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Edited Transcript of QTS earnings conference call or presentation 5-Nov-19 1:30pm GMT

Q3 2019 QTS Realty Trust Inc Earnings Call

Overland Park Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of QTS Realty Trust Inc earnings conference call or presentation Tuesday, November 5, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chad L. Williams

QTS Realty Trust, Inc. - Chairman, President & CEO

* Jeffrey H. Berson

QTS Realty Trust, Inc. - CFO

* Jon D. Greaves

QTS Realty Trust, Inc. - CTO

* Stephen W. Douglas

QTS Realty Trust, Inc. - VP of Finance & IR

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Conference Call Participants

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* Aryeh Klein

BMO Capital Markets Equity Research - Analyst

* Brett Joseph Feldman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Eric Thomas Luebchow

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Erik Peter Rasmussen

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Michael J. Funk

BofA Merrill Lynch, Research Division - VP

* Nicholas Ralph Del Deo

MoffettNathanson LLC - Analyst

* Robert Ari Gutman

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Simon William Flannery

Morgan Stanley, Research Division - MD

* Yong Choe

JP Morgan Chase & Co, Research Division - VP in Equity Research

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Presentation

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Operator [1]

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Good morning and welcome to the QTS Realty Trust Third Quarter Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to Stephen Douglas, Head of Investor Relations for QTS. Please go ahead.

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Stephen W. Douglas, QTS Realty Trust, Inc. - VP of Finance & IR [2]

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Thank you, Operator. Hello, everyone, and welcome to QTS' Third Quarter 2019 Earnings Conference Call. I'm Stephen Douglas, Head of Investor Relations at QTS and I'm joined here today by Chad Williams, our Chairman and Chief Executive Officer, and Jeff Berson, our Chief Financial Officer. We're also joined by additional members of our executive team who will participate in Q&A. Our earnings release and supplemental financial information are posted in the Investor Relations section of our website.

We also provided slides and made them available with the webcast and on our website to 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 NOI, FFO operating FFO, adjusted operating FFO, monthly recurring revenue, ROIC, EBITDA ROE, 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. And now I'll turn the call over to Jeff.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [3]

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Thanks, Stephen. Hello and welcome to QTS' Third Quarter 2019 Earnings Call. Turning to slide 3, QTS delivered a strong performance during the quarter. The consistency of our financial and operating results continues to be supported by our diversified platform across our key customer verticals, Hyperscale, Hybrid Colocation and Federal. The diversity of our sources of growth enables our business to perform. We believe in a variety of different demand cycles, even during intermittent periods of slower Hyperscale absorption as the industry witnessed over the past year.

Across these customer verticals we are differentiated through our industry-leading leadership in sustainability. Our commitment to a fully digitized service delivery model, benefiting both customers and QTS employees and a premium customer experience delivered across our world-class data center infrastructure. Year-to-date our signed net leasing has been driven by our broad strength across each of the customer verticals. As you may recall the first quarter leasing results of $11.3 million were primarily driven by our Hybrid Colocation business. While our near-record second quarter leasing performance of $19.6 million was led by our Federal vertical. During the third quarter and so far the fourth quarter, our leasing results have been driven by the strength in Hyperscale demand. The combination of a growth acceleration opportunities with Hyperscale customers and a more diversified higher return opportunities with enterprise and federal customers continues to provide a strong value creation opportunity in a risk-adjusted return profile for QTS and its shareholders.

Moving on to slide 4, our leasing performance during the third quarter reflected a strong acceleration in our Hyperscale business, combined with steady enterprise demand. QTS signed new and modified leases representing $17.4 million of incremental annualized revenue. Which is above our prior 4 quarter average of $15 million and brings our year-to-date average to more than $16 million of quarterly net leasing. Included within our Q3 net leasing volume is a 4.5 megawatt downgrade from a Hyperscale customer enrichment mega data center.

However, the strategic customer subsequently executed an additional 12-megawatt expansion in QTS's Atlanta Metro campus. The 12-megawatt expansion with this customer was signed subsequent to the end of the third quarter and is not included in our third quarter leasing results. This deployment will anchor the new facility under construction on the Downtown Atlanta campus that was announced in conjunction with our earnings release yesterday.

Excluding the 4.5-megawatt downgrade in the third quarter, our net leasing performance during the quarter would have been in excess of $22 million, well above our prior 4 quarter average. On top of the acceleration, we experienced in our Hyperscale vertical during the third quarter, our Hybrid Colocation vertical continues to drive steady growth in our business. Consistent execution in the Hybrid Colocation is built around our platform that offers customers a fully integrated in technology-enabled solution delivered across our scalable data center platform that is combined with a premium customer experience.

