QTS Realty Trust, Inc.
Q4 2014 Earnings Call Transcript

Published: 24 Feb 2015

[Operator:]

Good day, and welcome to the QTS Fourth Quarter 2014 Conference Call. All participants will be in a 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 Geoff Johnson, Senior Analyst and Investor Relations. Please go ahead, sir.

[Geoffrey Johnson:]

Thank you, operator. Hello, everyone, and welcome to QTS’ fourth quarter 2014 conference all. I’m Geoff Johnson, Senior Analyst, Investor Relations at QTS. And I’m joined here today by our presenters; Chad Williams, our Chairman and Chief Executive Officer and Bill Schafer, our Chief Financial Officer. We are also joined by Dan Bennewitz, our Chief Operating Officer, Sales & Marketing; and Jim Reinhart, our Chief Operating Officer of Operations, who will participate in the Q&A. Our earnings release and supplemental financial information are posted in the Investor Relations section of our website at www.qtsdatacenters.com on 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, 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, EBITDA and adjusted EBITDA. We refer you to the 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. As a final matter, you may have seen our announcement regarding the launch of our proposed common stock offering, as I’m sure you can understand since we are in the offering process we cannot comment further on the potential offering during the call. And now, I will turn the call over to Chad.

[Chad Williams:]

Thanks, Geoff. Hello, and welcome to the QTS fourth quarter and year-end 2014 earnings call. We are pleased to be speaking with you today to update you on the continued success at QTS. On Slide 4, the financial performance that we’ll walk you through today is the direct result of our differentiated strategy, which is to provide a fully integrated technology services platform that sits on top of world-class real estate. We are driving strong revenue growth through our fully integrated 3C product mix; C1 customized data center, C2 colocation, and C3 cloud and managed services. We offer this product mix overlaid with our high level of security and compliance capabilities to sophisticated enterprise customers who value QTS’ premium customer service. We believe that these services and customer support will continue to differentiate QTS in the market and drive our continued success. We deliver our product mix on top of world-class real estate that supports the cost efficient delivery of our data center services. This infrastructure has been developed through our proven ability to acquire infrastructure-rich properties at a low basis, which enables our low cost to build metrics of approximately $7 million per megawatt across our portfolio on a fully-stabilized basis. It also supports the significant capacity in our current facilities that gives QTS the ability to more than double our business in our existing powered shell at a very attractive cost. Together, this fully integrated technology services platform and world-class real estate supports our strong growth, return on capital, solid pricing and customer retention metrics. Our result are driven by our engine of our business, C2 colocation, and C3 cloud and managed services, which continue to support our consistent growth rates, while our C1 customized data center product affords us the opportunity to let our customers stay with us and grow, and allows us to selectively participate in large strategic deals when the right opportunities arise. Our predictable C2 colocation leasing activity was seen again during the fourth quarter, while our C1 and C3 ability to accelerate growth during certain quarters was seen in our business over the course of 2014 and lead to accelerated growth during our second and third quarters. Next on Slide 5, with this being the first full year for QTS as a public company after our October 2013 IPO, I thought this would be a good opportunity to reflect further on what the QTS team has achieved during the past year. For the full year 2014 we achieved record revenue of $218 million, up 22% over 2013; NOI of $141 million, up 25% over 2013; adjusted EBITDA of $100 million, up 33% over 2013; operating FFO of $74 million, up 50% over 2013. In addition, the fourth quarter of 2013 was our first quarter as a public company, while continuing to grow our business over the last year we have also increased our adjusted EBITDA margins from 44.8% during the fourth quarter of 2013 to 48.7% in the most recent quarter. And for the full year of 2014 our adjusted EBITDA margin was 45.9% compared to 42.4% in 2013. Our operating platform has supported our adjusted EBITDA growth of 33% year-over-year. From a capital standpoint, we invested approximately $300 million in CapEx during the year, which included approximately $100 million in acquisitions for our New Jersey and Chicago facilities. We achieved an annualized unlevered return on invested capital during the year of 15.5%. This capital plan has resulted in the redevelopment of approximately 180,000 square feet during the year, while maintaining average utilization levels of 88% during the year, based on our raised floor leased as a percentage of built-out raised floor available to lease. This expansion was done in line with our targeted cost to build of under $7 million per megawatt. Our sales pipeline has also demonstrated the growth in our business during the year and is supporting strong visibility for the future. Our strong leasing activity in customer growth was based more than double our booked-not-build backlog since the end of 2013 to $57.8 million. We have also worked hard to expand our business during the year to provide a strong base for future success. Richmond, one of our mega data centers and our newest operating facility at the time of the IPO had 52,000 square feet leased or committed to be leased as of December 2013. At the end of 2014 this number has grown to a 137,000 square feet, 163% increase. I said going into 2014 that it would be year of Richmond and I’m pleased to say that it truly was. I would like to thank the powered by people QTS Richmond team that is driving this great success and is prepared of for continued growth and momentum in our Richmond facility. In addition to our Dallas mega data center at the time of the IPO was just beginning development, as we had just purchased the facility a few months prior. As we exited 2014, we placed the first 28,000 square feet into service which was essentially preleased as it continues to come online and we accelerated the next 31,000 square feet to be placed into lease in service in 2015 based on the strong demand we are seeing in the market. We have also continued to invest in to support the future growth and capacity within our facilities. At the end of 2013, we had 1.8 million square feet of potential raised floor within our powered shelf. We have since grown our raised floor capacity by almost 300,000 square feet and now have close to 2.1 million square feet of potential raised floor. As a result our current developed utilization rate is 44%, supporting our ability to more than double our business within the powered shelf that we own and control today. A large contributor to our expansion was the acquisition of our new data center in Chicago. When developed this will provide approximately 130,000 square feet of raised floor and will support our continued future growth. We have continued to demonstrate that our integrated model is providing the flexibility that enterprise customers require with notable wins including our enterprise outsourcing transaction with Atos and McGraw Hill Financial. In addition, our capacity in our mega data centers enables us to bring on large strategic C1 enterprise customers at strong return on invested capital returns, while maintaining the space and capacity to continue to support our core C2 and C3 products. This was clear with one of the largest deals of 2014, the 19 megawatt contracts at our Richmond and Atlanta-Metro facilities that I talked about last quarter. Our ability to meet enterprise customers’ needs was also enhanced during the year with the rollout of our critical facilities service. We believe CFM will accelerate our ability to work with enterprise customers who require a provider to support their critical data center needs with flexible product offerings. Finally, we continue to strengthen our C3 cloud and managed service business, which has grown 23% from Q4 of 2013 to Q4 of 2014. This growth is a result of the multiple new products that we introduced during the year, including our enterprise and federal cloud offerings, and Disaster Recovery as a Service, just