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Edited Transcript of QTS earnings conference call or presentation 1-May-19 12:30pm GMT

Q1 2019 QTS Realty Trust Inc Earnings Call

Overland Park May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of QTS Realty Trust Inc earnings conference call or presentation Wednesday, May 1, 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

* 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

* Bora Lee

RBC Capital Markets, LLC, Research Division - Associate VP

* Brett Joseph Feldman

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Eric Thomas Luebchow

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Frank Garrett Louthan

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

* Jordan Sadler

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

* Matthew Niknam

Deutsche Bank AG, Research Division - Director

* 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

* Simon William Flannery

Morgan Stanley, Research Division - MD

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Presentation

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Operator [1]

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Good morning and welcome to the QTS First 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, Head of Investor Relations. Please go ahead, sir.

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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' First Quarter 2019 Earnings Conference Call. I'm Stephen Douglas, Head of Investor Relations at QTS and I'm joined here today by Chad Williams, our Chairman and Chief Executive Officer; and Jeff Berson, our Chief Financial Officer. We're also joined by additional members of our executive team who will participate in Q&A.

Our earnings release and supplemental financial information are posted in the Investor Relations section of our website. We've also provided slides and made them available with the webcast and on our website to make it easier to follow our presentation today.

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

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

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

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

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Thanks, Stephen, and hello and welcome to QTS' First Quarter 2019 Earnings Call. QTS delivered another strong performance during the first quarter to kick off what we expect will be another year of consistent, robust growth in 2019.

QTS' growth plan relies on our healthy balance between the consistent performance within our higher-return, diversified, enterprise vertical combined with select, strategic growth acceleration opportunities with large hyperscale technology companies. We believe this strategy maximizes our risk-adjusted value-creation opportunity for both near and long-term shareholders while capitalizing on the 2 strongest drivers of demand in our industry.

Continued strength in the overall industry demand combined with our fully financed 2019 business plan and strong leasing momentum positions QTS well to continue to deliver industry-leading financial and operating results.

Turning on to Slide 3. Building on the strong performance that we generated in 2018 QTS' business results in the first quarter of 2019 demonstrate continued successful execution on our strategic growth plan. For the quarter, we achieved reported revenue and adjusted EBITDA of approximately $113 million and $59 million, up 12% and 17% respectively over our core results for first quarter of 2018. This level of organic growth is near industry-leading and continues to support our longer term financial and strategic objectives.

Our first quarter results reflected an adjusted EBITDA margin of approximately 52.2%, which is up more than 200 basis points over our previous year core results. Reflecting effective cost controlled and continued operating leverage as we grow our business in addition to the impact of the unconsolidated joint venture we announced last quarter.

Underpinning strong financial results our leasing performance during the first quarter continued to reflect a healthy balance across our platform. For the quarter QTS signed leases representing $11.3 million of incremental annualized revenue, which is consistent with our leasing performance during the fourth quarter.

We ended the quarter with a backlog of signed but not yet commenced annualized revenue of approximately $55 million including QTS's pro rata share of the annualized revenue within the unconsolidated JV, which continues to derisk our performance in 2019.

Moving to Slide 4. Consistent with our leasing performance during the fourth quarter our hybrid colocation vertical accounted for the majority of our leasing volume in Q1. Over the past year we've experienced an acceleration in our hybrid colocation vertical, which has been driven by a number of factors. First, the backdrop for enterprise demand is robust. The strengthening economy has unlocked a level of enterprise spending, which has in turn resulted in new and expanding data center requirements. We experienced this throughout 2018 and that momentum has carried over into 2019.

During the first quarter we signed 47 new logos spread fairly evenly across our footprint, which represents a 15% growth year-over-year. More than 50% of our growth typically comes from our embedded customer base continuing to expand on a reoccurring basis. So bringing new customers onto our platform remains a key initiative for our sales team.

Second, as a result of our increased partnership with our strategic channel relationships we've experienced a significant step up in the contribution from our channel to our overall deal flow. During the first quarter nearly 50% of our hybrid colocation leasing was sourced through a channel partner, which compares to approximately 15% just 3 years ago. Over time, we would expect the contribution from our channels to continue to grow as we focus on maximizing lead generation from our top sales leaders.

And finally, our acceleration in hybrid colocation performance is also being driven by continued differentiation from our software-defined data center platform or SDP.

