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Edited Transcript of QTS earnings conference call or presentation 30-Jul-19 12:30pm GMT

Q2 2019 QTS Realty Trust Inc Earnings Call

Overland Park Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of QTS Realty Trust Inc earnings conference call or presentation Tuesday, July 30, 2019 at 12:30:00pm 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

* Clint Heiden

QTS Realty Trust, Inc. - Chief Revenue Officer

* 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

* 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

* Jonathan Atkin

RBC Capital Markets, LLC, Research Division - MD and Senior Analyst

* Jonathan Michael Petersen

Jefferies LLC, Research Division - Equity Analyst

* Jordan Sadler

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

* Michael J. Funk

BofA Merrill Lynch, Research Division - VP

* Nathan Daniel Crossett

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Nicholas Ralph Del Deo

MoffettNathanson LLC - Analyst

* Robert Ari Gutman

Guggenheim Securities, LLC, Research Division - Senior Analyst

* 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 Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I would now like to turn the conference over to Stephen Douglas. 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' Second 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 also are 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 have 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, return on invested capital, EBITDAre and adjusted EBITDA. We refer you to our press release that we issued yesterday and our periodic reports furnished and 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 will turn the call over to Chad.

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

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Thanks, Stephen. Hello, and welcome to QTS' second quarter 2019 earnings call. During the second quarter, QTS continued to capitalize on our strategic differentiators in the market. Our focus on world-class scalable infrastructure combined with premium customer experience that is delivered through our software-defined platform continues to resonate with our target customer base, and we are winning market share. Strong execution combined with our go-to-market approach that balances the steady performance of diversified hybrid colocation business and select growth acceleration opportunities with strategic hyperscale customers continues to support our consistent growth and financial performance at the high end of our peer group.

Turning to Slide 4. Our leasing performance during the second quarter continued to reflect a healthy mix of demand across our targeted customer verticals. QTS signed new and modified leases representing $19.6 million of incremental annualized revenue, more than 40% above our prior 4-quarter average and at the attractive returns on invested capital. This represents one of the strongest quarterly leasing performances in our company's history. As a result, we ended the quarter near-record backlog of signed, but not yet commenced annualized cash revenue of approximately $68 million.

QTS' hybrid colocation sales engine continues to perform well. Our leasing results over the past 6 quarters represents a 41% increase over the prior 6-quarter period, with hybrid colocation representing more than 2/3 of that volume. Over the same period, the average size of signed deals both in terms of monthly reoccurring revenue and square feet is up approximately 50%, while pricing on a per square foot basis was held flat.

In addition, same space renewal rates were up 1.2% during the second quarter, continuing a trend of increased same space pricing that we have consistently reported over our 6 years as a public company, demonstrating the value that our customers continue to see in QTS' platform and dedication to innovation.

Our software-defined data center platform, which empowers customers to interact with their data and QTS services remains a powerful differentiator in the market. Through this platform and QTS' application programming interface, or API, we can enable real-time access to all aspects of data center operations, including security, power, cooling, sensors, provisioning and many other key metrics.

However, our STP platform is more than just a critical infrastructure monitoring tool and interface. Through this platform, we are able to seamlessly integrate our customers' infrastructure with the world's largest and most advanced IT partners, cloud service providers and carriers, accelerating the ecosystems developing within our facilities.

Customer demand for cloud solutions is a theme that has continued for several years. It is for this reason that we have strategically invested in our software-defined platform, which acts as a facilitator for customers to solution for their hybrid IT needs, integrating their colocation and their cloud environments.

Customers leveraging cloud environment is a trend that we will expect will continue. And these customers are choosing QTS because we have the platform, technology and capability to integrate their complex IT requirements.

While our hybrid colocation vertical, which represents 2/3 of our revenue remains the engine of our business, we continue to actively pursue strategic growth acceleration opportunities with the largest and fastest-growing hyperscale technology companies. Data center requirements for this customer base are significant and as a result, inherently lumpy and difficult to predict from a timing perspective. For this reason, our financial model is built upon an assumption of signing only 1 to 3 larger 5-plus megawatt hyperscale opportunities each year. This combined with the steady performance of our diversified higher-return hybrid colocation business is the best path for us to optimize growth, supporting a strong return on invested capital and driving leading risk-adjusted performance for QTS.

We are pleased with the progress we continue to make at building relationships with our target hyperscale customers and are incrementally confident that hyperscale will remain an attractive growth opportunity for QTS and our sector for the years to come. Our second quarter leasing results include the signing of a 5-plus megawatt multisite deployment for a strategic hyperscale customer supporting a large federal program. This deployment in 2 of the existing QTS sites, which is set to commence in late 2020, includes multiple incremental expansion opportunities and represents a significant win in growth opportunities for both hyperscale and the federal business.

Turning to Slide 5. The federal vertical remains a core focus area for QTS. Due to the unique security requirements for this customer base and higher barriers to entry, the return on capital profile for the federal data center deployment is typically well in excess of the return profile we see our customer in other customer segments even for the deployments involving hyperscale customers like the one we signed during the second quarter. In addition, the large lease that we signed in Q2 will be supported within a QTS existing powered shell, enabling moderate incremental capital and supporting even higher returns.

