QTS Realty Trust, Inc.
Q3 2015 Earnings Call Transcript

Published: 28 Oct 2015

[Operator:]

Good morning, and welcome to the QTS Realty Trust Incorporated 2015 Third Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Mr. Jeff Berson. Please go ahead.

[Jeff Berson:]

Thank you, operator. Hello everyone, and welcome to QTS’ third 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 who will participate in Q&A. Our earnings release and supplemental information are posted in the Investor Relations section of our website at www.qtsdatacenters.com on the Investors tab. We’ve 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 results may vary materially in the future. 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’ third quarter 2015 earnings call. We are pleased to be speaking with you today to update you on the continued successful execution of our business. Our success is the direct result of QTS’ differentiated strategy, 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 capabilities to over 1,000 sophisticated enterprise customers who value QTS’ premium customer service. We deliver our product mix on top of world-class real estate which 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 supports our capital efficiency. It also supports the significant capacity in our current facilities which 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, stable pricing, and high customer retention. Moving onto results on Slide 5, for the third quarter 2015, we have continued our strong momentum for 2015, with healthy year-over-year growth across all key financial metrics, which now reflect a full quarter of Carpathia’s results. We also achieved an annualized unlevered return on invested capital of 15.7% for the third quarter of 2015. This ROIC remains above our target level of 15 plus percent unlevered returns on a fully stabilized basis. In addition, as of the end of the third quarter, we continue to benefit from the visibility of our strong booked-not-billed backlog of over $61 million. This supports our confidence in our continued future growth. Turning to Slide 6, I want to spend some time providing an update on the integration of Carpathia into the QTS family, which is continuing to progress as planned. The entire leadership team of QTS remains focused on the integration of the two businesses. We have created a project management office to oversee integration efforts. The PMO team is staffed by both QTS and Carpathia employees who are leading the coordination and tracking our integration efforts. This team has also supported by an outside consulting firm to ensure that we are implementing best practices into our process. The PMO team reports directly to our Chief Product Officer, Peter Weber who is leading the integration effort. Below the PMO team, a number of our integrations team with cover across verticals including sales, operations, product development, facilities and finance. Each team is headed by our strongly skilled people from both companies, focused on implementing best practices for the combined organization. Our integration efforts are progressing rapidly. We are excited about the progress we are making and the way that two organizations have come together with common purpose and strong culture and business fit. We remain on track to achieve the synergy and cost targets we originally laid out and expect to be fully operating as one company by early 2016. One integration area in particular that we are focused on is the migration of certain Carpathia customers from lease facilities to QTS owned facilities. In markets, where we have overlapping footprint, this migration process along with the integration of our operations into a single platform is being led by Jim Reinhart, our COO of Operations and Development. As we begin our migration plan, with expectations to start to move customers in early 2016, it is typical to experience some incremental cost and higher levels of churn. As a result, we are expecting the benefits from our migration strategy to balance with the incremental cost during the first year of our migration plan and then drive incremental performance and value creation in 2017 and beyond. All of these factors are on track and have been incorporated into our synergy and cost projections which we continue to be confident in achieving. As this migration progresses over the next few years, we believe the ultimate value creation to QTS can be significant. In addition the integration of the sales team has progressing well. The team is now successfully operating under an integrated go-to-market team and working together under Dan Bennewitz, our COO of Sales and Marketing. To offer customers a fully integrated solution, this collaboration of our sales effort is already paying dividends. Moving to Slide 7, we’ve had several wins in the quarter that demonstrated the increased strength of the joint sales effort. In this early example of revenue synergies, the teams worked together to find the right solution for enterprise customers. Both of these wins originated with leads through the QTS sales team, leveraging the enhanced capabilities from Carpathia to significantly strengthen our solution and ability to win the business. The first example is a software cloud based communications platform company, located in Northern California. This customer selected one of our Northern Virginia data centers for C2, and C3 services, based on our ability and flexibility to design to their exact requirements. This is a hallmark of QTS solutions that are winning customers by enabling us to partner with them to offer flexible and complex solutions that meet their needs. In particular this customer select the QTS for our ability to integrate a direct connect to their Amazon web services public cloud, in combination with our managed services and colocation offerings. Through Carpathia we are increasing our focus on assisting our customers, managements of workloads in third-party clouds, such as AWS, and integrating those services with the management of workloads and customer assets located in QTS data centers. Also in the quarter, our joint sales team worked together on another great win, which included C2 and C3 services over multiple years. This customer and IT infrastructure solutions provider selected our highly compliant, highly secured Vault campus in Dallas, Virginia. The customer required a data center provider that has a focus on security and compliance. In addition, this customer recognized as their data center needs expand, they also could leverage other QTS highly compliant, highly secured data centers located across the country. This is a great example of the types of transactions that QTS is looking to expand through the combination with Carpathia. There are a number of customers that have high compliance and security needs for their performance of