouraged by the positive underlying demand we see in our business and will continue to look to allocate capital in a balanced approach to capitalize on growth opportunities in our pipeline. With that, I will turn it back over you Chad.

[Chad Williams:]

Thanks, Jeff. We are pleased with our strong performance during the second quarter and look forward to extending our positive leasing momentum over the balance of the year. The industry is rapidly pivoting towards hybrid and QTS is well-positioned as the only fully integrated hybrid data center provider in this sector. With the blended capabilities also deliver hyperscale capacity within our mega data center facilities. True [ph] capability such as our service delivery and software defined networking platforms we are innovating and digitizing the data center customer experience and further enabling our customers diverse hybrid data center strategies. We continue to also evolve our hyperscale strategy to strategically accelerate growth with some of the largest and fastest growing data center customers in the world. Our ability to deliver both large, concentrated deployment as well as smaller scalable capacity solutions to hyperscale customers gives us an opportunity to continue to participate in this growing customer vertical. Customers expect a lot from their data center provider, and at QTS our business relies on premium customer service and operational excellence, day in and day out. I would like to thank our 750 plus QTS employees for their hard work and commitment that fuels a culture of service within our company and broader communities. As always, I would like to thank our customers and our shareholders for their continued trust and confidence into QTS. Now, I’d like to open up the call to questions. Operator?

[Operator:]

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Robert Gutman of Guggenheim Securities. Please go ahead.

[Robert Gutman:]

Hey guys, solid print and thanks for taking the question. So annualized rent increased meaningfully at Irving, Forth Worth and Chicago in the table and the --, can you provide some color on what’s coming from commencement versus new leasing and just where those facilities currently stand in terms of availability, development, and the outlook.

[Chad Williams:]

Hey Rob, this is Chad, thanks. I’m going to let Dan Bennewitz take that.

[Dan Bennewitz:]

Yes, hi Rob, this is Dan. So I think across all three properties we are pleased with the continued momentum of our bookings and obviously the commencements will follow here. I think here – atleast taken one by one for Chicago and we continue to see strong activity, we have multiple new customers, you can see the revenue growth is materially higher quarter to quarter and we see that continuing as we build out in the Chicago location. In Irving, we continue to see a strong demand both for our C1 product as well as our C2 and C3 product including one of the customers as Chad mentioned in his prepared remarks. With the Fort Worth addition there you know we’ve been focussed on having that anchor client reposition the India [ph] facilities so that we can now open up later in the year for additional multi clients for C1 and C2 and we see that whole market continuing to be strong.

[Robert Gutman:]

Thanks. If I -- go ahead, sorry.

[Dan Bennewitz:]

One more thing, you didn’t ask you about, but do you want to talk about is Piscataway. We continue to see strong demand there. We -- in the last quarter here we added new customers in that facility and we’re very pleased with the volume of tours and activities and opportunity for both C1 as well as C2 and we see – its been the fourth consecutive quarter we've been able to report to you positive results in Piscataway.

[Robert Gutman:]

Thanks. And also is there any difference in C1 hyperblock pricing versus non-hyperblock C1 pricing?

[Dan Bennewitz:]

I think there is -- every deal is different here. I think what we like about hyperblock, if you take a step back -- the hyperscale buyers are demanding three things. They demand speed. They demand capacity in the markets that they care about. And they care about scalability. We -- the hyperblock allows those customers to grow incrementally with us. That’s very different than saying hey guys, sign up the 10 megawatt deployment. So we feel good about the hyperblock pricing strategy and that is more incremental and just-in-time. And it’s more it can to ultimate enterprise C1 pricing which is different than 20 megawatt pricing. So, we feel good about that. Every deal has its own characteristics and every deal we need to be competitive to win those.

[Robert Gutman:]

Great. Thank you.

[Operator:]

The next question comes from Jonathan Atkin of RBC Capital Markets. Please go ahead.

[Jonathan Atkin:]

Thanks. So, I wondered if you could talk little bit about the leasing for the second half of the year and how much of that – how much is sort of incorporated into your full-year guidance for 2017? And then, just a quick follow-up on Chicago, any color on AWS direct connects and how that’s sort of feed in say C2 business? I also noticed that the occupancy percentage in Chicago decline. So just wondered if you could clarify that? Thank.

[Chad Williams:]

Hey, Jonathan, I’m going to let Dan take the AWS direct connect partnership conversation and maybe Jeff on the guidance. Dan?