During the third quarter, we signed 40 new logos. A 10% increase year-over-year, with broad strength across our footprint in Hybrid Colocation. In addition, pricing on our installed base, which is more weighted towards our enterprise customers remains healthy. With same space renewal rates up 2% during the third quarter, which is consistent with our general expectation of rates increasing in the low to mid-single-digit range. As a result of the strong momentum in leasing, we ended the quarter with our highest ever backlog of signed, but not yet commenced annualized recurring revenue at approximately $80 million, which provides tremendous visibility and future growth and with the 12 megawatt already signed in Q4, we are off to a strong start in the fourth quarter as well.

Next on the slide 5. As discussed a significant driver in our leasing performance during the third quarter was driven by our strong acceleration in Hyperscale business, which contributed approximately half of the net leasing volumes in the quarter, we signed multiple significant leases with strategic Hyperscale tenants, including both new and existing customers.

Early last year, we announced the signing of a Hyperscale lease in the new facility in Manassas with a leading software as a service company. As part of the lease agreement, the customer is expected to ramp up from its committed deployment of 9MG as of the second quarter into the full 24MG facility. During the third quarter, we are pleased to announce that the customer committed to its third tranche of turn-key capacity representing an incremental 4-megawatts which brings our total committed turnkey capacity to 13-megawatts.

As the Manassas development was contributed to our 50-50 joint venture with the Linda Capital earlier this year, our leasing results for the third quarter only reflect the 50% contribution from the incremental 4MG commitment. We will continue to recognize the additional leasing performance in our go-forward quarterly results as this customer signs additional commitments and ramps into the full 24MG of turn-key power capacity. Providing additional visibility and pipeline in future growth.

Moving now to Piscataway, we signed a 500kW lease with one of the largest consumers of Hyperscale data center capacity in the industry. We initially brought this customer into the QTS platform in Fort Worth in Q1 of '19. This incremental expansion highlights the importance of incumbency with Hyperscale customers who typically prefer to buy on a re-occurring basis with existing partners given the complexities and time commitment related to their internal procurement and approved vendor processes. Once you've established yourself as an approved vendor in our experience, Hyperscale customers tend to continue to expand with their existing relationships.

This was also the case with the 12MG expansion in Atlanta that was signed subsequent to the end of the third quarter with one of the largest standing Hyperscale relationships. This lease is consistent with our typical Hyperscale return on invested capital range of 9% to 11% and the first tranche will commence upon the official opening of the new facility in mid-2020. This deployment is significant in that it represents the continued expansion of our relationship with this strategic customer and derisk our new Atlantic campus development aligning with our overall approach to capital allocation.

Consistent with our focus on bringing new strategic Hyperscale customers onto the QTS platform. During the third quarter, we're pleased to sign a 10MG lease with a new Hyperscale logo in the Ashburn facility. This customer is one of the fastest-growing consumers of Hyperscale data center capacity. And is expected to ramp into the full 10MG commitment over approximately a one-year period beginning in mid-2020. The return profile for this lease also is consistent with our typical Hyperscale return on invested capital range of 9% to 11%. We believe our pricing on this deal was above our other competitors, and yet we were able to secure this commitment, leveraging our operational maturity, our software-defined platform and the quality of our Ashburn facility and on-site personnel. Building new relationships with Hyperscale customers takes time and persistence. And we are pleased to have added a new strategic customer to our platform to drive incremental growth in the future.

Moving on to slide 6. Since opening our newest data center in Ashburn in the mid-2018, we've been pleased with the pace of our growth and demand. In fact, it is among our most active sites discussed among our sales team with potential customers across both Hyperscale and Hybrid Colocation.

And just over a year since opening the facility, we've already sold 16MG of capacity, including the 10MG Hyperscale lease we signed during the third quarter. This equates to approximately half of the capacity of the entire facility, which represents a tremendous accomplishment for our team. While we do believe that the supply in Ashford market will increase over the next 6 to 9 months. We are pleased with our current pipeline and the return profile we've been able to achieve on our signed leases. We will continue to monitor the supply in the Northern Virginia market and stop our capital investments appropriately based on the growth opportunities in our pipeline.

Turning to slide 7. In conjunction with our earnings release yesterday, we also announced the commencement of our expansion of our Atlanta-Metro mega data center campus. This expansion will include the development of a new data center totaling more than 250,000 square feet of leasable capacity and 72MG critical of incremental power capacity adjacent to our existing QTS Metro facility. Including our adjacent land holdings, we have the capacity to more than double our current footprint over time in the Atlanta-Metro market.

We currently expect to deliver the first phase of our new development in mid-2020. We're pleased that the entire first phase of development is pre-leased as part of the 12MG lease we signed subsequent to the end of Q3 with the strategic Hyperscaler. This significant pre-leasing is the new development is consistent with QTS to de-risk approach to development and overall capital allocation. QTS is well-established market leader in Atlanta, having served the market through our Downtown Atlanta and Sweeney Georgia mega data centers for over 10 years. QTS has competitive advantage in the Atlanta market will extend to this new facility, including strong operating leverage based on our 1 million square feet currently in operation. The ability to offer customers, the lowest cost power in the market through our expandable 120MG substation in a large embedded customer base totaling over 500 customers across our 2 sites. We look forward to extending our market leadership in Atlanta and continuing our partnership with the City of Atlanta to further establish Georgia as a key destination for Hyperscale and Enterprise customers. With that, I'll turn it over to Jeff Berson, our Chief Financial Officer, Jeff.

