QTS Realty Trust, Inc.
Q1 2015 Earnings Call Transcript

Published: 28 Apr 2015

[Operator:]

Good morning, and welcome to the QTS First Quarter 2015 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please also note, this event is being recorded. I would now like to turn the conference over to Mr. Jeff Berson, Chief Investment Officer and Head of Investor Relations. Please go ahead, sir.

[Jeff Berson:]

Thank you, Rocco. Hello everyone, and welcome to QTS's first quarter 2015 conference call. I'm Jeff Berson, Chief Investment Officer and Head of 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're also joined by Dan Bennewitz, our Chief Operating Officer, Sales & Marketing and Jim Reinhart, our Chief Operating Officer of Operations, 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.qtsdatacenters.com on the Investors tab. We also provided Slides and made them available with the webcast 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, 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'll turn the call over to Chad.

[Chad Williams:]

Thanks Jeff. Hello and welcome to QTS's first quarter 2015 earnings call. We are pleased to be speaking with you today and update you on our progress as we enter 2015. In addition, I would like to welcome all the new shareholders that participated in our equity follow-on in February. We are excited to have you on the call today and appreciate your support and confidence in QTS. Our continued success is a direct result of QTS's differentiated strategy, which is to provide a fully integrated technology services platform that sits on top of world class real-estate as seen on Slide 4. We continue to drive strong revenue growth through our fully integrated 3C product mix, C1 customized datacenter, C2 colocation and C3 cloud and managed services. We offer this product mix overlaid with our high level of security and compliance capability to sophisticated enterprise customers who value QTS as 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 a proven ability to acquire infrastructure rich properties at a low basis, which enables us to deliver our below market cost to build metrics, 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, derisking our growth 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 results are driven by the 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 and grow with us, and allows us to selectively participate in large strategic deals with the right opportunities arise. Moving on to the results on Slide 5 for the first quarter of 2015, we have continued the strong momentum we had in 2014 with healthy year-over-year growth across all key financial metrics. We also achieved an annualized unlevered return on invested capital of 15.5% for the first quarter of 2015. This ROIC remains above our target level of 15% plus unlevered returns on a fully stabilized basis. In addition, as of the end of first quarter we've achieved a new record level of booked-not-billed backlog of over $64 million. This further supports our confidence in our future growth. On Slide 6 our strong financial performance is based on our fully integrated technology services platform which is providing the right solutions to our enterprise customer base. A few examples during Q1 included our newest operating mega data center in Dallas-Fort Worth. This new facility continued the strong momentum that began when we opened in late 2014. With our Phase 1 space fully pre-leased during the first quarter we experienced additional key wins across our C1 and C2 platform in this facility. One of our initial anchor tenants in Dallas-Fort Worth a software as a service provider is expanding their space by 2.5 megawatts. This customer who is in addition to being in our Dallas-Fort Worth data center is also a Suwanee mega data center customer increase their power with QTS by over 50%. We also had a key C2 win with an international IT and networking technologies integrator. This customer a new logo for QTS selected our facility because of its industry leading security and compliance in prime location in Dallas-Fort Worth. Next our Richmond mega data center continues to build on the activity levels that we saw last year. This included a key C2 expansion from an existing customer. This customer, a software and engineering services company increase their MRR with QTS by five times. This customer is choosing to grow with QTS based on our premium customer service and our solutions that focus on an integrated technology services platform. In addition this customer was attracted to Richmond facility as a world class mega data center enhanced by the scale and security at the facility, as well as the low cost of power in Richmond. In addition to the C1 and C2 wins, we also had a number of C3 wins in the quarter. During the first quarter, an international design firm who already had C2 space in our Sacramento data center added an enterprise cloud services product at our Suwanee mega data center. This is a 36-month agreement and will be more than doubling their MRR with QTS. This win highlights that our C3 offering and fully integrated solutions continues to be a strong differentiator for QTS in the market. It also demonstrates the value of our C3 business in providing a path not only to attract new customers but also to increase the revenue and pricing with our core C1 and C2 customers over time as the technology and the data center needs continue to expand to include more managed services and cloud applications for QTS customers. As you can see we continue to experience significant wins across all of our platforms and our national footprints. Customers recognize QTS for our innovative approach providing an integrated technology services platform that sets on top of world-class real estate enabling QTS to meet our customers diverse IT needs with one provider. Now on to some details for Q1 leasing and pricing on Slide 7. During the quarter we saw new and modified leases representing approximately 13.6 million of net incremental annualized rent. This strong leasing performance is inline with our prior four quarter average which was elevated based on the few large C1 wins during 2014. The base for our strong quarter leasing activity was C2 colocation which continues to be the stable and predictable growth engine of our business and was particularly strong during the first quarter. In addition after a typical slower C1 fourth quarter, we saw considerable C1 activity during the first quarter of 2015. This demonstrates the strength of our model leveraging a base of predictable C2 and C3 performance with periods of accelerated growth from our additional C1 activity. In addition to our continued leasing activity, visibility of our future growth remains strong, based on our record level of booked-not-billed backlog of over $64 million at the end of first quarter. With this record booked-not-billed backlog we’ve accelerated development in Richmond and Dallas as Bill will discuss in more detail. As a result, we are increasing our capital expenditures for the year in recognition of a higher signed commitments. As we have discussed previously, the signed and committed backlog supports solid revenue growth derisking 2015 and driving growth in 2016. Now on the pricing trends, as detailed on Slide 8. We continue to see evidence that are differentiated strategy supports pricing stability. First quarter pricing from new and modified leases was 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 $1,047 per square foot for the quarter, inline with our prior four quarter average. Pricing for C1 new and modified leases of $340 per square foot was 65% higher than our prior four quarter average due to our higher level of smaller footprint C1 activity. Regarding renewals on a like-for-like basis were customers renewed contracts without change in the square foot, we experienced renewal rates for the first quarter in 2015 of 1.2% above the pre-renewal pricing rates. As we have said in the past, the number will fluctuate by customers changing their product mix with C3 services during different periods. While we do experience volatility and renewals rates to 1.2% increase in the first quarter, it is consistent with our past experience of renewal pricing increases in the low-to-mid single digits and our four quarter average renewal rate increase of 2.7%. Lease commencements during the quarter were significantly above our four quarter average. This was due to product mix as there was a considerably higher amount of C2 and C3 commencements compared to C1. In addition, pricing on C1 commencements was over 17% above the prior four quarter average and pricing on C2 and C3 commencements was 12% above our prior four quarter average. We believe that when adjusting for product mix, deal size and market, our current leases commencements and renewal rates are consistent with our trailing results and continue to demonstrate the stability and positive trends being driven by our 3C business model. In summary, QTS continues to build on the momentum that has taken place over 2014 and we are off to a great start in 2015. Our growth and profitability trends along with the capacity in our facilities continue to demonstrate the strength of the business model. Our strong C2 colocation leasing provides stable and consistent growth with an internal sales force that drives revenue with short book-to-bill timing on a consistent basis. Our strategic C1 customized data center enhances our growth with periods of revenue acceleration and the ability to bring strategic large scale deals into our mega facilities that drive accelerated return on capital and profitability metrics. Finally, our C3 cloud and managed service products are critical driver enabling QTS to win new enterprise customers looking for an integrated IT solution and supporting growth with existing customers using incremental QTS services over time. This combined product offering continues to give QTS the ability to consistently win in the market enabling our industry leading growth while maintaining our high levels of 15 plus percent return on capital. Now I will ask Bill Schafer to discuss our financial performance, capital plan and balance sheet. With that, over to you Bill.