[Dan Bennewitz:]

Yes. First off, the AWS direct connect in Chicago has a couple of benefits. One, obviously we have the direct connect capability in Chicago, but we think actually more importantly is our ability to have a deeper, broader relationship with AWS across our entire portfolio. As Chad talk about, we do see the market shifting into this hybrid environment where conductivity to public cloud is a big opportunity. And we are very excited about working with Amazon to help, monetize that and provide additional services to our customers from not just access to Amazon but also be able to manage Amazon for them. Chad talked a little bit about service delivery platform. That is a great enabler for us to be able to provide not only these capabilities for Amazon, managing Amazon instances for customers but also provide the visibility for customers into their operations whether it's an Amazon instance or colocation environment or a private cloud environment.

[Chad Williams:]

Hey, Jonathan, we’re also getting use to size and scale of our data center assets to drive really a connectivity agenda that has us connecting to cloud first with four of the five largest CSP providers as customers today. We really want to work towards using the scale of our infrastructure to provide the connectivity that we see as the next generation of connectivity which is all about connecting the clouds. And so, we're really focused on that. AWS win in Chicago is a amazing accelerator for that among other things. So Jeff you want to…

[Jeff Berson:]

Yes. Hi, Jon. So, as it relates to the leasing in the second quarter that is incorporated in our guidance. We are very happy with how that number has rebounded. I’d say not surprised and that was built in to our guidance and coming off of Q1 we know it was important to you all and clearly important to us that we continue to demonstrate the strength of the platform and that average leasing has been built into the guidance we’ve given. When you have a slightly weaker leasing in Q1 and I guess [ph] made up for Q2 it does have some impact that close to commencement because just a timing of when that revenue is but all that factored into our guidance. The last question I think you had which is on Chicago capacity. I want to make very clear there, Chicago is continuing to ramp the revenue from last quarter this quarter from just over a $1 million annualized over $6 million. We haven’t had churn or downgrades that occupancy drop is actually based purely on for what we’ve brought in service the ability to find more leasable square feet in what we brought on line. So we’re finding more capacity than what we brought on line there as we develop that asset it gives us more space to be able to sell into, but its purely from upside not from any one departing.

[Jonathan Atkin:]

Okay. And then, on the lease there was more second half expectations and how much – what is sort implied in your full-year guidance for second half leasing on that second quarter?

[Chad Williams:]

Sure. I mean, if you look at what our – we like the fact that over a trailing basis because leasing as we’ve demonstrated it can be a little bit lumpy, but over trailing basis over the last four quarters versus the four quarters prior our leverage leasing has been up 17%, its driving the overall growth in the business and we’re pleased with that. And going forward we anticipate we’ll continue to show strong lease engines, the models working in the market. In general if you look over our last four quarters, our average leasing volume has been somewhere in that call it $10 million to $11 million annualized leasing each quarter. And if you look over the last couple of quarters you’ll see we continue to hit that average and that’s what we’d expect to see.

[Jonathan Atkin:]

Great. And finally, at land side, I appreciate the color on Dallas and Chicago, and Piscataway. So, Atlanta with a new competitor moving in, just wondering how you are seeing competitive dynamics reflected in a customer discussions and so forth. And then, as I look at your development pipeline kind of just make the kind of limited set of data points, but it looks like you’re powered into the -- is going a little bit higher in terms of what you’re building racks and if so, what’s driving that?

[Chad Williams:]

Jon, this is Chad. On the Atlanta market we have had the privilege to be there for over a decade and have a significant presence there as you all know with our Suwanee asset and our Metro, Downtown, Atlanta asset. They continue to see robust customer concentrations. We’re in the conversations. People know us as a go to provider as one of the strongest markets in the portfolio. We haven't seen impact from new competition, but we expect to compete in every market that we are. And I think the benefit that we enjoy there is a leadership position, an operational excellence history and an ability to still double our scale in that market with our existing footprint and infrastructure. So, it will be something that we’ll continue to be a competitive leader in that market and can we expect to compete with people all the time. So with that, Jim can talk a little bit about the development questions.

[Jim Reinhart:]

Yes, Jon. We continue to see a wide range of customers asking for different densities and its great that our model whether its densities or types of liability concern those. Our recent developments as we've seen more growth from those hyperscale type customers has trended towards both a higher density and a high reliability model and that we just see it in the most recent numbers.

[Jonathan Atkin:]

Thank you.

[Operator:]

The next question comes from Andrew DeGasperi of Macquarie. Please go ahead.