to name a few. Our integrated technology services platform would not be as effective without as effective without a robust C3 product capability. We will continue to invest and grow this critical component of our product offering and we see customers continuing to reward us for our ability to work with them as they transition their technology requirements. As a further validation of the QTS’s 3C product offering, in December we received a full FedRAMP compliance. FedRAMP is a broad federal program, lays out the rigorous standards for security assessment, authorization, and continuous monitoring for cloud products used by federal agencies. This is something we’ve been working on for some time, and represents a continued focus on providing industry-leading compliance and security capabilities. As seen on the federal Chief Information Officer’s website, QTS is one of only a handful of cloud providers that has achieved this significant milestone. While FedRAMP will support our federal business, we also believe it provides strong credibility to our enterprise customers who are increasingly focused on compliance and security in their data center operations. We believe that QTS’s compliance and security strength will be a critical factor in unlocking enterprise outsourcing opportunities in the future. It has been an extremely busy year at QTS as we continue to execute on the vision that we laid out to the market when we became a public company. We appreciate the confidence and trust we have received from our customers, employees, and investors who have enabled this success. We believe that we are powered by our people, with approximately 500 employees, which believe is a further differentiating factor. Moving onto fourth quarter results on Slide 6, we’ve had number of wins in the quarter across our national footprint that continues support the future financial performance. We continue to strengthen our partnership with Atos. As you recall in July, we announced that QTS entered into an agreement with Atos to provide C1 and CFM services at our New Jersey data center in support of the McGraw-Hill Financial. In addition, we announced the launching of a new strategic relationship between QTS and Atos, in which QTS will act as Atos’s North American data center partner. In this partnership, QTS will be supporting Atos’s service offering with QTS data center ownership, and facility management options for Atos and its customers. During the fourth quarter, in continuation of this relationship, Atos expanded its business with QTS, signing a contract for C2 and C3 services at our mega data center in Dallas. As we’ve been working closely with Atos at the New Jersey facility, Atos recognizes the premium customer experience and the world-class compliance and security that our facilities offer. We believe they also recognize the flexibility that our size scale across our portfolio brings to their customers. We are pleased to recognize Atos in our list of multi- facility customers, and look forward to continuing to grow with them. Next, we are continuing momentum in Richmond mega data center with a new healthcare customer. This customer, a healthcare provider, purchased multiple QTS cloud and managed service offerings under a 36 month term during the quarter. They selected QTS and our Richmond data center for a number of reasons. As a critical healthcare provider, they require the highest level of security and compliance, and we believe they recognize the value of our highly secure and hardened Richmond facility. They also recognize the flexibility and customization that QTS provides to meet their complex requirements and the premium customer service to meet all their expectations. Also, we recently signed an expansion and lease at our Atlanta- Metro mega data center with an insurance company provider who started working with QTS during the third quarter. This customer recently started at QTS with our C2 offering in a Richmond data center, after working with us the last few months, this customer has now expanded their services to include our new Disaster Recovery as a Service capability in Atlanta-Metro. This expansion is a five year agreement which will increase their MRR by 33% over their initial deployment and we believe was based on the positive experience with QTS premium customer service. We are excited this customer chose to grow with QTS, and value our broad product mix and national footprint. Now onto some details for Q4 and 2014 leasing and pricing, on Slide 7, our leasing activity for the engine of our business, C2 and C3, was very strong, with new and modified leases representing $10.5 million up over 10% from our prior four quarter average. At the same time close any significant C1 opportunities during the quarter. We proactively revised on customer’s contract to better balance their space and power needs. With this customer we modified their agreement where they returned 58,000 square feet of raised in our Atlanta-Metro data center and we received a net one-time payment of approximately $700,000 to allow this modification. We expect to re-lease this space at a higher rate than we had been leasing it, and with minimal reconfiguration costs. Our incremental net leasing activity for Q4, net of downgrades, was $4.1 million. The strength of our 3C product offering is that we continue to grow our business quarter after quarter based on consistency to leasing. This growth can be accelerated at times with strategic C1 and larger C3 opportunities. Our 2014 full year performance demonstrates this strength. For the year we signed a record $58 million of incremental annualized rent, net of downgrades, a 34% increase over 2013. This significant growth was based on the consistent C2 activity each quarter, with strong C1 driving record activity in Q2 and Q3, and strong C3 driving accelerated activity in Q1. You will continue to see volatility in our net leasing activity quarter-to-quarter based on selective strategic opportunities, while we expect a consistent C2 that continue to drive a stable base of growth. In addition to our continued leasing activity, visibility on future growth remains strong, based on our high booked-not-billed backlog of $57.8 million as of the end of fourth quarter. As discussed last quarter this signed and committed backlog supports solid growth de-risking 2015 and driving growth into 2016. Now on to pricing trends, as detailed on Slide 8, in addition to our record leasing activity in 2014, we continue to see evidence that our differentiated strategy supports pricing stability. Fourth quarter pricing from new and modified leases were significantly above our prior four quarter average based on the level of C2 and C3 activity relative to C1. On a consolidated basis you will see variability in our price per square foot quarter-over-quarter depending on the product mix. Pricing for our C2 and C3 new and modified leases averaged $1,025 per square foot for the quarter in line with our prior four quarter average. Regarding renewals on a like-for-like basis where customers renewed contracts without change in square feet, we experienced renewal rates for the fourth quarter 2014 of 3.4% above the pre-renewal pricing rates. As we have previously said, this number will fluctuate by customers changing their product mix with C3 services during different periods. While we do experience volatility in renewal rates, the 3.4% increase in fourth quarter is consistent with our past experience of renewal pricing increases in low to mid-single digits. Leasing commencements during the quarter were line with our trailing prior four quarter average. Pricing on C1 commencements was slightly above our average. Pricing for our C2 and C3 was below our average, as a result of a larger sized C2 agreement that commenced in the quarter. We believe that when adjusting the product mix, deal size, and market, our current leasing and commencements and renewal rates are consistent with our trailing results, and continue to demonstrate the stability and positive trends driven by our 3C business model. In summary, QTS continues to build on the momentum that has been taking place throughout 2014. Our growth and profitability trends along with the capacity in our facilities are continuing to demonstrate the strength of our business model. In addition, our steady C2 leasing, ability to accelerate growth with strategic C1 and continued C3 opportunities, pricing stability and strong backlog gives us continued confidence that our profitable growth will continue. Now, I will ask Bill Schafer to discuss our financial performance, capital plan, and balance sheet. With that, over to you, Bill.