sensitive applications that QTS is well positioned to support. At the same time, these customers are increasingly looking to integrate these services into a robust and growing need for equally compliant and secure colocation services. The unique 3C combination that QTS can provide, is continuing to differentiate us in the market, and driving our success with our growing list of sophisticated enterprise customers choosing QTS. Even though we are still only a few months into the integration process, it is great seeing employees working together, offering complex solutions to sophisticated enterprise customers, who are increasingly require solutions customized to their specific IT, security and compliance needs. Now onto some leasing details on Q3 leasing and pricing on Slide 8. During the quarter, we signed new and modified leases representing approximately $5.6 million of net incremental annualized rent. This leasing performance is below our prior four quarter average which had been elevated based on a few large C1 wins, but consistent with our overall model of driving consistency and predictability of our core C2 colocation business to drive steady underlying growth in our business. We then leverage our C3 product in managed services to upsell and drive increased capital efficiency from our customer base and the benefit from our C1 business driving quarters of accelerated growth when we find the right strategic opportunities that meets our internal return metrics. The success of this model can be seen in the first three quarters of the year, where we experienced consistent growth overlaid with quarters of strong C1 and have supported average net new leasing activities of approximately $10 million per quarter, supporting our stated growth targets of mid-to-high teens top line growth. In addition to continued leasing activity, visibility of our future growth remained strong. Based on our strong level of booked but not billed backlog of over $61 million at the end of third quarter. As we have said previously this signed and committed backlog supports solid revenue growth, de-risking 2015 and driving growth in 2016. Next we experience strong pricing during the quarter, particularly based on customers increasing the density of their deployments taking more power within their existing space. This trend brought a number of pricing metrics to unusually high levels and further supported and strengthened the capital efficiency that QTS was able to deliver during the quarter. Third quarter pricing for new and modified leases was significantly above our prior four quarter average. C1 pricing for the quarter was unusually high due to several customers increasing their power requirements within their existing space. Pricing for C2 and C3 new and modified leases were also significantly higher than our prior four quarter average. This elevated pricing levels based on a few factors. First our mix of C3 has increased, which drives higher revenue per square foot, with the higher blend of C3 we saw normalized basis C2 and C3 pricing raised a levels approaching $1,200 per square foot for the quarter. In addition during the quarter, we also benefitted from a few other factors including incrementally higher density deployments and a larger mix of smaller C2 deals which tend to have higher price per square foot. These factors further brought our pricing for the quarter to levels beyond what we would expect in the future. Regarding renewals on a like-for-like basis where customers renewed contracts without change in square footage, we experienced renewal rates for the third quarter of 2015, reflecting increase in pricing of approximately 0.9% above the pre-renewal pricing rates. The C1 renewal pricing rates increase of 18% was due to a customer increasing their power requirements within their existing space. C2 and C3 renewal rates were down 0.7% partially based on a few customers reducing their service levels without changing their space requirements. On a normalized basis, our renewal rates were in line with our expected renewal increases in the low-to-mid single-digits. Leasing commitments pricing during the quarter was below our prior four quarter average based on the significant volume increase and the commitments of larger deals during the quarter that typically priced at a lower cost per square foot. Overall pricing was in line with expectations when adjusting for the increased volume in square foot brought online during the quarter. In summary, we continue to execute with our differentiated business model, and I’m pleased with the momentum in the business. Our 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 returns 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 you can see on Slide 10, we have continue to demonstrate strong and accelerating growth across all of our key financial metrics on a year-over-year basis, which as Chad mentioned was further enhanced by a full quarter of Carpathia results. Our momentum also can be seen across our entire portfolio, as we continue to experience consistent NOI growth across our major markets. Year-over-year NOI increased 19% in the Atlanta market. Richmond continued strong year-over-year NOI growth of approximately 42% and our California market NOI increased close to 5%. In addition, our other facilities experienced year-over-year growth of 12%. Not only in our Dallas mega data center, which we opened in Q3 2014 experienced significant year-over-year NOI growth it was also up sequentially close to 5%. Next as outlined on Slide 11, our business continues to have strong margins when waited for our product mix. As we mentioned on the call last quarter, we anticipated a decline in margins as we factored in a full quarter effect of Carpathia. As C3 typically contributes lower margins while delivering significantly higher return on invested capital than C1 and C2. It is important to know that we continue to experience operating leverage in our business model. As we scale the business over the infrastructure and service and support organization that we have build. We believe that with our current product mix, we should continue to experience adjusted EBITDA margin expansion that could contribute up to an additional 200 basis points over the next few years. On Slide 12, our backlog of annualized booked-not-billed revenue from signed, but not yet commenced leases. So that $61.3 million of annualized revenue as of September 30, 2015. The high level of backlog continues to give us great comfort on the growth embedded in the business. We continue to expect this booked-not-billed backlog to drop through 2016 as we deliver on our lease commitments over the next year. The stability of our customer base also was evident in our continued low churn for the quarter. Rent churn is the MRR impact of customers completely leaving the QTS platform in a given