[Andrew DeGasperi:]

Good morning and thanks. So first question, I was just wondering if you could maybe comment on the Digital Realty acquisition at DuPont and wondering what – how does that change the ecosystems, systems as far as your competition is concerned? And then, secondly on the Megaport, just curious to know what the opportunity in terms of revenue is on that front with them and could it potentially cannibalized in your existing interconnection strategy?

[Chad Williams:]

So, Andrew, this is Chad. The DRT, DLR acquisition I don't think it was a huge surprise, I mean, people been talking little bit about consolidation. I look at it as a fairly positive result for us. I think that DuPont has had a long history of being focused on wholesale or what they call super wholesale and doing it well for a long period of time. And I know that DLR was looking for success in that area to try to build capabilities. And so I'm sure that made a lot of sense for them. But as far as a market player, it kind of just for us it takes one more player out of the market, and I think at a time where we feel and see a lot of demand across our products including C1 hyperscale. We feel like that it will bode well for us. Some times customers who have huge concentrations want to look at alternative providers. And I think basically the market just consolidated to very large players in the one bigger player. And so, from that standpoint I think it actually probably opens up opportunities for us and we love to compete in the marketplace and feel like we’ll have a very competitive offering. I’ll let Dan talk a little bit about the Megaport strategy. We are firm believers that interconnection and connectivity is changing and shifting around the technology stack. And we have been on multiple fronts from the very beginning of our company with our hybrid integrated platform and embracer and innovator of technology that supports and enhances our real estate. And I think Megaport and PacketFabric are another example of us in embracing, what is happening and going with it versus against it. And I’ll let Dan maybe add a little bit more that.

[Dan Bennewitz:]

Yes. Hi, Andrew. This is Dan. So, I think first off just to reemphasize is the market is changing from who do I connect to how do I get to XYZ public cloud. In addition the network is seeing the innovation around Software-Defined Networking. So therefore the market is shifting. I don’t think you recognize us as a period [ph] exchange necessarily. We want to be a carrier neutral ability to help our customers connect to whoever they need to connect to. PacketFabric and Megaport bring great innovation to the market. We look at them as new partners that are addition to the on-net carriers we have. Obviously we see a growing demand for connecting to clouds whether it’s Amazon, Oracle, IBM, Google et cetera here. So this Software-Defined Networking around PacketFabric and Megaport we see it as additional offerings for our customers that we can help monetize and help differentiate QTS as the place to deploy customers whether collocation or managed AWS or private clouds. So we think this hybrid environment demands and we’re very excited about the relationship we have with them add to our portfolio.

[Andrew DeGasperi:]

And I’m sorry, remember last call you mentioned the 10,000 cross-connects, how does that fit in with Megaport?

[Dan Bennewitz:]

I think I view them as complementary and I think the way we may be an overly simplistic way to think about is, cross-connects are physical connections here where Software-Defined Networking is allowing physical connections to be able to be multiplied in the multiple connections. That’s the innovation in the market and we think that's an added [Indiscernible] to be able to provide the best solutions to customers.

[Andrew DeGasperi:]

Got it. Thank you.

[Operator:]

The next question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thanks. Good morning. I wanted to just delve into the hyperblock opportunity a little bit more. You mentioned you've got opportunities and availability in places like Dallas and Chicago. You mentioned Silicon Valley and I know the Virginia maybe one other is as areas of opportunity where you don’t unnecessarily have that capacity. Can you maybe talk about sort of the initiatives or the way in which you expect to deploy or create opportunity in those markets?

[Chad Williams:]

Hey, Jordan, it’s Chad. First off on hyperblock, it is a product that fortunately with the scale of our assets we felt comfortable coming out and talking about the ability to do hyperblocks which we kind of designated two megawatts with the ability to grow and to be able to do that in 120 days or less in most of our mega data center markets and in some cases in those markets 230 [ph] days or less. So it is something that been received well and Dan spoke about that and its been something that we feel like the speed, the operational excellence ability to execute that’s been an important distinctive differentiator because people want to talk about speed and it is a reality and that’s what we have to be ready to address. Obviously, we don't have mega data centers in each one of what you’d call the Tier 1 hyperscale focus market. It is hard to compete in the competition on certain deals that are in markets where you are not. So we are constantly looking. We've always had a capital conservative approach, the way we allocate capital and drive our returns that will continue to be the case of being discipline around capital. We do you think it's about growth and opportunity, but we don't want to sacrifice our ability to return and be profitable and be respectful of that timing, but we are out looking at different markets and obviously the markets where hyperscale are driving a lot of the business. At the same time where we could also bring our hybrid product set with C2 and C3 will be part of that strategy. So, we’re looking in the areas of the country for infrastructure rich low basis assets or infrastructure rich low basis land opportunities that would let us to be able to take more of the greenfield approach to the development. So those are things we’re out looking for on a pretty regular basis, but that’s pretty consistent from the very beginning and probably the best example of that is when we right after the IPO launched Dallas. Remember that was a pretty competitive time in the marketplace in Dallas and there was a lot of comments around that, but again we were confident. We had the right location, the right infrastructure access, the right fiber access and we’re able to make that one of the most significant drivers of QTS with our approach around our hybrid products and our ability to do scale deal. So we’ll continue to be disciplined and focused on it and move forward.

