QTS Realty Trust, Inc.
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

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

[Stephen Douglas:]

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

[Chad Williams:]

Thanks, Stephen. Hello and welcome to QTS's third quarter 2017 earnings call. QTS continues to execute on its strategy. During the third quarter we achieved success across a diversified set of enterprise customers utilizing our integrated C3 services platform. On Slide 3 as we have discussed in the past we have two primary drivers of demand in our business today. Starting with Enterprise Outsourcing, which is primarily supporting demand for our C2 and C3 business we are seeing accelerated adoption of the Hybrid IT. We refer to Hybrid IT as solutions utilizing a mix of co-location, private cloud and public cloud on boarding with various managed services and connectivity products attached, all seamlessly integrated into our service delivery platform. The growth of cloud and the concern among enterprise customers regarding how they can manage the growing risk around cyber security is causing CIOs and CTOs to reevaluate their long-term IT infrastructure roadmaps. Complexity within the IT stack is only growing as leaders are tasked with optimizing their infrastructure requirements into a single, highly compliant, integrated solution. Our integrated technology services platform model provides QTS the ability to support customers' future IT infrastructure roadmaps by providing the flexibility within our products as their needs change and grow, effectively derisking their journey to Hybrid IT, while ensuring the highest levels of security and compliance. As we discussed last quarter, we continue to enhance our platform to drive innovation into our data center solution set and further integrate our product. These steps include the official launch of the QTS Service Delivery Platform or SDP which functions as a primary customer interaction integration tool and the announcement of the strategic partnership with two of the leading cloud based network exchange providers, PacketFabric and Megaport as part of QTS's multi-faced approach to expand our carrier neutral cloud ecosystems. These enhancements allow us to provide more comprehensive data center solutions, greater visibility and dynamic control of customer's infrastructure deployments and ultimately a richer overall customer experience. We continue to believe our 3C integrated platform positions our business as the center of where the data center market is growing and will continue to leverage that advantage. Now moving on the C1 Hyperscale which we view as the second primary driver of demand in our business today. The Hyperscale vertical is largely comprised of the 15 to 20 largest technology cloud and social media companies in the world whose businesses are growing and transforming in ways that are increasing their overall IT and data center demands at accelerated pace. The Hyperscale vertical is one in which we have participated in the past including four of the top five public cloud companies as current customers and we look forward to continuing to support this vertical moving forward. The demand we are currently seeing from Hyperscale customers primarily falls into two buckets; the first as we have discussed in the past is focused on the smaller edge type deployments in tier 1 markets where speed to delivery and proximity to the end-user is critical. You may recall that we recently introduced our QTS Hyperblock solution comprised of 1 and 2 MW deployments with options for rapidly scalability over time. These deployments have been optimized for fast delivery and engineered specifically to meet Hyperscale infrastructure visibility, economic and operator excellence. We have committed that we can deliver Hyperblock capacity in any of our mega data centers across the country in 120 days or less and in some cases as short as 30 days. We believe this solution and commitment is resonating well with Hyperscale companies and in fact as I will discuss later in my comments, we are pleased to sign two additional Hyperblock leases during the third quarter with existing Hyperscale customers. The second bucket of demand that we are seeing from Hyperscale customers is centered around significant requirements of 4 MW or more. Demand for these larger scale deployments over the past several quarters has largely been concentrated in only a handful of tier 1 markets. While we have historically have had scale capacity in some of these markets like Dallas and Chicago we have not had in others like northern Virginia and markets on the West Coast. Our historical approach to Hyperscale was more opportunistic in nature, executing our large-scale opportunities in existing QTS footprints where we had scale and capacity. As you will see in our press release yesterday, we are pleased to now have the ability to extend our Mega-Scale platform into additional key Hyperscale markets which expands our capability to be more intentional about targeting larger opportunities in both existing and new potential customers on. On Slide 4, before I move on to discuss our new mega-data center development in Ashburn Virginia, I'd like to take a moment to review our overall development strategy. QTS's development model sits on [indiscernible] when based on a disciplined and derisked approach. Building data centers requires a significant upfront capital investment. As a result QTS has consistently looked for ways to derisk that upfront investment to drive more efficient and ultimately a higher risk adjusted return profile. We have historically been able to achieve this by acquiring infrastructure rich assets that had other previous uses, opportunistically at a low basis and redeveloping them into world class data centers. This was the model in our Atlanta-Metro Data Center a former retail distribution facility, our Dallas and Richmond Data Centers, formally two of the largest semiconducting manufacturing plants in the country and our mega-data center in Chicago previously a large infrastructure rich printing facility. And these assets are now among the most significant contributors of growth in our business. But we've also been successful in finding other ways to derisk our entry point. In Suwanee, Georgia and Piscataway New Jersey for example we were able to acquire purpose built data center facilities at a fraction of the build cost and refocus and repackage the infrastructure to support a multitenant environment and our broader services platform and ultimately drive higher return. And then in Princeton New Jersey and Fort Worth Texas we've been able to derisk the expansion of our platform through sale leaseback transactions with enterprise customers at cents on the dollar as previously been invested in the data centers. QTS's abilities for customers' current and future IT roadmaps through our fully integrated solutions has helped unlock these insourced-outsourced opportunities with enterprises who need to increase the data center efficiency and performance without compromising security and compliance. In each of these approaches QTS has been able to significantly derisk our upfront capital investment and ultimately support our higher potential risk adjusted return on capital. A second way that we are able to derisk our development model is through Greenfield developments with strong upfront visibility and anchor tenants. Greenfield development typically starts with a minimal amount of capital upfront through the acquisition of land and modest investment the required site infrastructure for future development. This typically represents less than 10% of the total capital investment. Then as the pipeline of demand builds visibility in the specific anchor tenants for the facility allows us to deploy the remaining capital including the shell, mechanical, electrical and raised floor calibrated to the level of preleasing that we're able to achieve. We view the Greenfield including our newest development in Ashburn as a natural extension of our development strategy and look forward to applying the same derisk and disciplined approach that we have to each of our footprint expansions throughout the company's history. Importantly, each of our mega-data center facilities including our plans for new Greenfield facilities is designed to support multitenant environment in order to deliver our broader services portfolio and ultimately a higher potential return on capital versus a single tenant Hyperscale facility. While we will continue to look to derisk our facilities with C1 anchor customers early in our development as we have in each of our mega-data centers, we believe our broader, multitenant approach ultimately drives valuable diversification in terms of product and customer mix, supports higher terminal value upon renewal of larger Hyperscale leases and provides enhanced flexibility as customer specific needs in IT infrastructure requirements grow. Moving on to Slide 5, we are pleased to announce that we have commenced development of a new Megascale data center campus