I think I go back to like 2008, I don’t think I’ve ever seen your multi-tenant buildings actually drop. What’s going on with that? Because you usually add buildings, which obviously gives you incremental potential capacity for some corporate growth.
Dave Schaeffer: Okay. I’ll take those in reverse order. So post pandemic, we have slowed the rate of multi-tenant building additions. We actually did add several buildings in the quarter, but we also had a half a dozen buildings converted to residential service from office. So the net reduction of one building from 1,862 to 1,861 was fairly insignificant. Actually, the square footage increased, meaning the new buildings that came on were larger than the ones that were taken offline because of the residential conversion. We do expect our multi-tenant footprint to continue to grow, but at a more moderate rate. It makes more sense for us to divert that capital into more data center connectivity as that is a more robust and growing market.
Now I’ll go to your IPV4 monetization question. IPV6 was introduced in 1998. It today accounts for a whopping 7% of Internet traffic. The Federal Government — U.S. Federal Government in 2010 put a mandate out for all agencies to be entirely on V6 within 18 months. Today, they’re less than 2% converted. This has a very long tail. It is a very fine resource and the expense of renumbering is not trivial. So even if you had V6 and it would work, the cost of leasing and addresses so diminished versus the benefit it gives. Most companies will take a very long time to renumber. And no one wants a partial view of the Internet. The primary reason, sale prices have softened over the past six months as Amazon and Microsoft have been withdrawing from the purchase market as they accomplish our initial goals.
Now I think both of those companies will re-enter the market. There is still a broad and active market. The pricing for larger blocks has actually continued to go up. So we will explore sales. We’re very comfortable with our ability to continue to grow the leasing business, and we are going to do what it takes to create the maximum long-term value for shareholders out of this asset, our data center assets and our fiber assets. No one should have any doubt that Cogent is sitting on foul assets that could be monetized.
Walter Piecyk: Okay, that’s helpful, Dave. But in the absence of a sale, maybe you can just give us some sense of, without having the IPV4s in order to secure that incremental financing? I mean, obviously, these TSA payments are going to drop from $87 million to $24 million. So that drop alone, I think, takes your EBITDA to a level that I’m not sure it covers CapEx and cash interest expense. So when we think about incremental financing without IPV4 assets to lean on for incremental gross debt increases, what is that rate going to look like, interest rate?
Dave Schaeffer: Yes. So first of all, if I remember, Walter, I had a few fairly aggressive questions from you several quarters ago around our aggregate leverage. And as I pointed out, it peaked at a net leverage target of 4.6, which was, as you pointed out on that call, substantially above the 2.5 to 3.5 range that we had laid out. We have been able to reduce that leverage to 3.17, substantially below the high end of that range. And that number will come down even further in the next quarter as it is, as Tad pointed out, an LTM tax. We are going to look at our aggregate balance sheet and try to optimize whether it be through incremental high yield, whether it be through securitization or through asset sales. We have many levers to pull.
We have been very transparent around the reduction in payments from T-Mobile. They are going down. They will go down in June. However, we are achieving substantial cost savings ahead of what we laid out. And again, I know — I think it was last quarter, you had great doubts on our call about our ability to do that. And I think our improvement in EBITDA shows clearly our ability to reduce those costs, both SG&A and COGS substantially. So I think it will be the combination of cost reductions and revenue growth. As the incremental wavelength business grows at a more normalized rate with very high contribution margins, our aggregate EBITDA will begin to grow. As I laid out on the last call, we did $352 million in EBITDA in ’23, up from $233 million in ’22.
While we’re not giving exact guidance, it will be similar in ’24. But in ’25, the impact of wavelengths, IPV4 monetization and data center monetization, coupled with growth in the core IP business should grow our EBITDA and expand margins. As I said, it’s a top line 5% to 7% growing business with a 100% or a 100 basis point a year margin expansion. I’m also going to clarify a question that I didn’t answer for Frank, which is T-Mobile’s utilization. And that’s two parts. One, the commercial services are typically connectivity services and Colo. They’re getting out of our facilities. They are stopping using us for backhaul. In many cases, we’re buying it and reselling it to them. That’s part of why off-net declined. They are very far along in that exit.
The revenues declined sequentially at about $5 million. On the transit services, it was always meant to be a subsidy payment to Cogent. They are using a couple percent of the transit that we are providing them. They could use it all. It would be fine with us. It’s all provision. But I’m not sure there’s a huge incremental opportunity with T-Mobile. Hopefully…
Walter Piecyk: So what is the incremental rate — no, I mean, the question was what’s the incremental rate when you’re not using IPV4 to back the cash you’re going to need to pay the dividend? Because again — yes, the leverage is going down, Dave, that’s just math, right? You’re getting TSA payments. But when those payments drop from $87 million to $24 million, so does the EBITDA and then EBITDA can’t cover CapEx or cash interest. I mean, it’s just math, right? The leverage is obviously going to go up. So the only question is what is the rate when you have to borrow more? what do you think the rate on that new debt is going to look like?