[William Schafer:]

Thanks, Chad. And I would like to say hello to everyone as well. For the fourth quarter results, as seen on Slide 10, we have continued to demonstrate strong and accelerating growth across all of our key financial metrics on a sequential and year-over-year basis. Our continued momentum can also be seen at the market level, as all of our major markets have continued to experience consistent NOI growth. Year-over-year, NOI increased 19% in the Atlanta market, 51% in Richmond, and 12% in our California market. As outlined on Slide 11, our business has also continued to benefit from increasing margins due to our existing operating platform. NOI and adjusted EBITDA margins both increased in the quarter when compared to Q3. This was driven in part by our strong top line growth, as well as some seasonality. In the fourth quarter, NOI typically benefits from lower utility costs when compared to the third quarter. As a reminder, we experienced seasonality with our utility costs in the third quarter, as we experienced higher cooling expenses. Also, our fourth quarter benefited from the ramp with our CFM agreement in our New Jersey facility. This facility is now fully ramped. These NOI benefits also flow down to adjusted EBITDA margins, which increased during the fourth quarter by 370 basis points. In addition, during the fourth quarter, we typically see reduced G&A expenses based on significantly lowered payroll taxes and certain professional fees than earlier in the year. We would expect these items to return to higher levels in the first quarter of 2015. In addition, we have increased our marketing spend for 2015, especially in the first-half of the year, which will also impact G&A expense. As a result of these factors, we typically experience first quarter NOI adjusted EBITDA and margins to be flat to down from the prior-year fourth quarter. We would anticipate the same trend to occur in our first quarter of 2015, relative to our fourth quarter 2014. As Chad mentioned earlier, we did receive a one-time payment of $700,000 in Q4 from a customer that restructured their arrangement with us. This amount was more than offset by certain product investments, severance costs, and certain professional costs that occurred in the fourth quarter. Although we continue to be pleased with our ability to improve margins as our business scales, we will look to find a balance between increasing margins and continuing to invest in the product and service side of our business. As we have said previously, we continue to increase our investment in our C3 products. In addition to the upfront investment, these services tend to have lower margins offset by significantly enhanced return on capital. Assuming a stable product mix, we continue to support our target EBITDA margins approaching 50% in the next few years. On slide 12, our backlog of annualized booked-not-billed revenue from signed, but not yet commenced leases was $57.8 million of annualized revenue as of December 31, 2014. We expect leases representing approximately $21.7 million of annualized MRR to commence in 2015, which will contribute an additional $12.4 million of MRR in 2015; leases representing approximately $21.1 million of annualized MRR to commence in 2016, which will contribute approximately $15.3 million of MRR in 2016, and the balance of $14.9 million of annualized MRR to commence in 2017 and beyond. This high-level backlog continues to give us great comfort on the growth embedded in the business. I do want to note that we expect this booked-not-billed backlog to drop in the future as we continue to deliver on our lease commitments. Our near-historic booked-not-billed backlog prior to our larger C1 leases in Q2 and Q3 were less than half of the current level. And we expect to trend back towards that level, as we work through our current large C1 backlog over the next year. The stability of our customer base also was evident in our continued low churn for the quarter. Rent churn is the MRR impact of customers completely leaving the QTS platform in a given period, compared to the total MRR at the beginning of the period. Churn for the fourth quarter was 1.3%, bringing churn for the total year to 6.2%, which was in line with our expected business plan of 5% to 8%. Turning to development. As planned, we did not have any space come online in the quarter. As we discussed on the third quarter call, we had accelerated development for Q3 and Q4, and as a result, we had 83,000 square feet come online in the third quarter. I will discuss our 2015 development plans in a bit. Our utilization increased in the quarter to 85%. This represents the occupancy rate as of December 31, and does not include the booked-not-billed backlog. As of the end of the year, our total raised floor built out was 927,000 square feet, which is only 44% of the total powered shell raised floor capacity of 2.1 million square feet in our existing facilities. We have the capacity to more than double our existing raised floor within our existing footprint. Also keep in mind that we own a significant amount of land adjacent to all of our mega data centers as well. This capacity provides us with comfort that we control our future development at a known lower cost and lower risk path to support our future growth. On Slide 13, CapEx spend is based on market demand, successful leasing, and our flexible, capital efficient model, which drives strong returns. We will continue to develop in small incremental space in response to customer backlog and real-time demand. Real estate related capital expenditures incurred during the fourth quarter were approximately $61 million, and $200 million for the full-year 2014, with an additional $90 million for the acquisitions of our Chicago and New Jersey facilities. A breakdown of those capital expenditures is summarized