[Bill Schafer:]

Thanks Chad and I’d like to say hello to everyone as well. As Chad mentioned, and as you can see on Slide 10, we have continued to demonstrate strong and accelerating growth across all of our key financial metrics on a year-over-year basis. I’d like to point out that the year-over-year growth in OFFO has the interest expense impact of our July 2014, $300 million unsecured senior note offering where we locked in long-term, fixed rate capital with a maturity date in 2022. 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, 40% in the Richmond market and 4% in our California market, which has been more limited in capacity. In addition, we have seen NOI increased by approximately 30% year-over-year in our other facilities and have benefited from additional growth through our Dallas and Princeton facilities, neither of which were in our operating portfolio a year ago. All of this supports our growth and a diversification of our revenue across our national footprint. As outlined on Slide 11, our business has continued to benefit from increasing margins due to operating leverage in our cost structure. NOI and adjusted EBITDA margins increased during the first quarter by approximately 170 basis points and 150 basis points respectively over the prior year first quarter. Sequentially, as we discussed on the call last quarter both NOI and adjusted EBITDA margins decreased. In the first quarter with regard to our selling and general administrative expenses, we experienced a higher amount of payroll taxes and professional fees relative to the fourth quarter. In addition, as we previously discussed, we increased marketing spend by over $400,000 and increased product investment cost by an additional $400,000 over Q1, 2014 amounts. As we’ve said in the past, we have and will continue to increase our investment in our products. In addition to the upfront investment, these services tend to have lower margins offset by significantly enhanced return on capital. To the extent that our C3 business continues to ramp, this improved performance will support better capital efficiency while bringing our overall margin down based on product mix. As we continue to grow and invest in our business, we expect that SG&A as a percent of revenue will average in the low 20% level on an annual basis. This SG&A level will support our target to approach 50% EBITDA margin within the few next few years assuming our current product mix. On Slide 12, our backlog of annualized booked-not-billed revenue from signed but not yet commenced leases increased to a record of $64.3 million of annualized revenue as of March 31, 2015. We expect leases representing approximately $22 million of annualized MRR to commence in 2015, which will contribute an additional $9.7 million of MRR in 2015. Leases representing approximately $25.1 million of annualized MRR to commence in 2016 which will contribute approximately $18.4 million of MRR in 2016. And the balance of $17.1 million of annualized MRR to commence in 2017 and beyond. This high level of backlog continues to give us great comfort on the growth embedded in the business. I want to continue to remind you that we expect this booked-not-billed backlog to drop in 2015 as we deliver on our lease commitments during the second half of 2015 and into 2016. Our continued high levels of booked-not-billed backlog prior to the signing of larger C1 leases in 2014 was 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 2015. The stability of our customer base also was evident in our continued low churn for the quarter. Rent churn is the MRR impact if customers completely leaving the QTS platform in the given period compared to the total MRR at the beginning of the period. Churn for the first quarter was only 0.4%, we still have an expected business plan of 5% to 8% annual churn. Turning to Slide 13, I would like to spend a few moments on development. For the first quarter, we brought online over 33,000 square feet as planned we brought online approximately 18,000 square feet at our Dallas-Fort Worth data center. A large portion of this space will go to the C1 customer win that Chad mentioned earlier. We now have over 47,000 square feet build out in this data center. Next we brought online 15,000 square feet in our Atlanta Metro data center. This space is part of large seven megawatt deal that we discussed last year. For the balance of the year, we anticipate bringing online and additional 73,000 square feet of raised floor. This includes 10,000 square feet at Atlanta Metro, 7,000 square feet at Dallas-Fort Worth and 56,000 square feet at Richmond. We will continue to manage our development plans inline with our just in time philosophy, which matches our development with our customer backlogs and real time demand. This demonstrates our continued efforts to support our customer growth with available inventory for managing our development spend with the focus on capital efficiency and high utilization. Our utilization as of the end of the first quarter was 83% down slightly when compared to the fourth quarter. This represents the occupancy rate as of March 31 and does not include the booked-not-billed backlog. The decline was in part due to the fact that the actual billing associated with customers occupying the 15,000 square feet, we brought online in Atlanta data center will commence in the second quarter. In addition, in our Dallas-Fort Worth data center similar to last year, when we opened the facility we anticipate customers will ramp into their space over the next several quarters and as a result, we expect our utilization to increase at this site. At the end of the quarter, our total raised floor build out was 960,000 square feet which is only 46% of the total powered shell raised floor capacity of 2.1 million square feet in our existing facilities. We continue to have the capacity to more than double our existing raised floor within our existing footprint. Also keep in mind that we owned 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, lower risk cap to support our future growth. On Slide 14, CapEx spend is based on market demand, successful leasing and