Dave Schaeffer: So a couple of things. One, you are correct. As the TSA payments go away, that will have a negative impact on EBITDA. However, growth in the business and the ability to monetize these assets will have a positive impact. They are roughly going to offset each other. So EBITDA for full year ’24 will be similar to full year ’23 and will grow in full year ’24. In terms of being a [indiscernible] on interest rates, that’s difficult. I’m not [J-PAL] and I’m not in a position to answer that question totally. But what I can tell you is that our current unsecured bonds not IPV4 securitized are trading at around $99 million, giving a yield to worst of about 7.5%. And I think that would be indicative of about what our incremental cost of capital would be.
We will explore a combination of additional securitizations and additional debt. We understand that as our EBITDA grows, we have a targeted range. We are committed to returning capital to shareholders. So your point that we’re giving out more than 100% of our free cash flow is old news, Walt. It’s been our policy since 2010…
Walter Piecyk: No, no, no. I didn’t say — I’m not talking about the dividend. I was saying the EBITDA is not covering CapEx or cash interest. That is new after these payments run because of the cash interest from the deal, right? That’s the new thing…
Dave Schaeffer: I don’t — I’ll just agree with your arithmetic. I think you’re…
Walter Piecyk: Okay. We will just see how it play that. Dave, just one last question. Just on the synergies, just ballpark, like what have you realized so far? And what’s left in the bucket when we try and come up with EBITDA estimates? And we know what the targets are, so you don’t need to review them, just kind of percentage realized or dollars already realized? Thank you.
Dave Schaeffer: Yes. We’re probably 40% through the synergy realization.
Walter Piecyk: Awesome. Thank you very much.
Dave Schaeffer: Thank you, Walt.
Operator: And will come from the line of Michael Rollins with Citi. Please go ahead.
Michael Rollins: Hi, Dave. Good morning. I’m just curious, if we take a step back, can you simplify either how Heritage growth rate in corporate Net-Centric are performing? And if you’d rather do it pro forma given the integration of the business? It’s just some way to kind of appreciate the level of growth that you’re achieving relative to what you’re used to over the long-term. And if you see things in those growth rates inflecting more positively or pulling back in terms of that rate of growth as you look out over the next few quarters and you look at the sales trends, the volumes, et cetera?
Dave Schaeffer: Yes, absolutely. Mike, good questions. So Cogent has two market segments. It has a Net-Centric segment that it focuses on transit sales, that continued to grow. T-Mobile as a customer was a Net-Centric customer. They’re a service provider. If you just net out their decline in revenue, that business grew. Traffic grew sequentially 1%, roughly 20% year-over-year, and that business on a Heritage basis is probably growing around 10%. In the Heritage business, that represented about 40% of Cogent’s aggregate revenues. The other larger business, Heritage, was Cogent’s corporate customer base. That Corporate customer business was actually declining during the pandemic, far worse than its long-term average growth rate of 11%.
And today is probably at a growth rate of around 3% to 4% year-over-year. Still far worse than what we had experienced for nearly 15 years between going public and the beginning of the pandemic. That business is slowly improving, but I’ve given up trying to predict when everybody is going to be back in the office at the same level of occupancy pre-pandemic. There is improvement. That business is improving sequentially and year-over-year, but it is a slow pace. We now have a singular integrated customer base. We report now on three customer types, and we report on some additional products that were not material. Non-core, we always reported on, but was immaterial. Now it’s more material, and we now have wavelengths as a service. So yes, Cogent became more complicated when we acquired Sprint.
We got new customers and new products. But the trends in the underlying Heritage business are reasonable. They’re not at peak, but they’re doing pretty well. I mean a 10% growing Net-Centric base and a kind of 3% to 4% Corporate is not terrible.
Michael Rollins: And two follow-ups, if I could. Just first on the corporate side. Just given where your share is in your buildings of unique customers, what do you see as the catalyst to try to improve share? Is there anything competitively that’s shifting in that market that could help or hurt this performance?
Dave Schaeffer: It’s been a gradual shift. Everybody in our footprint is already using Internet connectivity. And if they need a VPN service, they already have a VPN service. So they need to either relocate or they need to change their usage patterns. I think video conferencing was a huge tailwind to that as people became dependent on it, that max out their connections. However, many, many companies were reluctant to enter into new IP contracts until they had some clarity around their office real estate requirements. I think companies are now kind of settling into what that new real estate requirements footprint looks like. So I think we’re seeing this gradual improvement, but there are still leases that have term left on them that people intend to exit or downsize from.
And until they make that final real estate decision, they’re not going to make a permanent bandwidth decision. Bandwidth is a utility to support their office occupancy. I don’t know if there’s another killer application that’s going to drive things, but I do think the dependence on video conferencing is a significant shift in the world from pre-pandemic to post-pandemic. And I think as companies figure out, I’m going to stay in this office, this is how many square feet, they’re going to be much more interested in signing a long-term higher cap bandwidth connection. It was interesting. Five years ago, our average corporate on-net user was using about 18% of a 100 meg connection at peak. Today, our average Corporate customer is using 13% of a 1 gigabit connection at peak.