[Jordan Sadler:]

Is greenfield development an existing in-house capability or do you need to add some infrastructure there?

[Chad Williams:]

Absolutely. And I would take -- I think our development team is one of the most agile, most developed, most advanced teams in the country. And I’ll tell you why? The hardest thing you can do is to take on substantial pieces of infrastructure and convert them to a data center, but our team has rose the challenge time and time again taking some of the most advanced facilities in the world with two semiconductor plants in Richmond and Dallas and convert those the state-of-the-art data centers on budget, on time and executed flawlessly. And that is a very challenging thing because a lot of engineers and architects and developers want to start with this blank sheet of paper and they want to have everything kind of lined out and it's a challenge. So our team has actually energized from the ability to start with a blank sheet of paper and design the QTS next generation of infrastructure, fast, economical and capable. And by the way, our partnerships are there to support that. We have five of the largest general contractors in the world that are at projects, they had work for us for years and years. And in this world there's still about a dozen players in this size of scale of infrastructure both engineering, architects and contractors that do all this work and all of those are partners with Mr. Jim Reinhardt and our development team as we do that. So, we’re excited about it. We have all of that capability in-house it just an extension of our C1 product offering that we've had from the beginning.

[Jordan Sadler:]

Okay. And then, are the returns on hyperblock and on greenfield development consistent with what you guys have targeted historically or should we expect them to be a bit lower?

[Chad Williams:]

It is the competitive environment. No question. So, if you're looking at standalone deals with hyperscale and hyperblock less because hyperblock is more of an enterprise type pricing model with a smaller space with the ability to scale, which is why we like that product. But the hyperscale is the competitive environment. So where we have the opportunity those will not be 15% type return deals. I think that in most cases on the hyperscale those returns are 200 to 300 basis points less than out on a pretty average basis. The benefits that we have and the opportunity we have is to continue to have a diversified environment. So, we don't feel like we have to build for just hyperscale. We’re going to continue to build infrastructure and deliver that to support our full product offering. So, obviously it takes longer and smaller capabilities to intersect customers in C2 and C3, our co-location in cloud and services to come into those facilities, but we still love the customer diversification and revenue opportunity at a higher margin to help complement the facilities where you might lean forward early in an asset to put customers and revenue into that building on a more competitive return model, but at the same time we want to fully stabilize and grow our assets to meet the objectives and goals of the company. So we – it to us it’s just kind of continue to do what we've always done.

[Jordan Sadler:]

Okay. And then just one for Jeff on the guidance. As I look at sort of the revenue setup what you would need to do to hit the midpoint of the revenue guidance? Or even the operating FFO guidance for the back half of the year. I think it implies a pretty meaningful step-up from the 2Q run rate. And even maybe beyond what's in the backlog. So, is there something specific that you are pointing toward or that you know about that gives you high conviction in those numbers?

[Chad Williams:]

Yes. Jordan, I’d say that it’s a combination of the leasing that we’re seeing in the market, the booked-not-billed backlog that we’ve got which close to 40 million gives us tremendous visibility toward the remainder of the year. And also just the fact that as we’ve said in the past over the first couple of quarters we had a customer churn event that close down some of that relative revenue growth and without that churn event hitting the last quarters the underlying growth moment in the business should shine through in a much clear way.

[Jordan Sadler:]

Okay. Is there any update on that space or the churn space?

[Chad Williams:]

The Virginia space continues to be active in the market. Dan, do you want to give more clarity on it.

[Dan Bennewitz:]

Yes. Jordan, this is Dan. As we said before the strategy we’re on is twofold to see a very good activity in the government place where clients would value the skit [ph] space there. We see a lot of good activity there. And if we can come to an agreement at the rate terms we’d like to keep that facility. If we don’t we’ll look at a short-term options that would run through the lease expiration in early 2019. But we’re pursuing both options in parallel and I think what our goal is to be able to come back to you and have a clear forward view by the end of the year.