Thanks, Chad, and good morning. Moving to slide 9, for the third quarter 2019. We delivered strong year-over-year growth across our key financial metrics. We reported revenue of $125 million, up 17% over 2018. Adjusted EBITDA of $53 million, up 14% year-over-year and OFFO of $41 million representing a 16% increase year-over-year. Our adjusted EBITDA margin came in at 50.3% for the quarter, down 90 basis points year-over-year. During the quarter, we experienced higher than expected power costs in certain locations due to unseasonably hot weather in the south. A significant portion of which was passed through to customers.

While the third quarter typically results an increased margin pressure due to seasonally high utility costs relative to other quarters during the year. The margin impact during the third quarter was higher than anticipated. In addition, we were subject to increased property tax expenses in certain facilities, which also contributed to higher operating expenses during the quarter. Although again, a portion of this increase was passed through to customers. The unexpected incremental impacts during the third quarter to our adjusted EBITDA results from these items totaled approximately $1.5 million of net incremental expense.

Excluding the net effect of these increased expenses. Our adjusted EBITDA margin would have been approximately 53% or nearly 200 basis points of margin expansion year-over-year. Next on slide 10. I'd now like to review our current balance sheet position. In October, we completed an extension of our unsecured credit facility with expanded capacity up to $1.7 billion from $1.52 billion. We successfully extended the weighted average maturity date of our term loans by nearly 1.5 years, expanded the available liquidity on our revolving credit facility by $180 million to a $1 billion and improved overall pricing across the credit facility reflecting the continued improvement in our overall credit profile.

Also during the third quarter, we settled 2.8 million shares of forward equity raised in March 2019 for net proceeds of approximately $110 million, which was used to pay down our revolving credit facility. This leaves approximately $36 million of forward equity proceeds remaining undrawn from the March 2019 equity raise. In addition, since the end of the second quarter, QTS has incrementally raised through it's ATM program approximately 2.8 million shares of common stock at an average price of approximately $51 per share, which represents approximately $139 million of additional net equity proceeds on a forward basis, including the $36 million of undrawn forward equity proceeds remaining from our March 2019 raise and the aforementioned proceeds raised subsequent to the end of the second quarter, QTS has access to over $175 million of net proceeds through the forward stock issuances.

These proceeds provide significant future capital availability and materially derisks QTS's financing plan well into 2020. At the end of the third quarter, pro forma for the amended credit facility and available forward equity proceeds, we had total available liquidity of approximately $961 million. We have no significant debt maturities until beyond 2022 and more than 75% of our indebtedness is subject to a fixed rate, including a series of interest rate swap agreements. We ended the quarter with leverage of approximately 5.5x net debt to annualized adjusted EBITDA. This level is consistent with where we have historically managed the business and we remain comfortable in this range in the near term in light of our significant booked-not-billed backlog.

Including the 175 million of available forward equity proceeds. Our pro forma leverage as of the end of the third quarter was approximately 4.8x. We expect to draw down the forward equity proceeds over the coming quarters to fund our future development plan, while maintaining leverage at a level consistent with where we've historically operated.

Next onto our financial guidance on slide 11. For the full-year 2019. We are increasing our total revenue guidance by $7 million at the midpoint, to a range of $470 million to $480 million, up from $461 million to $475 million previously.

The primary driver of the increase in revenue guidance is a higher-than-expected power and tax recoveries that we've experienced over the course of this year as I mentioned previously. Despite these increased costs, we are reiterating our adjusted EBITDA guidance range of between $243.5 million and $253.5 million and our FFO per share guidance range between $2.51 and $2.71. Underlying this guidance is a full-year rental churn outlook of between 3% and 6%, which is unchanged from our initial expectation and compares to our year-to-date performance of 3.4%.

As a result of our continued focus on capital allocation and aligning our investments with the backlog that is weighted towards second half 2020 commencements, we are lowering our 2019 CapEx guidance to a range of between $350 and $400 million. As we head into 2020, we are pleased with the momentum in our business. As ever enhanced by our year-to-date performance and record booked-not-billed backlog. Based on the visibility in our backlog, we believe our current momentum will support low double-digit top line growth in 2020. In addition, we continue to expect incremental operating leverage across our platform. The drug year-over-year, adjusted EBITDA margin expansion in 2020 of at least 50 basis points. From a CapEx perspective, we continue to efficiently expand capacity in our existing sites in 2020 at a level consistent with 2019.