QTS' strategy to execute on the growth opportunity within enterprise customers is built around a platform that offers customers a fully integrated and technology-enabled data center solution delivered across a scalable data center platform. When our sales team can walk into a meeting with a customer and show them real time visibility and dynamic control of critical metrics across their hybrid IT environments from a single platform they are consistently blown away.

Our technology-enabled platform is an essential element of what sets QTS apart in the market and for this reason each of our direct sales people is trained to lead with this differentiation. In addition, our CTO, Jon Greaves and his team currently spend a significant portion of their time in customer meetings demonstrating the capabilities of our platform.

Our ability to enable a broad ecosystem of fully integrated cloud and connectivity partner solutions through our platform combined with QTS's high-end in security and compliance, customer service and world-class infrastructure represents an attractive solution for customers that largely is not available in the hybrid colocation market today. We remain encouraged by the continued adoption of our SDP platform and we expect our growth opportunity with enterprise will continue to expand.

Now moving on to hyperscale on Slide 5. During the first quarter we were pleased to sign a new hyperscale logo in our Fort Worth data center. Over the past several years this customer has been one of the largest and fastest growing consumers of hyperscale data center capacity in the industry and we're excited to bring them onto the QTS platform.

We had originally anticipated this deal would close in 2018 but ultimately the transaction pushed into early 2019 and was split into multiple phases. The first phase of this deployment encompasses a 3-megawatt commitment, which we were able to support with our existing Fort Worth facility with limited incremental capital further supporting QTS' focus on capital efficiency.

Importantly, these leases leverage the assets that we acquired opportunistically from Health Care Services Corp. in 2016 at a material discount to what the previous invested -- investment in the site was. Our low basis in the Fort Worth facility enables a return on capital for this lease that is above the typical hyperscale return expectations in the market. We expect this initial commitment to scale substantially at the site over time and we're pleased to establish a new relationship with a top hyperscale customer.

Hyperscale remains a core area of focus for QTS as an opportunity to strategically align a portion of our growth with the fastest growing technology companies in the world. Based on our conversations with our target hyperscale customers we remain encouraged by the level of investment they are anticipating in third-party data centers over the coming years.

We remain confident that the overall hyperscale leasing volumes over the next 3 to 5 years will exceed the volume over the previous 3 to 5 years. And we believe our strategically located platform is well positioned to capitalize on this opportunity.

We strongly believe that having a business approach that balances the steady performance of a diversified, higher-return, hybrid colocation business and a growth acceleration opportunity with strategic hyperscale customers is the best path to optimize growth and risk-adjusted performance for QTS.

Next, on Slide 6, yesterday, we were excited to announce QTS' first mega-scale expansion outside the U.S. On April 23, as part of our global growth strategy, we closed on the acquisition of 2 operating data centers in the Netherlands for approximately $44 million including closing cost. The data centers were opportunistically acquired from TCN. The 2 facilities have approximately 158,000 square feet of raised floor capacity and 30 megawatts of combined gross power capacity built out and fully available.

As we've deepened our presence with target hyperscale customers it's become increasingly evident that a significant opportunity exists to expand our business on a global scale. This acquisition allows QTS to leverage our strong customer relationships in the U.S. and support their expanding data center requirements in Europe as well.

Along with tremendous available capacity in the Eemshaven site, the Groningen facility also has an embedded customer base supporting in-place revenue and cash flow. At closing we'll currently expect the 2 facilities to generate approximately $3 million of annualized recurring revenue and $1 million of annualized adjusted EBITDA, assuming no new leasing.

We have evaluated an expansion into Europe for a number of years. Given the significant runway for growth in the U.S. and with more than 1 million square feet of raised floor expansion capability in our owned-powered shell, in addition to more than 640 acres of adjacent land, the hurdle internally to deploy capital outside the U.S. has been high.

For QTS to allocate capital outside the U.S. we have been focused on finding the right opportunity to derisk our investment either through a significant customer pre-leasing agreement or a unique opportunity to secure permanent cost advantage on existing mega-scale infrastructure.

And in true QTS form this acquisition represents yet another example of our core competency of identifying and opportunistically acquiring large infrastructure at a low basis, along with an embedded customer base that provides us upfront revenue and breakeven OFFO share contribution matched with strong upside on future leasing.

