CoreSite Realty Corporation (COR) Q3 2021 Earnings Call Transcript

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CoreSite Realty Corporation (COR)
Q3 2021 Earnings Call
Oct 28, 2021, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the CoreSite Realty Corporation Third Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Kate Ruppe, Investor Relations for CoreSite Realty Corporation. Thank you. You may begin.

Kate Ruppe -- Investor Relations Manager

Thank you. Good morning, and welcome to CoreSite's Third Quarter 2021 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.

Paul Szurek -- President and Chief Executive Officer

Good morning, and thank you for joining our earnings call. I will cover our third quarter and year-to-date highlights, and Steve and Jeff will discuss sales and financial matters in more detail. We delivered another strong quarter of financial results, including operating revenues of $164 million, resulting in 6.4% year-over-year growth, adjusted EBITDA of $86 million resulting in growth of 5.2% year-over-year, and FFO per share of $1.39 or 4.5% year-over-year growth. We also reported strong operating performance, including cash rent mark-to-market year-to-date of 2.9%, churn year-to-date of 4.6%, in line with our expectations and 5% year-over-year MRR per cabinet equivalent growth, driven by strong power and interconnection revenue growth. Today, we will discuss leasing results of $8.9 million comprised of third quarter leasing of $7.2 million in annualized GAAP rent and a $1.7 million scale lease at SV7 signed on October 7. The demand continues to be positive for deployments and agile interconnection in our network and cloud enabled data center campuses in major metropolitan edge markets. And we believe supply and demand are generally in balance. As Steve will mention, sales cycles are a bit longer due to other distractions for certain scale customers, but our sales funnel continues to be at a high level relative to our history.

Turning to our property development. We executed pre-leases for some of LA3 Phase two during the third quarter, and we completed construction of Phase two in October. LA3 Phase one is now 93% leased, less than 12 months after placing the project into service, reflecting the strength of our position in the Los Angeles market and continued solid sales activity. NY2 Phase 4a, a four megawatt computer room also remains on track for a Q1 2022 delivery, and we continue to make good progress on the remaining pre-construction activities to bring SV9 to a shovel-ready state, completing demolition of the existing building and working with Silicon Valley Power to finalize power procurement by the end of the year. We are fortunate to have very strong customer ecosystems on our uniquely positioned network and cloud enabled campuses, which drive diverse demand with good margins and attractive returns, reflecting the value customers can achieve in our environment.

Our very capable team continues to add to our campuses, important customers with potential for future growth and our purpose built, power-efficient and scalable data center campuses, differentiated by our flexible and diverse interconnection platform provide ideal environments for secure, high performance, multi and hybrid cloud solutions that enterprises require in order to be cost-effective, agile and forward-thinking in their deployment of digital solutions. In summary, we are pleased with the progress made during the quarter and see more opportunity ahead to participate in the ongoing migration to a hybrid cloud world with extensive interoperability among customers.

With that, I will turn the call over to Steve.

Steven Smith -- Chief Revenue Officer

Thanks, Paul, and hello, everyone. I'll review our sales results and then talk about some notable wins. To begin, we had new and expansion sales of $8.9 million of annualized GAAP rent, comprised of $7.2 million signed during the third quarter and a $1.7 million large-scale lease at SV7 signed on October 7. We believe, including the $1.7 million lease signed in early October for purposes of our discussion today is instructive, given the size and that this customer lease is backfilling a portion of the churn at SV7, which we have previously disclosed. The leasing metrics discussed in the rest of my prepared remarks are inclusive of the $1.7 million lease signed on October 7. Keep in mind, our reported new and expansion sales results only include the rental revenue component of the new leases. The $8.9 million of GAAP rent for new and expansion sales reflected 62,000 net rentable square feet at an average annualized GAAP rate of $143 per net rentable square foot, which was lower than the trailing 12-month average due to lower than average densities for certain scale deployments. Our results also included 28 new logos or $1.9 million in annualized GAAP rent, our best quarter for new logos in terms of annualized GAAP rent since the third quarter of 2019.

I will review a few specific new logo use cases in a moment. The $8.9 million of GAAP rent also includes the number of leases that signed at SV7, which represents approximately $2.9 million of annualized GAAP rent. Turning to pricing. New and expansion pricing on a kilowatt basis this quarter was above the trailing 12-month average by mid-single digits, reflecting the mix of both size and location of leases signed. From a geographic perspective, our strongest markets for signed leases for Los Angeles, Silicon Valley, and Northern Virginia, which combined represented 88% of our annualized GAAP rent signed. Looking at organic growth. Existing customers continue to provide strong demand, which is an essential part of our strategy. Existing customer expansions accounted for 78% of annualized GAAP rents signed as more businesses adopt digital solutions to meet today's evolving marketplace. Noteworthy expansion from existing customers included a scale deployment from a global online gaming platform, expanding this footprint into our Los Angeles campus, a multimarket expansion by a network service provider in Los Angeles, New York and Northern Virginia and a large-scale deployment from a subscription-based digital content streaming company in the Bay Area. Turning to new customer wins.

The $1.9 million of annualized GAAP rent represents approximately 22% of our sales. As I mentioned, it was our best quarter for new logo sales since the third quarter of 2019. Successfully attracting high-quality new customers that value the interoperability of our portfolio ecosystem deepens CoreSite's competitive moat and helps drive future growth. Enterprises contributed to 55% of new logo annualized GAAP rent signed during the quarter which included a leading data management and storage systems company in the Bay Area, an email and social networking and marketing firm in Northern Virginia, a cybersecurity company providing prevention and detection solutions, signing to scale deployment in the Bay Area and a well-known domain registrar and web hosting company joining our robust Los Angeles customer community. Lastly, total data center occupancy decreased slightly this quarter, primarily due to the previously forecasted single-tenant lease expiration at SV7, which was also included in our third quarter churn. With the majority of this customer's lease expiration now behind us, we have a clear path toward our targeted occupancy goal in the high 80s range.

