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Edited Transcript of QTS earnings conference call or presentation 30-Oct-18 12:30pm GMT

Q3 2018 QTS Realty Trust Inc Earnings Call

Overland Park Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of QTS Realty Trust Inc earnings conference call or presentation Tuesday, October 30, 2018 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 & 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

* Thomas Greason

QTS Realty Trust, Inc. - Chief Hyperscale Officer

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Conference Call Participants

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* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Aryeh Klein

BMO Capital Markets Equity Research - Associate

* 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

* 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

* Robert Ari Gutman

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Sydney Marks

MoffettNathanson LLC - Junior Research Associate

* 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, Inc. Third Quarter Earnings Call. (Operator Instructions) Please note this 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' third quarter 2018 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 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 on the Investors tab. We also provided slides and made them available with the webcast and on our website, which we hope will make it easier to follow our presentation today.

Before we start, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings, and actual future results may vary materially. Forward-looking statements in the press release that we issued yesterday, along with our remarks today, are made as of today, and we undertake no duty to update them as actual events unfold.

Today's remarks also include certain non-GAAP measures, including core revenue, FFO, core operating FFO, adjusted operating FFO, monthly recurring revenue, ROIC, adjusted EBITDA and core adjusted EBITDA. We refer you to our press release that we issued yesterday and our periodic reports furnished or filed with the SEC for further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. These documents are available on the Investor Relations page of our website.

And now, I'll turn the call over to Chad.

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

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Thanks, Stephen. Good morning, and welcome, everyone.

QTS' financial results during the third quarter demonstrate the strong performance of our team and differentiated platform. And this performance is supported by an industry demand backdrop that is as robust as we've seen as a company.

Earlier this year, we laid out multiple strategic initiatives that we had high confidence would drive an acceleration in our business performance. And as you can see in our third quarter results, QTS has delivered on those initiatives with strong execution. We have put up the strongest performance in the first three quarters of 2018 that we have had as a public company. Our strength and momentum has been a direct result of the changes we implemented at the beginning of the year. We have now firmly put the restructuring behind us, and our success is poised to carry us into an equally strong 2019.

During the third quarter, we generated one of the strongest quarters of leasing volume in QTS history with a broad-based strength across our balanced hyperscale and hybrid colocation verticals. And our hyperscale sales pipeline is the strongest we've ever had. Hyperscale contributed about a third of the leasing volume in the quarter. With the momentum carrying over into Q4, this caps off a record $52 million of year-to-date bookings for QTS.

Next, we significantly outperformed our initial expectations and have fully completed the transition of customers to GDT's platform, both ahead of schedule and with significantly higher customer retention, which now positions our business for an acceleration in 2019.

In addition, our core profitability has expanded by over 500 basis points year-to-date. Schoen has reached a record low for our core business, and our revenue and profitability growth is accelerating. QTS' successful execution of our strategic initiatives has positioned our business for a new level of performance, setting the stage for continued strong growth heading into 2019.

Turning to Slide 3, our third quarter results reflect QTS' solid execution across our hyperscale and hybrid colocation platforms. QTS delivered a very strong Q3 leasing performance, building on the sales momentum that we exhibited during the first two quarters of 2018. QTS has signed leases representing $18.1 million of incremental, annualized core revenue in the third quarter, well above our prior four-quarter average and representative of expanding pipeline of opportunity. Moreover, this leasing reflects a very healthy mix of customers and locations across our footprint and the strength in the hyperscale vertical that we've discussed in recent quarters.

Year-to-date, we've signed leases representing more than $52 million of incremental, annualized core revenue, which is the highest in our company's history through the first three quarters of a year. Accelerating leasing performance continues to support the growth in our financial metrics.

During the third quarter, we reported year-over-year growth in core revenue and adjusted EBITDA of 14% and 20% respectively. On a year-to-date basis through the third quarter, core revenue and adjusted EBITDA are up 15% and 24% respectively. This remains consistent with our expectation for an acceleration in our top line revenue growth for '19 and beyond.

We have also been able to generate a meaningful improvement in our overall profitability through a streamlined go-to-market strategy and efficiency gained by leveraging our software-defined data center platform. During the third quarter, QTS reported a core adjusted EBITDA margin of approximately 51%, which represents a 250 basis point improvement year-over-year.

In addition, we've been able to enhance the predictability of our business by realizing customer churn rates well below our historical average through execution on a more simplified product mix. During the third quarter, we recorded core rental churn of just 1.1%, bringing year-to-date churn to only 3%, which remains among the lowest in the industry. As a reminder, our full year turn guidance is 3% to 5%, which was revised downward last quarter from an initial expectation of 3% to 6% and compares to historical churn rate we've experienced in our consolidated business of between 5% to 8%. That 200 basis point reduction in churn correlates directly to the increased revenue growth and provides further support our expectation for an acceleration in our business.

QTS' strong performance since the beginning of 2018 reinforces that the strategic growth acceleration initiatives we implemented are driving significant value. I am pleased with our team's performance in successfully executing our business plan and laying the foundation for continued future growth and differentiation. Through our world-class people and technology-enabled solutions, we have established QTS as a leading innovator in the data center sector, positioning our business to capitalize on the strong underlying demand we're seeing in the market in both hyperscale and hybrid colocation.

Now moving on to our operating performance on Slide 4. During the third quarter, we signed new and modified leases totaling $18.1 million of core incremental annualized rent, which was more than 20% above our already strong prior four-quarter average of $15 million.

We ended the quarter with a backlog of signed but not yet commenced annualized core revenue of approximately $59 million representing a 15% increase relative to Q2, which continues to derisk our future growth plan.

Pricing remains firm across our footprint as customers continue to see value in our software-defined data center solutions and service culture, which has led the industry in Net Promoter Scores. Pricing on renewed core leases were up 2.1% during the corner (sic) [quarter] relative to pre-renewal rates, which is consistent with our overall expectation of renewal rate increases in a low to mid-single digit percentage range.

Our sales results this quarter were driven by a broad strength across our platform, with our hybrid colocation business contributing approximately two thirds of total leasing volume. We are thrilled with the level of activity for our hybrid colocation vertical this year. We are seeing a broad-based uptick in performance driven by an increase in deal size, continued differentiation from our software-defined data center platform and an overall positive enterprise demand backdrop and solid execution by our sales team, led by our Chief Revenue Officer, Clint Heiden.