The 2 acquired data center assets are located in the cities of Groningen and Eemshaven approximately 200 kilometers northeast of Amsterdam. These 2 locations are strategically positioned adjacent to major undersea fiber cable landings and significant concentrations of existing hyperscale data center deployments. The Netherlands remains one of the top European markets for data center users due to the competitive utility and operating cost, availability of renewable power sources and proximity to diverse connectivity options to other major European markets.

The Groningen facility currently has built out capacity representing approximately 10 gross megawatts of power and 45,000 square feet of raised data center floor space. The Groningen data center is largely stabilized with approximately 20 colocation tenants and a weighted average remaining lease term of approximately 3.5 years. The facility represents one of the most interconnected data centers in the Netherlands market with more than 10 network providers and internet exchanges on-site including NL-ix and Eurofiber.

The Eemshaven facility, which is currently vacant, was originally constructed to support a single hyperscale tenant and was build-out in fully available capacity representing approximately 20 gross megawatts of power and 113,000 square feet of raised floor data center space. The facility is strategically located adjacent to multiple hyperscale customer-owned data center deployments including a 500-plus megawatt data center campus under construction that is operated by one of the largest hyperscale cloud providers in the world.

In addition, the facility is located in close proximity to multiple transatlantic fiber cable landings providing access to multiple markets within Europe and North America. QTS expects to invest incremental capital over the next several quarters to recommission the facility and anticipates positioning the Eemshaven data center with sellable capacity in late 2019. We expect the Eemshaven facility to support our on-growing hyperscale growth initiatives and have already engaged in preliminary discussions with multiple potential anchor tenants.

Turning to Slide 7. This acquisition represents an attractive opportunity to enter a new international market with significant existing expansion capability at a materially derisked entry point. The 2 facilities have approximately 30 gross megawatts aggregate capacity. The Eemshaven facility, in particular, which is a fully available and built out -- presents a unique opportunity to accelerate our hyperscale growth strategy with approximately 20 megawatts of state-of-the-art mega-scale data center capacity in one of the top European data center markets.

According to CBRE absorption in the top 4 European markets totaled an estimated 190 megawatts in 2018 representing nearly a 60% increase year-over-year, in large part, driven by growing hyperscale demand. Our acquisition positions QTS well to participate in this growth with only a modest upfront investment.

Including approximately $15 million of additional capital QTS expects to spend at the 2 sites in recommissioning during 2019, the purchase price for these 2 facilities represents an upfront cost per megawatt of approximately $2 million, which is a fraction of any conceivable data center build cost in the market today. This approach significantly derisks our entry point with a permanent cost advantage that provides an opportunity to generate enhanced value creation for customers and shareholders.

Given the low basis purchase price combined with in-place committed revenue at closing, this transaction is initially breakeven to QTS' 2019 OFFO per share conservatively assuming no incremental leasing. As a result of our modest initial capital investment, substantially and fully available power capacity at the 2 sites and the overall growth potential in one of the top European data center markets, we have an opportunity to generate significant future OFFO per share accretion in the Netherlands facility over time through incremental occupancy.

QTS expects to execute on the Netherlands market opportunity with U.S. hyperscale customers as well as attracting local and European customer growth opportunities through third-party local operators to support a lower-risk, more flexible cost structure with higher returns.

QTS has entered into a partnership agreement with Zentrys Group, a Netherlands-based data center operations company that has maintained day-to-day operations at the 2 sites for the past 5-plus years. Zentrys will continue to provide on-site data center operations and maintenance for both of the facilities under QTS ownership to maintain continued high level customer support.

QTS has also entered into a partnership agreement with Eurofiber, a leading international provider of fiber infrastructure that, in addition to local sales and marketing support, will enable connectivity between the 2 sites surrounding European markets and subsea cable landings in Eemshaven. We believe that by leveraging local partnerships we are able to further support our execution strategy in the new international market in a capital efficient and lower-risk approach.

We're excited to establish a strategic platform for the future international growth with a modest initial investment and derisk an efficient operating model that provides a significant upside opportunity. We look forward to executing on our growth strategy and we will continue to evaluate incremental expansion opportunities with the same discipline we have consistently demonstrated in the past.

With that, I'll now turn it over to Jeff Berson, our Chief Financial Officer, to discuss our approach to capital allocation, balance sheet 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 9. QTS has consistently sought to find a healthy balance in investing for both near and long-term growth understanding that investors have a variety of different return thresholds and time horizons.

