QTS Realty Trust, Inc - Fourth Quarter and Year-End 2017 Earnings Presentation
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QTS Realty Trust, Inc.
Fourth Quarter and Year-End 2017
Earnings Presentation
© 2016 QTS. All Rights Reserved.
Forward Looking Statements
Some of the statements contained in this presentation constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to
expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In particular,
statements pertaining to our capital resources, portfolio performance results of operations, anticipated growth in our funds from operations and anticipated market conditions contain
forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future
events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements contained in this presentation reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties,
assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that
the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to
differ materially from those set forth or contemplated in the forward-looking statements:
adverse economic or real estate developments in our markets or the technology industry;
obsolescence or reduction in marketability of our infrastructure due to changing industry demands;
global, national and local economic conditions;
risks related to our international operations;
difficulties in identifying properties to acquire and completing acquisitions;
our failure to successfully develop, redevelop and operate acquired properties or lines of business;
significant increases in construction and development costs;
the increasingly competitive environment in which we operate;
defaults on, or termination or non-renewal of, leases by customers;
decreased rental rates or increased vacancy rates;
increased interest rates and operating costs, including increased energy costs;
financing risks, including our failure to obtain necessary outside financing;
dependence on third parties to provide Internet, telecommunications and network connectivity to our data centers;
our failure to qualify and maintain our qualification as a REIT;
environmental uncertainties and risks related to natural disasters;
financial market fluctuations; and
changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. Any forward-looking statement speaks only as of the date on which it
was made. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or
methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements,
see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 (“10-K”) and in the other periodic reports we file with the Securities
and Exchange Commission.
This presentation includes measures not derived in accordance with generally accepted accounting principles (“GAAP”), such as FFO, operating FFO, adjusted Operating FFO,
EBITDA, adjusted EBITDA, NOI, ROIC and MRR. These measures should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and may
also be inconsistent with similar measures presented by other companies. Reconciliation of these measures to the most closely comparable GAAP measures are presented in the
attached pages. We refer you to the appendix of this presentation for reconciliations of these measures and to the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Non-GAAP Financial Measures" in our 10-K for further information regarding these measures..
© 2016 QTS. All Rights Reserved.
Fourth Quarter and Year-End 2017 Overview © 2016 QTS. All Rights Reserved.
3
2017 Year in Review
Revenue ($M) NOI ($M) 2017 Highlights
Deepened presence
$446.5 in existing growth
$281.3
markets: Atlanta,
Dallas and Chicago
$402.4 $257.0
Expanded footprint
with strategic land
acquisitions in
Ashburn, VA; Phoenix,
AZ; and Hillsboro, OR
2016 2017 2016 2017 Launched
Hyperblock solution
Adjusted EBITDA ($M) Operating FFO per Share Officially launched
industry-first
software-defined
$208.0 $2.76
data center platform
$2.61 Announced strategic
$184.3 partnership with
leading SDN platforms
Signed strategic
collaboration with
AWS – QTS
2016 2017 2016 2017 CloudRamp
© 2016 QTS. All Rights Reserved.
4
Q4 2017 Operating Performance Review
Signed new and modified leases in Q4 ’17 representing $8.7M of
incremental annualized rent
- Reflects 49 new logos, up 60%+ vs. Q4 ’16
- Includes 2MW Hyperblock expansion with existing customer in Irving, TX
- Subsequent to the end of Q4 ’17, signed a new tenant in one of QTS’ leased facilities in
Northern Virginia
Refills capacity that was previously vacated by a government contractor in early 2017
Had this deal signed during the fourth quarter, as previously expected, Q4 ’17 net
leasing would have exceeded $14M
Demand strength in Atlanta, Chicago and Piscataway
$ $ Booked-not-billed backlog remains strong at $47M of annualized rent as
$ $ $ of Q4 ’17
Pricing continues to reflect a healthy demand environment
- Pricing on new & modified leases up 8% vs. P4Q average
- Renewal rates up 1.2%, consistent with expectation of low to mid single digit percent
increases
© 2016 QTS. All Rights Reserved.