In addition to deliver on the attractive opportunity to continue our growth trajectory in the Atlanta market with a 12MG anchor tenant. We expect to deploy approximately an incremental $100 million to $150 million in 2020 to open our new expansion in Atlanta. We're also pleased to be in a position where a significant portion of our preliminary 2020 capital plan is already pre-funded through the $175 million of forward equity proceeds as discussed previously combined with incremental capacity on our revolving credit facility.

Overall, we are encouraged by our performance during the third quarter and the visibility we have into our forward growth trajectory. Our diversified business model continues to provide QTS the opportunity to deliver consistent financial and operating results at attractive risk-adjusted returns and we will remain focused on efficiently allocating capital to drive incremental shareholder value.

I'll now turn the call back over to Chad.

Thanks, Jeff. Strong execution, combined with a diversified business model that balances the steady performance of our Hybrid Colocation business and select growth acceleration opportunities with strategic Hyperscale customers continues to support consistent growth and financial performance for QTS. Our key pillars of differentiation include an industry leadership position in sustainability and innovation. A fully digitized operating model through our service delivery platform and a premium customer experience, which continues to support our growth objectives.

We are pleased with the performance during the third quarter and our momentum already in the fourth quarter and we look forward to continuing to execute against our strategic initiatives. I'd like to thank our powered by people QTS' across the country for their hard work and commitment to service to our customers and communities. I'd also like to thank our customers and shareholders for their continued trust and confidence in QTS.

With that, we'd be glad to take your questions, Operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Today's first question comes from Richard Choe of JPMorgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [2]

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I was wondering if I could get a little more color around the draw down from Richmond and the move to Atlanta, look at the customer comfortable in being able to do such a big move. And then what were the advantages that they saw? And in terms of the draw down, what was the financial back in the quarter? Thank you.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [3]

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Hey Richard, this is Chad. Customers are migrating and balancing load on a fairly especially Hyperscalers on a fairly consistent rhythm, so this was strictly a customer-driven initiative where they wanted to consolidate load into another facility. From a standpoint on being flexible with customers, it's always a conversation that we like to think about and talk about. And if it works for us and it's good for the partnership then we'll try to accommodate that. But just something they wanted to consolidate and something to do on their compute side. Jeff, do you want to take the impact?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [4]

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Sure. Hey, Richard. So with the customer pulling down about 4.5MG and we can't give price on any one customer, but generally for Hyperscale if you assume we're doing annualized revenue of about $1 million per megawatt that helps you put that in context. And so that pulled down revenue for a short period until the 12MG that the customer signed in Atlanta starts ramping in mid-2020 and beyond. Certainly, numbers that we can easily support with the momentum in the business and an upgrade in terms of capacity with that customer, we're pretty excited about.

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Operator [5]

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And our next question today comes from Jordan Sadler of KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [6]

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First question is just on Ashburn, you talked about, once you sort of become an approved vendor for serving these customers, usually there is some repeat business, I'm curious in that context if you could maybe offer a little bit of color of how you won that deal in such a competitive market with Ashburn obviously being perceived to be among the most oversupplied markets in the country? And what the deciding factors might have been for that? And then I have a follow-up.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [7]

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Hey, John, this is Chad. We were thrilled to bring on a new Hyperscale customer into our platform. It was a process that really was one of the best run process as we've seen in a long time. And this group truly valued the significance of what being world-class in customer support and operational maturity really means for their business. Certainly economics and those type of things matter. But our differentiation around our digitization, our platform. The tools that enable those Hyperscalers to really have an extension of almost being their own facility with the level of data and control they have. At the same time delivering world-class service in a premier facility. I mean the team builds a first-class data center from top to bottom, and the speed, the execution and the world-class infrastructure. It's just a great combination, it truly is, suddenly feel like that every chance we get to tell the QTS story around our customer experience and relationships it's a powerful message. And it is a competitive environment, we don't take that lightly, and we had some wonderful competitors. But in this case QTS was able to differentiate themselves to a brand new buyer for us and we do see a lot of opportunities where we continue to grow with existing clients, and that is a hallmark once you're in the Hyperscale incumbency is king as taxes and it is something that, it just streamlines the process because a lot of times, you got to move fast, you got to have good relationships, you have to have a lot of trust in both your ability to get things done and meet the objectives and QTS shine in that regard. So we're thrilled to have that opportunity.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [8]

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I guess as a follow-up. I'm just curious if incumbency is king, what were the one or 2 factors that helped you edge out the incumbents in this case because obviously this customer is already dealing with others in the market? And then as a follow-up, just in terms of pipeline, the backlog set a record level of $80 million. Can you speak to where it would be sort of in a pro forma basis, including the 12MG customer and then any insight on the 9% of leases that are rolling in the 4Q. If you have any insight in terms of known move-outs that might be helpful? Thank you.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [9]