In order to achieve this, we evaluate capital deployment in 3 primary ways: first, one of the most critical aspects of our role as managers in a capital-intensive business is to ensure that we are able to create value above and beyond the cost of capital that we deploy. We have consistently been able to generate a consolidated return on invested capital in excess of 12% with returns meaningfully higher in more mature facilities.

This return profile represents a strong premium relative to our cost of capital. In fact, we believe this spread is among the widest in the real estate industry. Through our business approach, which focuses on high return, hybrid colocation, currently 2/3 of our recurring revenue, balanced with strategic growth acceleration opportunities with hyperscale companies, we remain confident we can maintain a premium return on capital profile and continue to create significant value for shareholders.

Second, in order to achieve stable and predictable growth in year-to-year OFFO per share we constantly evaluate and prioritize our capital spend and will continue to exercise the same rigor in the future. In evaluating capital that we deploy in our business we have consistently demonstrated a focus on balancing both near and long-term horizons.

Our view is that a business model that focuses exclusively on either near-term or long-term performance is challenged to deliver consistent and sustainable performance. It's for this reason we have maintained a thoughtful approach to not only the amount of capital that we deploy in our business but also the source and timing of that capital.

And third, we remain focused on funding our business in the most shareholder friendly way possible. Based on our current backlog and sales pipeline we have strong visibility into growth in 2019 and beyond. With any growth business in a capital-intensive industry our model requires capital to fund our growth.

In evaluating capital that we bring into our business we have demonstrated a track record of managing both the timing and structure to fund the business while minimizing near-term equity dilution. As an example, last year we funded the business through 2 separate perpetual preferred equity raises and this year announced a joint venture structure with Alinda.

Turning to Slide 10. As we move forward in executing on our strategic growth plan, we will continue to evaluate a range of funding sources to maximize shareholder value. This includes the evaluation of additional opportunity to work with Alinda on potential joint ventures.

As a reminder, last quarter we announced the closing of our first joint venture agreement with Alinda in which QTS contributed its Manassas hyperscale data center development. Through the joint venture structure we were able to leverage the low cost of capital from a sophisticated infrastructure investor like Alinda and decrease our overall reliance on public equity markets to fund our business.

We were also able to reduce QTS' capital funding requirement in the Manassas facility by more than 50% while retaining our 50% proportionate share of the NOI generated by the facility in addition to incremental management and development fees. Through this structure we are effectively able to increase QTS' return on capital in Manassas from approximately 9% to approximately 12%.

We believe the structure of this joint venture creates significant value for shareholders. An important aspect of what makes this structure unique is the fact that the implied 6.75% cap rate is applicable to not only in-place NOI at the time of closing but also future phases completed through full stabilization over the next 3 years.

We believe there's an opportunity in the market to achieve a modestly lower initial cap rate than the 6.75% embedded in our Manassas JV agreement but largely only for assets that have remaining growth capacity. In our evaluation of JV opportunities we've chosen to focus our efforts initially on evaluating assets at full stabilization thereby capturing all future growth and upside for QTS shareholders.

We continue to view the JV structure as an important incremental lever to fund our future hyperscale growth strategy while continuing to leverage traditional capital markets to fund core growth.

Next, on Slide 11, I'd now like to review our current balance sheet position. As of March 31, 2019, we had approximately $850 million in liquidity in the business including undrawn forward equity proceeds. Demonstrating our conservative approach to overall balance sheet management we have no significant debt maturities until beyond 2021 and more than 80% of our indebtedness is subject to a fixed rate including a series of interest rate swap agreements.

We ended the quarter with leverage of approximately 5.5x net debt to annualized adjusted EBITDA including QTS' share of debt and adjusted EBITDA from the unconsolidated joint venture. Including approximately $150 million of additional equity proceeds raised through the forward structure of our recent stock offering, but which are not currently reflected in our current diluted share count, our pro forma leverage as of the end of the first quarter stood at approximately 4.9x.

As we discussed last quarter, supported by a substantial 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 capital development plan.

Next, on to our 2019 financial guidance on Slide 12. As a reminder, QTS' 2019 financial guidance includes the impact of the closing of the unconsolidated joint venture with Alinda as of February 22.

Consistent with GAAP accounting standards revenue from the unconsolidated joint venture has been removed from QTS' reported GAAP financial statements as of the closing date of the JV. Also consistent with NAREIT defined standards QTS will include its 50% proportionate ownership of EBITDAre and funds from operations from the joint venture in its reported EBITDAre and funds from operations results respectively.