[Jordan Sadler:]

Sounds good. Thank, you guys.

[Chad Williams:]

Thank you.

[Operator:]

In the interest of time, we ask that you limit yourself to one question and one follow-up. The next question comes from Matt Heinz of Stifel. Please go ahead.

[Matt Heinz:]

Thanks. Good morning. Could you just kind of talk through the sequential declines in Q3 revenues and MRR, I guess, this slide what appears to be a trend of fairly strong book [ph] in that segment?

[Dan Bennewitz:]

Hey, Matt. This is Dan. I think you’re point here is what Jeff talked about we had some churn and down rates early in the year that have impacted the revenue. Bookings have been very strong as you see both in this past quarter and second quarter as well as first quarter. So, I think you’ll see that trajectory change as we move forward here given the strong bookings.

[Jeff Berson:]

And Matt, in particular on the C3 side we were very happy over the last couple of quarters that you saw that sequential growth in C3. It’s a relatively small number. So yes, its dip down marginally from Q1 to Q2, but big portion of the leasing and we did in the quarter was C3 driven. We talked about a deal Chad mentioned that was a $1 million plus and annualized rents that came largely from the C3 side that we booked during the quarter. And so, the pipeline and backlog gives us confident that we’ll continue see growth in that sector.

[Matt Heinz:]

Okay. Thanks. And regarding the two megawatt hyperblock deployment you’re announced in late June. It sounds like that deal was executed in April. So, I’m just wondering if that was included in the leasing volume that you had previously alluded to in the first month or so the quarter or was that was incremental? And then finally, your CapEx guide implies a fairly substantial uptick in second half development even at the low end of the range. So just wondering roughly how much of that implied CapEx is included in your 2017 projects table versus what’s allocated into projects to look for next year’s delivery? Thanks.

[Dan Bennewitz:]

Matt, this is Dan. I’ll take the first one there. So that hyperblock was one of the deals that we do not close in first quarter, that closed in April that we referenced in our last earnings call.

[Jeff Berson:]

And then on the CapEx side Matt, that is correct, we do expect some of that CapEx spend to be backend loaded. If you look at the development table you’ll see that we do have capital allocated to projects that will come on line in multiple areas. And if you look on what we have under construction to bring more space on line over the second half of the year you’re going to see that in Metro, in Irving and Chicago, in Piscatawaylate, Fort Worth, Santa Clara and the bulk lease facilities. So there is a number of different aspects of growth that we’re seeing across portfolio and that CapEx encompasses bringing space on line immediate.

[Matt Heinz:]

Great. Thanks guys.

[Jeff Berson:]

Thank you.

[Operator:]

The next question comes from Frank Louthan of Raymond James. Please go ahead.

[Frank Louthan:]

Great. Thank you. First sort of follow-up on previous comments on the space in Northern Virginia. As I recall it's fairly expensive space. What would you characterize the likelihood of being able to release that and why not just go ahead and get out of it and get the question out of the way? And then secondly, are you seeing any irrational behavior or new or disruptive new entrance in any of your markets? What is sort of the market dynamic there from competitors right now?

[Chad Williams:]

Frank, this is Chad. On the space in Northern Virginia, obviously we would be saying something much different if we didn't actually believe that there's an opportunity with the uniqueness of that space. So, it was previously sold to a very specialized client that was willing and able to pay a margin profile that was very attractive. And so, obviously with our federal group they have asked Dan and I that they'd like to have the opportunity to see if that skip compartmentalized space which is fairly hard to find in that Northern Virginia market. If they can have an opportunity and obviously if we can get the right economics and the right model we’re to do profitable deal. And if not, we will come to you by the end of the year and talk about it differently. But we do have confidence that there could be an opportunity there and we want to pursue that. As far as disruptive actions in other markets that we’re in. We have not really seen behavior that has not been consistent with just a stable environment. And I think a lot of it is just the demand in the markets where we are. There's just a healthy flow. There's a lot of competitors, but there's also a lot of deals. And so, at the end of the day it seems like people are winning their fair share along with us and the markets continuing to see a lot of demand and in some cases its kind of who has the space at the right time for the deal and that's where we want to take that on. Dan, do you have…

[Dan Bennewitz:]

Yes. Just to add here is maybe not disruptive, but we are seeing the market shift, and I think there is not a CIO out there that doesn't asking or planning, what is my path to the cloud. So we’re seeing the market shift from alternate space and power only opportunities to requirements that require services wrapped around that space and power. And for more we’re seeing customers talk to us about a hybrid environment. How do I have a hybrid requirement that may include insourced data center, outsourced datacenter, private cloud and/or public cloud. We think that plays in to our integrated platform and our integrated solution offerings that we can be a great solution for multiple different requirements, and as those requirements shift in the future which they will that we can continue to be a solution provider for those customers. So we think we’re very excited about where the market is shifting. We see it and we’re planning for that.