5
Fourth Quarter Leasing Detail
Leasing results in Q4 ’17 were below our prior four-quarter average
- Partially driven by delays in wholesale lease signings, which remain in pipeline or were
signed in Q1, and downgrade activity in C3 – Cloud and Managed Services business
Churn in Q4’17 of 2.8%, bringing full-year churn to 8.4%
- Q4’17 churn includes unanticipated C3 customer liquidation representing 1.2% of churn
Net Incremental Annualized Rent Signed ($M)
Average:
$12.0M
Average:
Average: $10.4M
$9.9M
2015 2016 2017
© 2016 QTS. All Rights Reserved.
QTS Strategic Plan to Accelerate Growth and Profitability © 2016 QTS. All Rights Reserved.
7
Strategic Plan to Accelerate Leasing and Growth in 2018 and Beyond
Purpose
QTS is seeing significant momentum in both Hyperscale and Hybrid Colocation; need to further align
the business with those primary growth drivers
Plan reduces complexity and cost in business and enhances growth, margin and predictability
Initiatives
Realign Salesforce and Further Narrow Focus of Broader Cost Reduction
Organization C3 Product Portfolio Initiative
Hyperscale
+
+ Focus exclusively on
solutions that
+ Align cost structure with
more simplified
Hybrid Colocation complement colocation business model
Benefits
Increase margin
Increase leasing volume Reduce complexity
Increase profitability
Accelerate revenue Improve predictability
Enhance OFFO/share
growth Operating efficiencies
growth and performance
© 2016 QTS. All Rights Reserved.
8
Differentiated Capability to Drive Success in Both Hyperscale and
Hybrid Colocation
Hyperscale Customers Need: Hybrid Colocation Customers Need:
Scale Economics Integrated Hybrid Solution Seamless Connectivity
Speed Location Premium Customer Service Secure & Compliant
QTS Solution: QTS Solution:
World-Class Infrastructure & Hybrid Colocation
Mega Data Centers Platform
Significant Growth Capacity – 1.3M SF of powered shell Software-Defined Data Center Platform – Provides
capacity in top U.S. markets with ability to scale quickly and infrastructure visibility and dynamic control to customers
efficiently
Enhanced Hybrid Solutions through QTS CloudRamp –
Operating and Build Cost Advantage – Low basis focus + Strategic partnerships with public cloud providers expand
mega scale approach provide permanent cost advantage hybrid colocation opportunity
Seamless Connectivity – SDN-enabled universal connectivity
New Market Expansion in Ashburn, Phoenix and to carriers, service providers and CSP’s
Hillsboro – Provides future path to growth capacity in
markets where hyperscale customers want to be High-End Security and Compliance – Dedicated team to
help enterprises manage cyber risks against their data
Premium Customer Experience and Service Delivery –
Software-defined platform and service delivery track record Premium Customer Experience – Portfolio of managed
provide further differentiation for hyperscale customers services and industry-leading customer service
© 2016 QTS. All Rights Reserved.