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Sounds good. I think very simply operational maturity, world-class customer support and facility, and our service delivery platform clearly differentiated this person to choose above unencumbered and you're right, they had to pick QTS in this market as a new vendor. And that's a high hurdle and we're thankful for that. Jeff, do you want to.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [10]

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Sure. Jordan. In terms of backlog impact. Again, without going into the specific price of any one customer. You can think about 12MG equating to plus or minus about $12 million of annualized revenue. So that would be added that is not currently in our booked-not-billed backlog. At the same time as we update backlog at the end of Q4, we will also have delivered capacity, so you want to see that backlog jump up by $12 million. That will also come back down in terms of delivery space. So that's really the impact of that and provides us great visibility going into 2020 and derisk the performance in that year. As it relates to leasing and our expectations of leasing coming up for renewal in Q4. A number of those have actually already been renewed. Subsequent to that we feel very comfortable with where we are and the best comfort I can give you is we've reiterated our overall churn in year of 3% to 6% and tracking towards well in sort of the middle of that range.

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Operator [11]

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And our next question comes from Robert Gutman of Guggenheim Securities.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [12]

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First, you were pretty fast on the funding side. I was wondering if you just sort of like, give us a quick review of the pre-funding and the access to capital for next year. And also as it relates to CapEx, a little more color on the reduction this year. And looking at the tails I can't tell really which facilities that relates to? So $100 million is a big difference. So if you give us a little more color on that, that would be helpful.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [13]

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Sure, Rob. So from a funding standpoint generally. So we have had from the February 2019 equity transaction that we execute at that time, we had about $150 million of capacity and forward proceeds that we have not utilized at that point. In the quarter in Q3 we used about $110 million of that $150 million to continue to fund the business and maintain a healthy balance sheet and maintain that leverage level at 5.5 turns that you see in the quarter. So that left us with just under $40 million of continued equity capacity that we have effectively already raised in February '19. Subsequent to the end of Q2 through the forward ATM we raised an additional $140 million, again not funded yet but raised identified and now available to us at prices that are approximately $51 a share during that period. So between the $140 million that we've done subsequent to the end of Q2, and the $40 million that we had remaining from the February 2019 equity deal. We've got about $180 million and to be exactly $175 million of equity funding that we have now tap from the market that we have available to utilize over the course of the next year.

We like that because it gives us visibility to fund our business well into 2020 and a goal target of pre-funding our business to 2 to 3 quarters in advance gives us the right we think balanced between de-risking our future and knowing we've got the capital available, but at the same time not over-funding the business as we've got confidence in the strength and momentum in the business and expect that we'll see cost of capital adjust as we continue to grow the business.

From the CapEx standpoint, basically the CapEx drop in Q3 was pretty simple, we had expectations of some nice signings in Hyperscale at the end of Q3, which you saw and actually the 12MG deal in Q4. And as a result of always managing our capital carefully and allocating our capital towards where we see demand and opportunities for near-term returns, we pushed back some capital during Q3 while we awaited visibility on these latest couple of Hyperscale deals. And so that was really just a push back until we saw and knew where we had that that growth and the trajectory of the leasing. And what you should expect going forward then is that capital will get move back up again in Q4 and into 2020 on the core business as well as building out the new Atlantic campus.

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Operator [14]

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Our next question comes from Aryeh Klein of BMO Capital.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [15]

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Thanks. It looks like a significant percentage of the commencements are expected after 2020. Can you just talk to the risk, if there is any that some of these get pushed out or conversely could any of them start maybe earlier than you're expecting?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [16]

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I think just like we see in the book, but not billed backlog it's consistent and we don't expect any delays. You always have customers from time-to-time that wants you to deliver sooner. So, but I think just in the balance and the tightness of this spread, we feel it's going to be consistent with what we put.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [17]

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All right. And then it seems like obviously exceeding expectation the Hyperscale leasing at least as it relates to the one to 3 deals a year. How does your pipeline kind of look now that the deals are signed and do you think that one to 3 deal the year number is the right way to look at the business going into 2020?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [18]

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Yeah, I think it is. I like that we're not over-weighted in any one area. The strength at QTS is a strong hybrid colo business, a strong federal vertical, and the opportunity accelerate growth with HyperScale. It keeps us disciplined on choosing the deals that matter most to the bottom line, it gives us the opportunity to be efficient in the way that we do things. And I think one to 3 deals is the right number. We certainly feel good about the 2 brand new logos that we've acquired this year in the Hyperscale space that was a goal that we had at the beginning of the year was to put 2 new logos into the QTS facilities, because that just makes inherent growth opportunities and we think that's the right mix and balance to have good performance.

