Cencora, Inc. Q3 FY2020 Earnings Call

Greetings and welcome to CoreSite Realty's Third Quarter 2020 Earnings Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your Investor Relations host, Kate Ruppe. Please go ahead.

Thank you. Good morning and welcome to CoreSite's Third Quarter 2020 Earnings Conference Call. I'm joined today by Paul Szurek, President and CEO; Steve Smith, Chief Revenue Officer; and Jeff Finnin, Chief Financial Officer. Before we begin, I would like to remind everyone that our remarks on today's call may include forward-looking statements as defined by federal securities laws including statements addressing projections, plans or future expectations. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. We assume no obligation to update these forward-looking statements and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our filings with the SEC. Also on this conference call, we refer to certain non-GAAP financial measures such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of our full earnings release which can be found on the Investor Relations pages of our website at coresite.com. With that, I'll turn the call over to Paul.

Good morning and thank you for joining us. I will cover our third quarter highlights followed by Steve and Jeff's more in-depth discussions of sales and financial matters. Our Q3 highlights include new and expansion sales of $12.5 million of annualized GAAP rent. Operating revenue of $154 million representing year-over-year growth of 6.3%; FFO per share of $1.33, a year-over-year increase of $0.05 per share or 3.9%; power and cooling uptime of 100% for the quarter, thereby sustaining 79% uptime year-to-date. Completion in October of LA3 Phase one and commencement of our previously announced 4.5 megawatt pre-lease and issuance of our third annual corporate sustainability report. The state of the economy in recent months appears to be leading more enterprises to raise the priority of their digital transformation initiatives. This dynamic seems to help our new and expansion sales execution during the third quarter leading to good new and expansion sales and good progress in building a robust sales pipeline for future quarters. Our sales customer support and data center operations teams have been extremely agile helping our customers navigate these challenging times and plug into the value of our ecosystems as part of their hybrid cloud architectures. As discussed last quarter, we continue to see some elongated sales cycles for traditional enterprises due to the COVID-19 pandemic, but the overall size of our sales pipeline seems to compensate for this challenge. However, we ultimately have to execute on those opportunities and convert them into successful sales. Some activities are returning to normal. We resumed in-person data center tours making sure they follow COVID-19 safety protocols. We have also seen more customers taking comfort in these protocols which support the safety of our on-site staff and customers leading to more normal volumes of customer visits in our data centers. At the same time, we continue to see increased remote hands activity and use of our customer portal. As I mentioned earlier, we recently published our third annual corporate sustainability report. Sustainability is an important ongoing goal for CoreSite as we focus holistically on a broad range of success measures that take into account all of our stakeholders. The report summarizes our continued commitment to our customers, colleagues and communities including providing our customers with reliable and energy-efficient data centers, building a culture of fair and equal treatment, respect, responsibility, transparency, innovation and operational excellence, and fostering communities of customers that work synergistically with each other. Turning to our property development, LA3 is our first ground-up data center in Los Angeles, so we are pleased to complete Phase one on time in October and equally pleased to commence our 4.5 megawatt pre-lease with much runway to expand on the success of our Los Angeles campus. We also completed the NY2 power infrastructure project adding an incremental 4 megawatts of power to support our existing space. The completion of LA3 Phase one fulfills our multiyear plan commenced in 2017 to add 4 ground-up enterprise-class data centers to our portfolio with the goal of restocking contiguous capacity to strategically support the expansion of our campuses and our existing customers and to bring new customers to join these communities. We realized some of the fruits of this plan this quarter through our ability to opportunistically win a modest and fast-moving hyperscale deployment. As important, we are making good progress on the permitting and entitlements for SV9, our next new data center on our Santa Clara campus. We continue to see a strong sales funnel for our new CH2 data center in Chicago; however, it primarily consists of enterprises with longer and less predictable decision timelines. Recently, we executed our Illinois memorandum of understanding providing our participating customers with sales tax savings. Our increased capacity is crucial to meeting the customer demand we continue to see for edge capacity and edge cloud deployments in our major metro markets, especially for enterprises seeking the highest performance, cost-effective, secure and reliable co-location solutions for multi and hybrid cloud IT architectures. In closing, our increased capacity is providing increased sales opportunities, driving our strong Q3 sales and our network cloud and enterprise-dense campuses in major metro markets are well positioned to benefit further from the secular tailwinds for data center space. With that, I will turn the call over to Steve.