our flexible capital efficient model which drives strong returns. We will continue to develop an small incremental space in response to customer backlog and real-time demand. Real estate related capital expenditures incurred during the first quarter were $92 million, the 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 first quarter of 15.5% 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 15, I will review our resulting balance sheet and liquidity position. In the quarter, we issued 5 million shares of common stock. The net proceeds from this issuance was approximately $166 million. We used the net proceeds to repay amounts outstanding under our unsecured revolving credit facility. As a result of this, as of March 31, 2015 our total debt outstanding was $537 million including capital leases. Our debt to first quarter annualized adjusted EBITDA was approximately 4.8 times. We do expect that this will increase in the coming quarters as we develop space to support our booked-not-billed pipeline that is more backend loaded to drive revenue towards late 2015 and into 2016. Additionally, we believe we have significant liquidity capacity in our balance sheet. As of March 31, we had a total of over $530 million in liquidity in the business made up of availability under our credit facilities and cash. We remain pleased with the strength of our balance sheet including attractive interest rates, no near-term debt maturities, minimal secured debt and significant available liquidity. Finally on Slide 16, we are reaffirming our core operating guidance for 2015 and updating our OFFO and OFFO per share guidance to reflect the impact of the common stock offering which was completed in March. Our full-year operating FFO expectation is now $87 million to $91 million and operating FFO per share of $2.07 to $2.17 per share. The update in the guidance is a result of lower interest expense by using a portion of the net proceeds from our equity offering to repay amounts outstanding on our unsecured credit facility. This debt repayment saved us approximately $2.7 million in interest expense for 2015. In addition, our total shares outstanding increased by 5 million on March 2, which will increase our average shares outstanding balance for the full year 2015 by 4.2 million shares. This new share count in the interest expense savings are the only changes that have been made to our updated OFFO and OFFO per share guidance. And our core operating guidance remains consistent with last quarter. On Slide 17, we have laid out our 2015 guidance, reiterating our prior guidance from a fundamental business and operating performance perspective. This includes revenue growth in the mid to high teens, annual adjusted EBITDA guidance of $115 million to $123 million and annual churn of 5% to 8%. In addition in light of the positive acceleration of customer activity and our record booked-not-billed backlog which gives us a pipeline of signed committed contracts, we are increasing our capital expenditures guidance by $50 million to between $275 million to $325 million for the full year 2015. A core driver of this increase is an acceleration of the large 12-megawatt C1 customer in Richmond that we announced previously. Based on this customer looking to accelerate their ramp in Richmond, we are planning to bring online and additional 15,000 square feet during 2015. The impact of this acceleration will drive additional revenue from this customer during 2016 as the added space will now be available for billing earlier in the year. Additionally, we continue to see strong momentum in our Dallas-Fort Worth mega data center. As a result, we are accelerating the timing to deliver additional raised floor capacity in early 2016, this acceleration moves from CapEx spend originally planned for 2016 into 2015. As always the increase in CapEx guidance remains true to our philosophy of developing space in small increments in a capital efficient manner and in response to signed customer backlog and strong market demand. We continued to be comfortable with our target of achieving a 15 plus percent unlevered return on capital on a fully stabilized basis and are pleased to be able to invest in response to the strong customer demand and success we’re achieving in the market. Overall, we remain pleased with our financial success 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’re 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. We're off to a great start in 2015 as demonstrated by our first quarter performance. We continue to be excited with the capital investments we’re making supporting our strong returns in the pipeline that we've built to enable this success to continue. We're driven by our fully integrated 3C product platform that differentiates QTS in the market. Our C2 colocation product remains the engine that drives the business while our C1 customized datacenter affords us the opportunity for accelerated growth. And the C3 cloud and managed services enables us to meet enterprise customers increasing need for integrated IT solutions. The enterprise customers of today and tomorrow will increasingly be focused on hybrid cloud solutions integrated in their datacenter needs. And we believe our market leadership allow customers to have the scale and flexibility across an integrated technology services platform that they require. This product capability enables QTS to sell the cubic feet rather than the square feet to customers who value our services, which supports our profitable growth and predictable results. In addition, our tremendous capacity with the ability to grow our raised floor footprints from 960,000 to 2.1 million square feet within our currently owed 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 percent 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 in 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 cannot thank the employees enough for their hard work and dedication that continue to make this possible by delivering premium customer service to our 850 plus customers and continue to differentiate QTS in the market. Now I’d like to open up the call to questions. Operator?