Incumbency and industry expertise are powerful differentiators for federal customers, and the strategic investments QTS has made in the necessary processes, operational capability and talent, including QTS personnel capable of supporting highly compliant government agencies has positioned our business to succeed in the federal vertical.

Although meaningful opportunities within the federal space have been relatively slow to materialize over the past several years, we are beginning to see a growing number of sizable federal opportunities in our pipeline. These opportunities are growing as data center requirements supporting federal programs continue to rapidly expand. At the same time, these programs are running into pressure internally to find outsourced solutions, be it within data centers or the cloud. As I mentioned, these deals generally represent return opportunities in excess of the typical return on invested capital we see in the market for multimegawatt deals, which represents an attractive value creation opportunity for QTS and its shareholders. We are excited about the momentum we see building within the federal customer vertical and look forward to leveraging our unique capability and relationships to further drive our growth.

Moving on to Slide 6. As we've demonstrated over the course of this year, QTS will continue to strategically pursue incremental growth opportunities with hyperscale customers with a differentiated approach that prioritizes capital efficiency and returns.

Our leasing performance year-to-date has already met our expectation of annually signing 1 to 3 larger 5-plus megawatt hyperscale leases, including the new logo signed in our Fort Worth facility last quarter and the multisite federal deployment signed this quarter. Through each of these transactions, in addition to the 24-megawatt lease we signed in our Manassas facility in 2018, we have demonstrated a unique ability to drive enhanced value creation for our shareholders.

Beginning with the 24-megawatt lease in Manassas through the JV we announced with Alinda Capital earlier this year, we were able to convert the Manassas lease, from which was previously a 9% stabilized hyperscale return on invested capital to a 12% return combined with approximately $120 million reduction in QTS' overall capital commitment.

We have also been able to generate above-average hyperscale returns by leveraging our existing low basis powered shell inventory to support both the 3-megawatt new logo signed last quarter in Fort Worth and the 5-plus megawatt hyperscale lease signed this quarter. In addition, I have also mentioned data center deployments supporting federal programs, like the one we signed in the second quarter, typically carry a premium return opportunity.

Over the past 18 months, we have signed 3 larger hyperscale transactions, each highlighting our capability to drive differentiated value creation, and we look forward to maintaining the same disciplined approach going forward.

Next on the Slide 7, I'd like to highlight an initiative that we are very excited about. During the second quarter, QTS published its first ESG Initiatives Report, which is available in the Sustainability section of our website. The report is intended to provide transparency to our key stakeholders and allow them to evaluate the progress we are making in delivering our commitment to the highest standards in environmental, social and governance principles. Among the key highlights of the report is our goal to procure 100% renewable energy by 2025. We are already well on our way to that target with more than 30% of our current power from renewable energy sources, including our mega data center sites in Irving, Piscataway and Chicago, all of which are currently 100% supported by renewable power. The availability of carbon-free energy sources continues to grow, and we are successfully finding opportunities to procure renewable energy sources at costs comparable to nonrenewable. QTS is proud to take a leadership role in that effort, and we are recently recognized with the EPA Green Power Partner award for the leadership in renewable power. Look for more from us on this topic as we continue to drive towards our goal of 100% renewable energy.

With that, I'll turn it over to Jeff Berson, our Chief Financial Officer. Jeff?

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

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Thanks, Chad, and good morning. Moving to Slide 9. I'd like to provide an update on the integration of the 2 Netherlands sites that we acquired in April.

In conjunction with Q1 earnings, we announced QTS' first mega-scale international expansion with the acquisition of 2 operating data centers in the Netherlands for approximately $44 million. The 2 data centers, one in Eemshaven and one in Groningen, are strategically located, adjacent to multiple major undersea fiber cable landings, renewable power resources and a significant concentration of existing hyperscale data center deployments.

We were able to opportunistically acquire the 2 sites through a broader ongoing bankruptcy process for approximately $2 million per megawatt, which is a fraction of the average market build cost closer to $8 million to $10 million per megawatt.

Along with 20 megawatts of available and built-out capacity in the Eemshaven hyperscale site, the smaller Groningen colocation facility has an embedded customer base, supporting in-place revenue and cash flow. The opportunity to acquire a large infrastructure at an incredibly low basis, along with an embedded customer base that provides upfront revenue and breakeven initial FFO per share contribution, matched with strong upside on future leasing represents a significant value creation opportunity for shareholders.

The integration of the 2 facilities into QTS' broader portfolio has already been completed, and we are shifting our focus to incremental growth in the assets. In fact, we are already seeing performance above what we had initially underwritten. At closing, we had initially expected the 2 facilities to generate approximately $3 million of annualized recurring revenue and $1 million of annualized adjusted EBITDA, assuming no new leasing.

Since closing the acquisition, we've already signed 4 new or expansion customers in the Groningen facility, representing more than $100,000 of combined incremental annualized recurring revenue.