Thanks, Paul, and hello everyone. I'll start by reviewing our quarterly sales results and then talk more about some notable wins. As Paul shared, we delivered new and expansion sales of $12.5 million of annualized GAAP rent during the third quarter, up approximately 35% compared to the trailing 12-month average, which included $5.6 million of core retail co-location sales, $6.9 million of scale leasing and an impressive 37 new logo wins with opportunities for future growth. Our new and expansion sales were comprised of 72,000 net rentable square feet reflecting an average annual GAAP rate of $173 per square foot. We continue to see elongated sales cycles, but we benefited from a strong sales funnel and the hard work of our sales team producing both good volume and some strategic wins for the quarter. Additionally, we continue to see elevated demand in the market supporting our efforts to build a robust pipeline for future sales. If our current pacing continues, 2020 will be our strongest year for creating new sales opportunity volumes. However, we ultimately need to convert these opportunities into successful sales transactions over the next several quarters. Looking at new logos, the 37 new logos represents $1.7 million of annualized GAAP rent, our best quarter since Q3 2019. New logos accounted for approximately 13% of our total annualized GAAP rent signed during the quarter and were strongest in the enterprise vertical. We are excited about the quality of these new logos and believe they will drive future growth as their IT needs evolve. Notable new logos included a global markets company that is one of the world's largest financial derivative exchanges, which signed and commenced during the quarter; a mobile marketing platform that fuels many popular mobile games through its studio and marketing technology; and a major participant in the investment industry. Attracting and winning new customers that value our platform remains a key area of focus, and it's great to see it continue to bear fruit. Our sales results were further supported by strategic wins from existing customers, which enhances the attractiveness of our data centers and connectivity platform. As Paul mentioned, having the capacity to provide flexibility for our customers to scale their deployments, while benefiting from native cloud on-ramps and robust interconnection collectively delivers unique value to support today's IT requirements that few others can match. Customer demand realizing this value to support their hybrid and multi-cloud needs continues to be evident through some of our Q3 existing customer expansions. Two of our most notable wins across verticals and business sectors this quarter were the signing of a communications cloud-based technology company that provides video and collaboration services and the high-tech financial services and mobile payment processing enterprise. In summary, the strength of our third quarter sales results reflects our initiatives to improve retail scale and new logo sales that further enhance the value of the ecosystem effect on our campuses. We remain optimistic about our opportunities going forward as our pipeline for the fourth quarter and 2021 remains strong and we continue to focus on translating our pipeline and capacity into new sales and revenue. With that, I will turn the call over to Jeff.