in the supplemental information provided with our earnings release. Our continued growth and capital efficiency drove an average annualized return on invested capital for the fourth quarter of 15.7% for a business that still has tremendous capacity available to drive incrementally higher returns. This continues to meet our target level of 15%, but will vary based on the timing of new development projects, acquisitions, and other expansion opportunities. Moving to Slide 14, I will review our resulting balance sheet position. In the quarter, we amended our unsecured credit facility to increase the commitments by $90 million, extend the maturity and reduce the interest rates. The unsecured credit facility increased to a total of $650 million, up from $560 million. This includes a $100 million term loan and $550 million revolver. The facility also has an accordion feature that gives us the ability to increase the size by up to $200 million in the event we obtained additional commitments. The term loan has a maturity of December 2019, while the revolver has a maturity of December 2018, with a one-year extension option. Finally, we lowered the interest rate spreads under the unsecured credit facility term loan and revolver by 45 basis points and 40 basis points, respectively. This amendment to our unsecured credit facility brought us extended maturities, increased liquidity, and added flexibility at a lower cost. In connection with this modification, we incurred a $291,000 non-cash charge in Q4. As of December 31, 2014, our total debt outstanding was $637 million, including capital leases. Our debt to fourth quarter annualized adjusted EBITDA was approximately 5.5 times. As we have stated previously, our long-term target on a stabilized basis is 5 times. Our near-record booked-not-billed provides us comfort and support of our current leverage level. We would also expect this leverage to come down somewhat if we were to complete an equity raise, such as the transaction we announced earlier. Additionally, we believe we have significant liquidity capacity in our balance sheet. As of December 31, we had a total of over $370 million in liquidity in the business, made up of availability under our credit facilities and cash. This includes the recent amendment I discussed a minute ago. We remain pleased with the strength of our balance sheet, including attractive interest rates, no near-term debt maturities, and our available liquidity. Of course, we would also expect to have additional liquidity following any equity raise, such as the transaction we announced earlier today. Moving to Slide 15. For 2015, we anticipate capital expenditures of $225 million to $275 million. This is subject to change during the year based on our ability to continuously monitor areas of high return demand and shift our spending plan to maximize the return of our invested capital during the year. This spend represents space coming online during 2015 in core markets, including Atlanta and Richmond; as well as accelerated development to meet expected demand in newer facilities, including Dallas and investment in Chicago, which is slated to come on line during 2016. Currently, we anticipate bringing online 97,000 square feet in 2015. This includes 41,000 square feet in Richmond, which will increase the raised floor developed by 43%. We will also bring 31,000 square feet online in our mega data center in Dallas, which will essentially double the available raised floor. A portion of the 31,000 square feet will be available in the first quarter. Finally, we’re bringing online 25,000 square in our Atlanta-Metro data center. The total cost to bring all of this space online is estimated to be approximately $146 million, of which is $75 million has been spent, and $71 million will be spent in 2015. After this development is complete, we will still have the ability to double our raised floor in the facilities we operate today. Next on Slide 16. For 2015 with respect to financial guidance, we expect 2015 operating FFO to be between $84.5 million and $88.5 million, or between $2.24 and $2.34 fully diluted per share and adjusted EBITDA to be between $115 million and $123 million. I want to be very clear that these numbers do not reflect the impact of the equity transaction announced earlier today. We expect to update these numbers in due course to reflect the impact of that transaction. In addition to our 2015 guidance, we have a financial model that continues to anticipate annual revenue growth in the mid- to high-teens over the next few years. We expect this revenue growth to be accelerated at the EBITDA line, based on operating leverage, which we believe will result in adjusted EBITDA margins approaching 50% in the next few years. Our model also anticipates rental churn of 5% to 8% per year. Also, keep in mind, due to our anticipated growth rates which occur sequentially over quarters, along with the booked-not-billed schedule which is significantly weighted towards the second-half of 2015. We anticipate a higher percentage of our annual revenue will occur in the second-half of the year as compared to the first half. Finally, we have declared a dividend of $0.32 per share for the first quarter of 2015. On an annualized basis, this would be $1.28 per share, or an increase of 10%, which compares to a rate of $0.29 per quarter for 2014, or $1.16 on an annualized basis. We plan to maintain this rate through 2015 unless circumstances change materially. Overall, we remain pleased with the financial success that we are achieving and the growth in our core business. We are excited about the incremental profitable growth that is supported by our significant backlog. And finally, we are pleased with our balance sheet and liquidity supporting strong expectations for future performance. With that, I will turn it back to you, Chad.