[Operator:]

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

[Jordan Sadler:]

Thank you good morning. My first question relates to the C3 product. I'm curious about sort of the take-up rate or the sort of pace in demand and releasing that you're seeing. It sounds from your remarks in closing there Chad that you're seeing and expecting the acceleration in hybrid cloud and that's pretty consistent obviously with what we're seeing out of the folks at Microsoft and IBM and others. But I'm kind of curious that your revenue from cloud relative to the overall platform seems obviously flat sequentially but maybe even down from the levels seen at the IPO. So maybe a little color.

[Chad Williams:]

Jordan, I appreciate it and thanks for the question. We are as we have been for a long time a big believer in the integrated services model a key part of that is our C3 cloud and managed service offering. We are continuing to see customers that have solution needs across the diverse IT stack and there's been a lot of research out I read, a report that came out from you all the other day there's a lot of data that supports but the data that I like the most is in all that Dan kind of get this in details here is that what we’re hearing from our clients are that their needs are continuing to advance and the benefit of hybrid clouds for them in their environments not that they go all one way or all another way that diversity to be able to have the solution with C2 at the same time they are taken a HIPPA-compliant cloud product from us at the same time they’re deploying some C1. It’s that type of integration that kind of conversation that makes us very unique. So it’s not that we have to win all the clog because we don’t. The partnerships and the public clouds are continuing to find a market space and a growth. At the same time we’re continuing to evolve our business and our integration and I expect our product and delivery of our service to continue to be a focus of our investment and opportunity to continue to enhance and differentiate that, because customers have been there and are continuing to show us and reward us for that and Dan can talk maybe a little more specifically about the growth side of it.

[Dan Bennewitz:]

Yes Jordan, hi. So just to reemphasize is, we're aiming at enterprises with CIOs who are dealing with a need for mix of IT infrastructure. So therefore as Chad said combined in collocation with hosting services, managed services and particularly cloud services, we’re seeing good demand on that from those enterprises are under IT journey and need that mix of services. We feel good about the take-up of our cloud product that we announced at the end of last year FedRAMP compliancy. We're the first cloud service provider to go through the CSP supply path. And so the federal market is one we’re aiming at and as Chad mentioned HIPPA that’s another area of healthcare that we’re seeing strong demand on that. So we feel good about the path of our C3 offering. And again it complements the C1 and C2 products.

[Chad Williams:]

Jordan, that’s another important thing to think about. When you look at C3 and the success we’re having it’s not just in that C3 vertical, but it’s also driving a lot that’s we’re seeing in C1 and C2. The way we’re wining some of those C1, C2 enterprise deals is that customers like the insurance that as their need shift or as their expected need shift over the next few years. We can work with them in transitioning up the IT stack towards the cloud. So that insurance factor of the managed services getting quite capable as we have is also driving the success in the C1, C2 verticals.

[Jordan Sadler:]

And a question on the backlog, the follow-up, I'm curious as to that composition typically the backlog has been more comprised of C1 but if you could shed any light on sort of what the current composition looks like our mix the $64.3 million by product. And then separately as it relates to Bill's comment of that backlog trending down closer to half more like to historical levels, does that reflect an expectation of a little bit less C1 leasing and is that strategic or other?

[Chad Williams:]

Jordan it's Chad. I think it is a safe assumption to say that it’s fun to put out releases where we get to continue to say we have a record breaking backlog. I don’t think that’s a trend that we want to guide for that $64 million is going to continue to grow, because keep in mind the backlog is influenced by several strategic C1 opportunities that we chose to do that were strategic to the platform 1 in third quarter last year, which was a 19 megawatt deal and it’s one of the largest in the industries for sometime. So you do have a lot of influence that C1 that are strategic deals especially early in our asset cycles like in Dallas, and in Richmond, and Atlanta, but one thing keep in mind is we still consider the engine of our business C2, C3. So if you kind of normalize the 19 megawatt strategic deal out of the backlog, and you look at kind of normalized leasing levels for industry leading growth, which we consider to be kind of $8 million to $10 million of net new leasing a month - per quarter, you are basically sitting at kind of a $13 plus million number this quarter it’s heavily influenced by our success in C2 and C3 driving the engine of our business. So I don’t want to - I love the ability that we have three products, three levers, and three opportunities for profitable growth, because it’s where the customer is as today and our integrated platform is reaching out to that and providing that solution. I also like that our sales force, internal sales force is out able to sell that business and drive that business and its been impressive for what they have been able to accomplish. And Dan, I don’t know if have anything to add to that?

[Dan Bennewitz:]

Jordan I would just reemphasize for our C1 custom data center we are targeting the enterprise segment of 500KW to a Megawatt. As Chad said, we can be selective and strategic wholesale opportunities but we don’t look it that as a core of our business. The core of our business is C2 which we see very good demand across our platform particularly, where we are targeting for security and compliance requirements from HIPPA to PCI we mentioned FedRAMP before. I think the, well we don’t give deeper details the booked-not-billed most of our C2 and C3 booked-not-billed is in 2015 and the majority of the C1 is 2016 and beyond.

[Jordan Sadler:]

All right. That's helpful. I appreciate it. There is a comment about the CapEx being accelerated as it relates to that C1 customer kind of moving forward into 2015 versus 2016. Was that move in - is that going to impact revenue in 2015 and was guidance updated to reflect that?

[Chad Williams:]

No. It's not going to have a big impact on '15 because its weighted towards the very end of ’15, it was just something where the customer is seeing the accelerated growth in their own platform and instead of having kind of that early 2016 take down the partnership was asked meeting our partnership with the client was asked, can you guys accelerate and kind of deliver towards at the end of '15 to help us with our accelerated ramp? And so of course it will have more influence on '16, of course than '15 but our incremental ability for Jim and its development team to be able to really provide the infrastructure rich solution which gives us a lot of basis in assets there were very capable to accelerate development because of our powered shell and the advancement of that asset and we were able to accommodate that for the client and really, kind of, have a win-win partnership. The customers certainly appreciate our skill and flexibility to be able to accommodate that. It's another comfort point of why they continue to choose QTS.