Thanks, Steve. Today, I will review our third quarter financial results, discuss our balance sheet including liquidity and leverage, and conclude with some items to consider for the fourth quarter and 2021. Looking at our financial results, for the quarter, operating revenues were $154 million, which represents 6.3% growth year-over-year and 2.3% sequentially, including growth in interconnection revenue of 10.8% year-over-year and 1.2% sequentially. Customer lease renewals equaling $20.7 million of annualized GAAP rent, which represents a cash rent mark-to-market of 2.9%, and we reported churn of 1.9%. Commencement of new and expansion leases of $7.2 million of annualized GAAP rent. Our sales backlog as of September 30 consisted of $17.8 million of annualized GAAP rent or $23.6 million on a cash basis for leases signed but not yet commenced. We expect approximately 60% of the GAAP backlog to commence in the fourth quarter and substantially all of the remaining GAAP backlog to commence in the first quarter of 2021. Net income was $0.50 per diluted share, an increase of $0.03 year-over-year and a decrease of $0.02 sequentially. FFO per share was $1.33, an increase of $0.05 per share or 3.9% year-over-year and a decrease of $0.02 sequentially or 1.5%. Adjusted EBITDA was $81.4 million for the quarter, an increase of 4.5% year-over-year and consistent with the previous quarter sequentially. Moving to our balance sheet, our debt to annualized adjusted EBITDA increased slightly as expected and was 5.2 times at quarter end. Inclusive of the current GAAP backlog mentioned earlier, our leverage ratio is 4.9 times. We expect to finish the year with leverage slightly higher than the current quarter at approximately 5.3 times. We ended the quarter with $326.8 million of liquidity, which provides us the ability to fully fund our 2021 business plan. Turning to our work ahead, we have accomplished a great deal in the first nine months and we are focused on continuing that momentum. In regards to the fourth quarter, we still anticipate elevated churn as a result of the first of two move-outs associated with the customer in the Bay Area that we have discussed the past several quarters and expect churn to recede to our historical levels of 7.5% to 8.5% in 2021, inclusive of the 200 basis points related to that specific Bay Area customer during the second half of the year. Turning to 2020 guidance, we increased our 2020 guidance related to net income attributable to common diluted shares to our new range of $1.92 to $1.96 per share from our previous guidance range which was $1.81 to $1.91 per share. In addition, we increased our 2020 FFO guidance to our new guidance range of $5.26 to $5.30 per share from our previous range of $5.15 to $5.25 per share. We increased our 2020 adjusted EBITDA guidance to $323 million at the midpoint from $321 million previously. The increase of $0.08 per share at the midpoint of FFO or 1.5% is largely driven by approximately $0.02 to $0.03 per share in net COVID-related savings, such as travel, entertainment, and conferences and $0.05 per share attributable to lower-than-anticipated property taxes, insurance and other operating expense savings. As it relates to 2021, we will provide detailed annual guidance during our fourth quarter earnings call in early February. However, I'd like to leave you with a few thoughts. We have brought a significant amount of capacity to the market with four ground-up data center developments over the last three years, which supports our leasing efforts, as our sales team has more contiguous capacity to meet a broader range of customer requirements. Keep in mind, the operating expenses related to the recently completed and pre-stabilized projects are higher at the completion of Phase one than subsequent phases and therefore typically negatively weigh on investment returns. As we look forward to 2021, we have the ability to bring consistent amounts of capacity to the market through incremental computer rooms and infrastructure development within our existing data centers. This enables us to bring capacity online more quickly and invest lower levels of capital per incremental computer room compared to the requirements for the initial phases of each new development like VA3, CH2, LA3, and SV8, all delivered in the past 12 to 18 months, ultimately culminating in higher returns on the incremental capital as compared to capital invested in building the core and shell during the initial phase. The expected capital investment in 2021 is currently estimated to be approximately $185 million to $225 million and continues to be dependent upon sales activity through the end of the year and the anticipated timing related to additional capacity requirements. In closing, we have ample liquidity to fully fund our 2021 business plan. Our balance sheet is strong with no near-term debt maturities. Our business fundamentals are strong and we believe we are well positioned for the long term. With that operator, we would now like to open the call for questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of John Atkin with RBC Capital Markets. Please proceed with your question.

Thanks. So a number of markets where you've delivered multiple megawatts as you mentioned Jeff towards the tail end of your remarks. I wondered if you could maybe talk across the kind of the competitive environment, pricing, expected yields, demands, environment across each of the four to just give us a flavor for how you view things commercially at present?

John, this is Paul. Thanks for the question. I'll try to answer that and Steve and Jeff can jump in if I leave something out. Obviously, the biggest markets in terms of volume for us as Jeff pointed out were Santa Clara in Los Angeles and New York. We also see good volume and good opportunities in Virginia and Chicago. Chicago is a bit behind for the reasons I mentioned, but the pipeline there looks good. We've got to execute on it. It didn't help. It came up in the early stages of COVID, which slowed some things down. I would say that our pricing comments would be consistent with what they've been in prior quarters. In most of our markets, supply and demand is pretty much in balance. Pricing is solid. It may vary in a particular market depending upon the density and the deployments that are won in that market in any given quarter. But quarter-over-quarter, they seem pretty stable. Virginia still is the most challenging market from the standpoint of pricing, but it hasn't changed. It hasn't gotten any worse in the last couple of quarters and may have even improved a little bit. We continue to target and believe we can achieve on average our historical yield targets. Those haven't changed. At this point in time with the development that we've completed and the inherent expansion capacity that we have within our existing portfolio. The main determinant of our future is going to be how well we can translate these sales funnels into sales? How well we execute on that? To put the capacity in perspective because I know there was some confusion in analyst notes coming out at least with a handful. We currently have the ability to increase in existing buildings both with available space and computer rooms we can turn up quickly within six months, roughly 88 megawatts of capacity. We have land that is either already entitled or in the entitlement processes like SV9 to turn up another 126 megawatts of development. So as our sales continue to succeed, we have a tremendous pipeline of developable capacity behind them to pursue those sales. Does that cover your question?

Yes. Unless, Jeff was going to add more.

John, the only thing I would add just a little bit around pricing is there were some questions in terms of our pricing this quarter on the signed build on a per square foot which is simply stated. If you just look at the composition of our scale leasing this quarter versus our retail colocation, a much higher percentage this quarter in scale which compressed that pricing a little bit.