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Operator [19]

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And our next question today comes from Brett Feldman of Goldman Sachs.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [20]

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Thanks. And kind of sticking with that theme, we came into the year worrying about a slowdown Hyperscale and it looks like Hyperscale is going to be the biggest factor among the biggest factors driving your bookings in the back half of the year. So I guess I'll flip it around and say now that we're most of the way through the year, how has the retail colo booking environment shaped up relative to your expectations and then since you've given us a glimpse into the top-line next year. I was curious if you could maybe just give us a little more insight. I'm curious how you're thinking about the contribution of the new international properties in that forecast? Thank you.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [21]

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Yeah. We continue, I mean 70% plus of our bookings for the year has been in hybrid, so hybrid continues to be the engine of QTS. We have seen acceleration in Hyperscale. But quite frankly, we expected that. So it's just I'd say business as usual and we'll continue to see a good growth. We have good opportunities both in hybrids federal and HyperScale and even though Hyperscale accelerated at the end of this year we think one to 3 deals is the right target for 2020 and have full confidence in that. The international property in the Netherlands is one that will come online in summer of next year for our one location. Of course, the other location in Groningen has been one that has performed exceeding our expectations. Customer retention growth opportunity. And it's just been a seamless transition in the Netherlands and we're just excited about the opportunity to bring the Eemshaven facility online summer of next year and we have confidence that we'll see some good pickup in traction as Europe comes online for us next year.

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Operator [22]

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And our next question comes from Erik Rasmussen of Stifel.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [23]

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Yeah, thanks. Maybe just circling back on just Ashburn. You've seen any sort of shift where there's sort of less pressure on pricing, obviously we are hearing the opposite. But I guess more in the lines of what you're talking about customers, at least the larger customers seeing significant value operational excellence and some of the technology offering. And then with that, do you see any more trade-offs, I guess in the market that could open up more opportunities for you and others?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [24]

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Yeah, I mean, I think from our standpoint Ashburn a competitive market, but it's always been a competitive market, there's always been a lot of space in that market and I think as an operator you have to figure out where your focus is and what your differentiation is. And I think what you're seeing is QTS has strong differentiation in the market. We did not win as the low bid provider that's not kind of what we are, that's not our focus and we're not balanced and having to win every Hyperscale deal, we're going to win the deals that we find the best opportunity to partner with people and I think maybe the last thing I'd say on this. There is a lot of Hyperscale enterprise customers that care more than about price. They're putting substantially everything they have in their enterprise on the line when they pick a partner. So I know that everyone wants to talk about price and there is competition but there is a lot of customers out there that value operational maturity, experience, quality of delivery, customer engagement, partnership and trust and that fits well with QTS.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [25]

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Great. And then maybe just my follow-up on the Federal business, it seems like that is very strong pillar for you guys for growth in last quarter, you obviously had that large deal you signed, can you comment on any other sort of activity. The team is tracking that would suggest that there is good momentum in this business. And then maybe just with that, what are your thoughts on Microsoft's win of the Pentagon's $10 billion JEDI contract and what that means for the space?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [26]

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I think the thing that you should think about Federal is long gain. The Federal Government has been working through this process for over a decade. We do see tremendous traction and opportunity, but the last thing, we're going to do is sit here and forecast the efficiency of outsourcing it to Federal Government. It's going to be lumpy, but I will tell you that we are preparing and executing at a high level in a very specialized space, it's something we think we can have tremendous strength and opportunity in and you're going to continue to see that focus for us. I think Microsoft's win fantastic for Microsoft. I think most people thought that was probably going to get minimum split. Microsoft has a big win, I think that's great for Microsoft and good for outsourcing at data centers.

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Operator [27]

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Our next question comes from Frank Frank Louthan of Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [28]

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Great, thank you. Looking at the expansion in Atlanta. I guess we could count the 12MG customer you have. But can you give us other indications of level of pre-leasing you have other customers in that. And you have any other plans to build additional campuses in Atlanta, some of the new properties being built in some different areas somewhere you're located. Any thoughts of needing to be closer to some of those areas as you expand that market?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [29]

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I couldn't be more excited about the Atlanta expansion. I think the best piece of that I can give you is, there is 250 QTS customers next door to this building 50% plus of our business still comes from customers expanding. So there is a ripe opportunity for us to go farm opportunities in the new building and what you have here in this anchor client is a customer that's expanding with QTS. So we're excited about that. We'll continue to build. We were thrilled to get going on it and have an anchor client, of course, we want to de-risk capital at every juncture, even in markets where we have a strong position, we're going to look to derisk opportunities for growth. So that's what we did. I think the pipeline for expansion starts with our incumbency of our customers and in the partnership we've had and we will be continuing to expand. We have adjacent acres that total almost 70 acres. So when you talk about the Atlanta facility, we have decade of growth in Atlanta at our mature facility and that will be quite a technology innovation campus in the center of Atlanta, couldn't be more excited to partner with the city and the local community on our continued expansion of that side, it's really a special site.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [30]

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And what's sort of the initial amount of megawatts on the first phase of the expansion and how much of that is the new customer taking?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [31]

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The contract that we signed was 12MW Phase 1 was 6-MW will deliver summer of next year. And then we'll like always combined some form of hybrid space available with each build. So we're going to continue to supply space to hybrid and continue to meet our deployment of our 12MW which has a pretty quick ramp by the end of next year and into 2021.