9
Hyperscale Growth Strategy Ramping
Recent land acquisitions in key markets have enabled
expanded hyperscale customer dialogues
Hyperscale opportunity pipeline is 4X vs. beginning of
2017
Active discussions on needs ranging from 4 to 40MW’s
Four Hyperblock leases signed since product introduction in
Q2 ’17
- 2MW Hyperblock expansion in Dallas during Q4’17 brings
customer’s total deployment up to 12MW with QTS
- Participated in multi-location public cloud RFP through two
Hyperblock leases in Atlanta and Dallas during Q3’17
Plan to bring 124k square feet of raised floor capacity online
in 2018, with the majority to satisfy current and future
hyperscale demand
© 2016 QTS. All Rights Reserved.10
Software-Defined Platform Differentiating QTS
in Hybrid Colocation Market
Recent customer wins driven by software-defined data center
platform
- University Hospital - Piscataway
- Global financial services firm - Piscataway
- Transportation and logistics company - Chicago
QTS CloudRamp partnership with AWS ramping
- Signed multiple CloudRamp customers in Q1’18
- Pipeline continues to build consistent with expectations
SDN partners driving accelerated pace of cross connect growth
- Q4 ‘17 connectivity revenue up 15% year-over-year
Re-leased formerly vacated facility in Northern VA during Q1 ’18
- Further validates QTS Federal focus
- Had deal signed during Q4 ’17, as previously expected,
Q4’17 net leasing would have exceeded $14M
© 2016 QTS. All Rights Reserved.11
QTS Piscataway: A Hybrid Colocation Success Story
Return on Invested Capital – Piscataway, NJ
12.0% Facility acquired in June 2016 for $125M
8.8% Mega scale: capacity to double
raised floor SF to 176,000 and
expand critical MW to 26MW
5.9% within powered shell
Low basis: purchase price $14M per MW
Acquisition Current Run-Rate Current Run-Rate +
(June 2016) (Q4 '17) Signed Backlog Growth opportunity: drive higher
utilization and returns through
Customers: 19 26 34 hybrid platform
Annualized MRR: $7.5M $13.9M $15.4M
© 2016 QTS. All Rights Reserved.12
Restructuring Plan Step #1 - Realigning Organization Around
Hyperscale and Hybrid Colocation
C3 Hyperscale Hybrid Colocation
C1 C2
Hyperscale sales team
C1-Wholesale Sales Team focused exclusively on top
30 Hyperscale accounts
Hybrid Colocation team
C2-Commercial Sales Team enabled to pursue all non-
Hyperscale opportunities
Realigning QTS leadership team around Hyperscale and Hybrid Colocation
Dan Bennewitz, COO – Sales and Marketing, plans to retire in 2018
- QTS has commenced an executive search for a Chief Revenue Officer as a replacement
- Tag Greason, EVP of Sales, will continue to lead hyperscale sales
David Robey, formerly VP of Facilities will be named QTS’ Chief Operating Officer
- Succeeds Jim Reinhart, who will be transitioning out of the organization
Expect realignment to drive accelerated core leasing and revenue growth rates
© 2016 QTS. All Rights Reserved.13
Restructuring Plan Step #2 – Further Narrow Focus of C3 - Cloud &
Managed Services Unit to Support Hybrid Colocation
Simplifying product portfolio to exclusively focus on solutions that complement hybrid colocation product
Reduce product portfolio from >100 products to approximately 15
Proven strength in “Core” products that are strategic to QTS’ long-term growth and differentiated colocation
Secured Remote
Logistics Hands
Hardware
Assure
Software-Defined Data High-End Security & QTS CloudRamp Managed Services
Center Platform Compliance Support Partners
Total revenue associated with exit of “Non-Core” products of approximately $65-75M
Revenue impact from exit of lower margin “Non-Core” products offset by direct and indirect costs
associated with operating full C3 – Cloud & Managed Services platform
Simplification of product portfolio will significantly improve predictability and operating efficiencies while
reducing complexity in the business
© 2016 QTS. All Rights Reserved.14
Restructuring Plan Step #3 - Cost Reduction Initiative
Narrow C3 Focus
Rent expense associated with certain leased data centers
_______
_______
_______
_______ Software licenses
53%
Core1 Adjusted
Communications expense EBITDA margin
in 2018
Hardware depreciation
Personnel-related expenses
Broader cost reduction initiatives + narrowing the scope of C3 product portfolio enables
QTS to achieve adjusted EBITDA margin in “Core” business of approximately 53%
in 2018
Enables business restructuring with relatively modest impact on bottom line performance
Aligning cost structure with simplified business model enables increased margin and profitability and
enhanced OFFO/share growth and performance
1.Core business includes Hyperscale and Hybrid Colocation businesses and excludes Non-Core Business unit. Non-Core business includes specific
© 2016 QTS. All Rights Reserved. products within C3 – Cloud and Managed Services business that QTS plans to exit over the course of 2018 in addition to an estimate of C3-
attached colocation revenue.Financial Outlook © 2016 QTS. All Rights Reserved.