As we finish out the year, we are encouraged by our solid execution of our core business. However, we have noticed slower processing and response times for certain customers seemingly distracted by other issues, such as supply chains and staffing of which we are all aware. We have specifically revised practices to improve the process and timing of assisting certain scale customers and keeping leasing on track as demand for high-performance edge use cases in strategic metropolitan markets continues to grow. Our diligence and discipline in attracting and winning deployment that value or add value to our ecosystem remains the primary focus. We are driven to provide continued profitable growth by attracting high-quality new logos and delivering incremental value to our customers and shareholders through higher value lease-up across our portfolio.

With that, I will turn the call over to Jeff.

Jeff Finnin -- Chief Financial Officer

Thanks, Steve. Today, I will review our third quarter and year-to-date results, discuss our balance sheet, liquidity and leverage and then touch on our 2021 capital expenditures guidance. Looking at our financial results for the quarter. Operating revenues were $163.9 million, an increase of 6.4% year-over-year. Lease renewals of $18.7 million of annualized GAAP rent were completed during the quarter, resulting in cash rent mark-to-market of 2% and GAAP mark-to-market of 5.7%. We also reported churn of 2.5% for the quarter, which was in line with our expectations and includes 160 basis points of churn related to the single tenant lease at SV7.

Commencement of new and expansion leases of $7.1 million of annualized GAAP rent, our revenue backlog consists of $9.9 million of annualized GAAP rent or $17.2 million on a cash basis for leases signed but not yet commenced, inclusive of the $1.7 million scale lease signed at SV7 on October 7. We expect approximately 60% of the GAAP backlog to commence in the fourth quarter of 2021 and substantially all of the remaining GAAP backlog to commence during the first quarter of 2022. Adjusted EBITDA was $85.7 million for the quarter, an increase of 5.2% year-over-year. Net income was $0.50 per diluted share for the quarter, consistent year-over-year. And third quarter FFO per share was $1.39, an increase of $0.06 or 4.5% year-over-year.

Turning to our financial results year-to-date. Total operating revenues were $483.6 million, reflecting year-over-year growth of 7%. Adjusted EBITDA of $259.1 million increasing 7.2% year-over-year and representing an adjusted EBITDA margin of 53.6%, and FFO per share as adjusted of $4.20 increased 5.8% year-over-year. Each of the above items are in line with our goal to achieve mid to high single-digit growth levels. Moving to our balance sheet. Our debt to annualized adjusted EBITDA increased to 5.2 times as of September 30, as expected. Inclusive of the current GAAP backlog mentioned earlier, our leverage ratio was 5.1 times. We ended the quarter with approximately $235.4 million of liquidity, providing us the ability to fully fund the remainder of our 2021 business plan. Looking at our 2021 capital expenditures guidance. We have spent about $103 million year-to-date compared to the midpoint of our guidance at $205 million in total capital expenditures for 2021.

We are continuing to work through the remaining preconstruction activities at SV9 and we anticipate breaking ground sometime in 2022, but timing is ultimately dependent on overall absorption in the Bay Area. As a result, we now expect to invest approximately $140 million to $150 million in total capital expenditures in 2021, which is reflected in our updated capital expenditure guidance. Refer to Page 21 of our supplemental for our full 2021 guidance. As it relates to 2022, we will provide detailed annual guidance during our fourth quarter earnings call in early February. In closing, with the majority of the SV7 single-tenant lease expiration now behind us, we have more visibility into increasing our occupancies, which will achieve even greater flow-through of revenue growth to margins, leading to margin expansion and value creation for shareholders.

With that operator, we would now like to open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Jon Atkin with RBC Capital Markets.

Jon Atkin -- RBC Capital Markets -- Analyst

Thank you. So I had a couple of questions. The pricing on new leases signed, it looks like it was at a multiyear low, and that doesn't include obviously the impact of what you did in October, which was a resigning a second-generation space. So given that dynamic around backfill at SV7 and then what you posted on pricing during 3Q, anything to kind of expect going forward around pricing?

Steven Smith -- Chief Revenue Officer

Jon, it's Steve. Yes, I think overall, as far as pricing is concerned, on a square footage basis, it was down a bit this quarter, primarily just due to lower-than-average densities. So we have fluctuations in density based off the sales mix every quarter. But collectively, pricing remains strong. And I think you see that as -- if you look at it on a per kilowatt basis, that reflects that.

Jon Atkin -- RBC Capital Markets -- Analyst

And would that include tech and generation space as well? Or could that drag down some of the recent trends that you've seen on a kind of per KW basis?

Steven Smith -- Chief Revenue Officer

I think that holds true overall.

Jon Atkin -- RBC Capital Markets -- Analyst

And then -- go ahead.

Paul Szurek -- President and Chief Executive Officer

Jon -- and Jon, this -- Jon, sorry, would just point you back to Steve's comments in his prepared remarks about power pricing being actually higher than prior -- on a per kilowatt basis than -- our pricing on a per kilowatt basis being higher than prior quarters.

Jon Atkin -- RBC Capital Markets -- Analyst

Got it. And then I wondered if there was any trends that you're seeing in the federal vertical, whether it's government agencies or SIs doing work for federal agencies? And I think if you've had some success with that in the past, anything around general demand that you are seeing and that you potentially benefit from?

Steven Smith -- Chief Revenue Officer

Yes, we are seeing more pipeline growth there, which is encouraging to see, and we have had some success there in the past. I would like to see more. And I think there's a good opportunity to improve our results there. So it's good to see the pipeline improve there, and we think that's a good opportunity.

Jon Atkin -- RBC Capital Markets -- Analyst

And then lastly, on the new logo generation, what are you seeing around cross-connect's take-up rates within how do you relogos and some of the use cases that you mentioned?

Steven Smith -- Chief Revenue Officer

Sure. Well, as I mentioned, this is one of our best quarters as far as overall revenue is concerned. And that's a big focus of my team and our marketing messaging and so forth, is to ensure that enterprises and new logos see the value in CoreSite and the uniqueness it brings to helping them navigate the hybrid multi-cloud environment that's out there. We feel like we've got a very unique value proposition and the amount of networks and native on-ramps to those cloud providers that very few other providers have. And our messaging and our sales objectives are really to ensure that we attract and win more new logos as they become the basis for the overall growth of the company, which you saw in our typical results.