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Operator [32]

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And our next question today comes from Simon Flannery of Morgan Stanley.

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Simon William Flannery, Morgan Stanley, Research Division - MD [33]

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Coming back to Richmond, can you just, Jeff, just clarify when exactly does the movement of 4.5 move-out. Has that happened already or is that during Q4, just for our models. And then what's the strategy to refill that space on the overall leasing environment in Richmond. And then just more generally as we go into 2020. How would you characterize the enterprise funnel generally is fairly stable through the year or is it any big changes in the kind of the way the enterprises are thinking about '20? Thanks.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [34]

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Sure. Simon, that downgrade was at the end of Q3. So if you look at the ending period MRR in Richmond , you will see that drop from Q2 to Q3. So that's now in the numbers. For the rest, Chad?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [35]

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In Richmond, it's been one of our largest new logo assignments within the hybrid business, we're going to reposition that space for both hybrid colocation and federal, we need inventory coming back in that market anyway, so it really was a win-win, which is the only way that would work for us in that and we're excited about it. Our pipeline for hybrid continues to be robust across our platform in all 3 of our focus areas. So we look forward to that moving forward with strength.

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Operator [36]

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Our next question today comes from Michael Funk from BOA.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [37]

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Yeah, thank you for the question, guys. A couple of quick ones if I could. Thank you for the guidance on your thoughts on revenue growth and EBITDA margin expansion for 2020. Jeff, maybe just kind of tie that back to your commentary about liquidity and funding the business and help us understand how you think about the FFO per share growth targets that you have?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [38]

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sure, Mike. And we'll put out formal guidance as we always do at the end of Q4. But what we're trying to do in helping people model that is if you can understand a little bit of the top-line growth and how we're moving margins. The other big piece there that we're trying to help you with a bit is thinking about the CapEx side. And you've seen efficiency in our CapEx spend in 2019 and that range of 350-400 that we put out. Now we think is a sustainable CapEx for growing our existing facilities. You can think about us viewing CapEx next year at that same bucket. And then on top of that, the new build in Atlanta, which again we have that pre-leased geared against. But that will add another $100 million to $150 million of capital in year next year or so, I think building in that incremental CapEx, you'll see some funding cost associated with that. But still comfortable that we can grow the bottom line in a healthy way.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [39]

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Great. Maybe one more then to Jeff, if I could. So you're about 22% of expirations in 2020. I think that's more weighted towards our hybrid colo within this year. So how should we think what the renewal rates during 2020 of those expirations.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [40]

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Sure, Mike. So a couple of things, first of all, when you look at our contracts that come up for renewal over the next couple of years, you will see that close to two-thirds of those contracts come up for renewal over the next couple of years. That's not unusual given the two-thirds of our business is from the enterprise hybrid colo side, which tend to have about third-year contracts. And so what you'll see in terms of the larger Hyperscale deals is that the vast majority of those have maturities that are 2021 or frankly far beyond that. And so we think that is a good mix and a mix and balance that we're comfortable with and frankly has been pretty consistent as we've been public over the last couple of years. From as it relates to renewals for those contracts coming up, part of why we're very comfortable with that hybrid business, even though it's got 2 to 3-year contracts or 3 year on average and renewals that come up over the next couple of years is one at a churn annual churn of 3% to 6% when those contracts come up for renewal. We typically don't lose them, and then when we do renew them, our renewal rates consistently for the last 5.5 years, we've been public have been steady in the increased, call it 1% to 4%. You saw that renewal increase this quarter of 2%. So we love the hybrid business because the diversification in the higher returns and although there are shorter contracts that those tend to be an opportunity to increase pricing and we typically don't lose the customers.

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Operator [41]

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Our next question comes from Eric Luebchow of Wells Fargo.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [42]

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Thanks for taking the question. I wanted to swing back to Atlanta. I know historically we've thought of that as more of an enterprise market than a Hyperscale one. So I was curious if your pipeline for the additional Atlanta build if you see additional Hyperscale requirements. And if you could maybe help quantify your embedded cost advantages there and also how the new sales and use tax exemption plays into any competitive advantage you have there? Thanks.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [43]

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Great, thanks Eric. For us, we think about the Hyperscale market in a little bit of 2 areas, one, be in the Hyperscale cloud providers, which everyone knows fairly significantly as 3 or 4 or 5 names that by around the country. I would say in that region of the country, you have 2 of those names that have been building some of their own assets. So they're starting to put real dollars in that market, which I think bodes well for additional capital and market presence from the Hyperscale cloud providers. We have historically and continue to really be thoughtful about the Hyperscale enterprise market, which is what I would put kind of most of this quarter and really kind of QTS is historical perspective in having very strong relationships with enterprises that are driving scale and demand. And when we start to say words like operational maturity in those type of things. It's not that the cloud providers don't value that, they are genuinely a little more self sufficient in owning and operating their own facilities, but these Hyperscale enterprise customers are very focused on that.