[Frank Louthan:]

Okay, great. Thank you.

[Operator:]

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

[Richard Choe:]

Great. Thank you. Just a follow-up, given the development timeline, as the lot of assets coming online at the end of the year and the 40 million backlog, how should we thinking about the pacing of revenue kind of going forward given this regarding to the low end of 11% and 13%, but I don't think you’d be doing this much development if you didn't feel confident in the backlog? And if you can clarify little bit on how much of the backlog is for this development and how much of it is maybe little bit more speculative or looking at deals in the pipeline? Thank you.

[Chad Williams:]

Sure. Hey, Richard. I think that the development that we’ve laid out is consistent with the fact that we’re continuing to see growth in the portfolio, and we need to bring space on line to meet that growth. If you look at one of the numbers that we put out which is for what we’ve brought in service, how much of that available space has been sold. This quarter that number was about 88%, it continues to be around that level, which we love because what it means is we’re not trapping a lot of capital in available space that hasn’t been sold. We’d like to bring that space online as close as we can to a just in time basis with the recognition we need some inventory available. And what that means is we do have to continue to put money on into new development to meet the increase revenue in the business. It’s success based capital spend. We’ve demonstrated in the past that we don’t know we stick to our development plan that significantly in the future because we do have the ability with Jim and the development team working with Dan and the sales team not to dynamically shift where we put money to meet where that demand is. So what we’ve laid out in the development pipeline right now is consistent with what we’re expecting in terms of revenue growth and bringing that space online, but it could also shift over the next couple of quarters or years again in response to where we’re seeing the best opportunities.

[Richard Choe:]

Okay. And I guess to follow-up on the managed services question, you mentioned $1100 for C2, C3 few quarters ago, 1600 and 1900, but given the churn the managed services has been kind of flat. When could we – should start seeing that ramp in the third quarter and beyond?

[Jeff Berson:]

I think you’re hitting on – there’s two different points there. We love the fact that you are absolutely seeing that price increase which demonstrates customer leveraging the C3 taken on those services. We have over the last couple of seeing the ramp in C3 that is growing as we work through some of these churn events in the past and given the leasing that we did see in the quarter, but we are also confident that we’ll continue to see growth in that C3 side.

[Richard Choe:]

Great. Thank you.

[Jeff Berson:]

Thank you.

[Operator:]

The next question is from Paul Morgan of Canaccord. Please go ahead.

[Paul Morgan:]

Hi. Good morning. Maybe you can just comment on some of the non-hyperscale industry verticals and where you’re seeing strength and maybe where demand is a little bit comparatively less robust right now?

[Chad Williams:]

From standpoint, Dan kind of hit on it earlier which is there’s hardly an engagement or conversation that isn’t talking about the hybrid nature of the CIOs and CTOs focus. So whether it is, how did their roadmaps work towards public cloud proportions or parts or how do they scale their SaaS offering or deployment. So, it is something that is happing across the portfolio, and I think we’re seeing demand across kind of the full enterprise spectrum for this hybrid approach to IT. Dan, do you have any more color specifically on that.

[Dan Bennewitz:]

Yes. Paul, this is Dan. What we continue to see strong demand in the ultimate the cloud IT services, SaaS, digital media space. Clearly, that the IT is the engine of their business. We continue to see strong demand in there. We are seeing, although a much smaller percentage for business strengthen in the federal government side and we feel optimistic about the future of that. We continue to see growth and demand in industry vertical such as the healthcare. We continue to see that and we were very strong in multiple markets in the healthcare space, as well in the retail space, with the lot of the changes going on in that industry here. So those are biggest ones. We see the biggest demand coming from and we’re – another thing I’d add here is when we go to market we try to go to market where we have critical mass to verticalize our sellers. So we do know and particularly as this market changes into more of a hybrid environment industry vertical knowledge and expertise is going to be increasingly more important there.

[Paul Morgan:]

Great. Thanks. And then, just you had – just got away last in Fort Worth since then and I’m just wondering on top of the organic development opportunities that you’re leveraging, is there anything in the acquisition market that you think you find interesting right now or that might be a 2017 investment?