We've updated our full year 2019 financial guidance to reflect the closing of our acquisition in the Netherlands. At closing, QTS expects the 2 Netherlands facilities to generate approximately $3 million of recurring revenue and approximately $1 million of adjusted EBITDA on an annualized basis.

For the full year of 2019 we now expect reported total revenue to be between $461 million and $475 million, an increase of $2 million reflecting the in-year contribution from the 2 Netherlands sites. Underlying this guidance is a full year rental churn outlook of between 3% and 6%, which is unchanged from our initial expectation.

We are also increasing our 2019 adjusted EBITDA guidance to a range of between $243.5 million and $253.5 million, up from the $243 million and $253 million previously, again, reflecting the closing of the Netherlands acquisition.

As a result of the low basis acquisition price relative to in-place power capacity at the Eemshaven facility combined with contracted in-place revenue at the Groningen site, QTS expects the Netherlands acquisition to be initially breakeven to our full year 2019 OFFO per share performance with significant future accretion upside from incremental leasing.

As a result, our full year 2019 OFFO per share guidance range is unchanged at between $2.61 to $2.71. Our CapEx guidance of between $450 million and $500 million is also unchanged, even factoring in the additional $15 million of recommissioning capital we anticipate deploying, in the 2 acquired Netherlands sites.

Importantly, our 2019 capital plan including the Netherlands acquisition is fully funded including the proceeds from our equity raise in Q1. Overall, we're pleased with the momentum in our business and our access to capital. We will continue to focus on delivering consistent growth in shareholder value through a balanced business approach and capital allocation strategy.

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. We're pleased to kick off 2019 with strong performance in the first quarter and look forward to maintaining our momentum over the course of the year. The demand environment for third-party data centers is robust and expanding. And I'm confident in the capabilities of QTS' platform to continue to deliver consistent growth in shareholder value.

Before moving on to the Q&A portion of the call, I'd like to take a minute to highlight the newest addition to our Board of Directors, Wayne Rehberger. Wayne joined the QTS Board as a new independent Director in March, which brings the Board composition to 10 Directors, 9 of whom are independent.

Wayne brings a wealth of leadership capability following a career spanning over 35 years of diversified financial operating and sales management experience. Most recently, he served as the Chief Financial Officer for Engility Holdings.

We are pleased to have Wayne join QTS' Board and expect his experience leading the financial organizations for multiple leading communications infrastructures and technology companies will provide valuable insight in support of QTS' approach to capital allocation and overall financial management.

In addition, Wayne's previous management experience with company focused on serving federal and government customers supports the increased opportunities we are seeing to leverage our unique best-in-class security and compliance capabilities to drive our federal vertical in the future.

Finally, in closing, I'd like to thank our QTS employees for their continued hard work and 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) Today's first question comes from Jonathan Atkin of RBC Capital Markets.

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Bora Lee, RBC Capital Markets, LLC, Research Division - Associate VP [2]

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It's Bora Lee on for John. Two If I could. First with regard to the Netherlands. Do you anticipate entering other international markets with a similar focus on wholesale in non-hub locations?

And then a follow-up on churn. Are there any notable customer events that could cause churn to elevate over the coming quarters?

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

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Yes. We had a little trouble hearing you on that. The Netherlands, can you re-ask the Netherlands question?

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Bora Lee, RBC Capital Markets, LLC, Research Division - Associate VP [4]

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Sure. I was just wondering if you anticipate entering other international markets with a similar focus on wholesale in non-hub locations.

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

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Yes, I think, from our standpoint, we feel the Netherlands is a unique opportunity, opportunistically focused. I wouldn't think about that as launching into a broad search in Europe for facilities or investment. That's not the strategy.

It is a strategy around an opportunistic acquisition that we feel really good about informed by a pipeline of hyperscale customers in the U.S. on location and really just the capacity and opportunity to accelerate our returns and capital efficiency to go.

We are going to be approaching the Netherlands asset with a little bit of a operational efficiency model. So outsourcing the facility services to a company that's really done it the last 4 to 5 years and we have high confidence in Zentrys. And then also through channel partners for the hybrid colocation sales opportunity.

So we will be focused on our U.S. hyperscale to drive most of the interest in Eemshaven and look forward to kind of having a partner deployment with the Groningen facility and the opportunity to kind of further that investment. So we're excited about a great opportunity, very unique and couldn't be more excited to be there.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [6]

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And Bora, on the churn side, we've reiterated our guidance of 3% to 6% annual. We don't see anything that changes our expectations there and feel very good about the visibility we've got in our pipeline.