Our hybrid colocation vertical remains a critical element of our growth strategy, as it enhances customer diversification, drives higher return on invested capital and helps to offset the inherent lumpiness of hyperscale deal flow. Hybrid colocation sales volume was broadly distributed across our footprint, with particular strength in Atlanta, Piscataway and Richmond. Notable leases signed during the quarter included a 750 KW expansion in Chicago with an existing consumer electronics customer, a 300 KW lease in Piscataway with a global communications vendor and a 150 KW lease in Richmond with an industrial manufacturing company. Our hybrid colocation pipeline remains strong, enabled by the industry's first software-defined data center platform, and we will look to close out the year with good momentum building in 2019.

Turning to Slide 5, I'd like to take a few moments to discuss our Richmond location, which has grown into a major contributor for our business and is positioned for significant contributions for the years to come. The Richmond data center market was effectively created by QTS when we acquired and repositioned a major semiconductor plant in 2010. Of the 34 new logos signed during the fourth quarter, more than 25% were signed in our Richmond footprint. QTS' mega data center in Richmond sits on a 220 acre campus and supports upwards of 1.7 million square feet of raised floor capacity with over 500,000 currently in deployment. This is one of the largest data center platforms globally. Combined with a materially advantaged cost basis, our value creation opportunity in Richmond is immense.

And the spotlight on Richmond has grown in recent quarters. Several months ago, one of the largest social media companies in the world announced their intention to build a billion-dollar data center campus located immediately adjacent to our property in Richmond. This is in addition to another corporate data center that neighbors our property and is owned by and operated by one of the largest global banks in the world. These major investments provide significant critical mass to the Richmond market and have already attracted meaningful increase in activity and interest from network providers who seek to gain access to the market via fiber deployment into the campus.

The most notable connectivity development in Richmond is the completion of the MAREA and BRUSA subsea cables, two of the highest capacity and lowest latency subsea cable systems ever built. These cables, which are operated by Telxius, provided low latency connectivity to Europe and South America and terminate in the U.S. directly into the new Virginia Beach Landing Station.

Last week, we were pleased to announce that Telxius has selected QTS' Richmond data center as a key point of presence, which positions our facility as the closest mega-scale data center to the Cable Landing Station in Virginia Beach. This is significant in that it enables QTS to offer customers in Virginia, including Ashburn, with large-scale capacity and the lowest latency connectivity to Europe and South America available in the market.

We expect the Richmond market to continue to gain traction as an attractive alternate to Northern Virginia and grow into a key destination for both enterprise and hyperscale customers. Those who have followed the data center industry for years know how significant the cable landings from Latin America have been for the Miami market, which exists almost entirely due to the telecom infrastructure terminating in Miami as a U.S. gateway.

Next on Slide 6, Atlanta is another market that we've continued to see consistently strong performance. Atlanta has been a core engine for economic growth for QTS. Between our two facilities in Suwanee and downtown Atlanta, we have continued to capture significant market share. Our incumbent position as a leading provider in the market with over 700,000 square feet of raised floor capacity, an embedded customer base of 540-plus customers and a structural power cost advantage enabled by our 120 megawatt in-grid substation positions QTS for continued future growth in Atlanta. Additionally, the recent passage of the new legislation provides an incremental tax incentive for data center providers and customers and further establishes Georgia as a key destination for data centers.

Earlier this month, we were pleased to announce that we closed on the acquisition of a 55 acre land parcel immediately adjacent to our existing mega data center facility in downtown Atlanta. Since acquiring our Atlanta-Metro site in 2006, we have acquired four separate parcels of land adjacent to our property, and this 55-acre parcel represents the final centerpiece. This strategic site provides QTS the opportunity to extend our leadership position in Atlanta and drive incremental operating leverage by expanding our downtown campus by an incremental 150 megawatts.

Importantly, the neighborhoods immediately surrounding our data center campus have dramatically gentrified since our first purchase many years ago. As a practical matter, it would be difficult, if not impossible, to locate a mega data center footprint in metro Atlanta economically at this stage. We expect to begin preliminary site work over the next couple of months to pre-position the site for future development. The Atlanta market remains a clear growth opportunity for QTS, and we look forward to leveraging our strong incumbent position to continue to drive incremental success in this market.

Now moving on to hyperscale on Slide 7, which contributed approximately one third of our leasing volume in the quarter. We continue to view hyperscale as an expanding opportunity to strategically accelerate growth with some of the largest and fastest growing technology companies in the world. We have discussed in recent corners the traction we are gaining within hyperscale. And during the quarter, we are pleased to sign new leases with two core hyperscale customers, aggregating to approximately 7 megawatts in existing QTS facilities supported by strong capital-efficient growth.

Earlier this year, we announced the signing of a hyperscale lease with a leading software as a service company in Manassas, VA. As part of the lease agreement, the customer is expected to ramp up for an initial committed deployment of 5 megawatts into the full 24-megawatt facility over an approximately two-year period. During the third quarter, we are pleased to announce that this customer took down its second tranche of turnkey capacity, which is included in our Q3 leasing results. This second tranche represents an incremental 4 megawatts, which we would expect to deliver in mid-2019. 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 24 megawatts of turnkey power capacity, providing additional visibility in pipeline for future growth.

We remain encouraged by our ongoing conversations with additional hyperscale customers regarding opportunities across our footprint. These conversations continue to suggest that we are in the midst of a multi-year data center expansion phase for the leading cloud and technology companies as their own businesses accelerate. And with over 1 million square feet of cost-advantaged powered shell capacity in the top U.S. data center markets and over 600 acres of fully entitled land available for development, we are well positioned to win our fair share in hyperscale.

Since realigning our sales focus to be more intentional targeting larger hyperscale opportunities toward the end of last year, we have made significant progress in deepening our relationships with key customer accounts. We have several larger potential opportunities in our pipeline that we are actively pursuing with both new and existing customers, and we will look to provide additional detail in the coming months around these opportunities. We continue to anticipate signing one additional larger hyperscale transaction by the end of this year, and our expanding hyperscale deal pipeline provides incremental support to our future top line growth expectations.