16
Full Year 2018 Core Guidance Summary
2018 Core Guidance2
Low Mid High
Core Revenue $408m $415m $422m
Core Adjusted EBITDA $218m $223m $228m
Core Operating FFO per diluted share $2.55 $2.60 $2.65
Capital Expenditures1 $425m $450m $475m
Over the course of 2018, QTS will provide guidance and disclosure around its Core3
business to isolate trends in the go-forward business and will separate out Non-Core4
business financials which QTS is in the process of exiting.
Annual rental churn for Core business: 3% - 6% (vs. historical target range of 5% - 8%)
Capital expenditures of $425-475m, front-end loaded in 2018 related to new development in
Ashburn, VA; excludes additional success-based development in Hillsboro, OR and Phoenix,
AZ
Expect to maintain leverage in the mid-5x range over the course of 2018 and will evaluate a
range of funding options including: 1) ATM program, 2) structured financing, 3) JV
partnership opportunities, and 4) potential asset divestitures.
1. Reflects cash capital expenditures and excludes capital expenditures from acquisitions
2.2018 guidance excludes results from Non-Core Business unit, which QTS expects to exit over the course of 2018 as part of restructuring plan
© 2016 QTS. All Rights Reserved. 3.Core business includes Hyperscale and Hybrid Colocation businesses
4.Non-Core business includes specific products within C3 – Cloud and Managed Services business that QTS plans to exit in addition to an estimate
of C3-attached colocation revenue.17
2018 Guidance Bridge – Investor Day vs. Current View ($50)
2018 Core Revenue Guidance ($ in millions)
$500 ($65) – ($75)
Non-Core C3
Revenue
($45)-($50)
$450
($7) ($5) – ($10) $408 - $422
C2 Revenue
$400 attached to C3
deals
$500 ($20)-($25)
$350 $447
$300
$250
2017 Preliminary Exit of Non-Core C3 Customer Q4’17 Leasing 2018 Core Revenue
Revenue Implied 2018 Revenue Churn Impact Guidance
Revenue in Q4’17 (Current View)
Guidance
(Investor day)
© 2016 QTS. All Rights Reserved.18
2018 Guidance Bridge – Investor Day vs. Current View
2018 Core Adjusted EBITDA Guidance ($ in millions)
$250
($4) – ($5)
($3) – ($4) $218 - $228
$230 ($4) – ($5)
53.7%
$210 Margin* $2.55 - $2.65
$190 $235
47.0%
$208 Margin
$170 46.6%
Margin
$150
2017 Adjusted Preliminary Exit of Non- C3 Customer Q4’17 2018 Core Adj. 2018 Core OFFO
EBITDA Implied 2018 Core Revenue Churn Leasing EBITDA Per Diluted
Adj. EBITDA in Q4’17 Impact Guidance Share Guidance
Guidance (Current View) (Current View)
(Investor day)
© 2016 QTS. All Rights Reserved. * Midpoint19
Updated QTS 2020 Vision
Investor Day View Updated Core1 View
(Nov. ’17) (as of Q4 ’17)
Revenue Growth 12% in 2018; Ramping to Mid- Accelerated Ramp to Mid-Teens % Growth in Core
Teens % Growth by 2020 Revenue in 2019 and 2020
Adjusted EBITDA • 50bp Margin Expansion • 53%+ Core Adj. EBITDA Margin in 2018, Up 600+ bp
Margin Annually vs. Prior View
• Implied ~48% Margin by 2020 • 50bp Margin Expansion Annually in 2019 and 2020
• Implies 54% Core Adj. EBITDA Margin by 2020
OFFO Per Share 300bp Below Revenue Growth • 300bp Below Revenue Growth
Growth2 • $3.50 OFFO per Diluted Share Run-Rate by End of
2020, In-Line With Prior View
Leverage3 Low to Mid 5x Range Low to Mid 5x Range
© 2016 QTS. All Rights Reserved. 1. Core business includes Hyperscale and Hybrid Colocation businesses
2. Excluding non-cash tax benefit
3. Long-term target leverage remains 5x or lower20
Restructuring Plan Summary
Key Steps
Realign salesforce Further narrow C3 Broader cost
and organization product portfolio reduction initiative
around to focus on managed to align cost structure with
Hyperscale and services that enhance more simplified business
Hybrid Colocation colocation model
Benefits
$
Increase margin
Increase leasing Reduce complexity
+
volume +
Increase profitability
+ Improve predictability
+
Accelerate revenue +
Enhance OFFO/share
growth Operating efficiencies
growth & performance
© 2016 QTS. All Rights Reserved.Thank You © 2016 QTS. All Rights Reserved.
