QTS Realty Trust, Inc.
Q2 2015 Earnings Call Transcript

Published: 9 Aug 2015

[Jeff Berson:]

Thank you, operator. Hello everyone, and welcome to QTS's second 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 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 and on our website, which we hope will make it easier to follow our presentation today. Before we start, let me remind you that some information provided during this call may include forward-looking statements, that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings and actual future results may vary materially. Forward-looking statements in the press release that we issued yesterday, along with our remarks today are made as of today and we undertake no duty to update them, as actual events unfold. Today's remarks also include certain non-GAAP measures, including FFO, operating FFO, adjusted operating FFO, MRR, 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 second quarter 2015 earnings call. We are pleased to be speaking with you today to update you on the progress we've made so far this year. Our continued success is the 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 co-location, 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's premium customer service. We have further strengthened our technology services platform, with the recent acquisition of Carpathia, a leading provider of highly secure and high compliant cloud products and managed services. We believe that QTS's integrated technology services, premium customer service support and leading capabilities for security and compliance will continue to differentiate QTS in the market and drive our future success. We deliver our product mix on top of world-class real estate that supports the cost efficient delivery of our datacenter products and services. This infrastructure has been developed through a proven ability to acquire infrastructure rich properties at low basis, which enables 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, de-risking 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, strong pricing, and high customer retention. Our results are driven by the engine of our business. C2 co-location and C3 cloud and managed services, which continue to support our consistent growth rates while our C1 customized datacenter product affords us the opportunity to let our customer stay with us and grow and allows us to selectively participate in large strategic deals when the right opportunities arise. Now that we have successfully closed on the acquisition of Carpathia, I thought I would take a moment to discuss the transaction and our progress to-date in transitioning Carpathia into the QTS family, on Slide 5. We closed the acquisition on June 16 for a total purchase price of $326 million, including $37 million of capital leases and lease finance obligations. We financed the balance of the acquisition through cash and available capacity under our revolving credit facility, which was enhanced by an issuing equity. On June 5, we issued 5.75 million shares of common stock at $37 per share to raise net proceeds of approximately $203 million. Financially, we expect Carpathia to contribute annualized revenue of approximately $90 million and annualized adjusted EBITDA of approximately $32 million pro forma for 2015. This expected performance result in a purchase price multiple of 10.2 times anticipated 2015 adjusted EBITDA and 9.6 times pro forma for anticipated synergies of $2 million, which we expect to achieve by 2016. We anticipate this transaction to be immediately accretive with accretion growing through the business performance and anticipated synergies in 2016. This performance will only be enhanced by the future migration plans to move some of the Carpathia's existing customers to QTS owned facilities in markets where we have geographic overlap. This migration plan will take some time as we manage customer relationships and leasing terms in existing facilities. As a result, we do not anticipate this future migration opportunity to impact synergies or performance through 2016. Strategically, this acquisition further strengthens QTS in a number of ways. First, we anticipate the acquisition will continue to support our industry-leading growth, while delivering scale and strong product diversity to our customers. With our balanced 3C product mix, Carpathia's additional scale with QTS's 3C products and services further strengthens this core capability. Also Carpathia's focus on federal business and security and compliance fits well with QTS's highly compliant mega data centers. In addition, Carpathia brings approximately 230 enterprise customers to QTS's 850 plus customer list. We believe there is an opportunity to cross-sell the QTS C1 and C2 product offerings to Carpathia's customers, while being able to leverage our accelerated cloud capabilities acquired through Carpathia to increase revenue with QTS's existing customer base. The combination provides strong diversification from product, customer and geographic footprint expansion. Carpathia's international presence should support additional QTS growth in opening up these markets to current QTS customers. And the last, the benefits of the combined business occur in an accretive financial transaction. In addition, Carpathia's management team led by Peter Weber will remain with the company and provide a strong base for continued growth and success for our C3 products. Peter is now my Chief Product Officer reporting directly to me and running our C3 cloud and managed service business, as well as leading our integration effort. We are thrilled to have Peter and his team as part of the QTS family. Turning to Slide 6, our integration planning and execution is well underway and on track. Once we announce our intention to purchase Carpathia, we immediately kicked off integration planning efforts. With the transaction closed, we officially started the integration process. We have established a number of core cross-functional work streams leading the integration effort. These teams are focused on a number of areas of expertise, including integration of our sales organization and supporting cross-selling opportunities; creating one operations organization to improve efficiency; integrating our product of road map to leverage the best aspects of both companies and working towards integrating our back office systems. The teams are also consulting with an experienced professional firm, which is supporting the integration effort. I'm pleased to say, even though we are only a little more than a month into the integration process, I'm excited at the progress we've made and believe we are on track to meet our goals. We feel comfortable that we will be able to achieve the $2 million in targeted synergies for 2016 that we told you about on the last call and the cost to achieve the integration are still in line with our original estimates of approximately $15 million through the end of 2016. Moving on to the results on Slide 7, for the second quarter 2015, we have continued our strong momentum in 2015 with healthy year-over-year growth across all key financial metrics. We also achieved an annualized unlevered return on invested capital of 15.8% for the second quarter of 2015. Pro forma for Carpathia, this ROIC remains one of our targeted level of 15%-plus unlevered returns on a fully stabilized basis. In addition, as of the end of the second quarter, we have achieved another new record level of booked, but not billed backlog of close to $69 million. This further supports our confidence in our future growth. Our results were driven by the strong underlying performance of QTS and were further strengthened by the contribution of owning Carpathia for 15 days during the quarter. On Slide 8, our customers continue to recognize the value of our fully integrated technology services platform, which is providing the right solutions to our enterprise customer base by continuing to choose QTS for their datacenter services. One of our larger C3 customers who has been with QTS since 2010 has continued to expand with QTS. The customer, a provider of cloud-based software solutions for mobile services located in Santa Clara and Suwanee data centers signed an expansion agreement that when fully ramped will increase their MRR by over 50%. They chose QTS for their expansion based on the existing partnership with QTS, as well as their appreciation for our customer service, flexibility and high in security and compliance. This is something that our sales teams, solutions engineers and support staff pride themselves on. In addition to the superior customer service, we partner with our customers to provide a solution that meets their ever-changing needs. In addition to this key expansion, we also landed multiple new logos, including a leading provider of Specialty Benefits Management Services headquartered in the Southeast. This customer is using our C2 service, both our Dallas and Atlanta-Metro mega data centers. This is a five year agreement