Overall, we are very pleased with our leasing performance year-to-date and during the third quarter. We remain confident that our software-defined platform, mega-scale footprint and world-class customer support provide a strong foundation for continued growth in leasing and heading into 2019.

Next on Slide 8, as part of a more intentional focus to drive hyperscale leasing growth, in late 2017, we announced multiple land acquisitions in key hyperscale markets including Ashburn, Phoenix and Hillsboro. Subsequently, during 2018, we acquired additional land in Manassas, VA, which is rapidly emerging as an attractive alternate to the more concentrated Ashburn market. These expansions rounded out our footprint and provide scalable capacity in the markets where the majority of hyperscale deal activity is taking place.

Looking at overall hyperscale deal activity in the industry over the past several years, more than 50% has occurred in the Virginia market, and that is consistent with the opportunities that we're seeing in our pipeline. To capitalize on these opportunities, in less than a year, we have transformed our growth opportunity into the top U.S. data center market. We now have the capability to deliver a total of more than 650 gross megawatts and 3.2 million square feet of raised floor across our 395 total acres within our current Ashburn, Manassas and Richmond footprints.

In fact, we see our Virginia footprint as the best positioned in the market for multi-location opportunities with significant capacity in three core locations. Demand within the Virginia market, particularly among hyperscale customers, continues to grow, and we are excited to have positioned our platform to drive long-term success in the largest and fastest-growing data center market in the country.

Turning to Slide 9, I'd like to now discuss our corporate governance modifications that we announced several weeks ago. QTS' board is comprised of experienced and engaged independent representatives who are committed to enhancing shareholder value by aligning with our corporate governance best practices. QTS was pleased to announce the appointment of Mazen Rawashdeh to our board of directors as a new independent director. Mazen brings more than 25 years of experience in the technology industry, specifically in large-scale data center infrastructure, management and strategy for some of the largest technology companies in the world. He currently serves as a Chief Infrastructure and Architect Officer of eBay. His addition brings valuable technology infrastructure experience and knowledge to our board and takes our board composition to 9 total directors, 8 of whom are independent.

In addition to expanding our board of directors, QTS announced a number of additional corporate governance modifications, including the rotation of board committee chairs, the decision to opt out of MUTA, the hiring of a new consultant for the board in executive compensation and the reduction in the company's related-party transactions. These modifications represent the latest example of the QTS' board's commitment to best-in-class governance policies and positions QTS to continue to deliver value for our shareholders.

With that, I'll turn it over to Jeff Berson, our Chief Financial Officer, to discuss our overall financial performance and outlook in more detail. 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 11, as you're aware, over the past several months, we've been working to transition certain noncore, managed-hosting customer contracts and support to our strategic partner, GDT. Through this partnership, we're able to maintain consistent customer support on solutions like managed hosting enabled through GDT's platform, which is integrated with our Service Delivery Platform, while driving enhanced profitability and a new source of potential growth for QTS. As of the end of the third quarter, we're pleased to announce we have completed the migration of noncore services and customer contracts to GDT with strong success and ahead of schedule.

When we began this process at the beginning of the second quarter, there were approximately 180 customers that we identified whose services and support we would look to migrate to GDT's platform. We were successful in migrating more than 85% of those customers. While we laid out conservative initial expectations, we're not surprised by our level of success in this initiative. GDT was carefully chosen as our strategic partner based on their high level capabilities as an IT solutions provider and the fact that they were already a QTS customer and partner, integrated into our software-defined data center platform. Through integration with STP, we were able to offer customers a smooth and transparent migration. In addition, the GDT team ended up taking on more than 60 former QTS employees that further supported our managed-hosting business and smoothed customer transitions.

The timing for completing this initiative is ahead of our initial expectations of full migration by year-end. In addition, while the financial impact to our core business this year is limited, due to better-than-expected customer retention, we now expect a potential core revenue contribution in 2019 from the migration of noncore services and customers of approximately $10-plus million, which represents an increase from our expectation last quarter of $8-plus million and our original stated assumption of $5-plus million and further derisks our growth expectations for 2019.

This initiative involved a significant effort across multiple groups within QTS and positions our platform to accelerate into a growing opportunity within hyperscale and hybrid colocation. We'd also like to thank the GDT team for their partnership and engagement over the course of the last several months to successfully complete the migration and maintain a high-quality support that our customers have come to expect from QTS.

By the end of 2018, through the transition of the noncore managed hosting business, both noncore revenue and expense will be fully out of our financial results. Execution on cost-reduction has tracked in line with expectations, and we expect to complete the elimination of all noncore cost by the end of 2018. In addition, we anticipate any remaining restructuring-related costs will be recognized in Q4.

Now turning to Slide 12, I'll review our current balance sheet and liquidity position. As of September 30, 2018, we had a total of approximately $750 million in liquidity in the business made up of availability under our revolving credit facility and cash on hand. We ended the quarter with leverage of approximately 5.3x net debt to annualized consolidated adjusted EBITDA. Based on increased visibility to delevering through an expanding backlog of signed but not yet commenced revenue, we're comfortable maintaining leverage in the mid to high 5x range in the near term to support our ongoing capital development plan. Supported by the Series A and Series B perpetual preferred stock offerings we completed earlier this year, our current capital plan development is fully funded through the end of 2018.

We remain pleased with the available liquidity in our business and the ability for our balance sheet to support our future growth. Between our debt and preferred securities, more than 75% of this capital basis currently subject to a fixed rate, which insulates our capital stack from outside interest rate risk. In addition, we have no significant debt maturities before 2022.

As a normal course of business, we continue to actively evaluate a range of additional financing options to support our future growth. These options include, but are not limited to, structured financing products, asset divestitures and JV partnerships, which provide the potential to drive incremental efficiencies in our capital structure over time. We'll continue to monitor market conditions for opportunities to enhance the health of our balance sheet further and improve our overall cost of capital.

Now onto our financial outlook on Slide 13. As a reminder, our financial guidance is based on the results of our core business. We're maintaining our core revenue guidance range for 2018 of between $408 million and $422 million, but expect to come in at the higher end of this range due primarily to higher than anticipated utility recovery revenue which passes through directly to higher operating costs. We're also reiterating our guidance for 2018 core adjusted EBITDA of $218 million to $228 million and core OFFO per share of $2.55 to $2.65.

