CoreSite Raises Guidance, Sees Gains in Interconnections

CoreSite Realty raised its projections for earnings, citing solid customer growth and an increase in revenue from interconnections, a key strategic focus for the company.

Total operating revenue for the second quarter ended June 30, was $57.7 million, a 13.9 percent increase year-over-year and up 4.7 percent over last quarter.
The company raised and narrowed its guidance, to $1.76 to $1.84 per share from the prior range of $1.72 to $1.82. Its guidance on adjusted EBITDA and sales are at the high end of guidance, but lower end of revenue range. The company said this discrepancy is largely due to a customer in its SV3 data enter using less power, but outperformance on high-margin services like cross connects.

The company is showing particular strength in interconnection revenue, which is up 17 percent since the same period last year, and 7 percent in terms of revenue from last quarter. Interconenctions now count for $7.1 million in quarterly revenue.

“We are pleased with the continued evolution we saw in our sales mix, recording an increasing number of leases bringing high-value applications to our platform,” said Tom Ray, CEO of CoreSite. ”We believe that we have considerable upside embedded in our portfolio as we increase the utilization of existing and new inventory, positively mark to market expiring capacity, and most importantly, continue to drive increased network density and valuable customer communities across our data centers.”

Solid Customer Growth

CoreSite executed 115 new and expansion leases in the quarter including agreements with 33 new customers.“We see market dynamics consistent with the prior 12 months. Market demand remains healthy, with performance little changed from Q1,” the company said on the earnings call. Here’s a look at some of the key developments for CoreSite (COR) in the quarter:

• It leased out 42,672 net rentable square feet of new and expansion leases with annualized GAAP rent of $147 per square foot. It executed new and expansion data center leases representing $5.8 million of annualized GAAP rent at a rate of $188 of annualized GAAP rent per square foot. Rent growth on signed renewals was 5.4% on a cash basis, and 11.7% on a GAAP basis, with rental churn of 2.0 percent.
• It saw a 35% increase in multi-site leases. Forty of these 115 leases signed were customers who do business in more than 1 data center, meaning customers are buying across their platform. It’s averaging $180 per net rentable square foot and it recently renewed 44k with an average 5.4% rent increase.
• The strongest market was Los Angeles, with LA2 in the first half of 2013 representing 78% of GAAP rent on LA campus (hence the need for expansion, discussed later). Northern Virginia was the second strongest market in Q2.
• In New York, CoreSite will tether NY2 with NY1, as well as with 60 Hudson and others. The strategy is working in other markets. It talked about tethering when entering a market as a way to seed growth. It’s the “Hub and spoke” method it’s been doing for years.
• There were 215 new and expansion leases in the network vertical, so CoreSite upped its connectivity significantly. There were 18 cloud customer leases. These customers strengthen CoreSite offerings, through both network and platform.

In terms of customers mentioned, Hibernia Networks was a key customer expansion. FK broadband in South Korea is leveraging CoreSite to expand into North America. NTT expanded into 3 additional locations to support north American growth. In Chicago, a leading global mobility provider, as well as a handful of others in the space, signed up. They’re seeing mobile applications as a key growth opportunity. Enterprise IaaS provider iland was a notable addition to the company’s open cloud exchange. It’s looking to add more participants going forward. It had an expansion supporting a SaaS offering from a large financial services provider.

Development Activity

The company says it is continuing to invest, with four construction projects currently underway. These projects total 236,673 of  usable raised floor data center space, including new data centers at SV5 (San Francisco Bay area), VA2 (Northern Virginia area),  and NY2 (New York). There’s also an expansion underway in Los Angeles, at its LV2 facility.

• NY2 remains on schedule, first phase in the fourth quarter
• In Virginia, first phase will be late Q1 in 2014
• In LA, the company is adding 20,400 square feet

As of the end of the quarter, CoreSite is about $59.4 million into the estimated $188 million required to complete these projects.

Healthy Wallet

The company has $2.8 million cash available on its balance sheet and $324.5 million capacity left under its credit facility. Long-term debt is 1.2x its annualized revenue, $132 million. The company will spend about $120 million of capex during the rest of the year, giving it good liquidity.

It’s sharing the love, announcing a dividend last May of .27 cents per share of common stock & equivalents for the second quarter.

The company has 14 data center campuses and counts over 750 customers