in Ashburn Virginia. Since the end of the second quarter QTS has agreed to acquire a total of approximately 52 acres of land in Ashburn Virginia in two parcels for a total purchase price of $53 million. The first land parcel representing 24 acres closed during the third quarter. Subsequent to the end of the quarter we closed on the second parcel representing 28 acres. The combined land parcel is located near adjacent to QTS's existing Vault campus in Dulles, Virginia, enabling us to continue to support and expand upon the more than 130 customers currently residing within the QTS Northern Virginia footprint. The Northern Virginia data center market remains the largest and fastest growing tier 1 data center market in the country representing approximately a quarter of all wholesale absorption among the top 10 U.S. markets through the first half of this year according to JLL. As a result of the continued development over the past several years, available land for future development in Ashburn has become increasingly scarce and we are excited about the opportunity to secure our future growth capacity in a strategic QTS market. We have commenced development on the first 24-acre land parcel and expect to deliver Phase 1 of development representing 4 MW of critical sellable capacity by mid-2018. Currently we have preleased over 50% of Phase 1 development to a global health insurance provider reflecting a typical enterprise wholesale pricing. We remain in active dialogue with a number of potential customers both new and existing from enterprise customers up to large Hyperscale opportunities. We expect to sign additional preleased commitments prior to the completion of Phase 1 multi-tenant development. However, given that Ashburn development is not expected to open until middle of next year we do not anticipate a significant impact on our 2018 financial performance. The initial 24-acre parcel of land is available to eventually support 178,000 square feet of raised floor capacity and 36 MW of gross power. Ultimately QTS believes the 52-acre site can support a total of more than 700,000 square feet of raised floor capacity and 140 MW. In addition to the announcement of our new development in Ashburn since the end of the second quarter we also acquired land parcels in two strategic markets. During the third quarter QTS acquired 84 acres of land in Phoenix Arizona for $25 million. Subsequent to the end of the third quarter QTS also acquired 92 acres of land in Hillsboro Oregon for a purchase price of $26 million. Each of these markets continues to attract demand from some of the largest technology companies in the world and are rapidly becoming two of the most strategic Hyperscale data center markets on the West Coast. Demand in these two markets is driven by multiple key factors including a affordable power and property cost, robust connectivity, proximity to major metropolitan areas and local and state incentives. QTS plans to complete preconstruction work with minimal capital investment over the coming months at both Phoenix and Hillsboro locations to position each site for future development. Ultimately development of either site into sellable data center capacity will be subject to market dynamics and ongoing interest from existing and potential new customers. Our announced development in Ashburn combined with new strategic optionality in Phoenix and Hillsboro enhances QTS's ability to deliver scalable capacity solutions in the top U.S. data center markets that are most relevant to Hyperscale vertical. In addition, the ability to do so with continued derisk development strategy is consistent with QTS's overall balanced approach to capital and allocation. Now turning to our quarterly leasing performance on Slide 6. For the third quarter we signed new and modified leases totaling approximately $15.3 million of net incremental annualized rent. This is more than 40% above our prior four-quarter average. Our Q3 leasing performance included 46 new logos which represented a 65% increase year-over-year and reflected broad demand across our footprint. In addition, we continue to be successful executing on our strategy in the Piscataway facility when we acquired that site by last year we are convinced that significant opportunity existed to drive higher revenue, returns and efficiencies through our execution across our higher touch integrated technology services model. In each successive quarter since purchasing the site in 2016 we have now either expanded existing customers within the facility or brought in new customers including four new C2 customers and C3 logos in third quarter. Over the same timeframe we've increased our reoccurring NOI in the site by approximately 35% driven by the execution across our broader services mix. Our pipelines and the deals in Piscataway continues to build and we look forward to the opportunity to continue to drive incremental value and the New Jersey footprint. This quarter's leasing performance also reflected strength in our C1 segment driven by both Hyperscale and large enterprise customers across multiple facilities including Atlanta, Dallas, Chicago, and northern Virginia. The strength in C1 was spread across the numerous deals with the largest lease signed in the quarter representing 2.2 MW to the large healthcare insurance company I referenced earlier in Ashburn. Our strong leasing performance this quarter also continues to enhance our visibility in the incremental growth embedded in our business. We ended the third quarter with backlog of signed but not yet commenced annualized revenue of proximally $57 million up nearly $40 million last quarter. Churn during the quarter came in at 1.3% bringing our year-to-date churn to 5.6% which is consistent with our full-year churn expectation of 5% to 8%. Lastly, the pricing environment continues to reflect rational competitive dynamics with generally stable to positive pricing on both new leases and renewals adjusted for business mix and volume. Next on Slide 7, I'd like to highlight some of the key customer wins during the quarter. As I've noted previously, we were pleased to sign two separate Hyperblock leases with one of our largest customers, a global search engine, with options for additional expansion. Through these Hyperblock deployments aggregating to 2.8 MW this existing customer expanded its current footprint with us in Atlanta and added an additional location in Irving Texas. This customer has been supported by the QTS platform for over 10 years and their continued growth within our footprint is a strong testament to our team's commitment to service excellence and value of significant visible growth capacity provided by our Megascale facilities. In addition, Atlanta continues to be a significant growth driver for our business and our core strategic location for our customers. In fact, of the 130 year-to-date new logos in our business more than a third were in the Atlanta footprint. Next, during the third quarter we signed a new enterprise C1 logo to a 10-year contract representing half a megawatt of capacity in our Chicago data center. This customer runs one of the largest hospital chains in the country shows our Chicago mega-data center for its primary site as part of a multi-phased data center outsourcing process. As evidenced by their willingness to sign a 10-year contract with us this customer saw value in the flexibility of the site, its strategic location adjacent to downtown as well as underlying quality and compliance of our on-site operations. This lease signing is an example of the continued momentum and success we have seen in Chicago since we officially opened the facility a little more than a year ago. We remain encouraged by the pipeline of demand that we're seeing which further supports our view of this site being differentiated in the market in a strategic location. Also during the quarter we signed a C3 expansion with our existing C2 co-location customer in our Suwanee data center. This customer is an international diversified industrial company and relying on QTS to provide a fully managed private cloud solution, importantly our high end focus on security with a primary differentiator as this customer was very focused on isolating their data and systems from other customers. Concern around how to manage cyber security risk is only growing among enterprise CIOs and we have positioned our platform and solutions to enable us to act as a true partner with our customers to help mitigate these risks. We are in discussions with this customer about incremental expansion across our footprint and look forward to continuing to support their future needs. Overall, we are very pleased with the leasing activity we saw during the third quarter. We're encouraged that our platform continues to differentiate QTS in the market, enable us to deliver world-class, highly secure and compliant solutions to complex IT infrastructure requirements. With that, I'll turn the call over to Jeff Berson, our Chief Financial Officer to discuss our financial results, development pipeline and outlook in more detail. Jeff?