[Chad Williams:]

From our standpoint organic growth and ability to develop and create value is always been kind of our first option. The opportunity to more than double our platform continues to exist in our portfolio, the best and most visible path in most instances is just to continue to invest in the opportunities that we have in front of us. So, external M&A we always are looking and have opportunities and are engaged in the marketplace as a whole. But we always kind of come back to put that through the lens of what we control and what we have and what we know. Obviously, as I said in my script, we continue to be thoughtful about the markets where we don’t have facilities in footprint and we’ll continue to be thoughtful about how and when to enter some of those opportunity markets with the platform but we feel like we’ve got a lot on the plate and an opportunity ahead of us and we love to create that organic value that our team has done from the beginning in and focus on.

[Paul Morgan:]

Great. Thanks.

[Operator:]

The next question is from Eric Luebchow of Wells Fargo. Please go ahead.

[Eric Luebchow:]

Hi, thanks for taking the question. In terms of the new market expansion that you discussed, are there any particular geographic areas that might be of particular interest. I know the westcoast has been talked about as one region where you don’t have a mega data center footprint and following up on an earlier question, if you did a Greenfield development, how would that kind of impact your cost to build and potential returns?

[Chad Williams:]

Yes, so Eric this is Chad. You know we in the script kind of laid out the areas, obviously were focused on tier 1 markets where we don’t have scale assets or infrastructure to balance our entire portfolio, so the Pacific Northwest Silicon valley or Santa Clara, those type of areas out West and then of course the opportunity for us to expand our market that were already in the Northern Virginia obviously being one of the largest markets in the country. It is those type of tier 1 markets where we feel like the opportunity in our customer base has talked to us or is talking to us about opportunities for our ability to drive that. As far as cost in Greenfield, I mean, I do feel like our teams feel like that they can be as competitive in the marketplace and is innovative as anyone in the marketplace. And so we are going to rely upon our partners that workforce for years and years and we are to drive the innovation that drive the success of our business. So obviously the range to buy new construction depends on which market you are putting it in, but our scale of our procurement in our capability to accept the infrastructure needs of our business we feel like we can do it , it is competitively as anyone in the marketplace, and I have partners to support that. Obviously, we don’t feel that the particular hyperscale market supports a 15 plus percent return, but again we’ll balance the return opportunity to complement the full product offering of our business to help continue to go for a fully stabilized return that drives our business, so we’ll focus on, we feel like it’s a great opportunity and we continue to be thoughtful about it.

[Eric Luebchow:]

Thanks, and just one quick follow up. In terms of capital allocation for the remainder of the year you are at a 5.3 net leverage right now and so how do you think about where you want to be by the end of the year and how much more equity you want to take on as part of your ATM program?

[Chad Williams:]

Sure Eric. We’ve operated and I think we said consistently we are very comparable and leverage that in or around 5 and a half turns what we love about the ATM program, and we took advantage of it in the second quarter as it enables us to be moderate with how we think about that equity, but maintain a healthy balance sheet that gives us flexibility. And so our expectation for the rest of the year is to it can move through our development plans and spending but continue that theme of discipline in terms of how we spend the money and discipline in terms of how we are bringing in capital through equity to fund it.

[Eric Luebchow:]

Great. Thanks.

[Operator:]

The next question is from Simon Flannery of Morgan Stanley. Please go ahead.

[Simon Flannery:]

Great, thank you. It was good to hear about the obviously the hyperblock orders and the options and I think one of the challenges investors have is around the lumpiness of this and it will be great to get some color about the mindset that you are going to get to more smaller deals that grow over time or do you think we are still going to have some of this lumpiness and what are the conversations that are driving this demand, are some of the hyperscale companies really deciding to outsource the majority of their future needs or are they still splitting it in-house out of house just using outsourcing where they don’t have space? Thanks.

[Chad Williams:]

Thanks, Simon this is Chad. Hyperscale is going to be lumpy. I don’t think that the CSP [ph] providers are moving to this, we are going to outsource everything. I think it is a direct all result of the growth that they are seeing in their platform and there in my opinion going to have a balanced approach to owning and operating significant parts of that infrastructure because it is their business, and as the same time looking to partners that can deliver with speed and operate with excellence to be great partner. So I see it as not a one or all on either side, I think it’s going to be balanced. It’s still going to be lumpy. I love the aspect we call it hyperblock today, but I called it C1 a decade ago, and I love the enterprise feature of being able to show enterprise customers that they can come into our facilities in smaller blocks and have the opportunity to grow and not feel like they are trapped because of the scale of our assets, so we love that aspect. We’ve always appreciated the opportunity to be able to intersect that and our strong focus on return on capital in the in the pricing metrics around that are or something that we like and we’ll continue to kind of focus on. It’s been part of our platform from the beginning and we’ll continue to take advantage of both the scale, opportunities and the smaller enterprise opportunities, and the lumpiness of this business is why we are an integrated platform. The lumpiness of this business will be here going forward, and I’ve had the privilege to lead the company long enough that I’ve seen oh so go from best to worst about four different times, and that’s probably not going to change. And so at the end of the day, the best way that we can build our platform is to build it across a diversified set of product and customers and be providing solutions that they value and be able to kind of consistently and reliably grow. And that is our goal at QTS and will continue to drive that direction.