And then as we think about SV7, I mean you had some success at SV8. Curious about SV8 signing was with the earlier customer that you had signed with SV8 last year. And then there has been quite a lot of demand in Santa Clara with a large build-to-suit project and kind of repeat demand from the cloud vertical. Curious your thoughts on filling SV7 with that type of demand or whether the build-to-suit commitments that have happened recently have kind of saturated that customer's appetite?

John, this is Steve. I can give you a little bit more color on the sales, the pipeline and how we're placing deals in seven, eight or otherwise. As you mentioned we have quite a few buildings in Santa Clara and as we build out our campuses which that's a great example of where we have multiple buildings within the campus. It really does give us a lot more flexibility on where we place customers based off of their unique requirements and our capacity within each of those buildings. So as we went through Q3, the opportunity to really maximize the capacity within SV8 made a lot more sense than just deploying and breaking up space in SV7. We do have a customer that we forecasted to churn out just turned out some of their space and we'll turn out the rest of it next year. So that's been forecasted for quite some time and we are encouraged with the pipeline that we see for the potential to backfill that potentially with a single tenant, but that remains to be seen.

John, you did seem to ask if the expansion in SV8 was the existing customer in SV8 and it was not.

Okay. Thank you.

Thank you. Our next question comes from the line of Sami Badri with Credit Suisse. Please proceed with your question.

Hi. Thank you for the question. First one just for Jeff. Just having looked at this at the live transcript yet, but for churn in 2021 did you say 7.5% to 8.5% inclusive of the 200 basis points expected churn in the second half of 2021?

That's correct, Sami.

Thank you for the clarification. Regarding backfilling, which is related to pricing, are you finding customers willing to pay the same rate or price point you had a couple of years ago for the capacity that is now vacant, or are there instances where you've had to be more flexible with pricing to secure and occupy that capacity?

So are you talking specifically around Santa Clara?

That's right.

Yes. I would say that the pricing remains to be seen as to how we actually lease the backfill for the customer I think you're referring to. But I would say that the pricing that that customer had been paying is right in line with the market. So depending upon densities and the overall dynamics of the pipeline and the customers that may take that space can vary of course. Overall, the current pricing in the market is very close to what that customer had been paying.

Got it. Got it. Thank you. That’s all I had.

Thank you. Our next question comes from the line of Jon Peterson with Jefferies. Please proceed with your question.

Great. Thanks. Good afternoon guys or good morning. Your renewal spreads this quarter were pretty good on a cash basis. I think the strongest we've seen in over a year. I'm curious if I guess high level were you feeling more boldness this quarter in terms of pushing rents, or is that more just a function of the mix of what you were renewing this quarter?

Hey, Jon, how are you? Yeah. A lot of what impacts those cash renewal spreads is largely dependent on the market in which we're renewing the lost customers. And then secondly, the types of deployments, i.e. retail colo versus scale. That has a big impact on what we're doing from a mark-to-market perspective. But I think it's representative of what Paul alluded to earlier in terms of the markets being relatively balanced in supply and demand, which just allows us to continue to drive some reasonable economics and ultimately perform at a very good level this past quarter. I can't expect that every quarter, but we're very happy with the outcome for this most recent quarter and still expect to finish the year for 2020 inside our guidance range of 0% to 2%.

Okay, got it. And then you mentioned a lot of the demand came from I guess Santa Clara, L.A. and New York, but what about Northern Virginia? How are the dynamics changing there? Is it opening back up in terms of demand, or is it still a tough market for you guys?

Jon, this is Steve. Overall, I would say that the market still remains strong in Virginia. We've been a bit more opportunistic on more of the hyperscale that you see the bigger headlines from as to how they value our ecosystem and bring value to our campuses. If you look at the results that we delivered even our first phase at Virginia, they've actually been pretty good and the rate that we've been able to acquire there has been quite strong in comparison to the overall market. The larger hyperscale and scale opportunities are still pretty lumpy, but it appears to be picking up. As Paul mentioned in his remarks, I think the overall market is probably more in balance now than it has been.

Okay. All right, great. Thank you.

Thank you. Our next question comes from the line of Colby Synesael of Cowen. Please proceed with your question.