Jon Atkin -- RBC Capital Markets -- Analyst

And then lastly, I wondered if you could give us a view on M&A and to what extent you feel like it might make sense at some point to become part of a larger platform, whether that's you acquire in somebody or the other way around?

Paul Szurek -- President and Chief Executive Officer

As we've said many, many times in the past, we have looked at many acquisitions, and we -- they have to fit from the -- or potential acquisitions, they have to fit from the standpoint of strategy, pricing, value creation and our particular model and we don't expect any change in that kind of surveillance. As to the rest of your question, as we've also said frequently, our policy is not to comment on any sort of speculation around that type of activity.

Jon Atkin -- RBC Capital Markets -- Analyst

Thank you very much.

Operator

Our next question comes from the line of Frank Louthan with Raymond James.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. Are you seeing any impact from inflation on the current leasing negotiations? How do you think that will work? And then can you give us a little bit more detail on some of the contractual obligations you've got with some of your facilities in terms of suppliers or the length of those terms and how well protected you are now?

Steven Smith -- Chief Revenue Officer

Yes, I think from a leasing perspective, I can give you that side of it, Frank. It's definitely an interesting world out there for sure. I don't think it's necessarily impacted the leasing dynamic per se. It does increase our -- the importance of working closely with our vendors and how we coordinate not just the colocation aspect, but there's a lot of different moving parts to get customers deployed, whether it's servers, cage material, and whatever it might be to actually deploy that. So we've implemented additional measures with all of our teams to ensure that we're ahead of that. We're planning for any changes in pricing or supply chain and that kind of thing and navigating that as closely as possible.

Jeff Finnin -- Chief Financial Officer

Frank, maybe I can just give you some additional color on the -- some of those additional obligations. I would look at it from really two perspectives, one being the development side, which we've substantially locked in all the development we're doing today just given when we started those projects. So we don't see any inflationary pressures on what we've got under development today. Most of that was ordered well before we started development there. But on the operating perspective, we do look at and go out to contractually lock in some of those operating costs usually out in periods of two to three years.

And we generally roll those depending upon the type of service. Some of those are up, and we're in midst of bidding for some of that tier over the next couple of years and then some have a couple of years before they roll off. My hats off to our vendors, they've stayed with their contractual obligations on those obligations, even though we know they're getting some pressures. And we'll just have to monitor and see how this next round of contractual obligations go with what we've got out in the market today, we'll know those results probably over the next two to four months.

Frank Louthan -- Raymond James -- Analyst

All right. Great. Thank you. And maybe I missed this, but did you guys discuss what your exposure is on power and what power costs and whether you're hedged on that?

Jeff Finnin -- Chief Financial Officer

Yes, Frank. No, we didn't touch on that yet. Just to give you some idea, when you look at our power utilization across our portfolio, we have about 30% of our power use that occurs inside our deregulated markets. I point you to that because that's the area that near term where we probably see the most impact. When you look at and factor in ultimately what's in those deregulated markets, how much of that is really subject to cost increases, it's really our breakered power model, which certain -- mostly our retail customers pay us a fixed price, and that's probably where we've got the most exposure. When you go through the amounts there, we've got about -- if you assume about a 10% increase in power cost in those markets, it would have an impact of about $0.02 per share, assuming you don't pass any of those costs on to our customers. We do look at that on an annual basis and assess how much of that we're going to pass on to our customers. We do have that right inside our contractual rights and licenses with our customers.

Frank Louthan -- Raymond James -- Analyst

Okay. Thank you.

Operator

Our next question comes from the line of Sami Badri with Credit Suisse.

Sami Badri -- Credit Suisse -- Analyst

Hi. Thank you very much for taking the questions. Around this time of every year, Jeff and Paul, you've historically given us some kind of color on what the capex trajectory looks like in the following year. Could you give us an idea on what that looks like just because your capex guidance is moving around now? And I have a follow-up.

Jeff Finnin -- Chief Financial Officer

Yes, you bet, Sami. I think you probably saw the notes and heard the commentary on the prepared remarks around the timing around SV9 and its impact on our 2021 capex. As you think about 2022, we'll obviously give detailed guidance in early February. Here's how I would think about it. When you look at us over the past few years, we, historically, have had somewhere around $200 million of capex in those years when we're building out inside existing Core shell. So without including any type of ground-up development. And so I would think about 2022 in the range of $200 million. And then it could be elevated when and if we start development that ground-up development at SV9. And as we said in our prepared remarks, that's going to be dependent on overall market absorption. And as Paul alluded to, finalizing our agreements with Silicon Valley Power. But that's the way I think about it, $200 million and then probably elevated from there as and when we start development on SV9.

Sami Badri -- Credit Suisse -- Analyst

Got it. Thank you. Now I do have a follow-up. I will just look it up online so you could just give it to the next analyst. Thank you.

Jeff Finnin -- Chief Financial Officer

No problem, Sami. Get back in the queue when you can.

Operator

Our next question comes from the line of Erik Rasmussen with Stifel.

Erik Rasmussen -- Analyst -- Stifel

Yes. Thank you for taking the questions. Just circling back on the comment you made about customers with slower response times in response to the supply chains. Just trying to -- is this just for scale or is this enterprise? Or is this all customers that you're talking about? And is this sort of the big -- the main reason why we haven't seen much scale business beyond sort of this early Q4 deal that you booked at SV7.

Steven Smith -- Chief Revenue Officer

Yes, I would say it becomes more magnified with the size of the deal just because the amount of the moving parts that are going on there, right? So it definitely becomes more complicated. But I would say overall, as far as the scale pipeline is concerned in our overall pipeline, we have confidence in where it sits today and the opportunities that it presents for us going forward. Some of these larger deals do take more time and have more components, as I mentioned. And if you think about the deal that we announced in this earnings call, that had a lot of moving parts to it that we had to work very closely with the customer in order to get it across the line. But I think the important factor to stay focused on is our main goal, which is maintaining and achieving mid- to high single-digit FFO growth, which is not just driven from top line revenue but more by pricing, interconnection and power margins that we remain focused on. So that's the main thing I think to say focused around.