and will be fully ramped by the end of the third quarter. The customer selected QTS for our strong reputation in the marketplace and our flexibility as they migrated their existing service over to QTS. Also in the quarter, Carpathia brought on a new customer that is a natural expansion to QTS's existing customer base. This customer, a Global Digital Media platform, signed a multi-year contract with Carpathia for total contract value of approximately $6 million. Through this contract, we will support several hundred servers in two locations Ashburn and Hong Kong by managing custom applications and providing network operations center redundancy. We commenced billing for Ashburn last month and we anticipate Hong Kong will start to bill later this year. Similar to what attracts customers to QTS, this customer selected Carpathia for our people, in particular, their strong engineering and support staff as well as their high levels of security and compliance capability. In addition, this deal demonstrates our ability to now support customers internationally through our integrated services and facilities both within and outside of the U.S. We are excited about this win and looking forward to Carpathia's continued contributions to our business. Now, on to some details for Q2 leasing and pricing on Slide 9. During the quarter, we signed new and modified leases representing approximately $10.6 million of net incremental annualized rent. This strong leasing performance is slightly below our prior four quarter average, which had been elevated based on a few large C1 wins over the past few quarters. The base for our strong quarter leasing activity was significant volume in our C2 colocation product, which continues to be the stable and predictable growth engine of our business. We had lower C1 activity in the quarter. This is a result of our disciplined approach to selling strategic C1 deals when we find opportunities to accelerate growth with strong capital returns. As we said in the past, when we sell C1 space, we make sure it meets our internal return metrics and fits a strategic need. This formula of leveraging a base of predictable C2 and C3 performance and adding on top of it, periods of C1 activity continues to drive our business. In addition to our continued leasing activity, visibility of our future growth remain strong based on our record level of booked but not billed backlog of close to $69 million at the end of second quarter. As we have said previously, this signed a committed backlog supports solid revenue growth, de-risking 2015 and driving growth into 2016. Now, on the pricing trends. As detailed on Slide 10, we continue to see evidence that our differentiated strategy supports pricing stability. Second quarter pricing from new and modified leases was significantly above our four quarter average based on the level of C2 and C3 activity relative to C1. On a consolidated basis, you'll see variability in our pricing per square foot quarter-over-quarter, depending on the product mix, pricing for our C2 and C3 new and modified leases averaging $1,225 per square foot for the quarter, 15% higher than our prior four quarter average. This increased pricing on top of higher volume of C2 activity during the quarter drove very strong results. Regarding renewals on a like-for-like basis where customers renewed contracts without change in square footage, we experienced renewal rates for the second quarter of 2015, reflecting an increase in pricing of approximately 5.1% above the pre-renewal pricing rates. As we've said in the past, this number will fluctuate by customers changing their product mix during different periods. While we do experience volatility in renewal rates, the 5.1% increase in the second quarter is consistent with our past experience of renewal pricing increases in the low-to-mid single digits. Lease commencements during the quarter were in line with our prior four quarter average. Pricing on C1 as well as C2 and C3 commencements were slightly below our prior fourth quarter average, but in line with expectations, when adjusting for the increased volume in square foot bought on-line during the quarter. You will continue to see variations in our C2 and C3 commencement pricing based on the average size of the deals during the quarter as well as the mix of C3 services delivered. We believe that when adjusting for product mix, deal size and market, our current leases commencements and renewal rates remain consistent with our trailing results and continue to demonstrate the stability and positive trends, being driven by our 3C business model. In summary, we continue to execute on our business plan, our growth and profitability trends along with the capacity in our facilities demonstrate the strength of our business model. Our strong C2 colocation leasing provide stable and consistent growth. Our strategic C1 customized datacenter enhances our growth with periods of revenue acceleration and the ability to bring strategic large-scale deals into our mega facilities, to drive accelerated return on capital and profitability metrics. Finally, our C3 cloud and managed service products, which was enhanced with our recent acquisition of Carpathia will continue to be a critical driver in enabling QTS to win new enterprise customers looking for an integrated IT solution and supporting growth with our existing customers using incremental QTS products and services over time. It also supports our growth through a capital efficient model to enhance our return on invested capital. 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 level of return on invested 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 12, we have continued to demonstrate strong and accelerating growth across all of our key financial metrics on a year-over-year basis. Our continued momentum also can be seen across our portfolio as we continue to experience consistent NOI growth across our major markets. Year-over-year, NOI increased 13% in Atlanta market, off of a high base performance from last year. In addition, we are very proud of the fact that Richmond has experienced year-over-year NOI growth of almost 50%. Our California market NOI was down slightly due in part to a customer consolidating some of its space as well as more limited capacity in our Santa Clara market. Even with less capacity than some of our mega datacenter locations, our California sales team continue to drive productivity for QTS through identifying a number of new customers that are looking to locate in our mega data centers in Atlanta and Dallas in order to access the scale that QTS can deliver in those facilities, along with the lower cost of power in those markets. Also, we have seen NOI increase by 9% year-over-year in our other facilities and have benefited from additional growth through our Dallas and Princeton facilities, which had minimal contribution in the second quarter of last year, as well as the recent contribution from Carpathia, which was not in our NOI metrics from last year. I would like to add an additional point regarding the continued momentum in our newest mega datacenter in Dallas. After opening in the third quarter of 2014, with our first Pods fully pre-leased, we have continued the momentum in Dallas and we are seeing strong financial results. During the quarter, we achieved almost $1.5 million of NOI from our Dallas facility. This is after only nine months since opening the facility and almost doubled the NOI we achieved during the first quarter. All of this supports our growth and the diversification of our revenue across our now international footprint. As outlined on Slide 13, our business also has continued to benefit from increasing margins due to operating leverage in our cost structure. Adjusted EBITDA margins increased during the second quarter by 130 basis points over the prior year second quarter and 100 basis points sequentially off of a typically lower margin first quarter. As we factor in the full effects of Carpathia next quarter, we do expect our margins to drop as C3 typically contributes lower margins, while delivering significantly higher return on invested capital than C1 and C2. Importantly, we continue to experience operating leverage in our business model, as we scale the business over the infrastructure and services and support organization that we have built. We believe that with our current product mix and pro forma for the addition of Carpathia, we should continue to experience adjusted EBITDA margin expansion that could add up to another 200 basis points over the next few years. On Slide 14, our backlog of annualized booked-not-billed revenue from signed but not yet commenced leases increased to a record of $68.7 million of annualized revenue as of June 30, 2015. We expect leases representing approximately $32 million of annualized MRR to commence in 2015, which will contribute an additional $9.7 million of MRR in 2015; leases representing approximately $19 million of annualized MRR to commence in 2016, which will contribute approximately $13.9 million of MRR in 2016; and the balance of $17.4 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 and further into 2016 as we deliver on our lease commitments during the second half of 2015 and into 2016. 