[Jeff Berson:]

Thanks Chad and good morning. Moving on to the financial results on Slide 9, for the third quarter of 2017 we reported accelerated growth quarter-over-quarter across key financial metrics. We achieved revenue of approximately $114 million up 5% sequentially, adjusted EBITDA of approximately $53 million, up 8% sequentially and operating FFO per share of $0.70, an increase of approximately 11% sequentially. Operating FFO and operating FFO per diluted share this quarter included a non-cash tax benefit of approximately $2.5 million. Finally, for the third quarter we achieved an annualized unlevered return on invested capital of 13.8% across our platforms. We are pleased with the overall sequential acceleration in growth in the business. Offsetting our growth this quarter was a sequential revenue decline in our C3 business. There were two primary factors that drove the decline. First, we had a customer that had planned to move from a C3 cloud product to a C2 co-location solution as the scale of their business has grown and matured. This process started over a year ago. As much as we see customers move from a co-location product to a cloud solution, we are also starting to see a trend of customers moving in the other direction from cloud to co-lo reflecting the growth in their business. The flexibility of QTS's service platform and infrastructure enables this kind of product shift in both directions which we view as a natural flexibility of our platform and we would expect to continue to see this trend at some level going forward. In addition, one of our largest C3 customers renewed their contract during the quarter extending their term by an additional five years. As part of their contract renewal this customer chose to retain their depreciated servers which reduced their revenue but importantly maintained their margin contribution. Excluding these two factors, our C3 revenue in the quarter would have been up approximately 1% sequentially. We remain encouraged by the trends we are seeing in the market as customers increasingly move towards hybrid solutions and we see our broader services platform continuing to drive attractive growth and strategically enable service attachment opportunities on top of our space and power business. Next on Slide 10, during the quarter we brought an aggregate of 9000 square feet of raised floor online in Atlanta and Irving Texas. As of the end of the quarter our totaled built out raised floor was approximately 1.4 million square feet which represents just over half of the total powered shell raised floor capacity of 2.7 million square feet in our existing facilities, not including land that we own adjacent to our mega data centers. During the fourth quarter of 2017 we anticipate bringing online an additional 44,000 square feet of raised floor which includes 7000 square feet of raised floor in Chicago and 20,000 square feet in Irving Texas to support continued strong momentum we have experienced. In addition, we currently anticipate bringing online additional capacity in Atlanta and Piscataway. Now turning to Slide 11, cash capital expenditures during the third quarter totaled approximately $97 million excluding acquisitions with the significant majority tied to development of new data center capacity. In addition to ongoing developments that are set to bring space online during the fourth quarter, as Chad discussed, we've commenced development of a new mega data center campus in Ashburn Virginia. We anticipate delivering Phase 1 of the development representing 4 critical megawatt of capacity in mid-2018. To deliver Phase 1 including the cost to construct a powered shell that can ultimately support approximately 178,000 square feet of raised floor capacity QTS expects to spend approximately $20 million in development capital expenditures in the fourth quarter at the Ashburn site. As Chad discussed, during the third and fourth quarters QTS acquired land in strategic markets representing purchase prices aggregating to $42 million and $62 million respectively. These acquisitions provide QTS the opportunity to extend our Hyperscale growth strategy with strategic customers as part of our overall derisk development approach. Lastly, also subsequent to the end of the third quarter, QTS acquired full ownership of our formally leased vault facility in Dulles Virginia for $34 million, less the capital lease obligation of $16.4 million as of September 30 resulting in a net purchase price of approximately $17.6 million. The acquired facility currently supports more than 90 customers and in Q3 generated approximately $31 million of annualized recurring revenue and $22.5 million of annualized NOI. This transaction is neutral to our OFFO per share as reduction in rent expense which was running through our income statement through capital lease accounting is offset by interest expense associated with the incremental debt used to fund the purchase price. While not a particularly significant transaction in terms of financial impact on the business we are a real estate company that sees asset ownership and derisking the long-term future of our strategic facilities as the core tenets of our strategy. QTS remains focused on finding the right balance in its capital allocation strategies between delivering near-term financial results while investing for future growth. As part of this balanced approach, factoring in the additional capital spend in Ashburn this year, plus the land investments we've made in new markets, and the acquisition of our vault facility, we pushed back a portion of the development spend that was previously expected in the fourth quarter to deliver new capacity in Fort Worth, The Vault and Santa Clara. As a result, even with the new development spend in northern Virginia, we continue to expect our 2017 cash capital expenditures to come within our CapEx guidance range of $325 million to $375 million. While we've not yet provided specific financial guidance for next year, we would expect our 2018 capital expenditures to scale at a rate consistent with the growth in our business plus approximately an additional $50 million primarily reflecting our early stage Ashburn development. Moving to Slide 12, I'll review our balance sheet and liquidity position. Our total debt outstanding, including capital leases as of quarter end was just over $1.1 billion, 66% of which was subject to a fixed interest rate pro forma for the forward interest rate swap agreements that we executed during the second quarter which become effective in January 2018. Our third quarter ending net debt to annualized adjusted EBITDA was approximately 5.2 times down slightly from 5.3 times as of last quarter. As of September 30, we had a total of approximately $430 million in liquidity in the business made up of availability under our credit facility and cash on hand. Earlier this year we established a $300 million after market shelf equity registration. We continue to view the ATM as an additional efficient means of raising modest amounts of capital to manage our overall leverage and more closely tie our funding requirements with our development spend on a near just-in-time basis. During the third quarter we issued approximately 1 million common shares through our ATM program representing approximately $54 million in net equity proceeds at an average sale price of $53.65 per share. In light of our strong book not billed backlog, we remain comfortable with leverage in the low to mid-five turns range and we'll continue to evaluate any future usage of our ATM program as part of our broader balanced capital allocation strategy. Proceeds from the ATM program during the third quarter we used to fund the previously mentioned acquisitions of land and associated developments. Based on available liquidity and overall leverage targets, our current plan as of today is fully funded through the end of the year. Overall, we remain pleased with the strength of our balance sheet position including the strong balance of fixed to floating rate exposure, no near-term debt maturities, minimal secured debt, and significant available liquidity. As always we will continue to monitor market opportunities to mature our capital structure. Finally on to our 2017 outlook on Slide 13, we are reiterating our previously disclosed guidance for revenue, adjusted EBITDA, and operating FFO. We continue to expect our 2017 revenue growth to be at the lower end of our revenue growth outlook of 11% to 13% or adjusted EBITDA guidance of $203 million to $211 million is also unchanged. Our OFFO guidance is unchanged at $152 million to $158 million which reflects an increase in the tax benefit assumption of approximately $1 million to $6.5 million, offset by higher assumed interest expense associated with our investment activity since the end of the second quarter. However, factoring in the higher assumed tax benefit assumption and capital efficiency reducing our need for equity in the fourth quarter we are raising our OFFO per share guidance by $0.02 at the midpoint to $2.68 to $2.80 per share. Our churn expectation for 2017 remains at our historical target of 5% to 8%; however, as we discussed previously, we continue to expect to end up at the higher end of that range this year due to one off churn that occurred at the beginning of the year. We look forward to providing additional detail about our long-term financial goals and planning at our upcoming Investor Day in Fort Worth on November 13. Overall we remain pleased with our execution in the quarter and will continue to look to allocate capital in a balanced approach to capitalize on the growth opportunities in our pipeline. With that I will turn it back over you Chad.