period, compared to the total MRR at the beginning of the period. Churn for the third quarter was 0.8%, bringing our year-to-date churn to 2%. While we continued to be pleased with this level of churn we do anticipate churn returning to more normalized levels of 5% to 8% annual churn in the future and could see churn above that in 2016, as we begin our Carpathia customer migration process. As Chad mentioned, this incremental cost was factored into our targeted synergy levels for 2016 and we’ve remain on track with our anticipated integration plan. Turning to development on Slide 13, for the third quarter we brought online approximately 22,000 square feet of raised floor across the platform. This was comprised of 10,000 square feet at our Atlanta-Metro mega data center, 7,000 square feet at our Dallas-Fort Worth mega data center and appropriately 5,000 square feet at the Vault campus. All this was in line with the development plans we disclosed last quarter. For the balance of the year, we anticipate bringing online an additional 45,000 square feet of raised floor, this includes 15,000 square feet at Atlanta-Metro and 30,000 square feet at Richmond. The majority of this space is to support the ramp-up of the 19 megawatt C1 customer expansion we disclosed last year. At the end of the quarter, our total build out raised floor was 1.076 million square feet, which is only 49% of the total powered shell raised floor capacity of 2.2 million square feet in our existing facilities. 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 no lower cost and lower risk path to support our future growth. On Slide 14, 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 incremental space in response to customer backlog and real-time demand. Capital expenditures incurred during the third quarter were approximately $69 million, which brings our year-to-date capital expenditures to $246 million excluding acquisitions. Our continued growth in capital efficiency drove an average annualized return on invested capital for the third quarter of 15.7% for a business that still has tremendous capacity available to drive incrementally higher returns. This continues to meet our target level of 15%, but will vary based on the timing of new development projects, acquisitions and other expansion opportunities. Moving to Slide 15, I will review our resulting balance sheet and liquidity position. As of September 30, 2015 our total debt outstanding including capital leases and lease financing obligations was $821 million. Our debt to third quarter annualized adjusted EBITDA was approximately 5.2 times. We continue to target a long-term stabilized debt to adjusted EBITDA ratio of 5 times. But are comfortable at our current levels given the pipeline of booked-not-billed backlog to enable us to grow into this leverage. We anticipate leverage will increase in the fourth quarter and in 2016, as we continue to deliver space to support our 19 megawatt contract, which will continue to ramp and support growth in 2016. Additionally, we believe we have significant liquidity capacity on our balance sheet. As we recently announced, we amended our unsecured credit agreement. This amendment increased the total capacity to $900 million from $650 million and at the same time we eliminated our $120 million secured credit facility on our Richmond asset which has now become part of the unencumbered asset pool. The amended $900 million unsecured credit facility consists of a five and a half year term loan of $150 million, a five-year term loan of $150 million, and a four-year $600 million revolving credit facility with a one year extension option. The facility also has a $200 million accordion feature. In connection with this amendment, our interest costs were also reduced by 15 basis points in relation to the unsecured credit facility and 60 basis points on the Richmond credit facility. Pro forma for our amended credit agreement, we had a total of approximately $440 million in liquidity in the business, made up of availability under our credit facility 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. 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 16, given the strength that we’ve experienced during the first nine months of the year, we are adjusting our 2015 full year guidance. We are raising the low end of our adjusted EBITDA estimates, and we now expect the range for adjusted EBITDA to be between $136 million and $142 million. In addition, we are raising our operating FFO guidance to $100 million to $103 million, and raising operating FFO per share to $2.20 to $2.26 per share. One factor that benefited our OFFO during the third quarter was a tax benefit of approximately $1.4 million, which we also anticipate at a similar level for the fourth quarter. Our OFFO was also reduced during the third quarter, by non-real estate depreciation of approximately $3.5 million for the quarter. This number increased due to the Carpathia acquisition. We anticipate continued non-real estate depreciation at this level with increases into 2016 as our C3 business grows, based on our largest C3 product contribution. Regarding churn, given the low levels we experienced during the first nine months of the year, we are anticipating annual churn for 2015 of 3% to 5%. We also anticipate capital expenditures excluding acquisitions to remain at approximately $300 million to $350 million for 2015. We are confident that this capital will continue to generate our targeted 15 plus percent unlevered returns. Our capital plan has been a balance of investing to support our strong booked-not-billed backlog for a new space online as we continue to sell available capacity in our existing facilities, and bringing on new facilities like Dallas and Chicago to support future growth. Given our continued strong pipeline and backlog, our expected continued new growth in an existing facilities and our continued investment in the future with our Chicago facility, we would expect similar levels of capital expenditures in 2016 as well, which will likely be front end loaded as we continue to do over space for our 19 megawatts C1 contract, and invest to bring Chicago online in the second half of the year. We will provide further detail and formal guidance for 2016, during our fourth quarter earnings call. Overall we remain pleased with our financial success and the growth in our core business. This success only will be accelerated as we continue with the integration of Carpathia and start to recognize the financial benefits we anticipate will happen with the combination of the two businesses. We continue to be excited about the incremental profitable growth, that is supported by our significant backlog and finally, we are pleased with our balance sheet and liquidities supporting strong expectations, for future performance. With that, I’ll turn it back to you Chad.