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 total MRR at the beginning of the period. Churn for the second quarter was 0.4%, bringing our churn for the first half of the year to 0.8%. While we are pleased that this churn was well below our typical expected churn of 5% to 8% annually. We do anticipate churn returning to more normalized levels in the future. Turning to Slide 15, I would like to spend a few moments on development. For the second quarter, we brought online seven megawatts of gross power and 26,000 square feet of mostly high density space in our Richmond mega datacenter for approximately $42 million. This space is part of the large 12-megawatt deal we discussed last year. We anticipate that customer will start to ramp into this space during the third quarter, which will further impact revenue during the fourth quarter. For the balance of the year, we anticipate bringing online an additional 67,000 square feet of raised floor. This includes 25,000 square feet at Atlanta-Metro, 7000 square feet at Dallas-Fort Worth and 30,000 square feet at Richmond. We also anticipate bringing online, in the third quarter, approximately 5,000 square feet at the Vault campus. The Vault campus is the flagship datacenter for Carpathia. Just to remind everyone, it is strategically located 29 miles from Downtown Washington DC and was designed to support a full range of highly compliant, highly secured customer needs. We believe this facility will be strong complement to QTS' highly secure and hard making datacenter in Richmond. We will continue to manage our development plans in line 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 while managing our development spend with the focus on capital efficiency and high utilization. Our utilization as of the end of the second quarter was over 84%, up slightly when compared to the first quarter. This represents the occupancy rate as of June 30 and does not include the booked-not-billed backlog. We anticipate our utilization will increase as the actual billing associated with customer occupying the 26,000 square feet we brought online in our Richmond datacenter will commence during the third quarter. In addition, this number reflects the impact of Carpathia's occupancy rate of just under 80%, which is lower than what we traditionally have had at QTS. At the end of the quarter, our total build out raised floor was 1.54 million square feet, which is only 48% of the total powered shell raised floor capacity of 2.2 million square feet in our existing facilities. Our raised floor build and powered shell now includes Carpathia's space. We continue to have the capacity to more than double our existing raised floor within our existing powered shell footprint. Also, keep in mind that we own a significant amount of land, adjacent to all of our mega data centers. This capacity provides us with comfort that we can control our future development at a known, lower cost and lower risk path to support our future growth. On Slide 16, CapEx spend is based on market demand, successful leasing and our flexible capital efficient model, which drive strong returns. We will continue to develop in small increments of space in response to customer backlogs and real-time demand. Capital expenditures incurred during the second quarter was approximately $85 million, which brings our six month capital expenditures to $177 million, excluding acquisitions. A breakout 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 second quarter of 15.8% 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 17, I will review our resulting balance sheet and liquidity position. As Chad mentioned earlier, in the quarter, we issued $5.75 million shares of common stock. The net proceeds from this issuance was approximately $203 million. As of June 30, 2015, our total debt outstanding was $754 million, including capital leases and lease financing obligations. Our debt to second quarter annualized adjusted EBITDA was approximately 4.8 times. This multiple is pro forma for Carpathia's adjusted EBITDA to annualize their performance from the 15 days post-acquisition that they were owned by QTS. Additionally, we believe we have significant liquidity capacity in our balance sheet. As of June 30, we had a total of approximately $380 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 liquidity. We will continue to review market opportunities to lock in fixed rate extended maturity debt over time as we manage our balance sheet and capital structure. Finally, on Slide 18, we are pleased to announce we are updating our guidance for 2015. This updated guidance has been adjusted to reflect the impact of the Carpathia acquisition and as well an increase over our prior guidance to reflect the strength in QTS's underlying performance. We expect 2015 operating FFO to now be between $95.5 million and $100.5 million or between $2.10 and $2.20 per fully diluted share and adjusted EBITDA to now be between $134 million and $142 million. These changes represent the continued success of QTS and our confidence in our future performance, overlaid with the inclusion of Carpathia and the impact from the recent financing and capital markets activity that we have pursued. We continue to expect annual organic revenue growth in the mid-to-high teens over the next few years, which will be accelerated in 2016 due to the full-year contribution from Carpathia. In addition, as I mentioned previously, we expect our adjusted EBITDA margin to drop next quarter to reflect the full impact of Carpathia and our new product mix. We expect to continue to see operating leverage in the model and anticipate continuing to expand our adjusted EBITDA margins by up to 200 basis points over post Carpathia margin over the next few years. We anticipate capital expenditures of $125 million to $175 million for the rest of 2013, which will result in anticipated total capital expenditures for the full year of 2015 of $300 million to $350 million. This increase in CapEx reflects the increased CapEx demands of Carpathia, as well as accelerated development in Richmond, Atlanta Metro and Dallas-Fort Worth to meet growing demand in our booked-not-billed pipeline in our business. We've remained focused on driving the capital efficiency benefits derived from our strategic model and we'll continue to manage our business with targeted ROIC performance of 15%-plus. Finally, we anticipate rental churn of 4% to 7% for 2015. This churn is below our typical expectations of between 5% and 8% and reflects low churn experienced during the first half of 2015, as well as the increased churn anticipated from Carpathia, which has experienced historic churn of approximately 7%. Overall, we've remained pleased with our financial success and the growth in our core business. This success only will be accelerated by the recent acquisition of Carpathia. We also 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. The second quarter performance builds off the momentum we have in the business. We continue to be excited with the capital investments we are making, supporting our strong returns and the pipeline that we have built at QTS to enable the success to continue. We continue to be driven by our fully integrated 3C product platform and low basis mega datacenter facilities that continues to differentiate QTS in the market. Our C2 colocation product remains the engine that drives the business, while C1 customized data centers afford us the opportunity for accelerated growth and C3 cloud and managed services enabled us to meet the enterprise customers increasing need for integrated IT solutions. In addition, our tremendous capacity with the ability to grow our raised floor footprint from approximately 1.1 million square feet to 2.2 million square feet within our currently owned and control powered shell enables us to deliver these products at a known cost with lower risk and supports the confidence in delivering our targeted 15% plus return on invested capital fully stabilized over our international footprint. We believe strongly that this is the right way to continue to build our business, delivering strong growth in a profitable low-risk and capital-efficient manner. I want to thank our customers and shareholders for their continued trust and confidence in QTS. In addition, I want to formally welcome all the new Carpathia employees and customers who have now joined the QTS family through the acquisition. We at QTS continue to be powered by our people, and I can't thank our employees enough for their hard work and dedication that continues to make this possible by delivering premium customer service to our now over 1,000 plus customers and continuing to differentiate QTS in the market. Now I'd like to open up the call to questions, operator?