[Chad Williams:]

Thanks Jeff. We are encouraged by our performance during the third quarter across key financial metrics combined with our strong leasing results. Our opportunity pipeline gives us confidence that our 3C integrated services platform delivered on top of mega scale infrastructure is the right model to deliver truly integrated hybrid solutions. I am proud of the significant enhancements we have made to our platform over the past several months and we remain committed to making the necessary decisions and investments that enables QTS to continue to deliver consistent long-term results for shareholders, customers, and our 800 plus QTS's who I'd like to thank for all of their hard work and dedication to make this possible. I look forward to seeing many of you at the upcoming Investor Day on November 13 in our Fort Worth Texas data center. Presentations during the event will run from 1 to 5 PM Central and we will have a webcast link available on our website for those who are not able to make it in person. If you'd like to attend and have not received a registration invite, please reach out to Stephen Douglas and he can help coordinate. I'd like to thank everyone for joining us on the call today and thank you for your trust and confidence in QTS. Now I'd like to open up the call to questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question will come from Robert Gutman with Guggenheim Securities. Please go ahead.

[Robert Gutman:]

Hi, thanks for taking the question. Can you talk about the expected development yield on the expansion assets and how it compares to existing facilities and further along those lines can you give any color on the mix of products and customer verticals that you're targeting in the respective markets?

[Chad Williams:]

Hey, Rob this Chad. I appreciate the comment. Like we did in Dallas we're excited to get asked for an open with a Phase I development of 4 megawatts. We will typically lean forward with our C1 side of the business. What was nice though on the initial signing, it was more of a typical enterprise customer with typical kind of enterprise pricing in line, but that doesn't mean that we won't be active on the C1 Hyperscale as we've talked about. And we've kind of talked about those yields in the Hyperscale market to be in 9% to an 11%. So it was good to get nine months out 50% prelease of Phase was just a typical enterprise deal which QTS does well, but we'll look forward to continuing and in most cases lean in a little forward on getting C1 activity including Hyperscale into the mega data center campus.

[Jeff Berson:]

Hey Rob. This is Jeff, just to add a little bit to that. So to Chad's point the ability to design these facilities for a multi-tenant basis and to support QTS is a multiple product offering and great evidence of that as Chad said is that first customer being an enterprise customer not Hyperscale, does still support our target that these facilities can drive a 15% fully stabilized return. That return depends on the ultimate mix in verticals. So you’ll see those returns earlier on with typically more Hyperscale and C1 heavy leasing early in that facility at lower return thresholds, but over time because the value of that multi-tenant capability you can bring in the C2, C3 customers those enterprise C1 customers and drive those returns up.

[Robert Gutman:]

Great. Thank you.

[Operator:]

Our next question will come from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thank you, good morning. Surprised us a little bit last night in how swiftly you executed on some of the plans you laid out for us last quarter and you've certainly got something teed up here in terms of the preleasing in Ashburn, but I'm curious about the pipeline as it relates to what all else you have teed up in Northern Virginia as well as Phoenix and Oregon now?