Although small and absolute terms, new revenue in the combined Netherlands footprint represents a strong incremental ROIC opportunity, given our low-cost basis. In addition, we're in the process of renewing multiple existing customers in the site, which we believe will provide additional upside, and we're having a growing pipeline of incremental opportunities building.

In Eemshaven, we expect to invest a modest amount of incremental capital to recommission the facility and anticipate potentially positioning the site with sellable capacity in late 2019. We have been encouraged by the initial discussions we've had with potential hyperscale customers and expect the Eemshaven facility to represent a valuable opportunity over time to support our ongoing hyperscale growth initiatives and above-average returns on our invested capital.

In addition, recent news reports suggesting that local Dutch government authorities have, for the time being, placed limitations on incremental data center development activity in the Amsterdam area enhances the strategic positioning of our 2 sites in the northern Netherlands, which has significant remaining growth capacity for customers and we believe are unaffected by the new policy.

We are excited to extend QTS' growth opportunity internationally with the modest initial investment and de-risked and efficient operating model that provides a significant upside opportunity. We will continue to evaluate incremental expansion opportunities, both in the U.S. and abroad, with the same disciplined and de-risked approach we have consistently demonstrated in the past.

Next, on Slide 10, I'd now like to review our current balance sheet position. As of June 30, 2019, we had approximately $718 million in liquidity in the business, including undrawn forward equity proceeds. We have no significant debt maturities until beyond 2021 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 5.1x net debt to annualized adjusted EBITDA pro forma for approximately $147 million of equity proceeds raised through the forward structure of our equity offering in Q1, but which have not been currently drawn and provide future capital availability. As we drawdown these proceeds over the next several quarters, we anticipate our leverage returning to the mid- to high 5x range, consistent with where we have historically managed the business and remain comfortable in the near term in light of our significant backlog of signed but not yet commenced revenue.

We continue to view our approach to capital allocation as directly tied to our goal of achieving consistent growth in OFFO per share. In order to accomplish this, we constantly evaluate and prioritize our capital spend to find the right balance of driving both near-term results, while continuing to invest in the long-term growth opportunities for the company. Over the past 2-plus years, we have made significant investments in our platform to position our business with the right assets in the right markets. We are excited to execute on the growth opportunity afforded by monetizing our 1 million-plus square feet of low basis powered shell capacity that we can deliver quickly on a just-in-time basis and had a material cost advantage, further supporting our incremental returns on capital.

From a financing perspective, we are focused on funding our business in the most shareholder-friendly way possible. In evaluating capital that we bring into our business to fund our significant backlog, we try to manage both the timing and structure, while minimizing near-term equity dilution.

To support our development activity over the next several quarters, we currently have approximately $147 million in remaining undrawn forward equity proceeds. In addition, we will continue to actively evaluate a range of incremental funding options, including additional joint venture opportunities with our partner, Alinda, as well as use of our forward ATM program to more closely tie development activity with funding needs.

Next, onto our financial guidance on Slide 11. For the full year 2019, we are reiterating our total revenue guidance of between $461 million and $475 million. 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 2.3%. We're also reiterating our adjusted EBITDA guidance range of between $243.5 million and $253.5 million and our OFFO per share guidance of between $2.61 and $2.71.

Our CapEx guidance of between $450 million and $500 million is also unchanged, which is fully funded, including the proceeds from our equity raise in Q1. Overall, we are pleased with our performance during the second quarter and encouraged by the ability for a differentiated platform to continue to generate strong returns to shareholders. We will remain focused on allocating capital in a balanced approach to support our ongoing growth opportunities and longer-term objectives.

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

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [5]

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Thanks, Jeff. Now onto Slide 13. The second quarter represented another strong quarter of performance for QTS, in which we continue to press our competitive advantages across our enterprise hybrid colocation, hyperscale and federal verticals. We see competition in our markets, just like each of our peers. However, our confidence and the opportunity we see in these markets remain strong.

Our differentiated platform is proving to be important in markets like Northern Virginia, where competition does tend to be higher, and we're gaining market share as a result across our key customer verticals.

First, within the enterprise customer vertical, QTS' software-defined data center platform continues to prove to be a valuable differentiator. In fact, industry analysts from 451 were recently quoted as saying, "QTS is one of the first data center service providers to leverage data for customer use and to improve visibility across its hybrid and multi-cloud environments." We have implemented a digitization first strategy at QTS and over 2-plus years of intense work, we are now seeing the benefits of our initiatives.

The data center market continues to grow, but customers are changing their buying expectations of data center services with data availability and multi-cloud access becoming the new norm. The path, space and power solutions that most operators have delivered the same way for over a decade is not sustainable in an environment where the digitization is impacting nearly every industry. We believe a higher bar has been established to win market share and the investments QTS has made in the software-defined data center platform have positioned us to deliver the next generation of solutions to enterprise customers that they expect.

Next, within hyperscale vertical, QTS has differentiated its capability to drive outsized returns by leveraging our existing 1-plus million square feet of cost-advantaged powered shell across the U.S. and Europe. This infrastructure provides not only the opportunity to deliver space for customers quickly, but also at a premium returns due to our low-cost basis as the case with the 3-megawatt lease sign we signed in the first quarter with the new hyperscale logo in our existing Fort Worth facility. And a third market we target with a differentiated approach is the federal vertical. Through strategic investments we have made over the past several years, QTS has established itself as a leading data center services provider to the government agencies.