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Operator [7]

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

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

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So first on the large hyperscale customer win in the quarter. Obviously, important vis-à-vis your strategic repositioning. A little bit surprised to see a seemingly subscale lease for one of the largest players there. Can you maybe expand on what the expansion potential or what the full agreement is and then maybe give us what the term of the lease is?

And then is the size of the initial lease a function -- I know it's a new logo, is it a function of you being a new vendor? Because usually we think the hyperscale as just taking bigger chunks?

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

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Hey, Jordan. This is Chad. Thanks for the question. Great question. We couldn't be more -- let me start with, we couldn't be more excited about the opportunity. This is a new logo for us and it's a logo that we consider to be a valuable partner to QTS and one that is not created equal with everyone. It's one that's hard to garner opportunity with but we are extremely excited about it.

What we like about this deal and I know we've talked about hyperscale being kind of 5-plus megawatt. So let me start with, we fully expect that this will grow to kind of our hyperscale thresholds and potentially beyond. But we couldn't be more excited about the 3 megawatts we did sign. A typical term for enterprise hyperscale, just to take that point of the question, so this -- our hyperscale is 5 to 10 year plus kind of deal. So very typical term on this.

But what's so exciting about this opportunity is this 3 megawatts tucked into matching up fairly well with what we had current inventory and availability because, just to make sure we're clear, this is going into our Fort Worth existing data center.

And so matching up kind of available opportunity in power and space to kind of come in and start to build fairly quickly was a priority to get started. And a lot of times you start with these hyperscalers, they've got to get network up and they've got to get a lot of stuff going.

So even though typically they consume larger amounts of space this is great to start in what is an infrastructure-rich, low-basis asset we bought in '16. And maybe in the wrap up of this, another reason that we're super excited about it is we've talked about our hyperscale range of returns being 9% to 11% and I think the deal we announced last year, we said was at the lower end of that.

And when you can put hyperscale incrementally into infrastructure-rich, low-basis assets, what it turns into is the higher end of the range. So it's a efficient, quick, 3-megawatt opportunity. We fully expect it to grow and it's a great opportunity for QTS both on a new logo and also filling up an existing high-return asset. So it's a win-win and something we look forward to having the opportunity to flourish with.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [10]

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Can you just expand on maybe some of the specifics in Fort Worth that asset? How much is presently available and then how do you expect the investment in that asset to play out over the course of the next year?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [11]

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Well, I look forward to continue to have momentum, both in hybrid opportunities with Clint and his team and also in the hyperscale. So if you remember, we had availability and built out space in a couple of pods there. We do have about 40,000 square feet of shell that we'll now move into. It'll be cost efficient, quickly deployed ability on that opportunity also. But it will be a mixture and a balance.

We're seeing good opportunities across both hyperscale and hybrid in that facility. So we'll continue to see things mature there. And it's great to get a hyperscale customer into an existing facility.

I mean a huge priority for us as a company is to take some of our powered-shell capacity that can deploy quick and have higher return hyperscale and put hyperscale opportunities in our existing shell capacity and built out facility. So it's just a great example of both those properties for us as a company.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [12]

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And we still have more than half that facility that we can continue to invest and ramp. So we feel very good that that path has significant upside.

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

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Yes, and one small note, we do also have a pretty good chunk of land. We talked about on the earning script that we have 600 -- almost 600 acres of availability. Some of that great land acreage surrounds that campus. That campus is almost 60 acres. So it's a great opportunity that we've got a lot of runway left in Fort Worth, not just in the existing facility, but also the adjacency.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [14]

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Okay. And then lastly on the Netherlands. Can you maybe speak to what you view to be market rents in Eemshaven? So a realistic or achievable level of rent, even considering that you're low basis here? I mean what did you underwrite as achievable in the market?

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

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Great question. I think that the thing about Eemshaven and Amsterdam and the Netherlands in general is it's a fairly similar market to the U.S., both in a build cost and also in a revenue model. So I don't -- there's not any dramatically different type of expectations in Eemshaven or Groningen or in the Netherlands in general than the U.S.

So I think it's a pretty consistent market. We expect it to behave in that way. I think the only thing that's not normal for us is that we have the ability with our cost basis to have another opportunity to -- have an opportunity to create outsize returns at that facility, and that's what we anticipate doing.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [16]

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And just to be clear, Eemshaven was previously occupied by hyperscaler?