[Chad Williams:]

Thanks Bill. Our third quarter performance demonstrate the continued success the QTS is achieving in the market by providing solutions that meet the increasingly complex needs of our enterprise customer base. We continue to be driven by our fully integrated 3C product platform and low basis mega data center facilities, which differentiates QTS in the market. Our tremendous capacity with the ability to more than double our raised floor enables us to deliver these products at a known cost with lower risk and support. Our confidence in delivering our 15 plus percent return on invested capital fully stabilized. We believe that it is a right way to build our business, delivering strong growth in a profitable low risk capital efficient manner. I want to continue to thank our customers and shareholders for their continued trust and confidence in QTS. Also at QTS, we are powered by our people. And without the hard work and dedication from our QTSers, none of this would be possible. I’d like to open up the call for questions. Operator?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jonathan Schildkraut of Evercore ISI. Please go ahead.

[Unidentified Analyst:]

Hi, this is Rob. Thanks for taking the question. I was wondering if you guys tell us a little more about the enterprise demand for Cloud, how it’s changing this year and of the breadth of your service offering is helping you to capture that. And similarly I was hoping if you give us some perspective on the broader market for the large footprint C1, from larger footprint C1 demand, even there was many in the quarter. How is that looking from a bigger picture perspective?

[Chad Williams:]

Hi, Rob. Thanks. This is Chad. I’m going to take the first part, I’ll let Dan, kind of add some color to it. Just on the second point first, we continue to see good demand, you’re right that we didn’t see a lot of signed deals in the quarter for C1. But again we’re looking for strategic certain deals that hit our parameter and our profitability metrics and not out chasing kind of every C1 deal. But we do see good robust demand and continue to see the demand grow, excited with Dallas continuing to have great momentum Atlanta, Richmond all the sites continue to build momentum in that category. About Cloud, we of course as we made our acquisition of Carpathia, it was really about strengthening bigger, better, stronger, the capabilities that QTS had and our very kind of focus Cloud, highly secure, highly compliant, high performance. People that actually want to know where their Cloud exist and how the compliance and security around that. So we continue to have some win, Dan you want to add some color to the momentum?

[Dan Bennewitz:]

Yes, Rob. This is Dan. So first half, we continue to see good demand for our customers who offer Cloud solutions in the market place, for example software as a service. While we didn’t have any large C1 deals in the quarter. You did see customers expanding with us, primarily by adding power with no additional square feet. Those are software as a service companies, that looked QTS to help them grow and we continue to see that activity growing and for C1 just to reemphasize what Chad said, is we look at target market for C1 as sort of 500 KW to one to two megawatts. That’s the client profile we want to go after, we’re selective about which deals we go after, they have to meet our return metrics and if an opportunity comes , it doesn’t fit, our return metrics and looking for commoditized space and power, we selectively determine that to went after that. We still see nice demand and growth in that, in the C1 marketplace, which includes a lot of the cloud software as a service companies. Interestingly, one of the other areas we see are systems integrators, for example, CSC, who are looking for partners to help with to bed their cloud down, in their – in terms of their cloud offering to their customers. So we see that, and that situation CSC is looking to QTS for our colocation our C1 solutions, if you will to be a solution for their solution, to their customers including their cloud product. So they’re able to pick and choose, which of the service portfolio they need to offer and integrate in terms of their solutions to their customers. So we are pleased to the level of activity we see, and we continue to be very optimistic about the future.