[Chad Williams:]

Thanks, Bill. Looking back over 2014, our first full-year as a public company, we are pleased with the strong performance and momentum that we experienced. We are also excited with the capital investments that we’ve made supporting our strong returns and the pipeline we’ve built to enable the success to continue in 2015 and beyond. We are driven by our fully integrated 3C product platform that differentiates QTS in the market. Our C2and C3 products remain the engine that drives the business, while C1 affords us the opportunity for accelerated growth. This mix of services has continued to support profitable growth and predictable results. In addition, our tremendous capacity will be ability to grow our raised floor footprint from 927,000 to 2.1 million square feet within our currently owned and controlled power shell enables us to deliver these products at a known cost with lower risk and supports our confidence in delivering our targeted 15% plus return on invested capital fully stabilized over our national footprint. We believe strongly that this is the right way to continue to build our business, delivering strong growth in a profitable, lower risk, and capital-efficient manner. I want to thank our customers and shareholders for their continued trust and confidence in QTS. In addition, we at QTS are powered by our people, and I want to continue to recognize them for their significant accomplishments that made 2014 possible delivering premium customer service to our 800 plus customers and continuing to differentiate QTS in the market. Now, I would like to open up the call to questions. Operator?

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Simon Flannery of Morgan Stanley. Please go ahead, sir.

[Simon Flannery:]

Thank you very much. Good morning. Thanks for all the detail. Chad, on CapEx you’ve got a pretty wide range there, a $50 million spread. Can you just talk about what could get you to the low end of that range, the high end, how much visibility do you have there? And then the Princeton facility, I know that came with some extra potential space. Can you just talk about how you are thinking about that now? Is that something that you are planning to develop and lease out, or is that more there for the long-term? And given what McGraw-Hill has done, have you seen interest from other corporates in pursuing some similar transactions down the road? Thank you.