Due to unique high security requirements of the federal government and generally higher barriers to entry as a result, these solutions typically carry amongst the highest returns on capital opportunities in our sector. We are excited about the multimegawatt lease we signed in the quarter supporting a larger federal program, and we see the number and size of these type of requirements continuing to grow and favoring incumbent providers like QTS. Across 3 customer verticals, we believe our platform is uniquely positioned in the market to drive enhanced value for our customers and outsized shareholder returns. We have successfully demonstrated this already in the first half of 2019 and expect to continue our momentum in the second half of the year, supported by a strong sales pipeline and a booked-but-not-billed backlog.

Before closing, I'd like to briefly highlight an event that we hosted during the second quarter on May 7. QTS hosted its inaugural Richmond Network Access Point event, which officially launched the Richmond facility as one of the next key Internet exchange points. We are encouraged by the enthusiastic turnout and the new customer activity we're already seeing. We expect this to be a reoccurring event and look forward to seeing you all there in the future.

Finally, I'd like to thank our QTS employees, who continue to drive the results of our business through their dedication to world-class customer service. 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) And today's first question comes from Jonathan Atkin of RBC Capital Markets.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [2]

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So I had a question about the big lease this past quarter, the 5-megawatt plus, is that an existing commercial customer that you served and is now kind of the federal division that you've kind of signed on into client?

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

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Jonathan, this is Chad. In this regard, it is a customer that we had an existing relationship with.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [4]

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And as you look at the federal opportunity more broadly, is there a wider sight towards generating revenues directly from federal agencies? Or is it more likely that you'd be seeing revenues from systems integrators and the like that have the federal government as a client?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [5]

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I would think, the primary role for us is to work with the federal integrators, but it is not outside of our abilities to have direct access, but a lot of times, federal integrators are involved.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [6]

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And then I was interested in commentary on just some of the market, Phoenix, Hillsboro, Chicago, Dallas, Virginia, where is this sales pipeline or where has quarter-to-date bookings been the strongest?

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

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We've seen a good balance across the country. Obviously, in some markets, we're not open. We have prepositioned infrastructure and land. You said Phoenix. We have prepositioned land and infrastructure. We've seen uptick in bookings in Chicago. We have seen strong demand in Atlanta. We continue to have opportunities in Northern Virginia, Richmond. It's been a nice balance this year. And of course, the engine of our business is our hybrid colocation business, and it continues to kind of drive what QTS and how we think about the business. And from time to time on the acceleration of growth, we see the hyperscale enter and we saw that in the first quarter in Fort Worth, and it's just been a nice balance this year for demand and opportunity for us.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [8]

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And then lastly, on international, prospectively going forward as you evaluate opportunities, could it potentially include Asia Pac or Canada? Or would you most likely keep the focus on Europe?

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

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Yes. I don't think you should think about QTS having big ambitions in the Asia Pac. We feel like we were fortunate enough in a QTS -- opportunity in a traditional QTS fashion to enter Europe with almost 30 megawatts of infrastructure in a de-risked, very visible path for value creation and earnings growth. I think we're very happy with what we have accomplished. And you should think that we're going to move forward and that -- focus on that. And I wouldn't read too much more into it.

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Operator [10]

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

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [11]

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Good leasing. I just wanted to know a little bit about -- just looking within the data center properties, some changes in occupancy within the footprint. It looks like some you had move-outs in Richmond and some move-ins in Chicago, Santa Clara. I was wondering more about just the change in Richmond and if Chicago is being impacted by the tax rebate law? Have you seen increased demand there?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [12]

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I think our uptick in Chicago was even before we saw the legislation pass, which has been a very, very pleasant surprise. I don't think a lot of people forecasted maybe that was going to get through. But as states become more competitive, we feel very good about what we have in Chicago and we already, with Clint and the team, had saw quite a big uptick in hybrid. So Chicago, I think we feel good about. It continues to grow momentum. It's a phenomenal site. And we just finished a large on-station substation on the property that's just probably one of the most robust substations in that market now. And I couldn't be more excited about that.

On the Richmond, from time to time, we have customers that have loads that grow in different areas of the country. And I think from that standpoint, we had a customer, takes a migration to a different location. And from that point of view, if it works for us, those kind of decisions are always usually at our discretion. And we just kind of work through that and move on, so -- but good demand across the portfolio.

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Operator [13]

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And our next question today comes from Erik Rasmussen of Stifel.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [14]

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I'll echo nice leasing results. If you look at Q2 $19.6 million annualized rent above the 4-quarter average, what does that say about just hyperscale leasing in general across the industry? And then maybe you could just talk about what you're seeing on the hyperscale side with just discussions with customers, I mean, obviously, realizing you're only targeting 1 to 3 deals a year. But I mean, how do you see the year shaping out in terms of activity? And that you also see maybe a potential for a better second half.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [15]

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I do think -- thanks, Eric. This is Chad. I do think that it is a different purview from QTS because we don't have to win every deal. We don't chase every deal. We need -- we kind of build our plan based on 1- to 3-type opportunities and we feel like we've accomplished that this year already. So we feel good about this year. And we see good demand. I mean, it helps when you have 1 million square foot of powered shell that has cost advantage and speed advantage.