Erik Rasmussen -- Analyst -- Stifel

Great. And maybe just follow-up on that, and this speaks to sort of the lack of scale deals we've seen, but you had the $40 million leasing guidepost for the year. I think year-to-date, you're around $24 million. Based on where we sit today, how realistic is it as you sort of look to close the gap on this or timing of this in these large-scale deals are so lumpy, that maybe it's just we think sort of slide into next year and maybe there's a better setup for even next year?

Steven Smith -- Chief Revenue Officer

Well, we're absolutely striving to hit it. And as I mentioned, we're opportunistically encouraged by our funnel. And I think that has an opportunity to get us there. At the same time, those are large deals that swing that number pretty significantly. I mean if you look at our core business, we performed very well in that regard, which does drive the majority of our FFO growth. So as I mentioned in my prepared remarks, we're trying to remain disciplined and diligent around how we ensure we're driving returns for our shareholders. At the same time, not sacrificing top line growth to do that. So it's a balance, and we've got good opportunity to achieve both, and we strive to do that.

Erik Rasmussen -- Analyst -- Stifel

Great. Thanks.

Operator

Our next question comes from the line of Richard Choe with JPMorgan.

Richard Choe -- JPMorgan -- Analyst

Hi. I just wanted to follow up on the new logos and the signings. You said they are lower density. But will that change over time as those customers mature? And how -- what -- can you remind us what the kind of normal process you see with signing new customers? And how they take more space and power over time?

Steven Smith -- Chief Revenue Officer

Yes, I think as far as new logos are concerned, I don't think we're saying that the new logos in themselves were lower density. I think overall, the bookings were of lower density. I'm not sure if we have the exact numbers on the density of the new logos at this point where we can get to that. But overall, I would say, collectively, densities continue to increase slightly as customers become more efficient and hardware becomes more efficient. So I think collectively, you just got to look at the trend line. One of the benefits of how we're structured and engineering our data centers is to really manage that overall collective density across the portfolio. So you'll have some deployments that are lower dense, some that are higher dense, but our design allows us to accommodate that to ultimately meet the desired impact.

Jeff Finnin -- Chief Financial Officer

Richard, the only thing I'd add on the second part of your question, typically when customers deploy and their subsequent growth inside our portfolio, I would tell you that for our retail customers, once they deploy, they will probably get to a stabilized power draw and cross-connect utilization, call it within 12 months, assuming they don't take additional space and power from us. On the scale of customers, it takes them a little bit longer. I would point you probably somewhere between 12 to 24 months as they ramp up and deploy their gear. And so much of what you see from some of those scale customers over that period of time is increases in the power consumption and utilization. And then they're continuing to connect on the interconnection side to those parties that they need to exchange and do business with. Again, that for the larger ones, takes about a 12- to 24-month time frame before we see them start to stabilize.

Richard Choe -- JPMorgan -- Analyst

Great. And the same-store MRR per cabinet increased 5% year-over-year, and that's accelerating. Can you give us a sense of what's going on there? And can it continue to grow at this rate?

Jeff Finnin -- Chief Financial Officer

Yes, Richard, I mean, that is a reflection on very consistent with what I was stating on customers getting deployed. And what you're really seeing drive, I think Paul commented on that is really increases in our power revenue and increases in interconnection revenue. Those are really the two components driving that, at least in the third quarter. At 5%, on average, we generally see that MRR per Cab E grow somewhere in the low- to mid-single-digit growth rates. And I think that's where in large part, we expect it to be on a go-forward basis. And it just depends on how quickly we see that based on customer installs and overall utilization of their space and deployments.

Richard Choe -- JPMorgan -- Analyst

Great. Thank you.

Operator

Our next question comes from the line of David Guarino with Green Street Advisors.

David Guarino -- Green Street Advisors -- Analyst

Okay thanks. Maybe for Paul. A number of your public and private payers have seen really good success outside the U.S. So I was wondering if you could just remind us for the reasons, like CoreSite wouldn't want to bring with a pretty strong reputation and strong knowledge base outside the U.S.

Paul Szurek -- President and Chief Executive Officer

Well, I wouldn't rule it out forever. But we've had plenty of good things to focus on here and quite honestly, just building a better model and stronger campus ecosystems and perfecting the playbook that we can take elsewhere. I think a lot of what you've seen, and I haven't -- I don't have a detailed view into it as you probably do, but much of that has been hyperscale. And as you know, that's just not our bread and butter. But we do believe that down the road, maybe there's an opportunity to expand to additional markets domestically or maybe abroad, with the mousetrap that we're building, especially the improved connectivity products that we've been implementing over the last two years to make connective -- interconnection, more scalable, more flexible, more dynamic, more diverse and more automated for customers.

And therefore, avoid the need for them to have extensive network engineering expertise within their own -- with their own systems within their own companies. And pairing that up with these very dense customer ecosystems with -- that are dense with cloud on-ramps, networks and diverse enterprises. So it's a good playbook, it's a good program and we've gotten a lot better at it over the last few years.

David Guarino -- Green Street Advisors -- Analyst

Okay. That's good to hear the company is open minded looking at outside the U.S. And maybe just one unrelated follow-up. I wanted to ask about the stabilized yield targets. You guys are still holding to that 12% to 16% even with the lower asking rents per square foot this quarter. So are these still realistic return hurdles? Or do you think there might be some downside risk to the midpoint in the near future?

Paul Szurek -- President and Chief Executive Officer

So let me take a stab at that, and then Jeff can jump in if he needs to. But it's important not to focus on a single variable like price per square foot. Because as Steve explained, that will move around quarter-to-quarter based upon the density and locations of our sales mix each quarter. On a per kilowatt basis, we're still seeing the same and even slightly stronger pricing. And meanwhile, we continue to see good margin increments from these deployments and use cases that drive additional margin from power, from interconnection and even from a lesser amount of other services.