[Chad Williams:]

Hey Jordan, this is Chad. It is our goal not to surprise you just for the record. We like to kind of lay out the plan and the strategy ahead of time. It is exciting, Ashburn is a market that we went into a few years ago and we look forward to expanding that market with our mega scale campus and it's great to get some preleasing done there. I think the way you should think about that market, I mean obviously the C1 Hyperscale market has been largely focused on two or three markets that have driven a lot of demand and uptick and I think from QTS’s standpoint over the last year we've been looking and working and really over the last couple of years on kind of how that works with us and I think we feel extremely excited about the opportunity to add some of those dots with Hillsboro, Phoenix and Ashburn. And you should think about we're going to get modest capital deployed on the rest of the stuff meaning Phoenix and Hillsboro and put those in a preposition because we think that with the visibility we have with having four of the top five CSPs as current clients you can imagine that we've had a pretty educated insightful view of kind of where to go and where people are looking to grow at and we're going to continue those active dialogue and conversations, but we'll look for very good visibility before we kind of move forward. But we will put them in a good position that the timing is not going to be elongated. In fact we kind of think about the timing on those transactions as you need to kind of be within a 12 month window, so we'll do some work on getting the pre-positioning done on the permitting and land and design and get some thoughts pretty far down the road, but we'll look for a pipeline to drive kind of really what we ultimately do.

[Jordan Sadler:]

Okay, and then as it relates to the new development can you give us a little bit of insight in terms of what the cost per megawatt would be for these types of development? You've typically been pretty value oriented in terms of your approach to development, redevelopment and I'm kind of curious where you think we'll shake out in Northern Virginia on the 140 megawatts eventually and then in turn and in the build outs in Phoenix and Hillsboro as well?

[Chad Williams:]

Jordan, I'll let Jim kind of take a little bit of that on from the cost standpoint.

[Jim Reinhart:]

Yes, Jordan, as you know, we've been very excited by our capability with both of our Brownfields. We clearly think that capability allows us to build efficient Greenfields as we view that as even an easier task than what we've done historically. Clearly when we do Brownfields we've talked about the fact we've gotten north of a 10% advantage from the deal we've gotten in mind, land, existing shell and utility which we won't be getting the exact same benefits in these other markets. So therefore, kind of sheer development costs running more in the $8 million to $9 million per megawatt than in our traditional $7 million to $8 million.

[Jeff Berson:]

Jordan if you are listening, as we think about some of these new expansions what we've always focused on is de-risking our entry into new markets and we're doing that in a lot of different ways. One of the ways that you’ve seen us do that in the past is through redevelopment of existing assets where we have a lower cost basis up front which gives us a lower cost to deliver. We've also done that in sale leasebacks, but in shifting to some of these new sites we still view that derisk and as opposed to de-risking from a lower cost up front you're de-risking by having better visibility as Chad said on that customer leasing. So you'll still see that same QTS de-risked approach in terms of how we enter markets.

[Chad Williams:]

Hey Jordan, just one other thing on the Phoenix and Hillsboro, those deals kind of play it out over a pretty long period of time. As you know, we always are active in looking. We try to be opportunistic with our opportunities. I'm very proud of the Phoenix acquisition, that is 85 acres in the center of Phoenix that's the - the site is unparalleled with this access to fiber, location, airport. I mean to have 85 acres in Phoenix in the middle of the city is an amazing thing. In fact that site was rumored previously to be the big site that the state was rounding up for the big stadium and it ultimately went out to Glendale. So that, a lot of things had to go our way over a long period of time that’s it had owned that parcel for decades, but to end up with something that has tremendous power and water and fiber access in the center of Phoenix and have that kind of scale at that cost basis was just amazing accomplishment by the development team and the corporate real estate team. Likewise in Oregon, this was the last large parcel in the "enterprise zone" for Hillsboro where the trans-Atlantic fiber comes in. And if you look at Google Earth, updated Google Earth you will see 92 acres in an industrial Tech area in Hillsboro. And on the back side of property if you squint a little bit you can see the gigantic substation and that actually is a substation and the access to power fiber and that site is tremendous. So we feel in both situations that disappoint and patience around what we buy and how we buy and how we think about it, to Jim's point we don't have exactly the same kind of things, but we've got a lot of really great infrastructure and time and cost advantage that will drive our business. And so we're excited about both those locations. You can tell I'm a little passionate about it but they're good sites, they are the right sites. We were patient and we're excited about it.

[Jordan Sadler:]

Hey Chad, I don’t mean too much time, but how long would you say you guys were looking at these sites, obviously you mentioned these last quarter in terms of some of the plans, but how long did it take to kind of ferret these out?

[Chad Williams:]

I've picked huckleberries for two seasons in Hillsboro is one way to think about that. There's a gigantic berry farm down the street and I've picked 19 tons of berry [indiscernible]. So I've done that a couple years in a row it's been a while. The Phoenix site was a situation where the state owned that parcel for over 50 years and we were in market for over three or four years looking and when that came out we knew exactly what it was and was ready to move on a very quick timeline because it was actually sold through a state auction process and we showed up and were informed and knowledgeable and knew what that deal was and took advantage of it. So it's both those unique, but both we have been looking at for a long time in those markets.

[Jordan Sadler:]

Thanks guys.

[Operator:]

[Operator Instructions] Our next question will come from Jonathan Atkin with RBC Capital Markets. Please go ahead.

[Jonathan Atkin:]

Thank you. So I was interested in the C1 business and any multi site deals apart from the search term that you talked about in your presentation? And then in cross connects I was interested in kind of an update there, how many do you have in place and in which metros are you seeing the most growth? Thanks.

[Dan Bennewitz:]

Yes, Jonathan this Dan Bennewitz. So on the C1 part we talked about the search engine which is multi site. The other wins we had were I will term it more enterprise C1 wins. Chad talked about a large healthcare provider that’s going in Chicago. We had - those are both new - the medical provider is a new logo, new customer acquisition to us, so we're very excited about that. And that I think it supports our view that there's opportunity out there in the Hyperscale space hence our Hyperblock and some of these things you've seen from us there as well as in the C1 enterprise base which is in the, say more than 500 Fortune 1000 companies are looking to outsource and looking to for us data center views. What was the second question then?