[Chad Williams:]

Great, Simon, I’m glad to have you on the call, and thanks for the questions. I’ll take the Princeton, New Jersey, facility. We are extremely excited. Of course it is a 200-acre campus. It’s sitting on about 600,000 square feet of facilities, of which, about 175,000 square feet is essentially a shell facility that enables us the opportunity to be opportunistic. We’re continuing to provide great service to McGraw-Hill Financial, as they continue to utilize the facility and transition and grow and our partner Atos. And we don’t have any immediate plans in Princeton, but I will tell you that we think it’s a strategic location. We think we have a tremendous, infrastructure-rich asset with opportunity to grow that infrastructure over time. We think the location being outside New Jersey is unique with people’s demand on trying to be close, but not too close. We think the power infrastructure, the 47-acre solar field, which is one of the largest in North America, just provides long-term value and opportunity that’s a unique to QTS in that. And we thank Atos, our North American partner, who continues to drive business, we’ll have opportunities to present there. And we’ll take a look at those on a case-by-case, and scenario. So we’re excited about the opportunity. On the capital range $225 million to $275 million on the guidance. We continue to want to be a predictable and reliable, but we also are very cautious about our capital allocation. We - I get to chair the Capital Committee, we meet every month and, in some cases, twice a month, just trying to take the feedback from our sales organization and our internal folks and make sure that we have immediate product available for the engine of our business, which is C2 and C3, and continue to make sure we have product and inventory in the right markets. And I think when you talk about capital and spend, the opportunity we have with our footprint and our mega data centers is that we can really accelerate growth when the right opportunity, the strategic opportunity, comes along. And so when we think about capital allocation - and a large portion of our capital for 2015 is just going to billed but booked, but not filling backlog of $57 million. So when you start with almost a build-to-suit mentality of de-risking opportunity in growth by having signed contracts, that presents a unique opportunity. And we’ll continue to deliver our 15%-plus returns. And we’ll try to be sensitive about the capital, and make sure that we don’t want a bunch of inventory sitting around, absent client. We want to try to match that bridge between capital efficiency and delivery, and the on-boarding of new space and power and revenue to be as close to perfect as we can. And so we’ll continue to focus on that. I don’t know if Bill or Geoff has anything to add to the capital allocation question.

[William Schafer:]

No, as Chad said, we indicated in our information that we have about $140 million associated - of capital spend an associated with our booked-not-billed backlog. The majority of that will be spent in 2015. There will be a portion of that, a much smaller portion, that will go into 2016. Again, a lot of the - outside of that, a lot of the capital spend is discretionary. And to Chad’s point, we do meet monthly and discuss the allocation of capital to make the most appropriate decisions based on the opportunities that are presenting themselves.

[Geoffrey Johnson:]

Yes. I think I just add to that that capital spend is - that capital spend supporting 2015. But if you think about some of the booked-not-billed that’s back-end-loaded in 2015 and 2016, and you think about bringing Chicago online, we’re also excited about putting that capital out to drive accelerated growth in the future, beyond 2015.

[Simon Flannery:]

Okay. So the midpoint is a fair place to go initially, is it? Is that there’s no particular guidance to the high end or the low end, at this point?

[Geoffrey Johnson:]

I’d say we’re comfortable with the range. And as Bill had said earlier, as we continue to see what happens in the business as it relates to continued opportunities to meet customer demand, we will figure out where we go within that range.

[Simon Flannery:]

Thank you.

[Chad Williams:]

Thank you, Simon.

[Operator:]

Our next question comes from Vincent Chao of Deutsche Bank. Please go ahead sir.

[Vincent Chao:]

All right. Hey, good morning everyone. Just wanted to follow up on the CapEx question, Bill, maybe a little bit more. Just in terms of the other capitalized cost and some of the maintenance CapEx spend, which I think is included in the $225 million to $275 million, just curious if we should be thinking about those line items similarly to 2014 in 2015, as we sort of dissect that total $225 million to $275 million?

[William Schafer:]

Yes. I don’t see a significant change - as we continue to grow there will be, again, probably a little bit proportionate increase in the maintenance CapEx, but nothing out of the ordinary.

[Vincent Chao:]

Okay, great. Thanks. And then just going back to the revenue guidance, so up mid-to-high double-digits. That was the same as at the start of 2014. Obviously you were able to do a little bit more than that here in 2014. Just curious how you are feeling about that range as we head into 2015. I mean do you feel like there’s a reasonable chance you could exceed that? Or is it more dependent on booking some large C1 tenants that you were able to do in 2014 that probably are not included in your outlook today?

[Geoffrey Johnson:]

Yes. Hey, Vince, it’s Geoff. I tell you that we continue to be comfortable with the guidance that we’ve laid out of mid-to-high teens. And I think part of our comfort is driven off the visibility on booked-not-billed, and part of our comfort is driven off of the predictability of the C2 business that has some nice stability to it. And then where we end up within that range is going to be based on a number of different factors. So you’re right; having opportunities for strategic C1 that can accelerate growth was something we were excited about last year. We wouldn’t be against that in the right circumstances, but only in the right circumstances.