Moving on to churn guidance, our visibility and confidence in lease expirations through the end of this year remains strong. As a result, we're maintaining our rental churn guidance for 2018 of between 3% and 5%, which reflects the reduction last quarter from 3% to 6% previously. Finally, we are reiterating our CapEx guidance range for 2018 of between $425 million to $475 million, excluding M&A.

Overall, we're asked pleased with our operating results in quarter and our execution on key strategic initiatives year-to-date. We are very encouraged by the increasing demand opportunity we see in our business and will continue to look to allocate capital in a disciplined manner to balance both our growth and returns across our platform.

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

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

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Thanks, Jeff.

Turning to Slide 15, earlier this year we implemented a plan to position QTS for accelerated leasing, improved profitability and enhanced predictability. And I am pleased that our successful execution on our strategic initiatives is driving strong momentum that is clearly visible in our operating and financial metrics. Year-to-date through the third quarter of 2018, we've been able to generate our highest leasing volume on record, which represents a 60-plus percent increase relative to our average quarterly leasing over the prior three-year period. We have recognized a more than 500 basis point increase in our overall profitability and a 30-plus percent reduction in customer churn relative to our average performance over the past three years.

We have also completed the migration of noncore customers and services to GDT ahead of schedule with a stronger expected contribution to growth in 2019 driven by better customer retention. And the strength in our results is a broad-based across our hyperscale and hybrid colocation verticals with our hyperscale pipeline continuing to expand.

The QTS team has accomplished a lot so far in 2018 and is excited to lean into what we believe is an expanding growth opportunity for our industry and QTS. Through our industry's first software-defined data center platform, mega-scale infrastructure and premier service delivery track record, we are differentiated in the marketplace, and customers are taking notice. Our confidence level in both hyperscale and hybrid colocation leasing performance remains high, and we look forward to finishing out the year with strong momentum headed into 2019.

I'd like to take this opportunity to thank our QTS employees across the country for their hard work and commitment to service to each other, our customers and our communities. As always, I'd 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) Our first question comes from Erik Rasmussen with Stifel.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [2]

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Wanted to just circle back. It seemed like you're seeing a lot of strong momentum in the business. Hyperscale and then obviously the GDT is tracking ahead of schedule. Would -- how would you categorize your opportunities going into 2019, especially as it relates to maybe growth for next year? And then I have a follow-up.

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

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Erik, thanks. This is Chad. We are excited where we are. The opportunity for us to really laser focus on '19, it just helps to get things like GDT done early. It gives us the ability to kind of continue to laser focus on hyperscale and hybrid colocation, our enterprise customer base, and we continue to feel the momentum is building. Obviously, we start '19 with a few less things to do, with things like the narrowing of the service taking complexity out of the business. And I think I couldn't be more encouraged about where our people and where our products with our Service Delivery Platform and software-defined data center is taking us. I think '19's going to be an exciting year of products, customer opportunity and really the focus in hyperscale and hybrid colo. I think the booked but not built backlog reaching back up almost $60 million is another very encouraging sign that we just got great visibility going into '19 and momentum to build for the years to come. So we're very excited about the opportunity.

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Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [4]

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Thanks, Chad. It sounds good. And then maybe just Jeff on the CapEx, you saw a meaningful step up this year. Given the growth plans, should we kind of expect a similar range in '19 or is '18 kind of a high-spend year and will maybe moderate sometime next year?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [5]

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Yes. Thanks, Erik. So obviously we're going to give out our formal guidance at the end of Q4. But when you look at the growth opportunities we've got in the business, you've seen it accelerate in '18 and, to Chad's point, with the backlog that we've got and the continued confidence we've got at the growth levels moving into '19 and the visibility for that, you've got to put some capital in to support that growth. That being said, we're thrilled that we raised $400 million earlier this year. Our business plan is funded through the year. We're continuing to put money out at returns that are far in excess of our cost of capital. And we think that there's a lot of opportunity to drive value into '19 and beyond.

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Operator [6]

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Our next question comes from Jordan Sadler with KeyBanc Capital Markets.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [7]

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Wanted to just see if we could flesh out how what's going on hyperscale side in the pipeline. It looks like, for you guys, in terms of inventory, Ashburn seems to have a little bit of room. Manasses seems to be committed to this one customer who's going to ramp into it. Where are you looking to site this one potential hyperscale customer that you envision signing before the end of the year?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [8]

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I think -- Jordan, this is Chad. Great question. And what's great about it is there's multiple sites. As most of you all know, with over 1 million square feet of powered shell in the ground, we can point hyperscalers a lot of different directions for speed, costability and great return metrics for us because of that powered shell inventory. Whether you're talking about the new building that did a soft opening this month in Ashburn, whether it's Richmond with its powered shell, whether it's Chicago or whether it is Dallas-Fort Worth, there is many places -- and I would -- I think what's most encouraging about hyperscale for us, it's an exciting part of our business. We've been much more intentional about it the next year. The conversations are very broad and very diversified in locations. And that's what's probably most encouraging to me is that there's a lot of opportunities in a lot of different markets, and our speed advantage and ability to offer kind of that product with speed, cost and delivery is a great combination at a great time. And we do have some things, like in Richmond, going with the transatlantic fiber coming through the building now that offers some new unique features for our hyperscale customers that we look forward to capitalizing on. But overall, the pipeline continues to build momentum. And if I think about where we were last year when we really started that initiative to more intentionally focus on hyperscale the end of last year and where we are today, we couldn't be more encouraged about where we're heading into fourth quarter with the opportunities. And we do look forward to that.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [9]

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Chad, just as a follow-up. I think we've talked about a larger hyperscale customer being a 5-plus megawatt-type customer. I'm just curious. What kind of lead time does that type of customer require in terms of having a facility open, ready and available or what kind of (inaudible)?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [10]

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What we typically see on hyperscale in those conversations, it's kind of like what we've done in Hillsboro, in Phoenix, which were big acquisitions of very strategic, infrastructure-rich land. Our purpose on those was to pre-position those sites to be 12 months or less delivery. We're just about to achieve that with the preliminary planning and permitting and dirt work that we've done in both those new markets. And we pretty much, for the most part, can accelerate and be part of just about any RFP with that kind of time line, if you can be 12 months or less. Here's the really strategic part. For the million square feet of powered shell that I have combined in the footprint across the U.S., we can offer 6 months or less in those markets. And that's kind of from start to finish for anywhere from 2 to 5 megawatts and potentially more. So that's a very interesting dynamic that can help lead us to differ results because of our speed. But having that combination, less than 12 months -- I mean, if you look at what we did in Ashburn, that full build was well less than 12 months from start to occupying the first client that we preleased in that space. Our speed, our standardization, our development, with what's Mr. Robey and that team's doing, is continuing to advance that in giving hyperscalers a very unique insight.