[Operator:]

Thank you. [Operator Instruction] The first question will come from Steven Douglas of Bank of America Merrill Lynch. Please go ahead.

[Steven Douglas:]

Great, thanks for taking the question. First, maybe more of a clarification, but taking a look at the updated guidance, you previously talked about a $0.01 of accretion from Carpathia for this year. So that implies about $0.02 from the legacy business, so I wonder if that's fair. And then second, on Carpathia, you had mentioned the opportunity to bring some of those leases in-house down the road and I'm wondering if you can maybe quantify how significant that opportunity is and maybe, kind of a realistic timeframe around doing that and some of the complications to think about there? Thanks.

[Chad Williams:]

Well thanks, Steven. This is Chad. You are right. We continue to see a good growth in our core platform and we're happy to bring the Carpathia customers and revenue on to contribute in the quarter for the short period of time than it did. As far as the integration, we are working towards a master plan, but we are customer-first focused and maybe Jim can talk a little bit about the integration of the facilities, but we're going to stay focused on those deals over time, that's 2017, 2018 kind of conversations. We, of course, would love to have as many customers in our QTS owned facilities as we can, but it's not a rush and it's not something that we're going to put customers in a position that they feel like they have to move. But I think, Jim, do you want to talk a little bit about the migration plan for facilities?

[Jim Reinhart:]

Yes, definitely. Steven, we're excited by the footprint that Carpathia adds to the existing QTS footprint and we definitely have a strategy to exit a few facilities to shrink the footprint at several others, but also to maintain several of the facilities. As Chad mentioned, we really are going to do what's in the best interest of the customer. But we do expect to start moving customers early in 2016 and that as you can imagine, will probably be mostly out of smaller facilities where we have a similar footprint to where those customers are today and we'll continue to give you guys guidance and update as we actually work through those plans with the customers and get their support for those transitions.

[Jeff Berson:]

And Steven, this is Jeff. Just to clarify, very specifically, that is correct in terms of the contribution that we anticipated for Carpathia and still anticipate for Carpathia this year would be about $0.01 a share on OFFO per share and owning it for about 28 weeks over an annualized EBITDA expectation of $32 million, would contribute just over $17 million of adjusted EBITDA to the core business. So in the revised guidance, we are on top of the Carpathia impact, factoring in up to $1.5 million to $2 million of incremental EBITDA and a couple of cents a share OFFO.

[Steven Douglas:]

Great, thanks guys.

[Chad Williams:]

Thank you.

[Operator:]

The next question will come from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thank you, good morning. Question regarding, I guess how the business is being run and sort of the go-to-market strategy of Carpathia versus sort of the legacy C3 product. Have they - will they be integrated as one? Will the legacy QTS product be offered independent of the Carpathia product maybe just some kind of description of how you sort of going to market with a similar product. And then who is orchestrating? And then ultimately, is that all reporting up to Dan or is Peter running all that?

[Chad Williams:]

Great question Jordan, this is Chad. I'll take the first half and then Dan can speak to it. I think we are committed to build a fully integrated service platform. As you continue to hear us talk about, we are believers that the best opportunity for this business and really just listening to our customers is that we deliver a seamless fully integrated platform which we talk about being the 3Cs. With the Carpathia acquisition, you are correct, we had a strong and vibrant cloud and managed service business that just got stronger with the Carpathia acquisition of people and talent and technology and tools and compliance and security to complement everything. So the first thing that's been exciting about it is that in this acquisition, the philosophies, the culture, the company is coming together nicely and I'm sure we'll talk a little more about integration later, but that has been seamless because the products, the roadmaps and the similarities between the two business were already available to us. And to have Peter Weber joined our team as a direct report to me and our Chief Product Officer, he really has consolidated and will be running both the QTS and the previous Carpathia existing portfolio of business. So he'll be running the cloud and managed service business for us and the product development and the roadmap and all of such. So, he and his senior leadership team are just doing everything that they were doing before, but they've got some great new QTS partners and customers and that's under their wheelhouse. Dan maintains, as a direct report to me, the sales side of the business for the combined business and I'll let Dan talk about the go-to-market strategy, but it's exciting that the chance for us, as a company, at the point we are in our growth to be able to acquire a company like Carpathia with such a strong culture and people and technology is just a unique opportunity to strengthen our business. And I can tell you that QTS family is excited about it and we're marching forward. Dan, do you want to talk a little bit about the go-to-market strategy?

[Dan Bennewitz:]

Yeah. Hi, Jordan, first off, it's exciting to have Peter as a teammate as Chief Product Officer and initially, obviously, focusing on the integration of the C3 platform. And so, just as Chad said, from a product point of view, we have an integrated play same for our go-to-market. So we will have an integrated go-to-market from a pre-sales or sales perspective; from a channel perspective in terms of who do we - how we partner better in the marketplace; and then, after the sale from a post-sales support point of view as well. So you should think of that as an integrated go-to-market and that just builds on our strategy of being able to offer to our customers this full portfolio of services from C1, C2 and C3 as our product portfolio. So it makes sense to have an integrated go-to-market.