[Simon Flannery:]

I think Chad you may a comment around being helped by positive competitive dynamics in the quarter. What exactly did you mean by that?

[Chad Williams:]

I think, I made that mention around the positiveness of the M&A acquisition of you know taking a competitor out the marketplace and from that standpoint we probably see it as a positive dynamic in the marketplace versus the negative to have that consolidation happen. It just kind of takes one more operator out of the marketplace that was competing in and puts them you know consolidated. So other than that, we are seeing consistent, we have competition in every market and we get up every day to work hard and compete against the wind [ph].

[Simon Flannery:]

Right. Thank you.

[Operator:]

The next question is from Sammy [ph] Badree of Credit Suisse. Please go ahead.

[Unidentified Analyst:]

Thank you for taking my question. Could you give us some color on interconnection and connectivity revenues or growth rates in 2Q, 2017 and any notable activity in the quarter? Also, just as a follow up to that question, has AWS Direct Connect data center in Chicago driven interconnection activity and has this been a factor in customer decisions when it comes to cross connecting or laying down connections in your data centers?

[Chad Williams:]

Hey Sammy, we talk about interconnection, the number of interconnects and the fact that that is still growing and historically and nothing has changed there we are seeing that growth continue at 15% level, so we are excited about that, albeit of a bit base and I’ll have Dan jump in to talk about how that strategy we think is evolving to drive even more power through some of the new announcements.

[Dan Bennewitz:]

Yes, Sam this is Dan. I think are having AWS direct connect in Chicago is certainly value add and we see that as a factor in the wins that we’ve had. I would say we continue to see a demand as we talked about before where instead of saying that I wanted to connect to such and such is we are seeing more and more a demand that I need to connect to Amazon Cloud or some of the other private public clouds out there. We see that is what’s driving a lot of the – of CIOs these days and that’s why we are excited about obviously with Amazon direct connect in Chicago that benefits Chicago as well as I mentioned before our entire portfolio. The relationships we have with Megaport and PacketFabric are also very exciting, the multiples are data centers and they have an impact across to our portfolio. That’s the exciting part of this is not just a physical data center physical connection, and when you start talking about software to find networking it opens up a whole new world of flexibility, capability and speed.

[Unidentified Analyst:]

Got it. Thank you.

[Operator:]

The next question is from Mike Cassini [ph] of Deutsche Bank. Please go ahead

[Unidentified Analyst:]

Hey good morning. Just on the – your customer expiration list, I guess the tenth largest [customer, the lease is expiring this quarter, anything you can talk on that front.

[Dan Bennewitz:]

Yes, this is Dan. I would say that customer number ten is we’ve finalized agreements and they are expanding with us as well as extending. So you’ll see the next time around that the weighted-average lease term is closer to five years than what you see today.

[Chad Williams:]

That just happened between the end of the quarter what you are looking at in this call.

[Unidentified Analyst:]

Yes, okay. And then just a follow up on the cost efficiencies, you guys mentioned just curious if something specific is driving that and then maybe what changed compared to last quarter that makes you more comfortable in making that?

[Chad Williams:]

Yes, Mike. We used the term discipline a couple of times and we apply that to the way we think about spending capital, we apply that the way we think about broadening our product mix to meet customer needs and frankly we’ve put the same disciple on the way we operate our business. So looking at the way we spend money we talked last quarter about the fact that we are leaning in and continue to invest in our sales team continuing to invest in the right product development, you’ve seen some announcements, but at the same time you know making sure that we are looking at where we spend our money we get investor turn off a bit.

[Operator:]

There are no additional questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Chad Williams for any closing remarks.

[Chad Williams:]

I want to thank everyone for their time and patience and we look forward to continuing to execute our business. Thank you for the confidence that you put in us and we look forward to executing our business and talking to you next quarter. Thank you.

[Operator:]

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