Appendix © 2016 QTS. All Rights Reserved. 22
22
NOI Reconciliation
Three Months Ended Year Ended
December 31, September 30, December 31, December 31,
$ in thousands 2017 2017 2016 2017 2016
Net Operating Income (NOI)
Net income (loss) $ (16,113) $ 7,394 $ 5,481 $ 1,457 $ 24,685
Interest expense 8,049 7,958 6,125 30,523 23,159
Interest income (1) (65) - (67) (3)
Depreciation and amortization 37,140 35,309 33,093 140,924 124,786
Debt restructuring costs 19,992 - 194 19,992 193
Tax benefit of taxable REIT subsidiaries (4,374) (2,454) (707) (9,778) (9,976)
Transaction, integration and impairment costs 9,449 1,114 1,521 11,060 10,906
General and administrative expenses 20,820 21,652 21,450 87,231 83,286
$ $ $ $ $
NOI (1) 74,962 70,908 67,157 281,342 257,036
Breakdown of NOI by facility:
Atlanta-Metro data center $ 20,845 $ 18,588 $ 20,187 $ 80,648 $ 81,074
Atlanta-Suwanee data center 12,778 12,206 11,937 48,365 45,760
Richmond data center 12,613 11,687 8,324 40,919 30,752
Irving data center 9,666 8,707 4,952 32,870 16,608
Dulles data center 5,744 5,630 4,877 21,672 19,384
Leased data centers (2) 2,238 2,648 5,504 12,006 24,131
Santa Clara data center 2,653 2,741 3,325 11,378 13,703
Piscataway data center 2,286 2,427 2,871 9,395 5,627
Princeton data center 2,391 2,415 2,364 9,598 9,544
Sacramento data center 1,664 1,525 1,892 6,804 7,734
Chicago data center 1,445 1,285 324 4,652 167
Fort Worth data center (7) 94 3 268 3
Other facilities (3) 646 955 597 2,767 2,549
NOI (1) $ 74,962 $ 70,908 $ 67,157 $ 281,342 $ 257,036
1. Includes facility level general and administrative expense allocation charges of 4% of cash revenue for all facilities, with the exception of the leased facilities acquired in 2015, which
include general and administrative expense allocation charges of 10% of cash revenue. These allocated charges aggregated to $5.6 million, $5.5 million and $5.3 million for the three
month periods ended December 31, 2017, September 30, 2017, and December 31, 2016, respectively, and $21.6 million and $20.6 million for the years ended December 31, 2017
and 2016, respectively.