So they’re using eight times more bandwidth than they were five years ago. I think video conferencing is probably the one thing I’d point to. And remember, they’re doing that with 40% less employee days in the office. Hopefully, that was helpful.
Michael Rollins: It was. Thanks Dave.
Operator: Your next question will come from the line of Nick Del Deo with MoffettNathanson. Please go ahead.
Nick Del Deo: Good morning, Dave. How are you plans to use the proceeds from the securitization? Are you going to buy out that uneconomic dark fiber lease that you’ve seen from Sprint you’ve talked about? And if that’s the case, can you talk about the mechanics and the benefits?
Dave Schaeffer: Yes, sure. So I’ll start with the benefits of mechanics. So the lease has a provision that allows us to buy out at a 12% discount rate. This is a lease that is fiber, that we don’t need and would like to exit as quickly as possible. There is about a $130 million liability associated with that lease today. The payment stream on that is $4.2 million a month, and we would have to write a check for probably about $112 million, $113 million to buy out. I don’t necessarily know we would use all of our cash to do that that we received. So we did $206 million and with an ABS securitization that were both substantial costs and reserve accounts established, our net proceeds were about $200 million, of which about $6 million were restricted in reserve accounts.
So $194 million of debt proceeds, and I’m not sure I want to use $112 million of that in cash. So we are looking at the points that Walt raised, do we raise more money. So I think what we’re going to do is keep some cash on the balance sheet. We will look to buy out of this lease and continue to be able to invest in the business at the appropriate rates, which include the conversion of the data centers, the wave enablement of the network and our ability to demonstrate, I think, kind of all three legs of the value proposition that we were anticipating from Sprint. We’ve been able to, I think, validate the worth of our IP address inventory. I think we have to show the value of the wavelength and dark fiber assets and the colocation. And I think these proceeds will be used to help demonstrate all of that.
Nick Del Deo: Okay. Great. And then two clarifications on EBITDA. So first, it looks like your unfavorable lease amortization went from $10.3 million in Q4 to $2.5 million in Q1. So I think if we were to look at it on like a cash basis, I think the sequential improvement would have been even stronger than you showed. Is that fair?
Thaddeus Weed: Yes. The unfavorable lease liability had to be adjusted and increased for the extension in renewal terms, that we had already recorded under leases themselves, so the lease liabilities that are on the balance sheet, kind of as a gross up, but the unfavorable lease needed to be matched to that. So that was one of the corrections that was made in the quarter that resulted in a net of a $5.5 million reduction in the gain and the $1.4 billion gain for the bargain purchase.
Dave Schaeffer: Yes. So we would have been a little better without that accounting adjustment. And listen, there are so much complexity to Cogent’s accounting for this transaction. We are working very diligently to report everything in a consistent and non-confusing way for investors.
Thaddeus Weed: But going forward, in terms of changes to the purchase accounting, we’ll have additional severance and perhaps an adjustment to the tax rate could be an adjustment to the deferred tax liability. That is all that is expected in the second quarter.
Dave Schaeffer: Yes. We also have an anticipated substantial tax refund coming as a result of this. We had overpaid based on Cogent’s run rates going in our Federal estimated tax and have approximately $18 million of a pending tax refund.
Thaddeus Weed: Right. So that will be split. We’ll get some prior to filing the tax return and the remainder when the tax return is filed.
Nick Del Deo: Okay. That’s great. And just to be clear on the amortization point, the reduction versus Q4, you’re saying it went into the gain rather than an expense reduction?
Thaddeus Weed: Yes, that’s right
Nick Del Deo: And then second, just a quick one. I think you called out FIC indication accruals in Q1. Tad, did you say that you did not have audit expenses in Q1 because you normally have those?
Thaddeus Weed: We absolutely did. So…
Dave Schaeffer: They were high.
Thaddeus Weed: Yes. Those associated just with the Sprint acquisition, which was valuation services, are in the Sprint cost. But the traditional audit, we paid over $2 million. You can read it in the proxy on a regular audit, that’s included in the first quarter costs. And the variation vacation, if you look at fourth quarter to first quarter, it’s a couple of million dollars in…
Nick Del Deo: I must have heard your comment then. And then did you have your sales meeting this quarter? Is that in Q2?
Dave Schaeffer: We’re actually not going to have it this year because it would end up just a large distraction. We’ve got so much integration work going on. Now what we have done is ramped up our regional learning manager program, hire some additional resources and are doing it on a more regionalized basis as opposed to a global meeting. We’ll resume that next year. But we felt with all that was going on with the integration that there just wasn’t enough cycles to do that. We think there’s great value in it, but we’re kind of taking a less impactful strategy in doing it just through regional meetings.