[Unidentified Analyst:]

Great, thanks. I’ll circle back in the queue.

[Operator:]

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

[Matthew Hines:]

Hi, thanks guys, good morning. I guess, with the updated guidance, it implies a fairly wide range for 4Q EBITDA of about $6 million, but get a much tighter range for FFO, I’m just wondering how we should reconcile this in our model, and I was hoping you could kind of help us understand the assumptions behind the high end and the low end of the EBITDA range?

[Jeff Berson:]

Hey, Matt it’s Jeff. So, on the EBITDA side, what we look to do is narrow the range that you saw from where we were, we still feel pretty comfortable and the momentum in the business and I think that to the extent of the business continues to track along, we feel very good about raising that guidance, raising the midpoint and getting those numbers. On the FFO side, the guidance has also been raised, and actually at the midpoint we’ve raised the guidance. Of course, we based on the tax benefit that we mentioned but also just based on underlying performance been stronger. Bill had mentioned that, you will continuing to look at the capital market as it relates to long-term fixed financing and depending on how we see those financing opportunities that could impact interest expense and could impact FFO, and thus far the volatility that we’re trying to building as we think about FFO guidance.

[Matthew Hines:]

Okay thanks. And then, it looks like, you’ve increased the CapEx associated with second half 2015 development projects by about $18 million from where you were at the same quarter, on the same 67,000 of square footage. I was wondering if there is some additional power density built into that or if there is maybe something else driving the uptick? Thanks.

[Jeff Berson:]

Yes. That’s exactly right, Matt, I mean that comes basically from Richmond, we talked last quarter about our large customer that’s accelerating in Richmond and what we saw is some acceleration in Q4, more on the power density side with the square footage, I think it’s 30,000 feet space fixed. But they’re taking in a little bit more power earlier and so that’s what you saw that incremental $15 plus million.

[Matthew Hines:]

Okay and just one more quick one. You mentioned the large C1 customer renewal taking down additional power. I’m just wondering what the – if you could quantify the revenue impact in the quarter from that renewal – these passed through power impact?

[Dan Bennewitz:]

Well, Matt this is Dan. Just to be clear, it was not a renewal, it was an expansion. So you see that in our – in the supplemental leasing statistics for signed leases. So those were expansions of those customers. In terms of the renewal we all said separate situation where customers renewed and added power that higher power densities with the same square foot. So it’s similar situation, but there are two different scenarios, one was in renewal, and one was just customers expanding when they’re in the middle of their lease.

[Matthew Hines:]

What – okay with either one was there, was there a kind of a notable revenue impact in 3Q from passed through power?

[Jeff Berson:]

No. Matt this is Jeff. I mean you can look – as you look, we’ll give you the annualized rent in the supplemental I mean for the renewals where you saw that 18% of rent change increase from that C1 renewal in-aggregate, it represents under $1 million of annualized rent and a good portion of that was already in the system and some of that increased based on renewal. So you can get a sense in the order of magnitude from that. I mean none of it, really drives any sort of unusual one-time factors in the numbers.

[Chad Williams:]

Yes, and it will take them a while if they add density in their portfolio to actually see the power side of that, the reimbursable side, having the real effect on that. So it got to be later in the – early in 2016.

[Matthew Hines:]

Okay. Thanks a lot guys. Appreciate it.

[Chad Williams:]

Thank you.

[Operator:]

The next question comes from Barry McCarver of Stephens Incorporated. Please go ahead.

[Barry McCarver:]

Hi, good morning guys. Good quarter.

[Chad Williams:]

Hi, Barry.

[Barry McCarver:]

Thanks for taking my questions. I guess just talking broadly if you think about the markets that your data centers are in, are you seeing any oversupply or more aggressive building than what we’ve seen kind of so far in 2015. Any thought about supply going into next year?