Great, thank you. My sense is that the company aspires to high single digits maybe even low double-digit type revenue growth. When we look at the interconnect enterprise-oriented demand, I guess non-scale that's a business that's growing in the mid-single digits. So really to get to those higher levels you need to do more hyperscale or scale deals. But to your point, that has been fairly lumpy and maybe not as consistent as I think what investors or maybe what the company would want to see. Is there a thought about potentially lowering your hurdle rates taking the returns down recognizing that the market has changed and that you could be a lot more successful and also equally important that the market or investors might be accepting of those low returns, recognizing there's maybe a better appreciation for the business that you have today than maybe just a few years ago? Secondly, I apologize I missed the first 10 minutes or so of your call, but can you repeat where the largest scale leasing was done in the quarter, and I guess to that point, what is the thoughts around New York and New Jersey in terms of what you're seeing from a scale demand perspective these days? Thank you.

So, Colby, let me start with your last question. We had three scale leases with three different customers; Santa Clara, Chicago, and New York. In terms of – look, I think we’re pretty on top of our business model, and our pricing and what we’re going after and respect we may have different views on that. We believe that we can deliver the right levels of sustainable growth and be better positioned to deliver that year-end and year-out by continuing to provide a higher level of value to clients to grow these customer ecosystems that enable them to save a tremendous amount of money and effort by collocating with each other and with their network and cloud providers in major metro markets. That higher value to customers translates into higher returns and we believe that there is sufficient amounts of that, if we continue to execute to enable us as we've said in the past to achieve mid- to high single-digit growth in FFO per share on a sustainable basis. Especially, once we get through this recent churn episode that we've had and once we start leasing up some of these newer buildings that are fairly fresh and right now are a bit of a drag on our growth. But, I think in the long run, what investors will appreciate is our ability to deliver more value on our capital, while delivering a very healthy and more sustainable growth rate and not pursue extensively lower-yield deals that eventually mean you just have to do more and more development or spread investing every year just to keep to tread water as opposed to having a value-added business model that is more sustainable for growth year-over-year. Now maybe that means, we're sacrificing an opportunity for double-digit growth in a particular year or two, I don't know, maybe not. But I think as a sustainable business model that focuses on delivering value to customers that translates into value to shareholders, it works pretty well and should continue to work well. Obviously, we just have to keep executing.

And just one more quick follow-up. The three scale deals that you mentioned. Were they all relatively evenly balanced, or did one market have a notably bigger deal perhaps than the others?

The Santa Clara deal was bigger than the other deals, but they were all in the scale category.

Great. Thank you.

Thank you. Our next question has come from the line of Michael Rollins with Citi. Please proceed with your questions.

Thanks and good morning. Curious if you could talk a little bit about how you think of investing in your platform and product development going forward? As you think about introducing additional managed services that you could provide for your customers or even conceptualizing your role as others and probably yourself explore the concept of the edge data center and getting infrastructure closer to where people are using the information and accessing the information? Thanks.

Hey, Michael, this is Steve. I give you my response and Jeff and Paul can chime in as needed here. But I think how you finish that question is really where we start which is providing that foundational high connectivity scalable data center that is at the edge. Each of our markets that we're in starts with a carrier hotel that is highly interconnected that's then tethered to a modernized scalable data center that allows for moderate workloads to be deployed there and leverage that low latency within those downtown metro cities. So that's a unique offering that very few others can provide out there, as I mentioned in my remarks. So it starts with that and then how we've built that out to provide even more value to our customers over time. In fact, just in the last year is really connect those together where now we have inter-site connectivity between those campuses to where customers can have diversity on how they deploy their architecture. They can have diversity as it relates to accessing different availability zones for different cloud providers. There's a lot of value that has been extended within each of those markets through that offering that we just rolled out about a year ago. That combined with our any-to-any exchanges that really provide the peering that many of the service providers and cloud providers are looking to exchange traffic on. As you know, NY2 is the largest exchange on the West Coast. There's unique value there. So there's a lot of embedded value that we've started with. If you look at where enterprises are moving today and really migrating from their existing data center that they may manage or own themselves into more of a hybrid performance-oriented architecture where they are leveraging a data center like ours to connect to those other cloud providers they need help, right? So to your point around managed services and other surrounding edge cloud adjacent type services, we have worked very closely with those third-party providers that are very good at that and really developed the ecosystem for them to come in and thrive. We know where we play and where we don't play, to where they can come in, invest in our ecosystem know that what the guidelines are around that ecosystem and how they make money and how they deliver value to our customers. We've worked hard over the last several years to really educate our sales team and partners on how we extend that overall value chain to our customers so they can really have the full range of services and how they map out their overall IT architecture. So that's a bit different than how some of our competitors have rolled out some of their offerings where they've chosen to compete with their ecosystem. We've been very diligent and thoughtful about how we ensure that we support and endorse that ecosystem and reward our sales team and those partners that come in to invest.