[Jordan Sadler:]

Thank you. And then, just as a follow-up, I know it's still early you've owned it for a month or a little over. But I'm curious about the revenue synergy side. I think that $2 million is an expense synergy number, but any - I think you previously characterized Carpathia as being maybe a little bit constrained in terms of, particularly the C1, C2 opportunities that they would've had to put customers into. And I'm curious if you're seeing anything early days where you could sort of point to revenue opportunity?

[Dan Bennewitz:]

Yeah, so Jordan, so first off again, this is an example of why we're so excited about this acquisition. We've already started training our respective sales forces on each other's solutions portfolio and we're already teaming together cross selling each other's solutions to customers and prospects in the market. So we are very bullish on the opportunity to leverage each other's solution portfolio and while we're not giving specific guidance on that, we do see - are very optimistic on the revenue synergies.

[Chad Williams:]

And I do think Jordan that Peter and I and Dan and the team have talked a lot. It wasn't necessarily a constrain in a negative way, but it was more where they had to choose to put their resources, tools and energy which is on highly complex cloud and managed service, high security, those types of things. They naturally ran into opportunities that needed compliance and security around co-location and sometimes wholesaler C1 products. And so, just the opportunity for their people not to have to say no, you can see the glimmer in their eyes about the excitement especially from sales organizations who have now a much broader set of capabilities at a much different scale. And the QTS people are excited to have strengthening around our cloud and managed service products, at the same time Carpathia's folks who are now QTS folks are excited about the expanded product and opportunity. So, I think that's what we're going to continue to see and I think that'll all translate to continued industry-leading growth.

[Bill Schafer:]

Hey Jordan, one thing I'd just add. Carpathia historically has been more on the mid to the mid-high single-digit growth rates. So our view that our growth rate will continue to be comfortable on an organic basis, pro forma Carpathia will be in the mid-to-high single digits is reflecting to some extent some of that confidence that we'll be able to continue to ramp and drive the business.

[Jordan Sadler:]

Is there a revenue growth number?

[Bill Schafer:]

Yes, let me, Carpathia historically had been growing in the mid-teens, so our view of looking at growth in the mid-to-high teens is reflective of continuing that revenue.

[Jordan Sadler:]

Thanks. Thank you for clarifying that. I’ll look forward, thanks.

[Bill Schafer:]

Thank you, Jordan.

[Operator:]

The next question will come from Simon Flannery of Morgan Stanley. Please go ahead.

[Unidentified Analyst:]

Hi, this is Lisa for Simon, Thanks for taking the question. Maybe you can give some color on the updated competitive environment that you are seeing given the recent acquisitions that we've seen in this space and also the fact that you are moving more into the cloud space with Carpathia and whether Carpathia brings on board a new set of competitors?

[Chad Williams:]

Well, thanks Lisa, and the competitive landscape, we continue to be encouraged. I think it's demonstrated in our numbers. Competition for us is by region or by market, because every market has a little different element and then really for us the one step layer deeper is the product. So when you talk about our wholesale product or our retail product or the cloud and managed services, we see different people in different regions. I think what we've seen across all of our Richmond, Dallas, Atlanta, all of our main markets is we have continued great opportunities in those markets. We're continuing to translate those into new logos for QTS, but also opportunities for our customers to continue to grow with us. And as far as the cloud environment goes, we are certainly focused on a highly complex, highly compliant, highly secured type of cloud customer. These customers with the combination of Carpathia and QTS are now billing kind of $27,000 a month-ish of monthly revenue and they are performance-based, secured and compliance type customers. So those are not customers that we're necessarily competing with other, maybe, public cloud providers, it's a performance-based, they usually have potentially more than one kind of product or service from us and they are looking for highly complex, highly performance-driven type application. So, we continue to intersect those type of customers and see good opportunity to grow that gives us confidence about our - to Jeff's point, mid-to-high teens growth in the business as we march forward Dan, do you have anything to add to that?

[Dan Bennewitz:]

Yes, Lisa, just to add that both companies are targeting similar market segments. As Chad said, the requirements where security is important, compliance, whether it's FedRAMP in the federal markets space, HIPPA, PCI. That's the segment of the market that we're aiming at and this helps fill in gaps in the respective portfolio. So now that we can have, as Chad said, we can say yes to customer requirements on a much better ability today than we had before the acquisition. So fundamentally, the competitors in the marketplace don't change dramatically. It's not like we're going into a very new adjacent market with new competitors. It's very similar market segments that we've been aiming at.

[Unidentified Analyst:]

Great, thank you.

[Operator:]

Our next question will come from Barry McCarver of Stephens, Inc. Please go ahead.

[Unidentified Analyst:]

Hi, this is Brian filling in for Barry. Two questions, one, is there anything going on in churn that would cause it to tick up in the back half of the year or is it just normal business? And then secondly, can you give us an update on Chicago?

[Chad Williams:]

Yeah, great questions. So for churn, we had a great quarter in minimizing churn. I think that goes to the power of the premium customer service and the people at QTS that continue to deliver world-class services. I mean, it is a very different service with a much deeper level of service and focus than some of the industry and we're proud of that and I think that was a result, Dan and his team did a great job. I don't think it's anything dramatically different. We don't have anything in the horizon for the rest of the year that is, to our knowledge, that we're looking at. And I think we had enough confidence to kind of narrow the churn guidance back a little bit for the rest of the year and we've got confidence in kind of completing the year and kind of continuing to be industry-leading low churn. As far as Chicago, it's a unique opportunity. There is just nothing you can say. Five years of patience to land in Chicago with an infrastructure-rich low basis asset on 30 acres, a couple miles south of Downtown Chicago on the Financial District, close to one of the other iconic Chicago Downtown data centers, that's been full for years, to have a new mega data center that's built to the highest new standards of redundancy and densities and to be able to do that in the heartbeat of Chicago, it's unbelievable. I mean, we just are excited about the asset and the basis and the ability for us to bring that on in mid-2016 and look forward to be another exciting location for QTS to have their full product offering and have state-of-the-art mega data center economics to drive our business. So we're excited about it as you can tell. I'm a big double dish pizza eater, so I love going to Chicago and being part of all of the things that are Chicago and we look forward to being part of the Chicago family soon.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

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

[Vincent Chao:]

Hey, good morning everyone. Just wanted to go back just to the revenue synergy comments. So the $2 million of synergies more on the expense side, but I think - I thought I heard you say that the utilization rate of Carpathia is just under 80%. Just curious where you think that can get to over time? And it sounds like the 2016 accretion that you guys have outlined, it doesn't sound like that's assuming that utilization really increases much. Is that Correct?