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Operator [11]

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Our next question comes from Eric Luebchow with Wells Fargo.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

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So your guidance implies a pretty substantial ramp in EBITDA in the fourth quarter. Could you just remind us what costs will be coming out? And as we think about beyond this year, how much additional cost cutting and operating leverage runway do you have beyond the 53% to 54% margins you expect this year?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [13]

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Sure. Eric, this is Jeff. So we laid out a plan in terms of pulling costs out of the business and driving margins up in the year versus where we were last year. And I think the good news is, correlated to the GDT transition and everything that we've done in our business, the vast majority of the cost take out and the improvement in EBITDA and the improvement in margin we've already accomplished. We've achieved every aspect of the cost that we laid out. We love the fact that our margins, if you look at the first nine months of this year on the core business versus last year, up over 500 basis points, and we think we're driving a lot of operating leverage. On a go-forward basis, the expectation is we will continue to see operating leverage, but on a more normalized basis, think maybe 50 basis points a year of increased margin improvement. As you think about Q4, part of the ramp in profitability in Q4, Q4 always tends to be an unusually higher margin, more profitable business. Part of that is you've got some accruals like employment and sales tax and other aspects that accrue through the first nine months of the year and just don't hit in the fourth quarter. You also have a period, just based on the winter, where the cost of cooling is lower. So you tend to see unusually higher margins on Q4 on top of the fact we're maintaining stable cost as revenue's growing, so all of that'll factor in.

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Eric Thomas Luebchow, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

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Great. And just a quick follow-up. Could you maybe talk about what growth rate or percentage of revenue you're seeing in your interconnection business? And has the addition of the Microsoft Azure ExpressRoute and the AWS Direct Connect nodes had any impact on that business' trajectory?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [15]

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Sure. From a financial standpoint, the interconnection business is growing close to 8% -- sorry, it's growing north of 15%. It represents 8% of our revenue at this point. That's up from 7% and 6% over about a year ago, so you are seeing the growth in revenue coming from that accelerate above our overall revenue. We like that business. It's higher margin. But the other aspect -- and I'll ask Jon to jump in -- is we're also transitioning a little bit in terms of the way we can offer that interconnection, and it's driving the digitization and the technology differentiation that I think QTS is known for leaning in on. Jon, maybe you want to jump in a little bit?

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [16]

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Great. Thanks, Jeff. And Eric, what Jeff is alluding to is the automation and the platform we put in place over the last several years, particularly the platform we use for CloudRamp and other services are now fully embedded in the platform so customers can order a lot of these services now online. And then, frankly, just month-over-month, we just see an incredible increase in customers preferring to buy online versus buying in person.

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Operator [17]

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Our next question comes from Aryeh Klein with BMO Capital Markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Associate [18]

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Chad, you mentioned some of the positive activity going on in the Richmond market. Has that resulted in any change in pricing in that market? And then, Jeff, just going back to the comments on the strength in the pipeline and the growth into next year, how do you think that impacts your capital plans? And you mentioned some potential options there. How would you rank those preferences?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [19]

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Aryeh , I'll take the first part. This is Chad. Thank you for the question. What's been fun about, as we talked about in the script, a large number of customers, actually hybrid enterprise customers, see growth in Richmond. And as we know, the one reason that we love a balanced business, and this quarter probably represents one of the best balances we've ever had between hyperscale and hybrid colo, is that we do have a lot better pricing dynamics around hybrid colocation. So I would say that I wouldn't say it's any materially different, but it's just strong and consistent enterprise pricing for those hybrid colocation deals that we've seen tremendous pick up in Richmond. So we are very encouraged about that. I do think the opportunity to do hyperscale is available in Richmond, and I think over the next few years, you'll see even more of that play out. But I wouldn't characterize it as anything really above the norm or irregular. It's kind of right in the sweet spot of -- we talk about that in 9% to 11% returns for hyperscale, and I think Richmond will be consistent with that. Our cost basis there does help us quite a bit because of what we have in the dirt there at what cost advantage we have and so much infrastructure. But we see consistency and opportunity is really what we see. Jeff, do you want to take the next part?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [20]

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Sure, Aryeh. So we talked a little bit. Our CapEx guidance this year at $425 million to $475 million. We've maintain that guidance. But that CapEx has driven, we think, market-leading growth in the business this year, and we do expect that that growth will continue next year, and we'll need the CapEx to put in to continue to fund that. At the same time, to Chad's point, the powered shell that we've got and the visibility we've got to bring space online and meet customer's needs at a more capital-advantage level and the fact that our product mix is giving us higher returns, we think, does drive capital efficiency in the business, so we're excited about that. From a rank and options, I can tell you without question that I and everyone in this room think that our equity does not appropriately reflect the underlying value of the business. It's not something that we're excited about at this time. We do have a lot of options in terms of raising capital. Again, we're very happy that we did the $400 million in the preferred and the convert earlier this year, which gives us capital support. We've got a booked-not-billed backlog that gives us visibility to natural deleveraging as the business ramps. And as we go forward, having additional options that could include JVs, working with other financial partners, monetizing assets and other factors are things that we're all in conversation with, and we're open to multiple different sources there.