Mike, I would just refer you back to my comments to Colby about the business model. Much of our success is driven by helping our customers succeed, and Steve has described a number of the ways that we do that. A big part of that is getting the right providers in our data center communities and making it easy for customers to work with each other so that it is a much more efficient and effective way for them to architect their IT and their digitization over the near term, but also to retain the optionality and to continue to explore better ways of doing things over the long term without having to leave that data center.

Yes. I think one of the biggest things, just to wrap up on is that enterprises are looking for is flexibility and choice over time. As you outsource the data center it's not a trivial exercise and it's really a long-term bet. So the potential to be locked into either a single provider with single or limited access to networks or cloud providers or other services that are around there because they have chosen to get into that business themselves. I think we've proven out over the last 15 years of data center providers that's probably not a great model.

And just one follow-up on the sales cycle that you described being elongated. I know it's tough to predict in this environment what the future may hold, but have you learned the catalyst for decisions from your customers on balance? Are they looking to the results of the election to try to get in a position to make decisions? Are they waiting for just a larger part of their workforce to return to the office or just having some stabilized strategy of how to manage through this? Are there some learnings that we should just be mindful of whereas if something evolves in the environment or for the macroeconomy that we could appreciate how that might help or slow that sales cycle for your customers?

I haven't seen the political environment affecting any discussions we're having right now. Many customers are handling it based on their specific situations. Technology has become crucial for enterprises, and how they integrate it into their success and business strategy varies from one to another. We've had to make some adjustments over the past six months in how we assist customers through the selection process and how it fits their model, including exploring alternatives like virtual tours. Based on the results you've observed, we're improving in this area, and customers are becoming more skilled at it. The extended sales cycles I mentioned earlier are still prevalent, as it takes more time for people to align their internal resources and prioritize capital, among other things. However, the overall pipeline is strong, and we're starting to catch up with many of those sales cycles. It remains to be seen how this will play out in the long term, but we're navigating this situation together and improving collectively.

Yes. We are really hoping that the Dodgers finally winning a World Series after a century would be a catalyst, but that remains to be seen.

Thought you'd be rooting for your Denver teams?

You got to be realistic here.

Okay. Thank you.

Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Thanks. First on Steve just following up on the pipeline a little bit the robust pipeline you guys discussed. I caught in your comments you said that 2020 would be the strongest year for creating new sales opportunities or volumes and you've got to convert these. So how does that sort of translate into actual leasing production? Is that sort of 2021's business, or is that 4Q into 2021, or how do I sort of interpret that comment?

The overall pipeline has shown strong resilience, and we've been actively managing it daily and quarterly since I've been here. When we entered the COVID situation, there were many uncertainties about its impact. However, we've observed a growing interest in our platform, which has led to an increase in our pipeline. This positive trend has persisted through the third quarter. While the timing and conversion of these opportunities are still uncertain, some immediate prospects could close within the current quarter. Typically, our closing cycle ranges from 90 to 120 days, and we're making good progress within that pipeline. While we are in a unique situation, we remain optimistic about our progress so far.

Okay. I just want to clarify the scale leases. I heard mentions of Santa Clara, Los Angeles, and New York, and then I also heard Santa Clara, Chicago, and New York. Can you clarify the locations of the three scale leases?

It was Santa Clara, Chicago, and New York.

Okay. Thank you.

Thank you. Our next question has come from the line of Erik Rasmussen with Stifel. Please proceed with your question.

Thanks for taking the questions. Just first on Northern Virginia you said you're seeing some pricing stability and even some improvement in that market. So I guess with that what does that mean for you in terms of opportunity as you sort of think about that market going forward?

Yes. We're encouraged with the market. Obviously we have a pretty big bet in Northern Virginia with our VA3 campus and are quickly moving through our first phase there. The pipeline is good. The competitive dynamics are still that; they're competitive. We continue to look for those right opportunities that value our campus. So all things in Virginia are not equal and those that value interconnection access to enterprises and cloud on-ramps those are the ones that we really focus on. There seems to be more and more of a preponderance of that, so we're encouraged with the outlook.

Okay. I have a follow-up question. There have been many inquiries about the sales cycle, and we have noticed an improvement on the enterprise side. The sales cycle seems to be getting a bit quicker, but are you suggesting that this might mostly be a 2021 phenomenon, or are we already observing this improvement extending into the fourth quarter as it pertains to returning to your historical performance levels?