[Jordan Sadler:]

Okay. Thank you. I’ll hop back in the queue.

[Chad Williams:]

Thank you.

[Operator:]

And our next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Hi. This is Lisa for Simon, Thanks for taking the question. I guess kind of circling back to CapEx as well. Now that you accelerated the CapEx in 2015, should we expect '16 CapEx to normalize at that and what are your thoughts on that. And also given that we have had another M&A announcement for datacenter space your outlook on potential extensions through consolidation. Thanks.

[Chad Williams:]

Lisa thanks. This is Chad. The announcement this morning is exciting and I think the way that this team took that announcement was continued validation of an integrated market and product is what the customers need and are requiring and the flexibility that deliver and enhance set of services with colocation and managed services in cloud is something that's resonating. And I think QTS gets to enjoy the moment of being, continue to validated that where we have been for years and where we worked hard to be as today as an industry leading integrated platform continues to be validated in the markets. So, we are excited about the announcement whichever one the best of luck except when you are competing against us and we are excited about that. The CapEx, Bill, do you want to talk about 16 CapEx and the influence -

[Bill Schafer:]

Again we haven’t provided any guidance with regard to 2016 CapEx and again we kind of continue to monitor where the capital spend will go based on the activity that we are seeing. Obviously, we do have a facility in Chicago that we expect to open probably mid-2016. So, that will clearly kind to have some impact on the '16 spend but we haven’t provided any specific guidance at this point of time.

[Chad Williams:]

Yes Lisa our approach to CapEx continues to be the same. We target in that 15% return on capital and it’s all of success based and we try and time that capital expense releasing in the portfolio. And as Bill mentioned, when we open a new facility like in Chicago or recently in Dallas and the second building, Richmond that CapEx goes up a little bit to allow us to get those facilities up and operating and the shared platform up but in general overall our CapEx is tied to success.

[Unidentified Analyst:]

Got it and I guess just jumping to the bookings, can you provide any color on just kind of the mix of existing bookings from existing customers versus new customers and have you seen a change of that recently as you grow your existing customer base?

[Chad Williams:]

Yeah, Lisa, Dan you want to address that?

[Dan Bennewitz:]

Yes, it’s about, the mix is about 50-50 in terms of new logos for us and business from existing customers who are expanding with us and that’s, pretty much the range that we’ve been in and our history and what we aim at from a business model moving forward.

[Chad Williams:]

And I think the other point of that is, this quarter was a great example of continuing to let the engine of our business C2 and C3 lead the way and then something else, people really think about QTS as mega data center scale in these strategically large deals that I must can continue to remind people that the normal customer is a C1 customer that averaging kind of half a megawatt of space and continues to either grow up out of our colo and instead leaving us like in some platforms they stay with us. So when you kind of have the smaller set of C1 customers which are really kind of a cross over for C2, C3 it really gets fun and exciting to be able to kind of put that kind of quarter together. And not really have any strategically large C1 deals influencing it, it’s just the engine is humming when all of that is kind of coming together and it’s fun to see.

[Unidentified Analyst:]

Great, thanks for the color.

[Operator:]

Our next question comes from Matt Niknam of Goldman Sachs. Please go ahead.

[Matt Niknam:]

Hi guys congrats on the quarter. Thank you for taking my question, I’ve just two if I could, one on pricing, can you give us an update on pricing trend it maybe more specifically which markets you may be seeing stronger demand conversely which markets maybe seeing weaker pricing trends. And then secondly on margins, 1Q seems to had elevated spend time to marketing and investing in the product portfolio that you talked about, how do we think about those costs in upcoming quarters and then I guess more broadly just the outlook for margins sequentially into 2Q. Thanks.

[Chad Williams:]

Thanks Matt. This is Chad, I’ll let Dan talk about pricing trends here in a minute and Bill can help us a little bit on some of the cost increase. I will tell you as an overall segment, we want to continue to be thoughtful about how to continue to invest in our business with the right measurements against that. So when you think about marketing and we continue to build the QTS brand nationally, we want to be flexible and capable to make the right investment with the right measurements that continue to enhance our products and our portfolio and our footprint and our marketing. So, you saw a little bit of that and we continue, keep in mind, believe you that we are measuring the dollars we spend in our VP of Marketing can attest to that, we focus on those dollars wisely but we do have a diverse set of products between cloud and colo and customized that we have to develop and talk about. We also are going to continue to invest in products right with our integrated services platform, we’ve got to continue to be committed to building the service and capability and delivery of our premium customer service with our multiple products and cloud enhancements with our hybrid or enterprise or federal cloud that Dan talked about. We want to continue to stay on the ability to make the right investments that continue to reward our shareholders and also our customers with our ability to deliver that. So Dan, I don’t know if you want to talk a little bit about pricing trends, they were up, which is good, so.

[Dan Bennewitz:]

Yes, Matt and we’ve more detail in our supplemental but you'll see there if I break it out for our C1 custom data center again we’re aiming at the enterprise market which is 500KW to a megawatt. So that pricing is very different than a strategic mega opportunity and so we continue to focus on that, I think you’ll see that reflected in our performance in first quarter as well as what we’re focused on moving forward. And in our C2 and C3 space, we feel good about the pricing levels for both colocation and cloud and managed services, I think we emphasize that we still have a very competitive market out there and we’re aiming not to go with to be a commodity but to go after and win the higher value on opportunities where customers value our integrated platform. It value our security and compliance in our high levels of customer service, so we try to be very disciplined and go after that, the marketing investments that Chad talked about are aimed at that segment continue to generate demand. There I think, we feel good about where we are in pricing although I would not say it’s a so I would say it’s a very competitive market out there in each of our markets. Bill you want to handle the margins?