So when you can start the conversation with hyperscalers in that regard with those 2 advantages, it puts you in good position. Of course, we spent the last couple of years expanding our market share to make sure we had key strategic locations for hyperscalers. So that's also another strong point. Now we get the opportunity to start to monetize those investments we made in the last couple of years, and that's certainly our focus now.

I do think that people that have to rely upon hyperscale, it's been a lumpy business from day 1. And I don't see that changing. People go buy space. They fill it up. And one thing I think the market should feel good about is they always come back and buy more. It's just the timing of when they buy. So I don't think we should read anything into the markets changing or going backwards. It's moving up and to the right, unquestioned. And we think we're well positioned for that. But it's a lumpy business, and that's why we built this company based on a differentiated model of our hybrid colocation engine that drives our business. That's just the fact that why we did it.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [16]

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Maybe just my follow-up. It's -- the data centers in Netherlands, you completed that and the integration seems to be complete now. You're focusing your efforts on growing that business for those 2 sites. So what's the plan in terms of the hyperscale Eemshaven facility to bring that online? And then maybe just highlight how strategic of a move is this as it relates to your global expansion plans? And also, maybe discussions with existing customers or maybe potentially breaking into new customers?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [17]

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Yes. It's -- so -- of course, Groningen is up and operating. And as Jeff talked about, we had some additional customer uptick in that market, nothing material. But it's nice to get off to a seamless transition to new ownership and customers that have confidence in growing and coming to us. So that's just a great message.

Eemshaven is something that we're working through the reconditioning and recommissioning of that facility. And you should expect that, that would be finished early next year. And we're already starting to talk to customers about that. And for us, it is strategic, just because it's such a huge earnings-type opportunity for us for shareholders because at the basis that we own that asset, just any small amount of leasing over there starts to be a material impact on our growth and our profitability with that platform.

So obviously, we expect to lease that property up over the next few years, and we're going to be focused on. We think it's a great accelerant for growth and great entry to Europe. And our hyperscale customers, we think, have received it well because that area of the country is going to grow more. And obviously, we had no insight that Amsterdam is going to make a statement about kind of curtailing data center growth at least for the -- for a period of time. That's just accelerating the conversation around the northern part of the Netherlands. It does have power, fiber and access to be another accelerant, so a great opportunity for us.

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Operator [18]

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And our next question 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 [19]

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So first, I wanted to clarify on the leases with hyperscalers year-to-date. You talked about deploying into existing powered shell capacity. I wanted to just make sure those were all hyper -- turnkey leases that you signed, right?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [20]

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Yes, sir.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [21]

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This quarter and last quarter as opposed to shell leases?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [22]

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Yes.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [23]

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Okay. And then looking at the federal opportunity, it sounds like you guys see additional potential there. Can you just sort of maybe clarify what it is about your franchise and platform and/or the assets that position you to win this business?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [24]

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Yes. I think, like anything, when you start to develop a track record of being able to have a business that understands the need, drives the right solutioning and has the right physical infrastructure, it starts to be a powerful combination. And we started that journey a few years ago in the federal space and obviously, have been very committed to it. In fact, we have a number -- a couple of our Board members that are specifically spent big chunks of their career in government-type agency work and we just feel like that we have a purpose and mission around that. And when you kind of bring the security focus and the personnel and have the ability to integrate all of that, it just becomes a powerful solution to winning. And it's just something that we look forward to build the momentum off of and having the right locations, the right people, the right tool set and the right mindset to really kind of be committed to a secured federal business is a big part of it.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [25]

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Okay. I guess, more specifically, I was wondering if these government RFPs have physical data center requirements like -- and/or certifications like FedRAMP that you guys have that others don't?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [26]

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There is a number -- it's kind of hard to generalize it because everything's unique and everything is different. And to your point around the requirements, yes, we have certifications that we're operating under today that could be unique to other companies. But that's not given that that's the only operator that could do that or that does that. It's just something we've been focused on. So it's just really hard to generalize an RFP because in many cases, they're very unique in each and every one.

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Operator [27]

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And our next question today comes from Richard Choe of JP Morgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [28]

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Just wanted to follow-up a little bit. You mentioned it in your prepared remarks, but to get a little more clarity on the leasing in terms of what would have been the breakout between colo and hyperscale? And now that you signed kind of 2 -- 1 to 3 deals for the year, what should we look for in terms of signings going forward?

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

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Richard, this is Jeff. We've continued and what you've seen in the quarter is an underlying basis on hybrid colo that continues to anchor the business. It has been pretty remarkably stable over the course of the last 5, 6 quarters. And then the spike that you saw in the quarter was exactly what we've laid out in terms of periodically and opportunistically leveraging hyperscale to see that acceleration. So if you look at what we've performed over the course of the last couple of quarters, you can get a feel for the traditional hybrid and that continues to provide that stable engine and then hyperscale really accelerated that.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [30]

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Great. And in terms of churn, I mean, given where we are in the year and where you're running, it looks like we're probably going to be more at the low end of guidance than the higher end. Can you kind of update us on anything we should be looking for? And then, I guess, a competitor that they saw some churn regarding the movement of some dedicated to cloud apps or instances and wondering if you're seeing any of that?