So between all of that, we haven't felt the need to change our guidance on what our return on invested capital will be. And I know some of your peers track that, and they see how we continue to do relative to the rest of the industry. But I want you to remember that it's -- ROIC achievement is a derivative of the main focus, which is providing value to customers. And the best way to provide value to customers is to create these campus ecosystems in the right markets where companies need to interoperate and where the most important data use cases for the future are likely to take place and that makes them more magnetic, more sticky and more sustainable in terms of growth relative to other ways to deploy capital.

Jeff Finnin -- Chief Financial Officer

David, the only thing I'd add to what Paul said is I'd just point you to our most recent experience with our most recent stabilized investment, which is SV8. At some point during earlier this year, that asset hit stabilization, which, as you know, we define in excess of 93% occupancy. The returns we saw at that point in time were just shy of that minimum. So somewhere in that mid-11 percentile. And also, as I was explaining earlier, it's still going to take another period of several quarters here before some of those customers stabilize their ultimate architecture and, therefore, deployments where they'll draw some additional power and cross-connects. We anticipate getting above that threshold on that asset here in the near future. But that gives us the most recent data set. So I think it's still hitting our underwriting. Now we have two others that we've invested in, obviously, LA3, which is in currently is up and then probably the most recent one before that is VA3. And we'll see how we do on those two, but we're optimistic we hit those thresholds. Time will tell whether or not that needs to be modified down the road. But based on the recent history, we're still comfortable with those thresholds.

David Guarino -- Green Street Advisors -- Analyst

Thanks for the color, Jeff. That's really helpful. I mean, given you guys don't have property level disclosure anymore, it's harder for Marci to figure that out. But to the extent you can provide some anecdotes like that, that's really helpful.

Jeff Finnin -- Chief Financial Officer

Always happy to help, David.

Operator

Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

Thanks. I wanted to come back to the capex reduction for this year. I think what you said was that essentially due to the slower leasing pace, presumably at SV7, essentially, you're slow walking the development of SV9. So just a function of market conditions there and sort of execution there, is that summarize that correctly?

Paul Szurek -- President and Chief Executive Officer

No, Jordan, the development schedule on SV9, and I'm glad you asked the question because I do want to clarify that, is driven by -- more by the timing of permitting and especially now the last important pole in the tent is securing power from Silicon Valley Power which we expect to achieve by the end of this year. We've done a significant amount of preconstruction work already, including demolition of the existing building, all the off-site work for connectivity and utilities, all of the design and everything. And we have some decision points that we have going forward as to the other things we can do to shorten the put once we aggressively go vertical. But now we don't need the capacity immediately, but we've got about seven to eight megawatts available in Silicon Valley, and we've been absorbing about five to six megawatts per year. So that probably gives you some indication of what our decision trees look like. But we're not going to do anything, obviously, of significant magnitude until we finish the power procurement process.

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

But even -- and what's the timeline to finish that, Paul?

Paul Szurek -- President and Chief Executive Officer

The power procurement process?

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

Yes.

Paul Szurek -- President and Chief Executive Officer

As I -- I think I said earlier, I apologize if I wasn't clear. We expect that to be done by the end of this year. And understand it's a process where you have to get agreement with the power company, which we have in principle. And then it has to go to City Council for approval and then we can execute contracts forward.

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

And so all that is planned [Technical issues] or construction or [technical issues] essentially, you would rather wait until some of seven to eight megawatts are more fully leased?

Paul Szurek -- President and Chief Executive Officer

Jordan, I think...

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

How much do you want to have in place?

Paul Szurek -- President and Chief Executive Officer

I mean, honestly, it's -- it really depends on what the funnel looks like, what preconstruction leasing negotiations look like. I can't give you a definitive formula right now. That's based solely on absorption.

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

Okay. And so -- but the short answer is you won't necessarily start construction right away in 2022, if all goes according to plan with SVP?

Paul Szurek -- President and Chief Executive Officer

Not necessarily, but that could -- but it's also possible that we do.

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

Okay. And then on the power exposure, Jeff, the -- that was helpful, a couple of pennies exposure. But could you maybe -- I know it's 30% of power uses in deregulated markets. What is sort of -- what percent is hedged in your deregulated markets?

Jeff Finnin -- Chief Financial Officer

Yes. No, great question, Jordan. I should have included that in there. Our policy generally is to try and hedge about 50% of that power use in those markets to give us some idea of balance. And we usually go out two to three years.

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

And then what's the policy on passing through power increases? How does that happen mechanically in your contracts?

Jeff Finnin -- Chief Financial Officer

So really look at it from two components. One, certain of our customers, about 45% of our portfoliowide revenue is on a metered basis. So those are just pure pass-through irrespective of what's happening, right? So those customers just pay those costs. The other 55% that's more on a breakered model, some of which is in our deregulated, obviously, some of it is in our regulated markets. Generally, we have the ability to pass through those costs to those customers. From a practical perspective, we've looked at it on an annual basis. because you just haven't seen power rates increase that significantly that quickly to where we'd have to do it more regular than that. If you start to see power price increases spike significantly in a short amount of time, it would probably necessitate us looking at that a little bit more timely than on an annual basis. But generally, we look at that late in the year like as we're talking today and then put the process in place to address that early so that it's in place for early the next fiscal year.

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

Okay. Thanks for the color.

Jeff Finnin -- Chief Financial Officer

You bet.

Operator

Our next question comes from the line of Colby Synesael with Cowen.

Colby Synesael -- Cowen -- Analyst

Great. Maybe just a follow-up on those last questions. How much have you seen your power costs go up in those deregulated markets maybe year-to-date? As you had mentioned, I guess, for every 10% increase, it would be a $0.02 impact. And then secondly, the stock is down today. I presume it's mostly associated with the leasing number. Really, when you frame it against the $40 million number that you had initially stated in terms of the guidance for this year. I know you've kind of taken that down a little bit or softened up a little bit. But I think that there is still an expectation that we'd see stronger demand, whether it was in the third quarter or in the fourth quarter, in part based on what you said and also taking into consideration that I think it's also perceived that Silicon Valley is a strong market. And it shouldn't -- and not to be little -- the ability and how hard it is to get it. I mean, it shouldn't be that hard to get that done just given what was perceived to be strong demand. Are you being just too picky in terms of the pricing you're looking for? Is there something else there? And I guess to that point, I mean, are you expecting the fourth quarter to be your strongest leasing quarter excluding the $1.7 million deal you just did? Thank you.