[Chad Williams:]

Barry, Chad. Good to talk to you. What’s been nice over the last couple of years is the group of competitors been disciplined on capital and careful with inventory and everybody kind of adopted something that we’ve had from the beginning which was just in time delivery of space and power, and I think it’s good for the industry, but in Atlanta we continue to be a leader in that market and continue to build space to deliver the customers, as they continue to grow, Dallas has been robust and how they accelerated, but everybody seems to be measured in on pace, and seeing brisk leasing activities in all the markets that we are in and, Dan. I don’t know if you have anything to add to that.

[Dan Bennewitz:]

The only thing I’d add is, is we are very excited to be entering Chicago in the middle of next year, and that we think that’s a good market for us. And we are excited about the potential in Chicago in 2016.

[Barry McCarver:]

Very good. And then just secondly I think, related to margins EBITDA margins, it certainly sounds like, you’re suggesting flatter margins in 2016 as we start to move customers over, maybe some incremental cost, some incremental return as we start to move customers over to own data centers. Is there expectations for improving next year or just pretty flat?

[Jeff Berson:]

No, let me make sure that that was misunderstood. We continue to think that we’ve got operating leverage in the business, and we are comfortable off of the new margin level that was about 44% this quarter, which is impacted based on the new product mix. We still have a couple of hundred basis points in margin improvement in our model over the next few years. And we have factored in to your point as we accelerate migration – potential migration of customers in 2016, and the guidance we give in the $2 million of synergies, we’ve given, we factored into that an expectation of some of those cost in migration. So we still think, we’ll see margin improvement even with that factor in that.

[Barry McCarver:]

All right, very good. Thanks for clean that up, Jeff.

[Jeff Berson:]

Thank you.

[Chad Williams:]

Thank you.

[Operator:]

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

[Vincent Chao:]

Hey, good morning everyone.

[Jeff Berson:]

Good morning.

[Vincent Chao:]

I just want to go back to the commentary about sort of the fixing some of the variable rate next year, I guess, when – Bill when you were speaking about it, I thought it was just kind of more of the longer-term plan, but Jeff, if I’m not mistaken – it does sound like the FFO guidance range contemplates potentially some fixing before year end, does that right?

[Bill Schafer:]

No, not that’s fairly been, I mean, in fact we’ve been indicated in the supplements and in the guidance that we haven’t factored in any capital markets activity. But, with regard to that something that we are, we watch that basically every single day, and will continue to evaluate and make decisions based on market activity where our liquidity balance are, liquidity needs are, and again, if there is good opportunities to kind of extend maturities and lock in fixed rate debt, those are things that, again we’ll take advantage of, when the opportunity presents itself.

[Vincent Chao:]

Okay, thanks for that clarification. Just thinking about the revenue guidance here, mid-to-high teens that’s been the case for quite some time. Just curious if you exclude Carpathia from third quarter – from results, I mean do you have a sense of what the year-to-date growth has been?

[Chad Williams:]

Yes. Vin, so Carpathia for the quarter was pretty much in line with – when we announced the deal and said that they are at about $90 million of annualized revenue for 2015. So they’re tracking right with what our expectation was there. If you back that out, the core QTS business has been performing at the high end of that mid-to-high teens growth rate. And we’re comfortable going forward that both independently and then combined basis will continue to achieve that mid-to-high teen level.

[Vincent Chao:]

Okay. Thanks and then may be one other question. I know you’re – can provide guidance for next year for 2016. But if we think about sort of lease signings, exclusive of any sort of major C1 deals. Do you think $10 million a quarter of signing is a reasonable run rate and I know you’ve been kind of bouncing around a little bit but is that seem like a reasonable estimate?

[Chad Williams:]

Yes. I think – you know we have, had, this quarter we like our performance, the engine of our business continues to be C2, we put up $5.6 million in net new leasings, we had quarters in the last four quarters that we’re left in that and we’ve had some – that were more than that. I think at the end of the day, we feel like that the momentum in the business continues to support the mid-to-high teens growth in revenue and we do – to Hines point earlier, to sometimes went to compete and see when and when not to. But it’s a huge accelerate for growth, when you’ve got a portfolio that has a million square feet of operating data center space and you can go to 2.1 million square feet with what you own, that’s power. It does give you the ability that from time-to-time you can accelerate growth by having a right strategic profitable C1 deals. But I think, our large booked but not billing backlog gives us a lot of visibility at $61 million going forward and we’re going to continue to drive the business in the momentum that we see in the business and continue to be happy with the results that continue to make the business happen.