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Operator [21]

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Our next question comes from Robert Gutman with Guggenheim Securities.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [22]

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I was wondering if you could provide us a little more color on the progress of the CloudRamp product, how that's selling through AWS and if you're intending to provide some metrics on that at some point.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [23]

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Yes. Rob, this is Chad. We continue to kind of find the foundation with CloudRamp, and I'm going to let Jon kind of talk about it in more detail, but one thing I want to call out is the underpinning of what drove that opportunity is really the digitization and what we call the first industry software-defined data center. That is embedded now across our entire platform, and I'm going to have Jon talk a little bit about that and how he sees CloudRamp playing out.

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [24]

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Absolutely. Thanks, Chad, and real good to speak to you again. So on the CloudRamp front, the technology that was the core of CloudRamp, as I mentioned, has now been embedded throughout our platform, so we have the ability to automate and take e-commerce-like transactions now across a wide variety of services ranging from everything from Smart Hands and physical activities in the data center all the way through to physical crossConnects and virtual crossConnects, so we're excited to see that move forward. CloudRamp specifically, as we mentioned on the last call, we've expanded the relationship now to include other cloud providers, and we're also taking that same technology and expanding it to other carrier-related services as well, so we're very excited to see the continued growth there in each of the markets we launched in.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [25]

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And again, those customers are smaller and the opportunities are more of an enterprise-level hybrid, but I think it's also why, in a market where people are trying to differentiate yourself, it's one reason I think that we put up one of the strongest quarters in our hybrid history is because our products and the differentiation around those hybrid colocation products are differentiating ourselves. CloudRamp is a piece of that, but really the technology and the focus around the software-defined data center is really giving Clint and his team a differentiation as Jon and the product team really roll that stuff out. So we couldn't be more excited, and we'll continue to grow multiple cloud providers and hopefully continue to see good momentum, even if it is small customers that come through in that cycle. It adds up over time, and we're excited about that.

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Operator [26]

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Our next question comes from Sami Badri with Credit Suisse.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [27]

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Wanted to talk about the SAS 24 megawatt lease that you've referred to on the slide deck and how your customer has actually leased more capacity, I think, maybe potentially earlier than you planned. Could you maybe talk to us about how you thought or how you think that is going? And is this actually being absorbed faster than you expected? And my broader question is really tying into more hyperscale CapEx and how hyperscalers are performing and how they're deploying CapEx. And just want to get a sense of the overall sector and the way you guys see it since you're becoming more indexed to hyperscale CapEx over time.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [28]

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Yes. Thank you, Sami. Specifically about the current customer, I would say that we talked about the 24 megawatt customer being a couple year deployment. And I would say that if you're saying that a two-year deployment -- are they little bit early? Maybe a month or two, but they're not dramatically early or late. So they're kind of hitting what we actually kind of like, which is they're doing what they said or thought they would do, so we haven't seen any irregular -- and it's always great to pull something in a little sooner, and that's what you're seeing play out there. Hyperscale's lumpy, and the reason we built this business with a foundation to be able to have an access to the dozen or so hyperscalers that really matter and the thousands of enterprise customers that still exist every day is because of that lumpiness. And so I know there's been a lot of chatter in the market lately. I can tell you, from Tag Greason and the hyperscale team, that they continue to see strong deal flow. And even though it is lumpy, and still is lumpy, we have not seen any changes materially to demand profiles or opportunities in our funnel. And so I think, like everything, there's always a little noise once in a while, and when things settle down, everybody realizes that it's moving right along. And that's what we're seeing in hyperscale.

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Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [29]

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Got it. Thank you. And then my next question is just -- has more to do with Arizona and when you think that's going to become almost a more comparable market to Ashburn, just given that the amount of construction that's actually occurring in specifically that state has recently stepped up pretty significantly in the first half of 2018. When would QTS potentially consider really deploying capital and scaling up the business there? Are you waiting on a specific inflection, certain customers, etc.? Maybe you could just give us more color on that side.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [30]

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Yes. It's a great question. Arizona has been a great market, and some of our competitors have really done well there. We certainly noticed that. I will tell you, our patience, I think, ended up with the best property left in Arizona with the 85 acre purchased last year in the center of Phoenix with unbelievable power, water and infrastructure, communications access. It's just an unbelievable site. It is why we were encouraged to take it all the way through the rezoning, the replotting, and have it now data center eligible and ready to go, and we're very close to being able to be in that, if not now, in a 12-month or less window. So we are in kind of an active conversation with opportunities there. And I really want the deal flow that comes from that to really drive significant things. We have to watch where our capital goes. We have to be thoughtful about investing not in too many locations at the same time. So we're going to let deal flow and pipeline strength drive us there. But when you think about our site and being in the middle of Phoenix, it is a very unique opportunity that, with some of the suburbs being full and having to stretch out to newer suburbs, this is right in the heartbeat of Phoenix. And I think it'll be a site, over time, that will bring tremendous value and opportunity for QTS, and we'll just see how the pipeline develops and let that drive really the interest in what we do there.

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Operator [31]

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Our next question comes from Michael Funk with Bank of America.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [32]

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First, it's a clarification. There has been a lot of noise this quarter around pricing and demand so just to clarify, you're saying [ER] is still a target and you're underwriting the same returns for both hyperscale and colocation, correct?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [33]

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Yes, yes. I mean, we continue to see the opportunity in hyperscale in the same 9% to 11% range. And our hybrid business continues to be a returns leader for us, and we continue to see colocation, especially with our differentiation -- what's been fun is what Jon and the team's doing around the software-defined data center. It's amazing how much you can change the conversation from price to solution, and when you can change that price to solution -- it's not that people aren't always looking for a good deal. They are, and there's enough competition out there that's willing to price stuff. But if you can get yourself out of that pricing conversation sooner and be talking about how you're embedded in their solution and how you can connect to their systems and how you can drive the automation and the data that customers really want in this level of data and technology that we have, it's a great conversation. I know Clint and the team are leading the way in that conversation. But returns are -- we haven't seen any material change.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [34]

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No, that's great. And then maybe a comment on your visibility and what you're seeing on deployments of next-generation technology such as AI, machine learning, big data and where we are in that lifecycle with regard to future demand driven by those newer technologies. And then even the importance of the proximity that your data centers offer for that type of new technology demand.