[Chad Williams:]

Thanks Vin. On the utilization rate, there are opportunities, to Jim's point earlier when we talk about the facilities, there are some very nice facilities. The anchor of that and the Carpathia portfolio was the Vault, a highly-secured, highly-compliant opportunity that I'll have Jim talk about here in a minute, because we do look to retain a number of those assets and really grow with some opportunities there. Jim, do you want talk a little bit about that?

[Jim Reinhart:]

Yeah, Vin, obviously our key metric is return on capital and how we're growing the business, but we do look at utilization and try to be very disciplined about bringing space on. I think you'll note, in our under construction that all that space that's coming online in the future is all to support our booked-not-billed backlog. So you will see utilization rates in the portfolio creep up as all that spaces are being ready to generate revenues.

[Chad Williams:]

Yes and about the synergy comments you had, the $2 million of synergies by the end of 2016 are expense-based synergies that we're projecting. We feel very comfortable about that. We continue to make great progress on the integration and I think, the optimization of the revenue really is just going to be something you'll continue to see in our every quarter numbers of, kind of mid-to-high teens growth rate. So that's where we'll see the impact of that combined business and the strengthening of our C3 capabilities in that arena in driving the core of our business.

[Vincent Chao:]

Okay, thanks for that update. And I guess, just sticking with the $2 million, it sounds like you guys got a pretty fast start on the integration process and I'm just curious, is there; one, do you see any potential for some of that $2 million to bleed into 2015? And then also, as you are doing your deeper dive on the organization, are you starting to see some additional potential sources of upside beyond the $2 million?

[Chad Williams:]

Right now, we're comfortable with the $2 million we projected through 2016 and we have got off to a fast start, but as Peter and I and the team have talked about, this acquisition wasn't about the acquisition of buying something and then taking a bunch of cost out of it. There are synergies coming out of this because of the scale of the two businesses coming together. But the 200 plus employees with Carpathia are assets to us and the ability to optimize their time and talents to bring that together into this integrated platform, Peter and I are committed to take as much time as we need to kind of get through this, making the right decisions for the combination of the businesses as he'll be running our C3 cloud and managed service business. So we're just kind of executing. It's moving well because of the type of dynamic that we started this with which was a win-win for bigger, better, stronger for the two organizations to come together. And we're going to continue to feel comfortable about the synergies that we have in front of us and as we get new data on calls in the future, if we find that we get comfortable to talk about something different than that, we'll let you all know, but we're comfortable where we are and feel confident that we've got a great plan to execute.

[Vincent Chao:]

Okay, thanks and just maybe one last question from me. I think on a mid-to-high teens growth for the - excluding acquisitions here for the balance of 2015, seems like you're tracking quite a bit ahead of that so far this year. Just curious, I mean, it doesn't seem like there is anything that would change that trajectory in the back half, but I just wanted to check that and see if there's maybe something that you'd expect that might bring the growth rate a little bit lower on the standalone business.

[Chad Williams:]

No, I think we feel comfortable. I mean the mid-to-high teens growth is what we're seeing and we're confident about with pipelines that we see in the business across the arena. I mean your point could be that with our 46% or 48% utilization of our powered shell, our ability to go from 1 million square feet to 2.1 million square feet with just what buildings that we own today as powered shell, you might convince yourself that there could be an unbelievable acceleration of growth ahead. But what you have to balance with that is that we want to continue to be disciplined about the return on invested capital, the returns in the business, the profitability and the way to drive the business. So we're not out chasing C1 deals just for the sake of growth and - so that's really the counterbalance or weighting of why we like to continue to execute our business plan methodically and strategically to deliver the kind of returns and the kind of growth that the market expects from QTS.

[Bill Schafer:]

And Vin, some of that might - that's reflected in the revenue growth and so forth may reflect the impact of like, Princeton for example, which was not in the prior year results until the second half of last year and that's in our current results for the first half of this year.

[Vincent Chao:]

Got it. Okay, thanks.

[Bill Schafer:]

Thank you.

[Operator:]

Our next question will come from Jon Petersen from Jefferies. Please go ahead.

[Jon Petersen:]

Okay, thank you. Just a question, probably more for my own modeling purposes, but on the booked-not-billed backlog of $68 million, it would be helpful if we can get a breakdown of how much of that will be applied to the - I think about 16% of your stabilized portfolio is vacant right now and how much of that is on space that's currently under development?

[Chad Williams:]

Jonathan, we may need to get back with you on the exact breakout of that, but I will tell you that, at less than 50% utilization, as I said earlier, on the powered shell, this delivering all of the booked but not billed backlog will still have less than 55%-ish, of the total portfolio, so going from 1 million to 2.1 million square feet. So, we can get to kind of some exact breakdowns on that on a follow-up, but the theme should be here is that delivering even though the historically high $69 million of booked-but-not-billed backlog sounds staggering, it is a small footprint expansion within the size of footprint that QTS enjoys with our mega data centers.

[Jon Petersen:]

Yes, okay. I understand that.

[Bill Schafer:]

With the extent - basically given the fact that a good portion of the backlog is our C1 customers. The C1 customers, we are right now kind of building out that space, trying to be as efficient with capital as we can to timely delivery of that upon the commencement of their lease obligations. So, obviously with C2, C3 there is inventory that is available to absorb that immediate impact, but a lot of that backlog is more associated with the C1 which - that inventory will come online as those customers open in that space.

[Jon Petersen:]

Right, okay. All right, that's helpful. And then just more high level, just thinking about how your competitors have reported this quarter, CoreSite, Equinix both had fantastic quarter, obviously retail colo companies. Looking at your leasing, this quarter, it was great and mostly driven by kind of the retail colo business. Just kind of curious, on more high level, what you're seeing - I guess, what you guys feel is driving the strong demand in the data center market overall nationally for the retail colo product? And if there is any reason we should expect it to slow down or accelerate in the second half of the year?