Jeff Finnin -- Chief Financial Officer

Colby, I'll start and address your first question, and then I'll pass it over to Steve. In terms of what we've seen so far in 2021 for power rate increases in those deregulated markets, it hasn't been all that significant, I'd say, depending on the market, somewhere around 3% to 6%. What we are seeing going forward in 2022, obviously, it's a lot of anticipation, and that's where we're continuing to watch closely. You're starting to see future is somewhere around 5% to 10% depending on the market. It remains to be seen if that ultimately materializes but it is something we're watching. And as I said earlier, we generally try to hedge roughly 50% of that exposure two to three years out. But that gives you some perspective of what we're seeing to date. Steve?

Steven Smith -- Chief Revenue Officer

Yes. Yes. As far as the $40 million is concerned, Colby, we are striving to hit that, as I mentioned earlier. And the pipeline is encouraging. There's some good opportunities for us in there. And I think if you look at our core sales year-to-date, they're strong in our core business. And to your point, what is not there as of yet anyway, is really hyperscale. I mean that is really the difference in where you've seen some of those elevated results in prior years versus where we are this year, which are really binary in whether or not they happen. To get to your question around fourth quarter, I probably can't comment necessarily around fourth quarter results, obviously. But we do have a strong pipeline. We're encouraged with where things are headed, and we're striving every day to hit that $40 million.

Colby Synesael -- Cowen -- Analyst

I mean, presumably, if you're still -- you're not talking down the $40 million, which unless I'm misunderstanding you're not, I mean, almost by definition, the fourth quarter should be the strongest quarter relative to the previous three. Is that -- am I misunderstanding?

Steven Smith -- Chief Revenue Officer

Well, I think the math is right that if we were to meet $40 million, that would be the strongest quarter, whether or not we can get there. As I mentioned, it's -- there's a lot of larger deals that can and could happen, but they are binary and whether or not they do happen and whether or not they meet the parameters, as I mentioned earlier, it's not just chasing top line bookings that we're after, and maybe you could call it being too picky. But if you look at the returns on invested capital that Paul talked about earlier and how we're driving the ecosystem, it's really about striking that balance between top line bookings and overall profitability, which includes not just rate, which typically can go down on those hyperscale deals, but also interconnection and power margin, which typically is less on a per square foot and per kilowatt basis as you get bigger opportunities. So it's a matter of managing pace with volume and pricing and all those kind of things. And so we're trying to do the best we can to thread that needle.

Colby Synesael -- Cowen -- Analyst

The one real quick follow-up on that, are those deals that you haven't logged since yet, have you seen any of them going to competitors? Or is it more a function of they just haven't signed with anyone yet?

Steven Smith -- Chief Revenue Officer

In some cases, both. A lot of the pipeline, frankly, as I mentioned earlier, is just taking longer. It's a complex world out there. As you look around, there's a lot of impacts in a lot of different industries. And the complexity around this just takes longer, and we'll see where they play out. I mean it's a competitive landscape as well. So we've lost opportunities. There's no question about it. If we were winning every opportunity, then I would say we're probably being too aggressive on pricing. But we look to balance that every day and try to make sure that we're driving the most value to our shareholders and I'm giving you an ultimate outcome.

Colby Synesael -- Cowen -- Analyst

Thank you.

Operator

Our next question comes from the line of Brendan Lynch with Barclays.

Brendan Lynch -- Barclays -- Analyst

Great. Thanks for taking my question. First, just a follow-up on SV7. It looks like you guys had some retail and small scale demand in the third quarter prior to the large-scale lease in October. Do you have a preferred mix going forward? I know there was some back and forth on how you're looking to fill that capacity. And in terms of the large-scale lease, are you reserving any additional space so that they can expand if they choose to do so?

Steven Smith -- Chief Revenue Officer

Yes. I guess as far as overall SV7 is concerned, we did see some good leasing. I think I mentioned we had $2.9 million of leasing at SV7. So that continues to be a good opportunity for us. And as we repurpose the single tenant space to multi-tenant, we've seen good lease up there as well. So as you look at that and the diversity that it provides as far as hedging any large churn event, we like the idea of that and balancing that with how fast we lease that up. As I mentioned, just talking with Colby, trying to balance the pricing versus the size of the opportunity versus the pipeline and making sure that we get maximum utilization out of every floor and every data center is what it's all about. So that's just kind of an overall approach, I guess. As it relates to reserving space for customers, in some cases, there's contractual obligations, but very few that we have out there. And typically, it's a first come first serve and we're looking to maximize the density in every floor.

Brendan Lynch -- Barclays -- Analyst

Great. And just a follow-up. You clearly have some tech advantages and a lot of cloud on-ramps. So I wonder how the value proposition of those cloud on-ramps is evolving with customers' ability to bring the cloud directly into the cabinet or even on-prem with the likes of an AWS Outpost or a similar product just having that availability right in the cabinet, how does that change the value of the on-ramp itself?

Steven Smith -- Chief Revenue Officer

Awesome question, and I'd love to get more of those because we feel like that is a great value for why customers would want to deploy in our data center. You mentioned Outpost, Outpost is essentially a private cloud managed service that you can put into a data center that can be connected to AWS or other high-speed on-ramps and how they interoperate together is where you get the real value out of those type of appliances. But having it in a data center that is removed from those native on-ramps makes it less rich than it otherwise would be, and the performance is somewhat diminished. So the perfect design around having an outpost architecture is to have a customer deployment that is also inclusive of an Outpost or a VMC on Dell type of environment that is then interconnected with an AWS Direct Connect or a Microsoft ExpressRoute or maybe both, where they can operate interactively and at very low latency to provide just the most seamless and high-performance solution available. It's where you start removing those things and separating them via IP networks and other remote type of interconnection that you start diminishing that performance. So in order to get the best possible outcome out of those appliances, you really need to be in a data center like ours.