So I would say that Atlanta has been Hyperscale enterprise for us for a long time and will continue, and we see tremendous growth in opportunity, and those deals may not come in the flash of 10MW and 20MW increments all the time. But for us, we actually like the ability that whether we're at 3MW to 5MW, as we kind of kind of historically have talked about HyperScale being 5-plus megawatts of deployment, those type of deployments just continue to come through once you put that customer in the facility. So it's a little more capital -- less capital intensive, it lets us spread out our capital on our growth. Our continued investment thesis in Atlanta is we have a terrific infrastructure, and operational cost basis, both from a 20% power advantage, just because of the scale and the ownership of our substation that's going to continue to have tremendous growth. The sales and use tax we played a vital role in helping deliver that to the State of Georgia which really is enjoyable for all data center providers in Georgia, as long as they're willing to sign up and go through the process to obtain that like we have. But we just feel like it's hard to replicate a 1 million square foot operational efficiency and scale. So we've got some tremendous opportunity and advantage. But we will not rest on that, we'll continue to be competitive in the opportunity for us to drive all the advantages, utilities, tax advantages and everything above.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [44]

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Okay, great, thanks. So, just one follow-up. If you look at your Hyperscale pipeline into next year and beyond. Could you talk about the balance of funding that on balance sheet with some of your existing powered shell versus using your joint venture partner that to help de-risk some of the capital investment and how you're thinking about balancing those two?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [45]

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I think the great thing is we've got a lot of opportunity to balance it. So, Jeff and the team have done a wonderful job with having a JV partnership, it's a robust and anxious to deploy more capital. Your point around having a 1 million square foot of powered shell, what I can point Hyperscalers 2 million or 1 million square foot of powered shell that is certainly gives me a time advantage and a cost advantage and makes me much more capital efficient. So I think I would say that we feel good about the 2020 opportunities within Hyperscale and we feel like we have a lot of levers that drives value.

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Operator [46]

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And our next question today comes from Nick Del Deo of MoffettNathanson.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [47]

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You guys generally highlight the customer satisfaction benefits of the service delivery platform, to what degree are you using SDP to help in the space churn or customer dissatisfaction preemptively address it. And are there other non-obvious ways you're able to use SDP to improve the performance of the business?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [48]

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Nick, I'm going to let Jon Greaves, who sit here handle that. So thanks.

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [49]

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Hey, Nick. Absolutely we get tremendous insight into the customer's plans to roll infrastructure at customers usage of power and any real changes in the customer infrastructure. So we see a lot of value from that data. We're also now deploying machine learning on that data to give us a better view as to what the future might look like. So extremely valuable tool for managing and predicting churn and other events.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [50]

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Okay, great. Yeah. And then one for Clint. If I assume is there too, Clint I've read your arguments that the Internet is becoming too concentrated into brittle, given the handful --

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [51]

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Hey Nick, Clint is not here today, Tag Greason is here from our Chief Hyperscale Officer. Yes. So and John partners with Clint, so.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [52]

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Okay. Maybe he can take it then I think Clint and presumably on behalf of the firm is making some arguments that the Internet is becoming bit too concentrated or too brittle given the handful of cities that are in sort of capturing the bulk of the main globally. Has that argument didn't gain any traction among customers and if we see folks decided that they might want to spread out their deployments more what sort of incremental benefits might there be for QTS?

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [53]

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Yeah, hey Nick, it's Jon Greaves. And so, yeah, absolutely. I think what we find is the all customers got a different risk profile depending on what the application they're delivering. So many customers are actually looking at areas other than some of the classic Internet Nexus points now to deploy. So we continue to see growth in those areas.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [54]

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Yeah. And a little bit of a Nick is just the sheer limitation. I mean Ashburn is a wonderful market we are having tremendous success there, but it's not an infinite market of infrastructure, so we can talk about it on connectivity. You can also talk about it on just pure power and infrastructure. And I think the way that we forecast growth or the way that the Internet is forecasted to grow inherently there is going to have to be additional locations in areas that have to grow. And I think it's great to be in the key markets. It's also great to be helping to define and be part of the future of that market. I think that's really the crux of it.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [55]

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Okay, thank you guys.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [56]

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Thank you. Well, on behalf of QTS and everyone, we thank you for the call today. Thanks for your continued trust and confidence in partnership. And thank all our QTS' all over the country that make it possible. Thank you.

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Operator [57]

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And thank you, sir. Today's conference has now concluded and now we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.