[Vincent Chao:]

Okay. And then just the last question for me. Just in terms of Chicago, obviously you’re spending some CapEx here this year to get that ready for some 2016 deliveries. As we think about the phased rollout of that, should we be thinking of a 31,000-ish or 30,000 square foot-ish build initially? Is that a fair way to think about it?

[Chad Williams:]

Yes, Vince. This is Chad. We are excited about Chicago. To think that Chicago has been one of the dots that we’ve been trying to put on the map for some time but, of course, we approach the asset and allocation of capital with a little different approach than some. And our infrastructure-rich approach, it took us a little while to get there. But to show up and be just a couple miles south of downtown Chicago financial district, and have probably what will be one of the most premier, new, industry-leading facilities in that market for some time is just really exciting. And you should think about the Chicago development and build out very similar to what we showed you in Dallas, which was a 25,000 to 30,000 square kind of Phase I. What was great about Dallas is we felt comfortable that we could get some pre-leasing done. I’m not sure we thought we were going to lease completely out of Phase I before we opened, but that was a great result. And I think you should think about it the same way. We’re going to bring up 25,000 to 30,000 feet. We’ll get working with the sales and marketing team way ahead of opening to make sure that people know that we’re open for business in Chicago. And I think it’s been one of the tightest markets in the country for C2 colocation, retail, and even strategic C1 that you don’t have to drive 30 miles north of town. So we’re excited to be right in the center of Chicago, and right on the fiber and infrastructure that I think people really pay a lot of attention to in that Chicago market. And it’s a great thing, and we’ll look forward to open it in 2016.

[Vincent Chao:]

Okay. Thanks a lot, guys.

[Operator:]

Our next question comes from Stephen Douglas of Bank of America. Please go ahead, sir.

[Stephen Douglas:]

Hey, thanks for taking my questions. Bill, maybe one for you. You talked about, kind of in terms of the revenue, it being more of a back-end-weighted year. Just wondering if you can provide a little more granularity in terms of kind of percentage weighting, first-half versus second-half there. And then second, just in terms of the dividend growth, just interested in your thoughts kind of around how you got to that 10% growth number in the context of the kind of FFO and EBITDA guidance you got out there. Thanks.

[William Schafer:]

Sure, Stephen, appreciate the question. Yes, with the booked-not-billed, as we indicate we have I think it’s close to $22 million on an annualized basis as coming online. That number will be probably less than $1.5 million in Q1, probably in the $2.5 million type thing in Q2, and really pretty much ramps Q3 and Q4. So it really is back-end-weighted. And like I said, there’s a few other things. We have decided to increase our marketing spend this year. So and again, that will be front-end-loaded a bit, so that will have some additional expenses. And again, the timing of some of our G&A expenses are much higher in the first quarter, certainly relative to the fourth quarter. So, again, we will see a ramp going forward. With regard to the dividend, again we want to look to - with all the capital we can reinvest within our facilities, it’s important for us to retain as much internally generated capital as possible. And basically the dividend increase is kind of reflective of the overall FFO increase. And again, it’s something that we want to basically maintain a dividend policy that’s going to approximate what our taxable income from a REIT perspective is.

[Geoffrey Johnson:]

And Stephen, this is Geoff. I would just add as you think about sort of the timing of the ramp for next year, and we do typically see from Q4 to Q1 - we saw this last year, and we’re expecting to see it again this year - that we have some cost accruals that typically lighten up in Q4, and then kick back in Q1. And because utility costs tend to be lower in Q4 as well, it’s not uncommon to see the EBITDA and FFO in the financials actually flat or down from Q4 to Q1. As we reflected in the call, just recently we do expect that to be down a little bit in Q1, that’s normal seasonality, and shouldn’t be interpreted as a reflection of any change in terms of our support for guidance, in terms of the back-end ramp.

[Stephen Douglas:]

That’s helpful. Thanks, guys.

[Chad Williams:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead sir.

[Jordan Sadler:]

Good morning, guys. First question, on the balance sheet. For the year, Bill, you made it pretty clear that the transaction announced this morning is not embedded in the guidance. What is embedded in the guidance, in terms of capital structure or financing for the year?

[William Schafer:]

I mean, we did not anticipate any acquisitions or any new financings, or anything along those lines, as reflected in the guidance.

[Geoffrey Johnson:]

It’s basically - Jordan, it’s basically similar when we use our revolver capacity, and we use our cash generation to continue to grow the business from internal financing, debt, and revolver.

[Jordan Sadler:]

It assumes basically that the CapEx spending is funded off of the revolver and from internal cash?

[William Schafer:]

That’s correct.

[Jordan Sadler:]

Okay. And in terms of the booked-not-billed pipeline, you guys gave that guidance, but I guess I’m thinking about the FFO and the $0.55 in the quarter. If I annualize that - and I know there were some puts and takes, so it’s not the best number, per se, and there’s some things going on in the other quarters - but just humor me for a second. Annualizing it, you are at $2.20 a share. The booked-not-billed contribution for next year is $12.4 million or so, which is a pretty big number relative to your share count, call it $0.30. Can you sort of bridge me the difference between the $2.29 at the midpoint and maybe the $2.50 or so I’m coming up with? I know there’s got to be some flow through number there in that $12.4 million, but just humor me for a minute.