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

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Yes, it was originally a build to suit for a hyperscaler and is currently vacated.

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Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [18]

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The -- and the power source, is it renewable by chance?

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

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Yes, there's -- it has one of the best renewable stories and power access stories and fiber stories that you could have. And I think it's not by accident that the port, which was quoted in our press release, is ecstatic that we are coming. They have a significant push for hyperscale business market and opportunities.

We are thrilled to be partnered with the port and the authority that runs that area and in Eemshaven. And it's not by accident that there is a facility to the tune of almost 500 megawatts within a, I'm sure your 9-iron distance away.

So it is a opportunity for us and also gives us a opportunity to be on the ground at the base level with a great asset in an area that you're only going to see growth, because the power access, the renewable story, the offshore wind that's adjacent and the transatlantic fibers that come in, that will be a story of future growth in that area.

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Operator [20]

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And our next question today comes from Aryeh Klein of BMO Capital Markets.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [21]

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Just on the Netherlands, it sounds like it was a more opportunistic one-off kind of deal and not really part of a broader push into Europe. But do you think you need to build out any kind of employee infrastructure there? Are you anticipating doing that? And how competitive was the process?

And then just as far as the leasing environment is concerned for hyperscale, you signed that one deal. But are you seeing new opportunities in the pipeline, and do you expect any more deals in 2019?

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

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Yes, great question. So let me just talk about the process. It was a long and tedious process. And one thing about QTS is we try to be patient and have a lot of perseverance, and this was involved in a parent type of bankruptcy process.

We followed and tracked the assets for some time, and we just dealt with the complexity and the patience around working through that process. So I can't speak directly to the competition, but in the process, I know they ran a significant type of process.

But I will tell you, at every juncture, whether it was the colocation clients in Groningen or people's desire to want one or the other asset, but not both, our ability to tie hybrid colocation and the ability to manage complex clients like the government entities at the same time that we had a great hyperscale capability and interest put us in a very unique position.

We love to be in positions where dollars maybe aren't the most optimized aspect. There's a lot of complexity and process to work through. I say that in -- that the competitive process led us to a -- an overall strategy that we felt a tremendously unique opportunity.

And we don't feel the pressure to have to build some big platform in Europe, that's not the story of this transaction. But we will, with appropriate resources, make sure that the QTS capability and availability for our U.S. hyperscalers and our in-country customers is at the highest level.

So we've picked great partners in Zentrys who has operated these facilities for years. And I would say that some in-country leadership is not off the table, and we'll look at that over appropriate period of time. But certainly look to be partnering both on the sales, marketing and operations and feel really good about where we're at and where we're going.

And of course, all the hyperscale customers for the most part are coming from the U.S. And our hyperscale leader Tag Greason and that team feel very comfortable that our teams can do that. We'll also be doing all the development activity based on the U.S. development teams and with partners in-country for the little bit of revitalization and restoration and recommissioning of the sites.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [23]

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Okay. And then just on the...

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

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As far as the pipeline goes, we feel very good about the U.S. hyperscale. It was a very informed acquisition of location, and we look forward to our partner creating some synergy and energy around the colocation.

We will be doing some optimizing of the facilities, because there is some space -- or there is some power capacity left in Groningen, but there is more of a space restriction because of some lower density deployments. So look for some of our capital kind of refresh some of the distribution and the layout and free up a little bit more space, so we can deploy some power against additional client profiles.

And we have some -- a good partner that feels like there's good opportunity in the colocation space over time. And Clint and his team will be managing that as we move forward.

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Aryeh Klein, BMO Capital Markets Equity Research - Analyst [25]

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And then can you talk about the hyperscale pipeline within the U.S.? You signed that one deal, but are you seeing new opportunities enter the pipeline? And do you expect to complete any more deal -- hyperscale deals in 2019?

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

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We feel really good about the hyperscale pipeline. We're planning on having Eemshaven open, recommissioned and ready by the end of the year. So I think that we're going to continue to build the pipeline and see where it goes. But I wouldn't anticipate that some big expectation that our leasing is going to happen immediately in Eemshaven, but I do think the pipeline is building.

The news just went out, and the teams are ready to kind of continue to move and talk through that. So we're seeing it build, and we anticipate to have good success when we'll get open at the end of the year.