2. At December 31, 2017 includes 11 facilities. All facilities are leased, including those subject to capital leases. During the quarter ended March 31, 2017, the Company moved its
Jersey City, NJ facility to the “Leased data centers” line item. In October 2017, the Company finalized the buyout of the Vault facility in Dulles, VA that was previously subject to a
capital lease agreement, and as such has moved it to a separate “Dulles data center” line item
3. Consists of Miami, FL; Lenexa, KS; Overland Park, KS; and Duluth, GA facilities. During the quarter ended March 31, 2017, the Company moved its Miami, FL facility to the “Other
facilities” line item
© 2016 QTS. All Rights Reserved.23
EBITDA & Adjusted EBITDA Reconciliation
Three Months Ended Year Ended
December 31, September 30, December 31, December 31,
$ in thousands 2017 2017 2016 2017 2016
EBITDA and Adjusted EBITDA
Net income (loss) $ (16,113) $ 7,394 $ 5,481 $ 1,457 $ 24,685
Interest expense 8,049 7,958 6,125 30,523 23,159
Interest income (1) (65) - (67) (3)
Tax benefit of taxable REIT subsidiaries (4,374) (2,454) (707) (9,778) (9,976)
Depreciation and amortization 37,140 35,309 33,093 140,924 124,786
EBITDA 24,701 48,142 43,992 163,059 162,651
Debt restructuring costs 19,992 - 194 19,992 193
Equity-based compensation expense 3,356 3,693 2,697 13,863 10,584
Transaction, integration and impairment costs 9,449 1,114 1,521 11,060 10,906
Adjusted EBITDA $ 57,498 $ 52,949 $ 48,404 $ 207,974 $ 184,334
© 2016 QTS. All Rights Reserved.24
FFO, Operating FFO and Adjusted Operating FFO Reconciliation
Three Months Ended Year Ended
December 31, September 30, December 31, December 31,
$ in thousands 2017 2017 2016 2017 2016
FFO
Net income (loss) $ (16,113) $ 7,394 $ 5,481 $ 1,457 $ 24,685
Real estate depreciation and amortization 32,539 31,237 28,703 123,555 108,474
FFO 16,426 38,631 34,184 125,012 133,159
Debt restructuring costs 19,992 - 193 19,992 193
Transaction, integration and impairment costs 9,449 1,114 1,521 11,060 10,906
Tax benefit associated with transaction and integration costs - - (525) - (3,592)
Operating FFO * 45,867 39,745 35,373 156,064 140,666
Maintenance Capex (848) (2,193) (2,613) (5,009) (5,059)
Leasing commissions paid (6,299) (5,592) (5,154) (20,115) (18,751)
Amortization of deferred financing costs and bond discount 925 992 912 3,868 3,545
Non real estate depreciation and amortization 4,601 4,071 4,390 17,369 16,313
Straight line rent revenue and expense and other (2,054) (1,149) (984) (4,967) (6,794)
Tax benefit from operating results (4,374) (2,454) (181) (9,778) (6,384)
Equity-based compensation expense 3,356 3,693 2,697 13,863 10,584
Adjusted Operating FFO * $ 41,174 $ 37,113 $ 34,440 $ 151,295 $ 134,120
*The company’s calculations of Operating FFO and Adjusted Operating FFO may not be comparable to Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use
the same definition
© 2016 QTS. All Rights Reserved.25
MRR Reconciliation
Three Months Ended Year Ended
December 31, September 30, December 31, December 31,
$ in thousands 2017 2017 2016 2017 2016
Recognized MRR in the period
Total period revenues (GAAP basis) $ 118,911 $ 113,767 $ 105,443 $ 446,510 $ 402,363
Less: Total period recoveries (11,053) (9,698) (8,965) (37,886) (29,271)
Total period deferred setup fees (2,979) (2,659) (2,636) (10,690) (9,172)
Total period straight line rent and other (9,442) (6,982) (2,867) (22,848) (16,589)
Recognized MRR in the period 95,437 94,428 90,975 375,086 347,331
MRR at period end
Total period revenues (GAAP basis) $ 118,911 $ 113,767 $ 105,443 $ 446,510 $ 402,363
Less: Total revenues excluding last month (78,746) (76,912) (69,465) (406,345) (366,385)
Total revenues for last month of period 40,165 36,855 35,978 40,165 35,978
Less: Last month recoveries (3,175) (2,631) (3,247) (3,175) (3,247)
Last month deferred setup fees (1,123) (893) (968) (1,123) (968)
Last month straight line rent and other (4,159) (1,704) (873) (4,159) (873)
MRR at period end $ 31,708 $ 31,627 $ 30,890 $ 31,708 $ 30,890
© 2016 QTS. All Rights Reserved.You can also read