[Jonathan Atkin:]

Cross connects and how many you have in place, where are they, in which locations are you seeing meaningful growth?

[Dan Bennewitz:]

Yes, so overall as we stated over 10,000 cross connects. Those have been growing roughly 15%. I think that we see the fact that we're AWS direct connect provider in Chicago, self supports Chicago was a network dense environment. We've also you've seen announcements recently for SDRAM providers, PacketFabric and Megaport that are deploying in our mega data centers to be able to provide additional connectivity options. The sites in terms of where we're seeing the highest cross connect growth are in our mega data centers. So we think in Atlanta Metro, in Suwanee, we mentioned Chicago. We see growth in Dallas. And then obviously we see we're very excited in Richmond with all the activity there we recently announced the internet exchange in Richmond going there. We've got the SDRAM providers going in there. So we continue to see Richmond grow as well, so we're very excited about that and on our Investor Day we’ll go deeper on the discussion on our connectivity strategy.

[Jonathan Atkin:]

Thanks very much.

[Operator:]

Our next question will come from Richard Choe of JPMorgan. Please go ahead.

[Richard Choe:]

Great. Thank you. I just wanted to get a little bit more color, is this the company wanting to expand into these markets to kind of grow the business or is this being driven by your customers and how should we think about your longer term growth rate given the substantial expansion potential?

[Chad Williams:]

Yes, and Richard this is Chad. So you're talking about the announcements around the expansions in land?

[Richard Choe:]

Correct.

[Chad Williams:]

Yes, so I think what you ought to do is you ought to think about that as just - we have when we went public people thought about it in Atlanta in a southeast company at the IPO we had announced and launched Dallas. We then went on to do Chicago. I think the way you ought to think about it is we're just balancing the rich ability for our platform to truly be an integrated national platform. And to do that obviously the C1 hyperscalers need dots on the map. They are focused on two or three and quite frankly we didn't have substantial capability in those markets. So with the insight from our customers and the opportunity for growth that we have with our customer base who wanted us to go different places, we take that knowledge and that capability of our internal customer base and pipeline and we look at how do we fill out the map in the Tier 1 markets to drive our business for the years to come and that's how we thought about it, and that's how we continue to think about putting one of the best national footprints in the country at scale on the map.

[Richard Choe:]

Great. And then one follow up, for the backlog of $57 million is the Ashburn preleasing in this part of that number?

[Chad Williams:]

Yes, sir.

[Richard Choe:]

Thank you.

[Operator:]

Our next question will come from Frank Louthan with Raymond James. Please go ahead.

[Frank Louthan:]

Great, thank you. You mentioned, you’re liking - some of the ATM for some of the financing into your [indiscernible] this year. How should we think about financing for next year? Are you going to need some more capital raise next year? And then the follow up there just strategically you have historically found some other properties as you mentioned, Jeff and your lower cost property to start with and now we see sort of rapid pattern of buying some more traditional land and building data centers. Did something change or sort of your strategy and how you're approaching the market or what you see is the need to do more this more traditional expansion or just give us an idea of how strategically you are thinking about the business if anything has changed. Thanks.

[Chad Williams:]

Yes, Thanks Frank. I'll take the first part. I’ll Jeff take the ATM. I think on the expansion part what I love about QTS is our ability and the executive team is focused on executing what's smart and what's profitable and what's right. And so I love it that we did it early on get some focus that we can only build Greenfield or only do Brownfield or not do any sale leasebacks, we're a real-estate investment trust. We want to do great real-estate transactions that build great value for our shareholders for the years to come. And what we have found and we talked about on this quarterly call is the really the broad ability whether it's the unlocking enterprise outsource with the Fort Worth acquisition at a terrific basis or whether it's the opportunity to go in and buy some infrastructure rich assets. And I just feel like, just like our integrated services platform has the broadest product offering in the industry, I feel that our ability for our development team and the talent that they bring to take on new opportunities, we want that full breadth of opportunities to intersect our strategy moving forward so that we can allocate disciplined capital to the best opportunities to grow space and opportunities for our customers, which is the locational things that we took on this quarter with our land expansions, but at the same time be flexible to still stay true to what we do. And it's all available to us as we move forward uniquely. And Jeff, you can talk about the ATM.

[Jeff Berson:]

Sure, Frank. In terms of the ATM the capital plan, we have consistently and will continue in the future to look to outside funds and sources to continue to grow our business, but importantly when we do that and as we've done it in the past, we've always done that with two mind sets. One is we're putting money out where we're convinced we're going to get the right returns and the right risk profile and that is not going to change in our business. And the second is, although we do continue to put our capital to grow our business we are always mindful of the trade off about investing capital to drive long term growth while still putting up near term returns and still driving profitability for shareholders that have a view towards growth and returns on the near term and mid-term and a long term basis. Part of the detail behind that and the reason we were excited to talk you about some of this new development, but in light of that still maintaining our CapEx guidance this year between $325 million and $375 million for development build and CapEx in the business. So, while expanding our development spend for the Ashburn facility looking at that incremental capital not purely as incremental but also in terms of trade offs and how can we shift some capital so that we can drive that business. And we'll go through our long term model at our Investor Day coming up in a few weeks, but you'll hear the same thing as it relates to CapEx planning for next year which is we do anticipate that CapEx growing in line with our overall revenue growth and with some of this new development we've got maybe you could see an increase in that by order of magnitude plus or minus $50 million. But again, it’s balancing putting out incremental capital, but not over capitalizing the business and making sure that we're stepping up near term performance as well.

[Frank Louthan:]

Okay, great thank you. It’s very helpful.

[Operator:]

Our next question will come from Vincent Chao with Deutsche Bank. Please go ahead.

[Vincent Chao:]

Hey, good morning everyone. Just in terms of the change in focus to sort of being more intentional about the markets you're in as well as targeting new and existing customers, I know we talked about some sales force changes here already this year and you've added some new products with Hyperblock and the Service Delivery Platform, but just curious if you anticipate needing to make any other changes to support that new focus?