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

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Yes. Michael, I'm going to let Jon take that, but it's all about why we are convinced that the data center industry hasn't changed much in the last couple decades. And it's why, a few years ago, when we really focused on that and said, we want to change the way we deliver services, it's one of the reasons why I'm most encouraged. And Jon can talk to you a little bit about the specifics of how that's developing.

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [36]

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Absolutely. And Michael, one of the big trends I think we've been seeing over the last probably two quarters now is the more emergence of those AI workloads really making it into the data centers for production use. So often those come in now with a much more high-density solution that requires GPUs and other exotic hardware into the mix, to allow them to achieve the results they're looking for. The other trend we're seeing a lot of is a lot of the source data, particularly if it's coming from an IoT solution, tends to be originating now from the cloud, with customers electing to do the data processing and data warehousing of that data outside of the cloud. So the proximity play absolutely comes into factor, and it's really twofold. One fold is latency, which matters. The second is actually cost, and as you're probably aware, getting data into the cloud tends to be pretty straightforward and pretty economical, but pulling data back out to perform other activities becomes a lot more expensive. So some of the activities we've been building around our software-defined networking strategy that sits within the software-defined data center has really enabled customers some really unique routes to managing their data strategy.

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

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And then one final one for Jeff here. It's a bookkeeping question. Have you evaluated the impact of the new lease accounting standard, what that would've meant for FFO in 2018 and potentially what that means in 2019?

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

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Yes. Thanks, Michael. So the answer is from the new lease standards and accounting standards, we do not expect any material change in our numbers in '19. Some of the big aspects that drove changes: one, we own the vast majority of all of our infrastructure, 90-plus percent, and so we don't have any issue around the leasing standards, and we love that we own our real estate. And the second is we've been fairly conservative in terms of the way we capitalize salaries for our salespeople. And so that's been another big area where you've seen some change, and given that we've been conservative all along, we don't see any significant change or adjustment in our numbers.

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Operator [39]

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Our next question comes from Frank Louthan with Raymond James.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [40]

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I apologize if I missed this, but where are you currently with your salesforce, and what percentage are you getting from channel sales? And how should we see that shifting over the next 12 months?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [41]

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Frank, I'm going to let Clint take that. But Clint joined the team, as you all know, April 2, and his pace is hard to keep up with. But I'm going to let Clint speak of little bit directly about kind of where he's seen and what he's done in channel and the sales force since getting here.

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Clint Heiden, QTS Realty Trust, Inc. - Chief Revenue Officer [42]

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Yes. Thank you, Frank. So we've put a big effort into the channel group. We think it's a great way to funnel leads into our sellers and partnering with that go-to-market approach. We've also combined some other tools that help us bolster the leads into our core selling organization. So going into 2019, we feel that the channel and the broker community are very strong avenues for us as are our internal lead-generating programs and the emphasis on core marketing efforts that we've put in place.

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

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And just to brag a little bit on Clint, the new inside sales function that he created from scratch since he got here has shown material change in what it's producing since we didn't have really that function like Clint set it up. It's just been an amazing thing to see his imprint in change in that organization and the opportunity to take the strengths that we had and really build on that. So the inside sales function's a great new dynamic that Clint's build and developed in a short period of time.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [44]

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That's great. So Clint, for perspective, sort of where was channel as a percentage of sales when you got there? And what do you ultimately think your target is? And then as another follow-up, from a sales productivity standpoint, where are you with the changes you've implemented in the salesforce relative to where you think it should sort of top out?

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Clint Heiden, QTS Realty Trust, Inc. - Chief Revenue Officer [45]

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Yes. Sure. Great. So we roughly had 30% coming from the channel, call it 2017. 2018, we're seeing it trend through the first two quarters upwards of 50%. And then going into 2019, I'd like to see that kind of go into the 60%, 65%. Then leads being generated from this inside sales team coming from 0 to now producing relative -- in the hundreds of inbound leads now or outbound generated leads. The productivity per rep, if you go back to January, I think was about $5,000 of MRR per rep generating on a monthly basis. We've now seen that jump up to roughly $8,700 MRR per rep. And we've also seen a lower cost of go-to-market with the number of reps. So we've seen bookings per month in hybrid go up, cost in sales go down and leading to a more efficient overall sales organization.

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Operator [46]

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Our next question comes from Richard Cho with JP Morgan.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [47]

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I just wanted to get a little bit more color with the GDT transition, the higher booked but not billed. But with rental revenue coming down, how should we think about how revenue growth should be going forward? And then I have one follow-up. Like, when should we see it start ramping (inaudible)?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [48]

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Sure, Richard. So I think if you look at rental revenue and you look at overall revenue in terms of where we are Q3 over Q2, you are already seeing extremely strong growth. So the booked-not-billed backlog, the increase in leasing volume, the reduction in churn and downgrades in the business and the greater visibility we have, from what we're seeing, is all already reflected in the revenue growth that you're seeing, quarter-over-quarter and year-over-year. We've seen mid-teens plus year-over-year revenue growth on our core business in Q1, in Q2 and in Q3 this year. And we anticipate and continue to be confident with our expectation and guidance that you'll continue to see that mid-teens, market-leading revenue growth going forward.

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Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [49]

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And then in terms of -- it seems like given the booked-not-billed and given the commentary that you've had, it seems like the CapEx number's going to be pretty flat if not higher going forward. I know you don't want to give '19 guidance, but how do you think about your leverage target? And then you had commentary about the equity side. How should we think about your comfortable range with leverage going forward?

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

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Sure, Richard. So we have always maintained and continue to be comfortable with leverage in the mid- to high-5 turns. Overall longer-term basis, I think you'll see leverage in or around the mid-5s, but given the booked-not-billed backlog and the visibility we have and our perspective in terms of the underlying value of the business relative to our stock price, similar to what we've said earlier in the year, we are comfortable with that leverage going up more to the high-5s. We don't anticipate any need to bring leverage beyond that, and we have full expectation to be able to continue to drive and grow our business. And again, we're happy that that plan is fully funded through the rest of the year and have good visibility into next.

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Operator [51]

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Our next question comes from Nick Del Deo with MoffettNathanson.