[Jeff Berson:]

Vin, one of the other things that will drive – that growth is going to be based on two factors. One is continued booking as Chad said we think steady C2, C3 and accelerated C1 as we’ve seen in the past. But the other as Dan had mentioned or Bill had mentioned in lease payments was given a new product mix, we’re also going to be seeing some higher revenue per square foot coming from the higher weighting in C3. And that’s part of why we like that business and like the Carpathia deals, it’s adding more capital efficiency and higher revenue per square foot product. So part of what will support our growth will be that increased leasing volume and then part of it will be some – some pricing acceleration from the C3 mix.

[Vincent Chao:]

Okay. Thanks guys.

[Operator:]

The next question comes from Jordan Sadler of KeyBanc Capital. Please go ahead.

[Jordan Sadler:]

Thanks, good morning everybody. I wanted to expand a little bit on Vin’s last question. Just to clarify, the $10 million is a number that I picked up on as well in the prepared remarks, and I’m looking at that versus your new base of revenue of plus or minus $90 million quarterly is, and I’m thinking about the mid-teens revenue growth that you are pointing us to. And if I, so if I take the new base of revenue on an annualized basis, and we say you’re annualizing, let’s say $360 million of revenue off of the fourth quarter. That would imply revenue growth that would be pretty meaningfully above the $10 million a quarter of new lease signings. So I’m not trying to pin you down, but I guess, I’m looking at that $10 million and I feel like that, it sounds like almost the low number relative to the mid-teens revenue growth, so target that you see maybe pointing toward. So am I thinking about something exactly or?

[Chad Williams:]

It’s a fair question, I think the comment on the $10 million, was that’s really what we’ve averaged over the last three quarters. The point being that, you’re going to have some quarters higher, some quarters lower, but we still feel comfortable with general trend. Well, it was not reflected if you just look at our average over the last three quarters, is going forward we do have a larger base of Carpathia. And so, to your point on that, may not work, if you assume that – same 10,000 going forward, we would expect that number to be higher of the larger base of Carpathia, and then as I said, we also expect pricing to move up a little bit. So when you blend all of that again, if your models are pumping up something in the mid-to-high teens, those are the numbers that we continue to be comfortable with.

[Jordan Sadler:]

From a top line perspective?

[Chad Williams:]

Correct.

[Jordan Sadler:]

All right, that’s helpful. And then maybe just a little bit of a finer point on another angle maybe for damp [ph] just curious about the demand funnel including Carpathia and what you are seeing sort of today versus maybe 90 days ago, or 120 days ago?

[Chad Williams:]

Well, Jordan first off we’re continued to be very excited with the opportunity with Carpathia. We’re having – that the, what Carpathia brings in terms of their solution set, is allowing us to have different conversations with customers and CIOs. And so, it fits into, what we want to do is to be able to offer the CIOs solution portfolio that they can take advantage of, to help as their IT needs change in the future. This notion of a hybrid IT. So I think, we see the activity is very, very good, very strong, we’re in different higher level type discussions with customers and be able to be more of a service provider to them. And so we’re very excited about the opportunity there, I think that will translate to – we continue to say C2 and C3 is the foundation of our business, that’s our runway we continue to like the level of activity there. And then as Chad said, for our C1 those are deals were selected by, wished to go after that, obviously accelerate growth. But we want to do those deals where they need our return metrics. So we’re very – we’re pleased with the way the Carpathia is integrating and that’s – very excited with the solutions that we can offer to the customers.

[Jeff Berson:]

I think in the transcript had some good, try to give you some tangible things around some of the QTS leads that were enhanced, enclosed by the additional strength that the Carpathia teams and talent bring to us. So pretty exciting opportunity for us to continue to integrate into one QTS.

[Jordan Sadler:]

Thank you, guys. Last one from me, is a follow-up on the guidance. But more so, may be above the line, ex-financing. I think the new adjusted EBITDA guidance of $136 million to $142 million. The low end there, I guess that in – Jeff, it implies like $37 million number for fourth quarter versus something close to $40 million I think in this quarter. Is there anything on the expense side or in the churn side I should be focused on that might be dragging that number down. Because I know you’ve got some booked-not-billed that’s going to commence, that will be an offset.

[Chad Williams:]

Now, Jordan, I think you’re thinking about it right and we’re just – we’re continuing to give ourselves a range and trying to give a range that we are comfortable will be able to perform within.

[Jordan Sadler:]

Is there anything coming online in terms of new space in the fourth quarter that’ll – there will be some expenses that pop up that we need to be focused on?