[William Schafer:]

Sure. Well, first of all, you’re right. I think taking the Q4 and annualizing it is one of the issues there. The second thing is we talk about the booked-not-billed. And just understand, there will be operating expenses that go against those revenues that come online. There will be additional utility costs and things like that, so it’s not like it’s $12.4 million necessarily completely falls to the bottom line. And again, we are going to continue to increase, like I said, our marketing spend a bit. We’re going to continue to invest in our products. So we’ll see some incremental cost associated with that.

[Jordan Sadler:]

Okay. So, do you know the flow-through number of the $12.4 million, offhand?

[William Schafer:]

Again, when we kind of run our models, it’s run on basically the overall portfolio, which takes that into account. Maybe the best guidance I can look at is looking at our NOI margins, which are probably operating in the mid-60 range.

[Geoffrey Johnson:]

But Jordan, again, I think the key factor in your math is recognizing that Q4 tends to be an unusually high quarter, and then just back down in Q1, and re-ramps back up.

[Jordan Sadler:]

Okay, that’s fair. And then lastly, I’m just trying to get a sense of the capacity number overall. I know you guys are 85% occupied on the operating portfolio, and are bringing on 97,000 square feet this quarter. But do you know - can you give us the square footage associated with the booked-not-billed? Or, in other words, maybe give us a percent least of the 1.07 million square footage of completed, and soon-to-be-completed square footage?

[William Schafer:]

That’s not a number that I have.

[Chad Williams:]

Yes. So Jordan, right now at the - I guess the capacity of 927,000 square feet of operating data center space, bringing on another 97,000 gets you to the 1.024 million of operational square footage that will be available Q4 2015. I think we’ve thought about the booked-not-billing reporting at $57.8 million of booked-but-not-billing more from a capital perspective, about $141 million of capital to support that. I’m not sure the square footage on that. We can certainly follow up with you on. But I think we’re going to continue to focus on running the platform in the mid-to-high 80s%, as close to 90% as we can, and continue to be very focused that we love the aspect that we are 44% utilized from a power shell capacity, and the ability for us to incrementally allocate capital in markets, to always keep C2 product available, but also be able to do strategic C1 remains a growth lever that this company will enjoy for some time.

[Jordan Sadler:]

That’s helpful, Chad. Last one quickly, you guys. The sale-leaseback completed during the year, it looks like it’s bearing fruit with the incremental signings this quarter, so that’s interesting. Any sense of the appetite for future sale-leaseback opportunities? There are purportedly a couple of portfolios out there from some of the larger telecoms [indiscernible] level.

[Chad Williams:]

Yes. I wouldn’t put a lot around our interest in buying Tier I and II type facilities without a lot of efficiency and strategic capability. I think what you should continue to think about us, as far as being opportunistic on infrastructure-rich assets that are in strategic new cities that give us size and capability to advance our 3C products on a competitive landscape, and unique. And then going back to the New Jersey transaction, which was a negotiated deal because of our ability to unlock security compliance and operations meaning that the partners, Atos and McGraw-Hill Financial in QTS came together and did out very solution based - it’s not hardly fair to call it a sale-leaseback, because it was so much more than that. It was a great partnership kickoff with Atos that continues, to your point, to provide fruits of opportunity. But it also was strategic, in the sense that we were able to finally unlock some enterprise outsourcing in a double-digit type return going in, with opportunity that further enhances our ability to get to a 15%-plus return over time, and really added a strategic partner that I think will pay many dividends down the road with Atos and McGraw-Hill. So we’re excited, I think that I’m sure people took notice of that from an enterprise perspective. And I think that the best discipline around new capital allocation is to have an abundant amount within your portfolio that you own and control and know, which puts a very high barrier on capital going outside of that, just because we’re operating these data centers, we know what it costs to build them, and we’ve got great visibility and leasing momentum. So we’ll continue to just be thoughtful about the business and the capital allocation as we forward.

[Jordan Sadler:]

Thanks, guys. I’m showing no further questions. I’d like to turn the conference back over to management for any closing remarks.

[Chad Williams:]

Well, again, thanks for being patient and listening this morning. I know we put a lot out into the market this morning. I want to personally thank all of the supporters, the shareholders, the analysts that support the calls. I know it, not easy to reinvent schedules quickly, but we appreciate your diligence and your diving in on a day that we are extremely excited about the opportunity over the next couple days. We’re going to continue to talk about QTS, as we often do, and proud to do it, and just want to thank everybody for a terrific year in 2014 within the QTS family. And we’ll just look forward to executing a great 2015. Thanks again for your support. Thanks for a great year in 2014, and we’ll see you on the road. Thanks a lot.

[Operator:]

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