Brendan Lynch -- Barclays -- Analyst

Great. Thanks for the color.

Operator

Our next question comes from the line of Michael Rollins with Citi.

Michael Rollins -- Citi -- Analyst

Thanks. First question was, if I think back, you used to provide a chart, and it would share your inventory in each major market, your absorption and extrapolate the years or months of inventory that you had on hand. And I was just curious if you could provide an update overall in the portfolio where you see that relationship? And maybe for some of the major markets, where that relationship is and where there could be some risks of bottlenecks or constraints? And then just separately, I want to go back to a question that you discussed it at a high level before, and that's segmenting retail versus scale performance. And just curious, internally, are you just spending more time thinking through what that retail revenue growth rate is versus the scale growth rate? And the total portfolio grew about 6% year-over-year. What would be the differential in terms of how much better was retail versus slower for scale? Thank you.

Jeff Finnin -- Chief Financial Officer

Michael, let me start off with your question on the inventory, and then I'll hand it off to Steve around the retail versus scale. I'll come back to your last question. So when you look at the portfolio today, from an aggregate basis, I think we've got 32 megawatts of capacity that is built and ready for moving. We've got another 10 megawatts that's under construction that -- those two components, one in L.A. and one in New York. If you look at our overall gross absorption, I'm going to give you some high-level numbers. This isn't -- don't take these as black and white every year. But high level, we lease somewhere around 25 megawatts per year on a gross basis. With churn, your net absorption is going to be somewhere around 18 to 21, 18 to 22 megawatts per year. That gives you some idea from a portfolio perspective. When you look at the, call it, 42 megawatts, where is it today and the relevance to that is, obviously, it's going to be in our top five markets. So you got about seven to eight megawatts in both the Bay Area and in Chicago that we have for lease up to date. You've got another four or five megawatts, some of which is in Los Angeles and then the other market of New York. Am I accurate there? Or...

Steven Smith -- Chief Revenue Officer

Virginia.

Jeff Finnin -- Chief Financial Officer

Virginia, I'm sorry, New York and then Virginia, so call it four to five megawatts there. And then you've got about three megawatts in New York. So you look at the top five markets, that gives you an idea of where that capacity is. And that capacity is important, as Paul alluded to when he was addressing the question around the Bay Area and overall, what is that annual absorption. And as we keep talking about hitting these high 80 percentile occupancy, that's key from our perspective to ensure you've got the available capacity to meet market needs and ensuring you don't have too much capacity that we've invested capital and that's just not earning us a good return and won't be for some period of time. So that's the balance we're trying to strike. But hopefully, that gives you a little bit more color around the inventory.

Steven Smith -- Chief Revenue Officer

Yes, related to -- I'm sorry, go ahead. Okay. Right. Mike, as it relates to retail and scale, I think it's important to look at those as it relates to, especially as you move up the size, to hyperscale and large-scale because as I mentioned, we typically get better pricing. We get more interconnection per square foot. And it also gives us more diversity across our base. Collectively, as you look at our performance over time, retail has remained very consistent. And we continue to get more results out of kind of the scale environment. And while size is important, and we need to manage that, it's also important to look at the customers that are actually deploying behind that and looking at really kind of that mid- to large enterprise that is really kind of rolling out of their legacy data centers refreshing their IT infrastructure, adopting a hybrid multi-cloud environment. And those are the customers that we're looking to target and the ones that we're actually winning. So those deployments that can be very large customers that may come in, in a retail environment, but then grow to a scale or even large-scale environment over time as they complete that migration over time. So we look at the overall mix because it does drive profitability in the short term, but we also look at the growth opportunity long term and where that is likely to show up, and that's where we're targeted.

Paul Szurek -- President and Chief Executive Officer

And Mike, just to remind you that 70% to 80% of our leasing is this organic growth of these primarily retail and smaller scale customers that continue to grow.

Michael Rollins -- Citi -- Analyst

And if I could just follow up with one other question. There was a comment that was made, I think it was a couple of times on this call. And there is a connection between the exiting of the single tenant lease in SV7 and visibility into increasing occupancy given you knew the inventory was coming up. Can you just help frame like what was important about connecting those two things together about improving the visibility for future leasing? Or is it just now that they're gone, you're closer to adding tenants back into and just kind of curious.

Steven Smith -- Chief Revenue Officer

Yes, I think well, if nothing else hopefully it provides clarity and visibility for these calls because I know we've got a lot of discussion around churn and what's churning and is at SV7 churning. So hopefully, that's behind us which I think is where a lot of those comments came from. We've been working actively to profitably lease up that floor over time. And I think as we sit here today, we're about 20% through that lease up, so -- and a good pipeline that's behind it. So we'll continue to do that.

Jeff Finnin -- Chief Financial Officer

And then let me just -- again, I think what you're alluding to is what we said earlier in the call, about five to six megawatts of absorption for us in Santa Clara, Silicon Valley over recent years. The SV7 space is just part of our available leasable capacity. Because of the tenant that's now gone, it received a lot of attention, but the five to six megawatts per year of absorption in ways that strengthen our ecosystem is probably the right way to look at that market and our capacity in that market.

Michael Rollins -- Citi -- Analyst

Thanks. I appreciate the help with that. Thank you.

Jeff Finnin -- Chief Financial Officer

You're welcome.

Operator

Our next question comes from the line of Nick Del Deo with MoffettNathanson.

Michael Srour -- MoffettNathanson -- Analyst

This is Michael Srour on for Nick. Thank you for taking my questions. There's been some optimism regarding the prospects for higher pricing from hyperscale focused vendors, maybe just talking their books. Are you seeing anything to suggest that? And if so, might it open up new scale opportunities in Northern Virginia? And how would you characterize the gap between market and what you're looking for as it relates to scale pricing in that market?