[Chad Williams:]

We've been one of the people out there talking about the robustness of the broader market in general. So, not always has the markets felt the momentum. I think the markets now certainly see the momentum, which is really, the important part is are you seeing it translate to business? We are, I mean the engine of our business and I've spoken about this from the very beginning, the engine of our business is our C2 colocation and cloud and managed service business. It is where the enterprises are needing us to solve for the cage and the cabinet opportunities in our business across our portfolio of in-service sales people, they're out on the street every day in our market selling very quick book-to-bill. You know all the attributes and the positiveness of why it's an important aspect to build your business off of, but we just continue to see the uptick in that demand and data is growing in every aspect of every business and people continue to drive their businesses and we see the demand and are doing that. Our security and compliance though is setting us apart in that example. So from a HIPAA-compliancy or PCI compliance, that is certainly in the cloud environment, but also in the colo. I can think of win that we had a couple quarters ago where it was a healthcare company needed to deploy their own cloud, but they needed a HIPAA-compliant colo to provide that. So there is a whole bunch of dynamics driving that. And I still think the biggest aspect of that is there is still a large number, over 80%-plus of the people try to in-source and I think, as people get confidence on the compliance and security, they are starting to recognize that it's not practical for them to keep, even if it's three or four racks, within their office building, just from a sheer network, connectivity, security compliance and those type of aspects. And I think that's why you see a pretty healthy demand with that, finally, that enterprise kind of unlocking the opportunity to look for participants. And I think the whole peer group is seeing the results of that and their businesses are growing in healthy aspects. I think my job here at QTS is to build the business to be the most robust for QTS for the long term. So that's why we continue to diversify our products and deliver them in a premium customer service experience because we want to be able to build our business for the long term.

[Jon Petersen:]

Great, thank you.

[Operator:]

The next question will come from Matthew Hines of Stifel. Please go ahead.

[Matthew Heinz:]

Hi, thanks. Good afternoon, guys. I was just hoping you could break down the $25 million increase to CapEx guidance between Carpathia and the needs of the core business for the expansion in Richmond Dallas and Atlanta.

[Chad Williams:]

Yes, hey Matt. I'm going to have Jim talk to you a little bit about capital.

[Jim Reinhart:]

Yes, that is mostly driven by the core QTS business. We do expect some expansion for the investment in cloud - in Carpathia, but from a CapEx perspective, their footprint is pretty solid for their booked-not-billed. That is really driven mostly by our largest customer accelerating the ramps particularly in Richmond, is what is driving that acceleration in capital.

[Matthew Heinz:]

Okay, great. And then, as a follow-up, going back to the backlog, kind of looking out over the next few quarters, you saw a big slug of C1 commence this quarter. So I'm just wondering, how much of that $10 million or so in incremental revenue commencing this year will be C1 versus colo and cloud?

[Dan Bennewitz:]

So, this is Dan. So, Matt, if you look at it, first off, you can see for 2015 the annualized revenue is just under $32 million. I think if you look at that for the - most of the C2 and C3 booked-not-billed, that is going to occur in 2015 and then you'll probably notice that the number - the 2015 number is a little higher than it was in the first quarter as is the 2016 number little less. And that's sort of a movement for C1, one of our largest C1 deals that we announced previously moving from early in 2016 to the end of 2015 and so, that's some of the movement that's occurred there quarter-to-quarter.

[Matthew Heinz:]

Okay, thanks a lot guys, and congrats on a nice quarter.

[Dan Bennewitz:]

Thank you.

[Operator:]

The next question will come from Jonathan Schildkraut of Evercore ISI. Please go ahead.

[Jonathan Schildkraut:]

Great, thank you for taking the questions and I apologize if some these have been asked and answered. I was sort of balancing a number of earnings calls this morning. I was just wondering about one sort of housekeeping item and then one bigger picture item. Just in terms of, as we look into the back half of this year rolling Carpathia in, I'm just wondering if this is going to go directly into the QRS or if there is some tax implications that we should be thinking about. And then I'll come back with sort of my, more strategic question, if I may.

[Chad Williams:]

Yes, Jonathan. Thanks. The acquisition of Carpathia, we acquired that through our TRS. We will look to - we are in the process of transferring the requalified assets into our REIT bucket. But it will continue to operate - the C3 component will continue to operate through the TRS. And there will potentially be some tax ramifications associated with that. And even in conjunction with our purchase price allocation, we had previously accumulated losses ourselves through our TRS from a tax perspective. And again, with the acquisition, we established certain assets which kind of created some deferred tax liabilities and the reversal of those liabilities will kind of go through the income, which resulted in us recognizing about $3.1 million of a tax benefit, again non-cash, associated with that. But there will be some tax implications associated with the Carpathia acquisition.

[Jonathan Schildkraut:]

Alright, awesome, thank you for that. So look, my other question just really has to do with the value proposition to shared infrastructure. Chad, I thought you did a really nice job of sort of laying out how the multiple products can draw customers into the facility and you guys have been a shared infrastructure provider for a while, that is the floor space is shared in most cases. And we're starting to hear some of your peers, which have been, I'd say, more focused on dedicated infrastructure starting to come around towards shared infrastructure and from your seat I'm wondering if you could talk through maybe some of the advantages, either from a customer perspective or from an operator perspective that your shared infrastructure platform can deliver. Thanks.

[Chad Williams:]

Yes. Thanks, Jonathan. It has been something we've built the business on. So what's fun is this team's been around long enough and been executing our business plan for long enough that the greatest compliment is people talking about what you're doing and how you're doing it and trying to move to that direction. I don't think that we spend a lot of time focused on that. What we spend time doing is, listening to our customers and they've been there for a long time needing this flexibility and scalability to deliver. And I think, I'll have Jim talk a little bit about the operations team, but I mean it's just taken a lot of time to get where we are and a lot of people and learning. So, by no stretch have we done things perfect or the smartest people around. It's been a lot of hard work and a lot of conviction around having the focus and delivery of that - of that shared experience in a way that delivers it highly compliant and highly customer service focused and then the ability to deliver that through network storage, cloud, colo and customized data center brings a whole different element of people and talent to deliver that. So, it's been a lot of work getting here. It's exciting to see the customers embracing it and continuing 50%-plus of our revenues coming from QTS-ers that can stay with QTS, even though they may start in colo and grow into wholesale or that they start in cloud and come to colo or colo to cloud, it is where the customer is at. And this integrated platform is delivering the value, solutions and security that customers are demanding in the marketplace today. Jim, do you want talk about operations a little bit more?