[William Schafer:]

And as far as the – could you repeat your question on the margin, I apologize.

[Matt Niknam:]

Yes, yes, no it was just about – there was about the 130 basis point margin headwinds from, you mentioned marketing and investing in the product portfolio, so I just want to figure out, does that continue in upcoming quarters and then more specifically, that seems to be a seasonal list in 2Q margins want to make sure, that’s the case. Do you expect that to be the case in 2Q?

[William Schafer:]

Yes, I think we will continue to invest in those we made that point, I think last year that we’re continuing to invest in the products and we’re also expanding our marketing dollars going forward and we expect to see benefits that will be down the road associated with that. So again we’ll and I think our margins will continue to improve based on the current product mix but that does have an influences to where the margins ultimately end up also.

[Matt Niknam:]

Okay. Thank you.

[Operator:]

Our next question comes from Barry McCarver of Stephens Inc. Please go ahead.

[Barry McCarver:]

Hi, good morning guys and thanks for taking my question. On the churn number in the quarter, very good quarter with low churn but you are maintaining your guidance for the year to be in a kind of a normal churn range at the high end of that range, it suggest there could be a big churn quarter out there somewhere this year, could you help me reconcile that?

[Chad Williams:]

Yes, Barry, I appreciate the question, it’s always fun to sit down with Dan at the end of the quarter and talk about churn tendency to go down, I think, what we want to be careful with this is just to make sure that we set the right expectations on an annual basis. Dan continues to provide the right solutions at the right time with the right premium customer service that quite frankly sometimes takes customers and turns them into bigger customers or maybe convinces them sometimes that they should not take something internal after an acquisition or all source of things like that that can happen. So I think, we want to be consistent and stable with our ability to kind of project that on an annual basis but it’s fun to sit down at the end of the quarter and talk about how the team and our solutions and our products and our facilities and our people continue to pave the way and provide a different level of service and integration that customers continue to value, so…

[Dan Bennewitz:]

And I just add, the guidance we have is 5% to 8% annually. I would say, we have in the past and will continue to look at specific customer situations where before able to work with them to reduce or get them to move out of space, if they’re at very low rate, we can backfill that with more market rates and we will continue to do that very selectively. So we don’t want to signal that we’re diverting from the guidance of 5% to 8% but we feel good about our ability to achieve that, that guidance.

[Barry McCarver:]

Okay and then just one more if I can, you highlighted the growth in Dallas-Fort Worth area and Richmond those two markets are certainly see a lot of development from your company in those markets. Could you talk a little bit more specifically about, what you’re seeing competitively in those markets both on supply from competitors coming online and then the pricing environment there. Thanks.

[Chad Williams:]

Yes, great question Barry, you feel it’s funny when we launched Dallas that was just a lot of chatter in the market and about over supply and I guess what we had the benefit of with the actual data from years of working before we actually ended up moving into Dallas. And I think what we continue to be validated on is that there is a lot of supply or capability of space in Dallas but as far as empty space, there wasn’t a lot of it and I think our preleasing of Phase one continue to validate that. There is a lot of business in that market but I’d also like to highlight that we’re unique in that market in the fact that we delivered a very different level of comprehensive set of services than most of the providers down there and I think people are understanding that, starting to hear that message and it's resonating with continued momentum in that Dallas market. So everything from owning our own 150 megawatt power sub-station and being able to get some of the cheapest pricing on power in Texas market continue it’s just a mega scale, the infrastructure, the services that story is ringing well in Texas and we look forward to continuing to invest those dollars in Dallas. Richmond is kind of a very similar story, it continues to be an accelerant for growth when we went public people had that question mark out there. Can Richmond sustain the success of this company and QTS has had in Atlanta. I’d like to say that 2014 was the year of Richmond, I don’t get that question a lot anymore it’s great and we’re going to continue to see that momentum into Jim’s point as Jim and I get to lead the capital committee for the company. It is a success based environment at QTS, this capital committee meets monthly and Dan and his team do a great job of setting the stage for where the best use of capital is to deploy capital for success based development. And when we find the right profitable deals and mix of clients and business that supports our success, we’re excited to continue to develop in a profitable 15 plus percent return discipline that drives our business in our return. So we’re excited about the market, the competition is out there, but we continue to differentiate ourselves and Dan I don’t know if you have anything else.

[Dan Bennewitz:]

I’d like to just add is, for our C1 custom data center offering, we offered that in our Dallas-Fort Worth data center as well as Richmond in our two sites in Atlanta, particularly Dallas and Atlanta are great destination sites based on sites and terms of the very attractive power cost as well as very attractive labor costs. Our C2 and C3 business, Dallas is very similar to Atlanta in terms of very robust enterprise and small medium business markets and that is the engine for our C2 business as well some of our C3 business. So the C2 and C3 business is less influenced at anyone quarter in terms of the supply that’s more of a wholesale market. And so we as Chad said we’re very diligent about looking at where we deploy capital and how we deploy capital particularly around our C1 product offering. So we are very disciplined and we look at be able to adjust that to be able to take advantage of the demand in each of those respective markets.

[Barry McCarver:]

That’s very helpful, thanks guys.

[Operator:]

Our next question comes from Tayo Okusanya of Jefferies. Please go ahead.