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

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Sure, Richard. We remain confident within the 3% to 6% range that we laid out at the beginning. Those numbers, that's never a straight line. And so you could see some quarters where it's a little bit higher or a little bit lower, so I don't want to limit that range at this stage, but we still -- we remain extremely confident that we'll fall within that range.

And from an overall churn perspective, we've seen that pretty stable. We had a deliberate focus in terms of, obviously, what we're delivering to customers and the way that we're working with our customers through STP and a lot of integration and a lot of other aspects that we think provides great value to customers. And as a result of that, we have seen some nice stability and expect that we'll see that continue.

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Operator [32]

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And our next question today comes from Michael Funk of Bank of America.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [33]

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Just kind of following up on the churn question. You don't have any near-term expirations of any large size. But maybe looking forward at some of the larger ones that you do have, looking at about 1.5 years to about 2.5 years, what are you doing to proactively manage that potential churn and kind of lock those customers than before they become free agents and having to deal with them then?

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

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Sure. I guess, the first point I'll make is if you look at our top 10 largest customers and the nice thing again about the diversification of our model is once you get down below 10%, you don't have any customers that are much more than about 1% of our rent. And of those top 10 customers, the average weighted remaining lease term is 42 months and most of those customers are 2, 3-plus years out. So we have got great visibility in terms of those larger renewals and a lot of pipeline. In terms of our ability to work with those customers in advance, I'll ask Jon Greaves to jump in, in terms of some of the interaction we have with them?

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [35]

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Yes. Thanks, Jeff. So the interaction we work with them on is really around the technology platform. So with the STP platform, we can see both their trends, their demand curves and work with them to balance that appropriately with their workload. So it gives us a really different way of talking to customers and a really different way of being interactive with their design.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [36]

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And it also keeps us very relevant with them. And I think it's going to be a direct result of the success we have in retaining and growing customers because it's just something that as this digitization marches on, customers are valuing the different interactions that Jon and the team are bringing to their solutions. And I think it will be a powerful accelerant for helping us minimize churn and accelerate growth.

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

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Maybe 1 more follow-up question, if I could. So in your capital expenditure guidance, I'm just wondering what kind of assumptions are underpinning the $450 million to $500 million? Is that -- does that level assume an improving market environment, rising demand? What are the assumptions underpinning that as we think about 2020?

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

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Sure, Mike. I'd say it's based on our best visibility in terms of continued strength in QTS. You can see in the performance that we've put up that we are seeing momentum in the business and we anticipate that it will continue in a similar fashion to what you've seen. We also have the benefit of booked-not-billed backlog that is, I think, the second highest we've ever had in the history of the company and gives us great visibility in terms of what our needs are going to be to support that growth over the next couple of years.

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

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And maybe just 1 more follow-up to that one as well. Are you seeing any change in behavior in the markets from competitors, either public or private, whether that would be slowing down builds, increase in build activity, change in pricing?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [40]

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Nothing material.

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Operator [41]

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And our next question today comes from Nate Crossett of Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [42]

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On the federal lease, when you talk about above-average ROICs, I mean, can you give us a sense of what the spread is above a nonfederal deal?

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

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Yes. I mean -- Nate, thanks, this is Chad. I mean, we talk about our hyperscale spreads at 9% to 11%. We've been fortunate this year to have a couple of our transactions, one went into an existing shell, which was quick and at the higher end of that return of 11%. I would just say that on the federal opportunities, because of the uniqueness around them operationally, infrastructure and security, you'll see that accelerate through the 11% return. So it's a trend that we've noticed and have been part of, and we don't see that changing. So it's just a great balance to the opportunity to accelerate returns.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [44]

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And then just one on the Alinda JV. Is there any update there on additional properties that could be added? And then I was just wondering if this recent Equinix JV announcement when [caped] gives you maybe more leverage on the cap rate for new assets that could go into that JV?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [45]

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Nate, this is Jeff. So as we announced with the original JV announcement with Alinda, we are excited that we have the ability to reduce our CapEx and increase our returns on that asset materially. But the second thing we're really excited about from that is it was laying out a template that we now have with Alinda that enables us to continue to put assets into that JV and continue to fund the business, leveraging that low cost of capital with Alinda partnership. So we remain in active discussion with Alinda about ongoing opportunities and are very open to that.

As it relates to cap rate and structure and deals going forward, every deal is going to speak for itself. But what we like a lot about the deal that we did and where we think that, that cap rate was pretty material, that was a cap rate that was not just based on the in-place NOI of the assets at the time. That was a set cap rate that was designed to frankly ratchet in as that asset expands, and that's a cap rate that basically caps out at full utilization of that asset.