Well, I think we continue to try to get better at it. We've seen some customers existing customers especially that may be deployed with us already that are really going through more of the virtual tour and making decisions on expanding with us without even physically seeing the space which a year ago would have likely never happened. It's very customer dependent, but customers are getting more savvy about how they buy, what they buy and really going through that evaluation process more pragmatically than a physical getting on-site and really walking the space. We’ll see where that plays out. We've seen some of that play out early whether or not that translates into longer-term opportunities and what happens with the current pandemic, and so forth, there’s just so much up in the air it's hard to predict.

Yes. We are really hoping that the Dodgers finally winning a World Series after a century would be a catalyst, but that remains to be seen.

Thought you'd be rooting for your Denver teams?

You got to be realistic here.

Okay. Thank you.

Thank you. Our next question comes from the line of Nick Del Deo with MoffettNathanson. Please proceed with your question.

Hey. Good afternoon guys or good morning where you are. Obviously the majority of your business is in California. Can you dimension your exposure if proposition 15 passes?

Hey, Nick we can. Obviously, it's an item we've been watching closely for a couple of years. It will play out over the next couple of weeks. But, we have given some numbers historically. To summarize, what we've said is if you look at our overall property tax exposure in California, specific to those leases where we are unable to pass through any increases in property taxes in the current leases, it equals about $3.5 million. That equals ballpark about 15% of our overall property tax expense for the company. That’s the area that we have exposure. The average remaining lease term for those leases is about 2.5 years. For that proposal, I think it goes into effect in 2022. We'll have opportunities to negotiate with customers over that period of time to minimize that impact.

Okay. That's helpful. Thanks, Jeff. And then, with your 2021 churn outlook, can you talk about your recommitment in the context of the changes you've made to your churn forecasting methodology over the past year or two? How would you assess the risk that it falls outside of that band?

I want to acknowledge the teams that have been working together over the past year to year and a half. My team and Steve's team have put in a lot of effort to gain deeper insights into our direction. We are confident in our previous forecast of 7.5% to 8.5%, which aligns us back to our usual range, accounting for the 200 basis points from one customer. Excluding that, we may find ourselves at lower levels historically. While it won't be perfect since we operate on certain assumptions, our clarity improves as we engage more with our customers. As it stands now, we feel good about our expectations for 2021. We have the figures in place, and we will evaluate our performance as 2021 unfolds.

Nick, I would just like to add to what Jeff mentioned by pointing out that we have a significantly smaller group of customers whose churn was more difficult to predict coming into 2019 and 2020. The reduction in that group gives us greater confidence in our forecast.

Okay. Got it. Thank you guys.

Thanks Nick.

Thank you. Our next question comes from the line of Brendan Lynch with Barclays. Please proceed with your question.

Hi. Thanks for taking my question. I wanted to follow-up on your commentary earlier about third-party technology that you have available in your data centers. You announced a partnership with the VMware Tech Alliance Partner program earlier this month. Maybe you can give us some color on what this enables for your clients and whether this was specifically in response to current customer demand or rather, you're trying to open up to a new sub-segment of customers?

Thank you, Brendan. This is Steve. I think the announcement with VMware and Dell is a great example of how we are looking to try to enable some of the tech leaders to invest in our platform and provide those services out to our customers. Probably can't get into the exact details, I would just kind of tease you a little bit and say stay tuned. We’ll see a lot more detail around that. The intent is for them to have their technology deployed to support those hybrid architectures and they have some technology that I know they're excited to deliver and excited to deliver the platform. It's really around supporting the enterprise and those hybrid environments multi-cloud environments where VMware is obviously very strong. We're excited about the partnership.

One of the keys to that though that Steve mentioned earlier. And I'm probably being redundant here. But it's working with companies like that to make it quick and easy for other customers to turn up their services in our data centers and significantly reduce the time and the lift associated with that.

That makes sense.

You could see that across other technologies whether it's Amazon Outpost and others just trying to make those kinds of new technologies available. They know the landscape that they're coming into incentivize our team to work with them to do so. That's the core of the strategy that we're working towards.

Sure. That makes sense. And then just one other quick one, one of the reasons you cited that you raised guidance was lower-than-anticipated property taxes for the remainder of the year. Would municipalities struggling financially in the COVID environment? Do you anticipate material property tax increases in 2021?