[Unidentified Analyst:]

Hi good morning this is Charles standing in for Tayo as I was jumping across calls. First question I have is on the C3 pricing outlook you had mentioned that the environment remains fairly competitive. And overall I think fairly aware of your larger competitors continuing to cut prices. So I’m just trying to get a sense of how you balance that with your sort of more higher end approach with the product. Thanks.

[Chad Williams:]

Thanks Charles, I must say that as we get less of this question as the market continues to kind of mature and I think that from our customers’ perspective and Dan can talk it a little more detail on this. We just don’t see the competition directly with the product that we’re offering. So when we’re talking to the Fed ramp client and one of a dozen operators in the world with Fed ramp certification that’s not a natural to go other places. It’s a client is looking for a specific hybrid or private cloud solution that needs a high performance, needs a strong capability of delivery and integration and some level of customization and kind of be world-class in its delivery. At the same time, it’s highly compliant, highly secured at the same time sometimes these clients have multiple product needs to interface with that, because they may have a primary application once you run on a private secured cloud and at the same time they’ve got some colo or some host there. So it’s just a very different conversation I like to talk to people about you should think about the large public cloud companies has opportunities for QTS in a C1 opportunity and you should think about the C3 cloud and managed service customers being a pretty targeted focus whether it’s HIPPA or government to Dan’s point earlier and Dan you can add to that.

[Dan Bennewitz:]

Yes so let me just add a couple of things as the market we’re aimed at is sort of - is the private cloud, private managed hosting market not the public cloud where, which is focused on ultra bit infrastructure and the cost performance that you referenced there. We are interested in market that requires security requires complaints has services wrapped around and if you look at our average C3 customer is $7,000 a month, pretty different than some of the public cloud providers out there, because we’re aiming at a different part of the market here. Now let me turn over to Jim Reinhart, who will give a little more detail on this too.

[Jim Reinhart:]

Yes Charles. In general we look at the lower cost and data as been a good thing for the industry as data gets cheaper more people use it, they’ve more devices, richer content and overall we’re seeing that drive growth faster than it does compression in margins. Clearly from our perspective, while yes the cost of storage or the price of storage goes down, so does the cost of storage. So we focus on as Dan said really targeting those high end customers that value their data and see that we’re able to maintain and even improve margins over time in the business as the cost of providing data improves, which ultimately drives growth for us.

[Dan Bennewitz:]

And this is Dan again, just to add in one of the customer references that Chad talked about is a great use case. For us where we have a C2 colocation customer in Sacramento that’s expanding with us now for additional footprint for colocation, but expanding to enterprise cloud in our DRS service C3 product that’s a great used case of a hybrid heterogeneous requirement that we’re able to beat the customers requirements.

[Unidentified Analyst:]

Okay. Guys, I really appreciate the detail there. That’s very helpful and the last question then and then I'll hop back in the queue, just around guidance just trying to work through the numbers here and just trying to get a sense of I don’t think you disclosed this. But your interest expense range for the year and then even when take that into consideration and look at the operating FFO, first the operating FFO per share, I’m still coming up a bit short if I take the midpoint based on sort of the weighted average shares that you have now including the $5 million that you did recently. So I’m just trying to reconcile that a little bit. Thank you.

[Bill Schafer:]

Charles?

[Unidentified Analyst:]

Yeah.

[Bill Schafer:]

This is Bill, could you just rephrase the question again? I’m just trying to understand what you’re referring to with regarding to the interest expense. Actually we did put a slide out on the webcast to kind of show how the impact what we did is with the proceeds was we did pay down our revolving credit facility. So that had some interest expense benefit on a going forward basis, but obviously our share count I think for the year increased to about 42.2 million shares and I think on a quarterly basis going forward we’ll see that closer to 43 million, again just based on the timing and the rating of that. But I’m not -- maybe I’m not specific or familiar with model as it relates to interest expense or…

[Unidentified Analyst:]

Sure, so I guess the interest expense of course is going down, because and you're paying down the credit line, but as you ramp up development spending will that -- can increase slightly as we go through the balance of the year?

[Bill Schafer:]

Yes, there will be additional interest cost. As those things are in development, that interest does get capitalized to those projects and then when they come online, the expense will be realized from an interest perspective.

[Jeff Berson:]

And Charles, this is Jeff. As you think through the model, the other thing to think about is the capital spend and you saw that in the first quarter. The capital spend that we’re putting out is somewhat frontend loaded in the model and both not build in revenue ramp tends to be further backend loaded in '15 and '16. So you’re going to see leverage over the next couple of quarters move up as we drive that capital spend and again that’s to deliver services to customers that have already signed that are seeing that book not build. We know we’re getting the revenue in. We know it’s a nice return it’s just a timing issue associated with that. But as a result of that, you are going to see the balance sheet impact. You are going to see leverage move up over the next couple of quarters until some natural de-leveraging in that booked-not-billed starts to ramp, that’s part of what impacts the interest. As it relates to overall the numbers that we just put out from a guidance again that was just all we’ve done on that is we took the guidance for 2015 that we put out last quarter and reflect and changed it to reflect the equity offerings. So it was really no shift in terms of our expectations from the operating performance of business clearly reflecting the incremental 5 million shares and a $2.7 million of interest savings from paying down that debt but as you think about the model, think about leverage increasing over the next couple of quarters, that drives some interest impact as well.

[Unidentified Analyst:]

Okay. That’s helpful. And just lastly on that share count, it’s probably minor but are you assuming any ATM issuances?

[Bill Schafer:]

We've not currently putt an ATM on file. It’s something we will look at but we filed our shelf back in November and obviously we executed on that. We did issue equity in March but at this point in time there is nothing planned going forward.