Paul Szurek -- President and Chief Executive Officer

I think there's been firming of pricing over the last couple of years. It hasn't declined like it did three, four years ago. Maybe it's come up a little bit but not discernibly. And thank you for this question because I guess we haven't really made it clear. There's quite a big leap between the pricing and the ecosystem value and all these incremental revenues that we get from the deployments that we're focused on compared to what is available with the undifferentiated hyperscale in these markets. And it's not just about getting the right returns, it's about building the right ecosystems. And frankly, future-proofing your ecosystems and your leasing significantly relative to churn and other events. I mean in our past history, our unpleasant churn related to undifferentiated hyperscale type activities. So yes, maybe it takes a couple of quarters or less sometimes, but sometimes around that time to get to the right levels. But meanwhile, you're making up for it with better margins and incremental revenue and building a much more valuable campus ecosystem for the long term. Does that make sense?

Michael Srour -- MoffettNathanson -- Analyst

Yes, yes. That definitely makes sense. One follow-up, unrelated, if I may. You increased your tenant improvement and recurring capex forecast. Can you talk about the reasons there?

Jeff Finnin -- Chief Financial Officer

Yes, Michael, two things. On the TIs, a majority of our tenant improvement costs really come from the building out the customer deployments as we're getting those customers deployed and ready and set up for their gear. So that's just a factor of the volume of infrastructure needed for those customer deployments, nothing unusual there, to be honest. It's just some of those take a little bit higher cost upfront, depending on complexity and the power needs. As it relates to the recurring capex, really two things going on. We have -- as you know, we were building out this chiller plant in Boston earlier this year. Some of those dollars ultimately came in -- the final parts of it came into Q3. And so some of that's impacting those numbers. And then secondly, we accelerated some recurring capex from future periods into the third quarter as we were looking around trying to take care of a few areas that needed to be addressed. And so that's really what elevated that a little bit this year. As you think about Q4 and more importantly, even 2022, we would expect our recurring capex to come back down to those levels that we've seen historically, which over the past 10 to 20 years has been 2% to 4% of revenue. And that's what we expect to see this year was unusual just given the investment we made with very good returns on that Boston Chiller facility.

Steven Smith -- Chief Revenue Officer

And the office lease facility.

Jeff Finnin -- Chief Financial Officer

The office build-out that we did in the Bay Area.

Michael Srour -- MoffettNathanson -- Analyst

Got it. Great. Thank you.

Jeff Finnin -- Chief Financial Officer

You bet.

Operator

Our final question this morning comes from the line of Dave Rodgers with Baird.

Dave Rodgers -- Baird -- Analyst

Yes. Good morning out there. Thanks for taking the time. Jeff, just a couple of questions for you. I wanted to cover a couple of things you said earlier to make sure I didn't miss them. I think you said you had about $235 million of availability, and I think you said something about $40 million of capex probably in the fourth quarter and $200 million next year for development and outlays. Is that what you did say? I don't want to put words in your mouth.

Jeff Finnin -- Chief Financial Officer

No problem. You're right. We've got about $235 million of liquidity. And if you look at the midpoint of the capex guidance we gave for this year, it'd be about an incremental $40 million for 2021. And high level, what we gave for 2022 as you think about us, obviously, excluding SV9, a regular year for us building out inside existing core sells around $200 million.

Dave Rodgers -- Baird -- Analyst

So I guess I just wanted to follow that thought up with the idea if you're going to kind of tap into that the remaining availability as you look out over the next, say, 15 months or so. At your current leasing pace, you're probably adding another $80 million of availability. I guess the question there is with the $300 million development like SV9 sitting out there, using up most of the remaining availability and getting really thin on what's left. What is your view on how thin on availability you're willing to go and leverage specifically? And when you look to kind of raise some equity either through asset sales, joint venture or straight up equity to kind of privy some cushion ahead of SV9?

Jeff Finnin -- Chief Financial Officer

Yes. Well, I think high level from a leverage perspective, Dave, we're comfortable in those low ranges that we -- with those ranges we've been talking about this year, where we expect to be somewhere between 5.2 and 5.4 by the end of the year. If you think about us, 5.5 times leverage, I think we're comfortable taking it to that level. So that gives you some perspective from a leverage. From a liquidity perspective, I would tell you that any time we embark on a development, we want to make sure we've got complete liquidity to ensure that, that development is built out in its entirety. And so we're not going to embark on development until we've got that liquidity to see it fully through. So as a result of that, we would anticipate needing some additional liquidity before we go vertical on SV9. And that's something we're thinking about and looking at options to ensure we solve for that prior to the time that will be needed.

Dave Rodgers -- Baird -- Analyst

Okay. Thanks, Jeff.

Jeff Finnin -- Chief Financial Officer

You bet.

Operator

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Szurek for any final comments.

Paul Szurek -- President and Chief Executive Officer

Thank you. Excellent questions, as usual. Before we wrap up, I'd like to thank all my CoreSite colleagues. I've mentioned earlier in the call that they've been working very hard the last few years to build a better mousetrap. Our cloud and network and enterprise dense ecosystems are more valuable and sticky and magnetic than ever. And that is the result of tremendous effort all across the company from operations to technology, to network engineering to sales and to construction to keep up with and provide the capacity to sell. So I'd like to thank all my colleagues and thank all of you for your interest, and we look forward to future discussions.

Operator

[Operator closing remarks]

Duration: 67 minutes

Call participants:

Kate Ruppe -- Investor Relations Manager

Paul Szurek -- President and Chief Executive Officer

Steven Smith -- Chief Revenue Officer

Jeff Finnin -- Chief Financial Officer

Jon Atkin -- RBC Capital Markets -- Analyst

Frank Louthan -- Raymond James -- Analyst

Sami Badri -- Credit Suisse -- Analyst

Erik Rasmussen -- Analyst -- Stifel

Richard Choe -- JPMorgan -- Analyst

David Guarino -- Green Street Advisors -- Analyst

Jordan Sadler -- Analyst -- KeyBanc Capital Markets

Colby Synesael -- Cowen -- Analyst

Brendan Lynch -- Barclays -- Analyst

Michael Rollins -- Citi -- Analyst

Michael Srour -- MoffettNathanson -- Analyst

Dave Rodgers -- Baird -- Analyst

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