And so it's a very different thing, if you think about it, and everyone's got different JVs and different structures and they all have benefits and they can all help different companies. We think the industry will look to continue to fund in many respects through JVs. As you look at what we're most excited about with the deal that we signed, it's a cap rate that's not just on the in-place NOI, but again, as that asset grows, that cap rate stays fixed, which means effectively, the increased value to grow that asset accrues to our existing shareholders.

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Operator [46]

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And our next question today comes from Eric Luebchow of Wells Fargo.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [47]

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Curious, the announcement around the new subsea cables terminating at the Richmond NAP. What type of opportunity do you think that those subsea cables represent and your ability to kind of accelerate leasing and interconnection revenues in that market in particular?

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Clint Heiden, QTS Realty Trust, Inc. - Chief Revenue Officer [48]

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Eric, it's Clint Heiden. So it's been a tremendous visibility for that site. It went from a domestic-based data center to probably one of the most talked about data centers worldwide. We expect both traffic coming in from Europe that wants to receive a better path, lower latency. Those are the highest capacity, lowest latency routes to the U.S. from Europe and South America that terminate in our Richmond facility. As a use case, we had an Atlanta-based customer in a competitor site that was routing traffic over the MAREA cable and had to route it through Chicago and then from Chicago back to Richmond. And now they're discussing with us moving their colo environment to our Richmond database. Now we just started this, and there's a long way to go. But in a nutshell, that data center will become one of the most sought-after interconnection points on the Internet, and it's something we need to do to diversify and preserve the Internet. So we're seeing great stuff.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [49]

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And then just one more for me. Looking at your backlog, I see a pretty large chunk of it commences after 2020. So is there any trend from some of these larger, more complex deals that are having longer book-to-bill cycles? Or is it just kind of specific to the federal deal you signed this quarter?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [50]

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Yes. It's really the federal deal. I mean, in general, the longer-term contracts and hyperscale contracts will have longer scale periods and the escalators as well. You'll see some of that impact. But from what you're seeing there, it's largely that federal deal.

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Operator [51]

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And our next question today comes from Frank Louthan of Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [52]

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So talk to us a little bit more about the government hyperscale customer? Is -- when you say it's 5-megawatt and it's a longer-term contract, is there a chance for that to expand? Can you give us an idea, sometimes these government deals can grow over the life of the deal? And then I have a follow-up.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [53]

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Okay. Frank, this is Chad. Yes. I mean, in most of these cases, with hyperscale customers and integrators working for the federal government, I think the hope is that their contracts, once they get the space established, the security procedures setup, it is an anticipation of both the integrators and us that we would have an opportunity to grow those opportunities. Of course, anything with the federal agency is very unpredictable. So we're not going to get enough prediction, but there are some reservations of additional space that we'll usually work into those types, and they like to have a runway once they establish themselves.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [54]

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And is that also related to the fact it's multisite? I mean, is it -- can you define -- is it -- can you define multisite? Or maybe if you did, I missed that. And how many different locations could this potentially grow into?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [55]

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Yes. One thing with the government type of business, we're not really at liberty to kind of talk about where and who and what. So right now, all we can add is this is a multisite deployment.

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Operator [56]

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And our next question comes from Aryeh Klein of BMO.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [57]

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So given the growing strategic importance of Richmond, do you expect any kind of change in the pricing structure there? And then just separately, it looks like a top 10 customer that was in 14 locations is no longer in the top 10. Any color you can provide on that?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [58]

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Yes. Aryeh, I'll take the first part of that. I think that -- yes, as Clint pointed out, Richmond Network Access Point is going to be a valuable accelerant and opportunity. And as he pointed out, it's going to take years to start to drive that. I don't think you should think about QTS is trying to significantly change. We stick to a pretty consistent pricing. We want to be a great partner to our customers and provide solutions that they value and that they trust. And I don't think you should think about anything being materially different than in our platform across the country.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [59]

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Aryeh, on the other question, that customer from the top 10 from 14 locations, that customer really was just an intermediary that was funneling some business through us. We had aggregated it in the past chart. But given that the decisions and the relationships that we have are actually working through that customer to the end users, we just thought it was more accurate to allocate that revenue to each of the end customers that are making those decisions. So it was really just a shift in terms of trying to get more granular with the data.

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Operator [60]

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And our next question comes from Jon Petersen of Jefferies.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [61]

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So in early 2018, you guys signed kind of your first big hyperscale lease, I guess, at least after your kind of strategy change, first to grow into 24 megawatts over 2 years, which would be 1Q '20. I don't know if you guys could just update us on where you're at in that process? When we should kind of expect the next tranche of space to turn from shell to turnkey? I realize this is a same building. I think it's in the Alinda JV now, but just any update around that would be great.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [62]

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Yes. Thanks, Jon. This is Chad. I mean, the facility is up and running. Customers deploy in and everything seems to be on track. I'm not going to speculate on their build-out, but everything is up and running and we expect it to be an opportunity for them to take advantage of in the years to come.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [63]

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I guess, should we still be modeling a full build-out by 1Q '20? Is that a conservative estimate?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [64]

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I don't want to get into projecting loads for the hyperscale customers. But I mean, we expect it to grow.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [65]

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Okay. And then leasing spreads have remained positive for the past few quarters. But I'm wondering if you could maybe segment that out to kind of your larger wholesale customers versus smaller deployments, and how leasing spreads are different between wholesale and colo leases?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [66]

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I mean, we have seen consistency on -- growth on spreads on all products. Jeff, do you have anything in particular?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [67]

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Yes. Jon, I guess, the nice data point you have is that having been public now for 5 years and that chart going back, you've now got 6 years of data, which means just about every customer we've had in our portfolio, both hyperscale and hybrid of that contract that have come up for renewal during those periods. And so you can see is just an evidence of the number, the consistency in those positive renewal spreads really across both verticals.