[Chad Williams:]

Vin this is Chad. We are always looking at driving the business and obviously there's always changes going on in some form or some fashion. Most of the time it's to support growth. And so from that standpoint as we continue to grow and as we need to add resources to execute the business plan we'll address that, but I feel like we're in good shape now and we have had a few adjustments here and there, but it's really about just more or less adding talent to the organization, adding depth across a number of different teams as we scale and grow the business and the products that support that. And Investor Day will be a good opportunity for us to kind of dive into that a little bit and give you all a little deeper perspective on kind of who and where and what's exciting as we also have a few more people to the team that maybe don't always get out as much to kind of highlight and show some of the things that our teams are working on and the changes that are driving the growth of our business.

[Vincent Chao:]

Okay, yes thanks for that and then just a totally different topic. I mean, just curious what the thinking is, Facebook announced plans to build a fairly large data center there nearby your own facility. It seems like that could be positive about the [indiscernible] demand for you guys, just curious, how you're thinking about that?

[Chad Williams:]

Yes it’s not a surprise to us. Although I think we've been an early leader from Richmond's perspective. We went there in 2010 because we bought an infrastructure rich asset with tremendous potential we fell back in 2010 for fractions of the cost. To validate Richmond and the market is just a continued growth. As Dan talked about we've seen customer concentration and growth there. We have a million square foot facility there, 100 acres of excess ground and you're correct now Facebook is sharing a property line with QTS and we'd like to think that what we've done there and what some of the other data centers in that area have done is kind of highlighted that from a power cost, regulatory, property and also what is now becoming a very fiber rich dense environment is a unique value prop in that market. And so Facebook is already in the mind of clearing land and moving. They're moving really fast. I saw their announcement when they were with the Governor of Virginia there of the day and I think it's just going to add to the concentration and density of massive scale data center and compute and it's not lost on us and we've been talking about this for the last year that the new transatlantic cable is going to be coming through Richmond and it's going to be coming through our property and into wider technology parks. So, the thought that you're going to have some unique fiber that goes around the world is a pretty unique thing from the standpoint of where we started in 2010 when people kind of said, well can you make Richmond work? We’re excited about it. We think the future in Richmond is bright and the opportunity for us to take advantage of scale that we have there a tremendous cost advantage is in front of us.

[Vincent Chao:]

Okay. Thank you.

[Operator:]

Our next question will come from Eric Luebchow with Wells Fargo. Please go ahead.

[Eric Luebchow:]

Hi, thanks for taking the question. Just looking at your churn guidance for the year, you said you'd be at the high end, so I think that would imply some sequential uptick in Q4, just curious if you could give some insight and as to where that's coming from? And then could you maybe give us an update on the channel partner program? You announced earlier in the year that you're expanding, will that be used as part of your expansion into the new markets? Thanks.

[Jeff Berson:]

Hey Eric, this is Jeff. I’m maturing basically we've been consistent over the last few years of churn guidance in the 5% to 8%. If you look back over the last couple of years we've been at the low end given that we did have the onetime churn invent early this year we've told the market we're going to be at the high end. We think that if you look at what we've been doing on a quarterly basis outside of that one time event, we've been consistent with our past performance and we think that will continue into Q4. So nothing in particular that we expect to see that's unusual.

[Dan Bennewitz:]

And Eric, this is Dan. On the channel question, yes we in prior calls we talked about targeting 30% and more of our new bookings via our channel partners, we're on track on that and third quarter we’re in the mid-30s. We continue to think strategically about building our channel program to allow us to be able to [indiscernible] more of the market opportunity and be able to more of a hybrid solution provider with those partners, particularly as we look at our C2, C3 space. So we continue to execute on that. We’re pleased. In the new markets we will be expanding our channel focus to be able to build channel capacity in those markets that’s sort of the ahead of our build schedule to build the opportunity pipeline and to build the demand in those markets.

[Eric Luebchow:]

Great, thank you.

[Operator:]

Our next question will come from Simon Flannery with Morgan Stanley. Please go ahead.

[Simon Flannery:]

Thank you very much. Just continuing on the theme about the expansion markets, you talked about the West Coast on a number of occasions. Is Oregon going to be your West Coast focus or might you still be looking for additional opportunities in say the Silicon Valley area? And as you put this capital to work, how do you think about the Facebook building their own facility versus using third party providers like QTS? What's the philosophy as you talk to these key players about how they think about for these 4 megawatt plus deployments outsourcing that versus building themselves? Thanks.

[Chad Williams:]

Thank you. On the expansion for the West Coast we think Hillsboro becomes the real foundational piece for us on the West Coast absolutely. We are in Silicon Valley and we continue to have a sales force in operation and a campus there that we continue to grow and see uptick. It's more of a retail focused type opportunity a C2, C3 opportunity for us, but we love being there. Obviously do we always – are we always are we always looking for opportunities, yes. But you should think about Hillsborough as just that will be a new substantial location that we'll look forward to building pipeline against and think it will be a very strategic West Coast presence for QTS. So as far as - the other aspect that Phoenix is another aspect of West Coast, so when you think about Hillsboro, our locations in Silicon Valley, we consider Phoenix also a West Coast solution. So Phoenix and Hillsboro I think pretty well solidify the ability for us to talk at scale in those two markets.

[Jeff Berson:]

And then taking on your second question there with regards to our outlook and how customers are evolving, clearly we've seen the enterprise customers go from building their own facilities to now really going to outsource providers almost 100% as they've seen our ability to deliver a high quality product at a much more cost effective that allows them to get the speed and flexibility and economics that they look for. We believe that's also kind of the long term outlook for the Hyperscale. As you'll see even today some of them have already moved to 100% outsourced strategy, others are in 50-50 and there are still some that are focused on building their own facilities. But over time we'll see the same migration to really putting their capital to work for the things that they're best at and putting using ourselves and others to really build what we're the best at.

[Simon Flannery:]

Great, thank you.

[Chad Williams:]

Thank you, Simon.