[Jim Reinhart:]

Yes, Jonathan. As Chad said, customers do take advantage of the shared infrastructure in multiple ways. Economically, it's sharing of capital and the ability to leverage large footprint and get the benefit of not having to pay for fully dedicated infrastructure, but also giving the high reliability of our mega data centers. On the operating side as well, they get the leverage of operating a large scale footprint, even though their footprint may be small. And lastly and I'd actually say most importantly, that operating and capital leverage allows us to invest in the business to give them the full range of services and security and compliance that gives them the peace of mind, not only from a data security perspective, but from the fact that they need to leverage multiple services and have that available from one provider. And then lastly, as their business change, they have a provider that can change and grow with them. And we find that that really is the story that our customers are living daily and find that QTS can be a great partner to help deliver across that stream of value props to them.

[Jonathan Schildkraut:]

Great. Well, listen, thanks for taking the question and extending the length of the call to fit me in. Really appreciate it.

[Jim Reinhart:]

Thank you.

[Operator:]

[Operator Instruction] The next question will come from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

[Jordan Sadler:]

Thank you for taking the follow up here. Coming back to the pipeline, excuse me the backlog. I know that it increased sequentially, call it $4 million from last quarter and I guess I'm trying to do the math here, and I maybe adding apples and oranges so I'm asking for your help. You've signed leases of $10.6 million and you commence leases of $27 million. And so, on the net basis and I don't know if this is how the math work, but I would think that the number would come down. So the one other thing that's obviously changed is Carpathia. So is there a way that you can give us the Carpathia backlog or am I missing something in the math.

[Chad Williams:]

Yeah, Jordan. This is Chad. Dan and I might try to do a follow-up with you. We can kind of work you through that. It's - from a backlog perspective, I don't think, we've broken it out to that level of details. We'll be glad to follow up with you and try to walk through that a little bit, make sure that we get you the insight that you're looking for. Dan do you have anything to add to that?

[Dan Bennewitz:]

No, we're happy to go through that and we can take you through the detail, Jordan.

[Jordan Sadler:]

Was there or is there a significant backlog at Carpathia that was layered in?

[Chad Williams:]

Jordan, there is something there, but I mean the Carpathia numbers are factored into all of the numbers you're seeing here. So there's nothing being skewed where we've added Carpathia to certain metrics and not to others. We're really looking to, - we're presenting the numbers on a blended basis with Carpathia, we will continue to do that. I think, if you think about the general math and this is where we'll help you walk through this. You can look at what we've commenced. You can pull out the churn from that. You can then look at how that changes the booked-not-billed and what's delivered and it will get to - I mean the math will work. It's just a factor of looking at commencements less churn, looking at re-pricing, and then looking at how booked-not-billed shifts between years.

[Jordan Sadler:]

Okay. And my other question, I mean there was a question regarding C2, C3 earlier. I'd have the same question regarding C1 which is, I know this is the lumpier segment of the business, but you guys seem to be very focused on the return on capital and obviously just spent quite a bit of money on this Carpathia acquisitions. So maybe you can just give us the landscape for what you're seeing in terms of demand in the C1 pipeline and then maybe just bridge that to how you are thinking about committing capital there or signing leases in the C1 pipeline given sort your current capital position?

[Chad Williams:]

Yes, thanks, Jordan. We're committed to all of our products and C1 is a strategic accelerant to our growth when we see the right opportunities. The only thing that I was trying to make clear earlier on the call is there are some companies that don't enjoy the ability of having a robust product offering and have choices of how to allocate capital between C1, C2 and C3. And I think that all I was trying to highlight is, is that from quarter to quarter, the lumpier C1 business which we do embrace and it is a part of our business, a big part of our business and strategic to our relationships that we have in those, when those right relationships come along and the returns match to something that will be positive, we will look at those and do those in a strategic fashion and it's going to be a core centerpiece or block of our business moving forward. So it's not negative at all. It's just that we've got more capital allocation options and opportunities and we are very thoughtful or try to be very thoughtful about how we allocate capital to grow our robust integrated platform. Dan, do you have anything to add to that?

[Dan Bennewitz:]

Hey, Jordan. Just to reemphasize is for C1, we are very selective on which strategic opportunities we want to pursue. There are opportunities that we elect based on our capital prioritization discussions and there is a lot of close teamwork with the team here to align on that and there are deals that we are not going to chase down because maybe they are more focused on commodity space and power, which is not the segment of the market we want to go after. So we do want to go after the higher value C1 opportunities where the buyer appreciates the value proposition that QTS now With Carpathia can bring to the table there. And it's a, I don't want to say a luxury, but it's an advantage that we can be selective about which opportunities to pursue and we try to do that very smartly in where we can deliver the most value to the customer.

[Chad Williams:]

And the one thing about demand, there is more demand in the marketplace in C1 today than there was a year ago, today. So, we are seeing healthy growth in the demand across all of our products, but C1 is not an exception. There's a lot of demand in the markets that we serve with that product.

[Jordan Sadler:]

That's great color. Thank you, guys.

[Chad Williams:]

Thanks Jordan.

[Operator:]

Ladies and gentlemen, this will conclude our question and answer session. I would like to hand the conference back over to Chad Williams for his closing remarks.

[Chad Williams:]

Well, first off, I just want to thank all the people for participating and having interest and putting confident and trust in QTS and our executive team and Board. We don't take that lightly and we thank you for the participation. On behalf of the executive team, we thank all the people that make it possible. We at QTS are powered by our people and wouldn't be here today without the opportunity for them doing the things that they do every day. And we thank you for the opportunity to talk to you today. We're going to continue to have industry-leading growth and we'll be excited to continue to develop a great relationship with the market as we continue to build our business and thank you for that.

[Operator:]

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.