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Jonathan Michael Petersen, Jefferies LLC, Research Division - Equity Analyst [68]

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Okay. And then just one last one. You guys talked about moving to 100% renewable power by 2025. It seems like that's where the industry is going. But I'm curious if you could talk about kind of the cost of getting there and how we should think about how that impacts your margin and various investments you might need to make?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [69]

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Jon, I think it's a great question. You should think about QTS. And as we talked about in the script today, the ESG initiatives are some of the most important within the company. But you also hear when I speak about that, that I also am a firm believer that we have to balance the 100% renewable with the access to buy competitive cost of power for our customers, so it has to be a win-win. And I think the market's maturing enough where you can deliver the win-win.

Travis Wright, who runs sustainability for us under Mr. Dave Robey, is doing a fantastic job of making sure that we balance the stewardship of our environment. And at the same time that we balance the cost and competitiveness to our customers, and I think with the example in Piscataway and Irving and Chicago, those kind of markets, we're showing that balance. In some cases, locking in power cost either at the same rate or less, and that's a very attractive opportunity. We're going to continue to push through and we think the 2025 goal is ambitious, but we've set that as a target and we're going to try to live up to that.

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Operator [70]

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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 [71]

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Chad, you spent some time in your prepared remarks emphasizing that STP is a strategic initiative for you guys. How do you weigh the value that stems from differentiating your business via STP versus the potential value of licensing from the software you've created for others and generating a high margin, high multiple income stream? You'd just be shooting yourselves in the foot by doing something like that? Or is it something you've considered?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [72]

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Nick, I would say, right now, we have been on a journey in the last couple of years knowing that customers' expectations for what they need to drive a hybrid environment is here to stay. Multi-cloud's here to stay. Customer deployments and colo is here to stay. And right now, we're just focused on building the first world-class software-defined data center company in existence. And STP is powering that.

What I might do is let Jon speak about it because I think some people have disconnected that this is just a fancy way to talk about DCIM. It is absolutely more than that. And I think, to Jon's point -- maybe he could speak directly to some customer engagement type opportunities we're seeing that's really playing out.

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [73]

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Yes. Thanks, Chad. We've seen interactions with customers on so many different levels. They range from customers being able to control the access to their data center now directly from their own building management systems and in some cases the larger customers to having real time, now forward-looking views of power and cooling and other key metrics around the data center. It really allows us to be an extension of the customer and allow us to be embedded in the customer's own works, profiles and workloads they're building themselves.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [74]

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And the other part of that is could we eventually monetize this aspect? If we do this right, I feel like the opportunities for us to add value to QTS shareholders will be abundant. But really, it's a commitment not just about the platform, it's a commitment to digitize our entire business, which is another path that we've been on the last couple of years and it takes all of that. It's not just one thing that you go do. It's a mind shift. And you're seeing many, many industries play out on digitizing their companies for the future economies that we'll have. And that's the fun part of what's going on is it's not just one part of it, it's wrapping it all together and delivering it. And we'll see kind of how the future unfolds on it. But right now, we think it will differentiate our platform and add value to our shareholders.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [75]

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That's helpful. And then your site in Hillsboro has gotten some mention in the press recently. Can you talk a bit about how close you might be to initiate construction, the profile of the customer you think might find that location interesting? And how you plan to make your facility stand out from others in that market?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [76]

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Yes. That's great. Our -- starting with our 100 acres that's in the enterprise zone there, which there's not much land left in that data center enterprise zone. It's adjacent to a brand new substation, so just the physical elements of it, 100 acres adjacent to infrastructure, fiber and in the enterprise zone. So you start with kind of 3 big opportunities there. We also feel, like Richmond, Hillsboro has proven to be a network access point important to a lot of the technology and cloud providers. So we feel like the inherent nature of the growth in the Internet and the infrastructure will be another attractive area to Hillsboro. It's one of the reasons we put it on the long-term map a couple of years ago and went and acquired it. We are certainly trying to get ourselves in a position there with the infrastructure and planning that we could deliver in 12 months or less, and that continues to be our focus.

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Operator [77]

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Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Chad Williams for any closing remarks.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [78]

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Thank you for your time this quarter. We continue to work hard at QTS. I thank all our QTSers out there. We look forward to the future and the opportunities that we have, and thank you for your time today.

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Operator [79]

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Thank you, sir. This concludes today's question-and-answer session. I'm sorry -- this concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.