Yes, it's a great question, Brendan. I hate to give them any room to execute on that. The reality is when you look at the assessed values across each of our markets, they're reading the same information everybody else is in terms of the industry. They've been aggressive in terms of their valuations and it's an ongoing effort from our perspective to challenge those assessments and those values that they're utilizing. I'd tell you we do it frequently. Periodically, we're successful in them. Actually, I'd say frequently we're successful in them. That's what you ultimately saw in the results this year. In terms of next year, there's always that incentive, and it's just something we're going to have to continue to watch and see how it ultimately plays out, but nothing I can predict today. It is definitely an incentive form given some of the dynamics in play with lower revenues this year as a result of the COVID.

Sure. Thanks for the color.

You bet.

Thank you. Our next question has come from the line of David Guarino with Green Street. Please proceed with your questions.

Hey. Guys thanks for the questions. Just a quick one from me. Without the interest you've seen from center and in the data center space, how much competition are you seeing in the colo space, or would you say most of the new competition is more geared towards the hyperscale data center side? Thanks.

I'm sorry, we couldn't hear the original part of your question. Who's coming into the data center space?

It feels like there's a lot more private competitors coming in, so whether it's infrastructure funds or just a whole host of credit investors coming in from the sidelines?

Yes. Thanks for the question, David. Going back to our overall capital allocation strategy, we try to stay out of the way of where it's easy for capital to get deployed and where it is in fact being deployed in creating a seller's market. That's why we built our model around interconnection and cloud on-ramps in major metro markets where it's harder to turn up additional capacity. Nobody can be completely insulated when there's lots of new capital coming into an industry, and obviously it's clearly made the hyperscale, especially the generic hyperscale much more competitive. It's probably raising asset prices in second and third tier markets and frankly every market. But that's one of the dynamics we factored into and why we focus on the strategy that we have focused on.

Thanks.

Thank you. Our next question comes from the line of Frank Louthan with Raymond James. Please proceed with your questions.

Hey, guys. This is Rob on for Frank. So what's been the pace of new logo growth for you guys versus 12 months ago? And then going off of that, what's been the nature of the applications that new customers are coming to you guys for? I know you that you also talked about digitization, but what exactly does that entail? And like what does that look like for you guys in terms of the applications that you're selling to customers?

Yes, thank you for the question. New leverage is clearly a significant area we've been concentrating on this quarter. Bringing in 37 new logos is one of the highest numbers we've recorded in the last five quarters, which is encouraging. Overall, I would say the numbers are fairly consistent. However, the quality of the new logos has improved over the last few years. My team has been focused not only on acquiring new customers but also on attracting those who value our ecosystem and have potential for growth. We consider both the quantity of customers, their deployments, and their revenue contribution, as well as the long-term likelihood of them remaining customers. This means a lower chance of churn and a higher likelihood of ongoing growth. The quality of our new customers has notably improved, especially over the past two years, which has been a key priority for us.

Applications?

Oh applications. As far as applications are concerned, as you see kind of the shift towards more of that kind of mid- to large enterprise, it's interesting to see how technology from the cloud providers has kind of trickle down more to be more available to some of those enterprises, where they can now take advantage of some of the same economies that a lot of the large cloud providers have been solely able to do. Whether it's hardware, virtualization, applications that they're running being able to load balance applications across various environments and into the cloud enables them to really manage their environments within our data center differently. Customers are architecting their design to where they can manage their core workloads within our data center more effectively and more cost-efficiently, while still leveraging cloud for those workloads that are better managed there and also give better diversity and redundancy. It becomes a mix of all those things and how it comes together with SaaS or software-as-a-service, platform-as-a-service and then their core infrastructure. That mix varies by customer, but we're seeing more of that consolidation especially in the mid-to-large enterprise where they are thinking about their core applications.

Great. Thank you guys very much.

Thank you for your interest in CoreSite. Kate, Jeff, Steve, and I appreciate it. We're also honestly very fortunate to work with a group of colleagues who have been tremendously agile and innovative throughout this year. Whether it's figuring out how to get customers deployed quickly and interconnected very quickly to just getting all this new capacity built in an environment where safety is a much more difficult thing to achieve and regulations continue to change related to both construction and operations and to deliver such good uptime for our customers. You've heard a lot on this call about how strong our campuses are, about the customer ecosystems, about the major metro markets and how they've enabled us to drive value for our customers and translate that into shareholder value. But these colleagues that we have working around the country and all these facilities are really what makes it work and we're very grateful to form. Thank all of you for your time. Have a good and safe rest of your day.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.