[Operator:]

Our next question will come from Andrew DeGasperi of Macquarie. Please go ahead.

[Andrew DeGasperi:]

Thanks. So first if we were to take a very long term view, how quickly do you think you can monetize the whole 700,000 square feet in Ashburn, given the absorption rates there and also the low vacancy? And then maybe secondly, can you maybe talk about the government customer that turned off in Q1 is there any update on that and if not would you still need to lease that facility given the new purchase?

[Chad Williams:]

Hi, Andrew this is Chad. We couldn’t be more excited about the opportunity to have new fresh scale space in Ashburn. Keep in mind we're not open for nine months, so but we are - it's fun to be able to sign an enterprise great client with a nine-month opening ramp. I think it just, it shows the Testament that people are focused on getting their location figured out and Ashburn which has run at a very, very low vacancy rate. I know there's space coming online. A large portion of that's preleased. So, we're going to stay calibrated on the way that we deploy capital. We're not going to get too caught up in things. We're going to do probably like we did in Dallas right, we keep doing phases around 4 to 5 megawatts. We work hard at getting them leased. We drive our enterprise business and the one thing that could accelerate some of that is our C1 Hyperscale type initiatives, but those are going to be based on where we see and what's in the pipeline and how we build the visible dependable space. So we're excited to be there and we'll ramp that over time and be balanced in our capital approach. So it won't really have a material impact on ’18 until later in the year, but we'll drive and look forward to be in there and kind of continue to grow the business. As far as the updated government churn, we are active in some dialogues. We committed in the last earnings call that by the end of the year we will make a decision on that and give an update, but obviously as we bring more and more space on, it would take a unique situation for us to find value in leasing space continually. I think the other thing that we are excited about getting done is the largest site that we have right today in Ashburn is our Dulles Vault project which has over $22 million dollars in NOI. So to convert that, our largest lease site to a known site was another great thing. So we want to be owners of real estate. We want to control our destiny long term, but we will look at by the end of the year to kind of give an update if the right scenario works out with customers. You could see us keeping it and if not we're move through and move on so.

[Andrew DeGasperi:]

Great, thank you.

[Operator:]

Our next question will come from Sami Badri with Credit Suisse. Please go ahead.

[Sami Badri:]

Hi, thank you for the question. Regarding the Ashburn market, QTS is one of the multiple co-location providers building out in the market had a large scale. Could you give us some more color on the dynamics in Ashburn and is the demand noticeably higher now than it was in the last 12 months? And then I have a follow up.

[Chad Williams:]

Yes, Sam, this is Chad. We - the Ashburn market has been consistent reliable and on a growth trend. So when you look at the charts they're all up into the right and what we love about it is our balance in product, meaning our C1, C2 and C3 products all show growth. And so, we couldn't be more excited about the opportunity to just be in the market at scale and to be able to look through the funnel of all of our product offerings and just look for a path for growth and we don't - you know that that's continuing to grow. The one thing on Ashburn that it does get a little lumpy at times is when hyperscalers come in and take such enormous amounts of power in one shot it does give the charts a little bit, but we don't really see that changing for the foreseeable future. We think that's still going to be a lumpy part. We always come back to the reason we love our model is we like diversification across our customers and products and driving higher returns by the diversification of our ability to grow without having to do large deals, but certainly with our C1 Hyperscale initiatives and path for growth we'll be able to kind of look at all the buckets of growth from our standpoint, the full market and take advantage of our enterprise business growing and we're looking forward to it.

[Sami Badri:]

Got it. And then also could you give us an idea on what percentage of the book not build balance is projected to commence in Ashburn?

[Dan Bennewitz:]

Yes, right now Sami the - from the book not build the 2.2 megawatt customer that we signed is in that number. That’s the only formal signature we have from the new development. We obviously continue to sell smaller space and power in the Vault facility that we just purchased. So you’ll see some small numbers from that, but that is, as Chad mentioned, is more C2, C3 so it will be smaller in incremental numbers.

[Sami Badri:]

Got it. And then I have one more question regarding the push out of planned development that was supposed to come on in Fort Worth and Santa Clara and Vault in Northern Virginia and that was previously scheduled to come on line in the fourth quarter. Can you elaborate a little more on the dynamics going on here? I know you mentioned capital allocation and the discipline of where the dollars need to go, but are there more prioritized developments, I guess say worth the push out for all the other markets?

[Chad Williams:]

Sure Sami and the answer is we are continuing to put money in and development capital into supporting growth in all of our facilities where we're seeing the right opportunities. We are continuing to put capital into a lot of those markets that you just mentioned. But what we were able to do is figure out how we can push some of that development capital from Q4 into early next year. We still intend to put the money into those assets. We still intend to bring space online and we're continuing to sell them. It's really just a question of as I'd mentioned before every quarter we look at it frankly on more of a weekly and monthly basis. Our development team and our sales team talk about where we should be allocating or reallocating capital to drive the best of returns and the best performance. So it's continuing to move forward, but recognizing the discipline around as I'd mentioned earlier supporting long term growth while still putting up near term performance as well.

[Jim Reinhart:]

Yes, and Sami this is Jim. We’ll talk more about this at Investor Day, but as you know we really have taken a disciplined incremental approach to how we go about allocating and putting out our capital. Obviously batch that capital as best we can to where we see the customer demand, not just in volume, but in the types and mix of products that they need. And so this is just another example where we continue to use that incremental approach to make sure that we're as disciplined as possible in putting capital where it's going to get the best returns.

[Sami Badri:]

Got it. Thank you.

[Operator:]

Ladies and gentlemen this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Chad Williams for any closing remarks.

[Chad Williams:]

Well, thanks again for the participation, interest and trust in QTS and I want to put one more plug in. Please come to our Investor Day, November 13 in our Fort Worth data center. It will be a great opportunity to see a mega scale data center and some terrific executives that I get the privilege to work with every day and the broader QTS team that will be supporting the event. Come learn a little bit more about QTS, our integrated services platform and how we see the strategy and future of QTS which is bright. Thank you very much.

[Operator:]

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