[Chad Williams:]

Yes. I mean if you look at our booked-not-billed backlog, right and what we’ve continue to tell people is particularly on that 19 megawatt deal, a lot of that is coming, it was back end loaded to 15 and going to hit in 16. So what you will see from that from a capital spend standpoint. But that’s not really, as much of an EBITDA factor. From a capital spend you will see some real CapEx coming into that business, to bring that space online in Q4 and into early next year. And then you’ll see the revenue from that business really start to ramp and impact our numbers more into next year. So you will see some impact on the model from that and as a result of that you’ll see leverage ticking up as we put some more CapEx in towards the end of this year and its early next. But from an operating EBITDA performance, there is nothing that we’re anticipating in Q4 that’s particularly unusual.

[Jordan Sadler:]

Okay. Thank you.

[Operator:]

The next question comes from Jonathan Atkin of RBC Capital. Please go ahead.

[Jonathan Atkin:]

Thank you. I was interested in the pricing strength that Chad mentioned, that was on a per square foot basis. If we could drill down perhaps, what was driving that was obviously higher power density. So on a procural lot basis for your C2 incremental business, I just wondered how that behaves, whether that was stable or whether that also increased. And then I had a couple of questions about occupancy, I noticed that in couple of markets like Santa Clara, Jersey City and Miami, the occupancy decreased and I wondered what some of the factors there were given the square foot number seems to be unchanged. Thank you.

[Chad Williams:]

Yes, Thanks, Jonathan. I’m going to let Dan, part of the leasing success when I look at it for the quarter was almost $9 million of net incremental leasing and then as we take down rates out of that, some of that also affects the occupancy numbers because from time-to-time we’ll proactively do some consolidation where we can take some space and power back in tight markets or tight facilities that Dan and his team can optimize and then resell for a higher price and so some of that – in a couple instances had some pretty material impact to get us down to kind of the $5.6 million of net new leasing. So the engine continues to run in that business and when we can optimize and think long-term value creation by taken back space resale it at a higher price and doing some proactive take back – and keep the customer and have a win-win, we encourage that. Dan, you want to speak a little more about that in particular pricing question?

[Dan Bennewitz:]

Yes. So Jonathan, so let me address it two ways. So first, in terms of the new leases we talked before about a couple of C1 deals that we’re adding power into existing square feet to higher power densities, drill much higher rent per square foot. In the C2, C3 space, you saw, sort of in the prior quarters, we are between $1,000 and $1,015 per square foot. It jumps to over $1,600 this quarter, primarily for two reasons. One is we have a higher mix of our C3 product, obviously which includes Carpathia. And so that was probably, $150 a square foot is by itself. For the quarter, we had another, some unique situations where customers also added power densities without adding any additional space, and that’s – I think, a reflection of, A our customers are able to continue to grow with us, and B we have great infrastructure to be able to support those higher densities in our data centers there. So that I think it’s more of a one-time or exceptional basis, I think we’ll have those coming up in the future. I think the higher mix of C3, particularly with Carpathia; we’ll support sort of that the pricing for C2 and C3 going from a 1,000 to say 11 up, 11.50 that’s both under dollars equivalent.

[Jonathan Atkin:]

Okay, and then on the Jersey City, there was redevelopment activity referenced, in the last supplement but not in the 3Q supplement, and I wondered what the status was with that, because that’s why it was appears that square footage is unchanged?

[Jeff Berson:]

That something, it’s more on the timing perspective associated with that as we continue to evaluate – how we are going to grow that the raised square footage in that facility, and it’s more on a timing versus anything else. And you are right, I mean, you talked about, you mentioned a few of the percentages going down, and when you’re north of 95% or in some cases we were at 98%, 99%. And again, when you are dealing with relatively, I will say some of those facilities are little bit smaller when you referred to Jersey and Miami relative to our mega data centers and so yes, we will see fluctuations that are up and down, but when you get to that higher level it’s sometime higher, it’s more difficult to take that up. And that the space comes – we do get some space back there, I mean, that’s immediate when it comes back within will lease it up probably a lot in distant future.

[Jonathan Atkin:]

Thanks very much.

[Jeff Berson:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would now like to turn the conference back over to Chad Williams for any closing remarks. Please go ahead.

[Chad Williams:]

Well, again everyone thanks for calling in, thanks for your time, we continue to be excited about the opportunities. We thank our employees and our QTSers around the country that continue to make this possible. We thank our shareholders and all the people that make this possible. So we continue to have great momentum in our business, we continue to be excited about our strategy and our execution. We look forward to speaking with you in the next quarter, and I must close by saying sorry to the New Yorkers, but the Royals did win last night, 1-0. But it was one of the best World Series Games ever, Go Royals. Thank you.

[Operator:]

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