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Sydney Marks, MoffettNathanson LLC - Junior Research Associate [52]

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This is Sydney Marks calling in for Nick. Given some of the volatility we've seen as of late, can you talk about the relationship between capital market conditions and your willingness to invest at the current rates? I mean, how challenging of an environment would we need to see before it influences your investment plan?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [53]

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Hey, Sydney. This is Jeff. The good news from a QTS standpoint is because of the product mix, because of the higher returns in hybrid colo that we're seeing blended with the strong returns from hyperscale, when we're putting capital out, we are continuing -- and as you can see in this quarter, it's sort of a high double or mid-double digit type return -- it's far in excess of any aspect of our cost of capital. We can continue to put money out with a very large spread between that cost and the returns and continue to drive value for shareholders and drive value in the business. So our expectation is as long as we continue to see opportunities to put out capital at strong returns, to drive value, which we have and we don't anticipate changing, we'll continue to grow the business.

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Sydney Marks, MoffettNathanson LLC - Junior Research Associate [54]

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Great. Thanks for the incremental color. One quick follow-up. I know we're over. Just regarding the new property in Atlanta, is the $80 million price tag reported in the press accurate? And is this building one that can be repurposed or is it a tear down?

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

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Yes. The property is the -- this is Chad. The property is the final piece in the puzzle for our expansion. We couldn't be more excited about the opportunity to have 150 megawatt roadmap now in Atlanta. It's taken us about 5 years to make that assemblage in probably one of the hottest areas in all of Atlanta, called West Midtown. So it was not a given that we could make that acquisition, and we do feel it's very strategic, partly because we will feed all of that property from our cost-advantaged, owned, in-grid substation at Georgia Power. So that's a great opportunity for us, and probably the most encouraging part is now we have a very comprehensive story to sit down and talk to our over 300 customers at Metro about expansion and opportunity for continuing to be able to grow with QTS, which was a huge part of that initiative.

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Operator [56]

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(Operator Instructions) Our next question comes from Jonathan Atkin with RBC.

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Jonathan Atkin, RBC Capital Markets, LLC, Research Division - MD and Senior Analyst [57]

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So there's some pretty interesting disclosure about the Virginia market, Richmond obviously, but also Northern Virginia. And can you drill down a little bit more perhaps how you see medium- to longer-term the dynamics of the Manassas market evolving over time, not just for you, but for the industry? Because there's a lot of other folks that have sort of validated that opportunity. Manassas over Ashburn, are they going to be parallel paths or they'll be different types of requirements that you see landing in that market in Manassas? And then briefly, if there was anything to kind of call out on crossConnect trends by geography or through partners versus CloudConnect versus enterprise. And enterprise, I'm interested in just a little bit more granularity on what you're seeing on the crossConnect side.

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

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Jonathan, I'm going to let Tag Greason, our Chief Hyperscale Officer, talk to you about Virginia, and then Jon can follow up with the crossConnect.

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Thomas Greason, QTS Realty Trust, Inc. - Chief Hyperscale Officer [59]

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Hey, Jonathan. How you doing? This is Tag. Thanks for the question about Virginia. It's a fascinating market if you look at the statewide aspect of the marketplace. What you're hearing from our customers and our prospects is diversification across different locations. Ashburn can't be the only place in Virginia for people to set up shop. As you know, Ashburn land prices continue to increase and get more scarce. We've got a great runway in Ashburn, but the next Ashburn needed to reveal itself, and that is clearly becoming Manassas. We've got a great runway in Manassas as well. But when you look at the overall marketplace, hyperscalers don't want to be too concentrated in one location, so that Manassas alternative is becoming a very, very viable alternative. More importantly though, Richmond, which is an asset that we've been focused on for years, becomes even more viable as you get the transatlantic cable coming through. And so really the bottom line for Virginia is having options for the hyperscalers and the hybrid colocation customers to deploy in other than just the very, very dense Ashburn area. I'll turn it over to Jon for the second part.

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Jon D. Greaves, QTS Realty Trust, Inc. - CTO [60]

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And Jonathan, just on the crossConnect side of things, what we see from a volume and demand is the most requested type of crossConnect is really from our locations to one of the software-defined networks and then using that as an on-ramp to reach other targets or other clouds. The second, probably highest in demand, is actually just the straight data center-to-cloud provider crossConnect with probably the more traditional carrier crossConnect somewhat slowing down a little bit. Those are the two that are really the drivers for all of the activities we're seeing. And then on top of that, we're also seeing increased demand now for the virtual crossConnects allowing customers to kind of essentially multiplex multiple single crossConnects over a single physical crossConnect.

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Operator [61]

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Our next question comes from Nate Crossett with Berenberg.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [62]

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I just want to ask a quick question on Atlanta. We've seen some new players entering the market recently, and I just wanted to know, are you the only one with the power cost advantage? I believe you said around 20% in the past. Is it possible that other players could get a similar power advantage?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman & CEO [63]

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Nate, this is Chad. We think of ourselves, because of the scale, having a unique opportunity. Some of that power cost advantage has just been because we've been there a decade. We own our substation. The substation's in-grid, and we have access to a program that allows us to use the scale of our purchasing to do that. Can it be replicated? I don't know of it being done or able to, but you certainly wouldn't be able to do anything unless you could own your own substation, have it in-grid and have the ability to get on a program that really was started over a decade ago that has the size and capacity that powers one of the largest data centers in the world, taking that pricing and volume. So obviously, there's a lot of hurdles there. You never say nothing can be done because I don't know that to be factual, but I do know a lot of the facts, and the facts would lead me to say that we have a very strategic advantage that drops significant savings to our hyperscale customers. And I think it's one of the reasons why they have been probably most keen on us demonstrating a roadmap and why it is so strategic that we were able to make that final strategic acquisition of that site to give us contiguous 150 megawatt roadmap at a very cost-advantaged power basis. So we're excited about it.

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Operator [64]

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This concludes our question-and-answer session. I would 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 & CEO [65]

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Well, thank you. On behalf of all the QTSers out there that make this possible, we appreciate your hard work. Thank you to our customers and most important, thank you to our shareholders. We appreciate the trust and confidence you place in us. We couldn't be more excited. Sorry we ran them over on time. We had a lot of good things to talk about. Look forward to continuing to keep the inventors updated, and we appreciate the partnership and the opportunities in the community. Thank you, and we'll talk to you next time.

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Operator [66]

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