[Unidentified Analyst:]

Okay. All right, thanks. That’s very helpful. I’ll hop back in the queue.

[Operator:]

Thank you. Our next question comes from Matthew Heinz with Stifel. Please go ahead.

[Matthew Heinz:]

Hi good morning guys. Thanks for taking the questions. Just a question on the Northern California market you mentioned Santa Clara the site, where you are starting to approach capacity based on what's currently built there. Just wondering what you're seeing there in terms of the demand following how that market shaped into your redevelopment plans. Looking forward, I guess you could we see some more capacity there Come on line in the next few quarters.

[Chad Williams:]

Hey Matt this is Chad. I’ll let Jim take a little bit of the development stuff. Go ahead Jim.

[Jim Reinhart:]

Yes Matthew, basically we are seeing pricing starting to improve in the Northern California market. So we feel the trends are improving there. As we discussed in our approach to capital is to really put it where we see the great opportunities and we continue to see that as we’ve laid out to meet kind of our book number and backlog in Richmond, Dallas, and Atlanta and are excited about Chicago for next year. So while we’re seeing improvement in California, there is no specific plans to add capacity there at this time period.

[Chad Williams:]

The one thing that I will mention is we do have the Santa Clara, Kansas that we do have there is kind of pre-positioned with some shelf capacity that we could deliver some more space in the Santa Clara market. And we’ve been -- we can be very flexible as we continue to see it and I’m sure Dan and sales team as they continue to kind of work through getting closer to leasing capacity there. It’s something to our, to Jim point we want to stay flexible but we also want to put capital where the best use of it is, California is a big market and we certainly understand that and want to continue to kind of look for strategic markets. And we continue to look for infrastructure rich opportunities that continue to drive our business and invest in our business across the platform. So we’ll continue to be thoughtful and planning on how we continue to grow.

[Matthew Heinz:]

Well that’s great thanks. And then with respect to the C1 leasing activity this quarter, you mentioned the smaller deployment size as being a contributing factor to the plan, blended revenue per square foot. I was just hoping you could provide some color on power densities within those deployments and maybe just kind of general price to kilowatt trends?

[Chad Williams:]

Yes I would -- it is -- I did want to make the point about largely this quarter was a great example of all three Cs, but nothing what I call significant strategic C1 where it was multiple megawatts, which is kind of fun, because to your point where you're going, our ability to drive higher revenue per square foot in a higher KW pricing is just naturally -- it's kind of like anything when you buy a lot of something you can usually garner a bigger discount. And what I love about our business is that our model support a diversification of our product and our platform but also a valuing of our premium customer service. Our operation service center are people who deliver that in a premium setting and not that we don’t have terrific cost basis to be able to do what we need to be competitive, I love it when Dan and the team set the tone that where more than a commodity were a valued partner and what that delivers is the ability for us to drive higher revenue on a per square foot and KW basis across the platform because we can sell that integrated model. And it’s a powerful tool, when you see the leverage and also continues to diversify our revenue over terrific enterprise customers with a large count of them versus having a small concentration which I also like. So Dan anything to add to that.

[Dan Bennewitz:]

Yes, I'll just add, so our standard density is 150 watts per square foot. We are seeing more and more customers talking to us about higher densities particularly with the path of cloud deployments in those deployments. But also we’re seeing more heterogeneous requirements around redundant levels of redundancy. And our ability to be flexible, we don’t have a cookie cutter solution as we work with customers and see the diversity of solutions we have in the C1 customized data. So it’s based, it’s more diverse today than it was previously. And that’s a benefit we see, we’re able to deploy capital better, provide better solutions for customers and it allows us to differentiate ourselves in competitive environments and Jim do you want to add anything.

[Jim Reinhart:]

The only thing I would add is our design is basically a 200 watt per square foot design as Dan said we typically deploy at about 150 watts per square foot, but we do see customers that want a range and we believe our C3 platform really gives us flexibility to meet customers that both want a higher density as well as those that want lower density and believe that flexibility in our design in our model allows us to serve the market better and feel good about that approach going forward.

[Matthew Heinz:]

That's great color, thanks. Just lastly, real quick, could you remind us how the customer put back announced last quarter impacting your 1Q revenues on a sequential basis?

[Chad Williams:]

I’m sorry the customer put back?

[Matthew Heinz:]

Yeah, there was a customer announced last quarter, I believe it was about 5,800 square feet, it was announcement to last quarter results and then there is some dynamics there in the revenue, I'm just wondering if that any kind of sequential impact on 1Q?

[Chad Williams:]

Yes, that was -- we reconfigured the space and power that customer had and it had a positive impact on revenue. I think it’s -- given the size of our portfolio, its de-minimis and I don’t think you could see the needle move on that specific customer deployment.

[Matthew Heinz:]

Okay. That’s all I have. Thanks guys.

[Chad Williams:]

Thank you.

[Operator:]

[Operator Instructions] Showing nothing further, I would like to turn the conference back over to our leader -- to our leaders and for any final remarks they may have. Please go ahead.

[Chad Williams:]

Well on behalf of QTS powered by our people, I want to thank our Executive Team who continues to be the strength of this team and continue to lead the way. We appreciate the shareholder's confidence and our continued partnership with our customers as we continue to march through 2015. We’re excited about the opportunities ahead. We’re going to be continue to be thoughtful with capital and continue to drive our integrated service model and look for ways to continue to build our business and strengthen our customer partnerships and deliver that in the world-class setting. So we thank you for the support. We thank you for the questions and time today and everybody have a wonderful day and we’ll talk soon. Thank you.

[Operator:]

Thank you, sir. This concludes today’s conference. We thank you all for attending today’s presentation. You may now disconnect your lines and have a great day.