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Operator [27]

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(Operator Instructions) Today's next question comes from Brett Feldman of Goldman Sachs.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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I believe last quarter, you talked about some conviction that you'd be able to exceed an average of $14 million of bookings per quarter. Over the course of the year, at $11.3 million, you came in a little under that this quarter, and I appreciate that it's lumpy.

I guess, really just the question would be, can you give us an update that you have in terms of the visibility that you have into your funnel for bookings for the remainder of the year? Do you still feel confident that you'll exceed $14 million on average over the course of the year?

And then as a component of that answer, do you expect additional phases with this new hyperscale customer to actually book this year? Or is that something you see as an opportunity a little longer term?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [29]

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Brett, thanks. This is Chad. We still feel fine about the $14 million average for the quarter. Yes, a little bit inside of that, but we feel like we had a strong hybrid booking quarter. We've got a great new hyperscale. And we do, as I said earlier, do expect some more opportunities as we generate and continue to book this year with additional phases at that property.

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Brett Joseph Feldman, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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Got it. And just as a follow-up of that, you mentioned that your channel is becoming increasingly important. Do you feel comfortable with the size of your sales force? Or do you think that you -- it makes sense to ramp the size of your inside sales force in order to drive higher bookings?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [31]

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I think -- and Clint is sitting here with us today. I think we feel very good about his balance of what he's done with the sales force. In fact, if you can say anything, he's trimmed it up a little bit and repositioned it, refocused it and created an inside sales, but also expanded channel.

So I think his balance of that trifecta is working well, and we continue to have great confidence in that. So it's not about the numbers of people, it's about the quality of people. And I think those quality partners and people are demonstrating our ability to really drive our hybrid colocation vertical, and we feel very good about it.

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Operator [32]

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And our next question today comes from Michael Funk of BoA Merrill Lynch.

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

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Just a follow-on, I guess, to the last question. You highlighted that about 50% of your sales came from the channel. This quarter also showed some very good margin expansion of the business. Maybe just walk us through the opportunity to expand that margin in the future and the operating leverage in the business now that you're depending more on the channel partners for your sales?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [34]

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I think that we definitely set a goal when Clint stepped in to take channel and have more of a focus on it. I don't know if there's a finite exact number that is the optimal percentage, but we were pleased to see that the channel picked up so much momentum, and that's really a direct connection to our commitment that channels are going to be a huge part of both our sales verticals, hybrid and hyperscale.

So we're going to continue to leverage that and drive that. I think it does make us more efficient. I think it also gives us the ability that more brokers are getting involved at earlier junctures with smaller deals because the hyperscalers are pretty efficient to buy on their own, they're really set up to do that. So the brokers have found a very good ability to intersect the enterprises that may start at a lower kW, maybe 500kW to 1 megawatt, and we want that broker community to know that they're an extension of our business and our partnerships.

So I think Clint and the team are doing a great job at setting that tone. They just finished their channel program event, which is a biannual event out in Arizona, and the feedback that I get is continued, thanks for listening [tough] as a broker community, thanks for giving us a foothold to be able to be an influencer in your business and thanks for what you're doing to make us successful.

And they're making us successful, we want to make them successful, and I think it's just going to be part of how we continue to emphasize and be very intentional about that as a company.

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [35]

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Mike, on the operating leverage side, we do -- we have had a strong focus and discipline around spending. We like that we've been able to demonstrate significant margin improvement, and we think there's room to grow there. Our expectation from operating leverage is the ability to drive another 50 basis points of margin each year over the next couple of years, and we've got a good path towards it.

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Michael J. Funk, BofA Merrill Lynch, Research Division - VP [36]

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And one follow-up if I could. So you commented that you thought that hyperscale deal might close at the end of 2018. I appreciate things can slip. It's hard to be precise in timing. We've been hearing though from a number of hyperscalers this quarter that they're finding it less necessary to build so far in advance. I've been hearing that the contract talks which are taking longer now with the hyperscalers, maybe a little bit less urgency on their part to bring capacity to market quickly.

Just wondering if your commentary about that deal slipping, even the size of the deal you announced in Texas, reflects that theme about less urgency from the hyperscalers and a shift in their leasing pattern that you're seeing or if that's more of a one-off?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [37]

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I really think -- I know people have to read into the data and make assessments and we do too. But I would not read in -- this business is lumpy. It's going to be lumpy for the rest of time. The reason that we love the hybrid colocation engine of our business is because the hyperscale is going to continue to be lumpy. There's going to be buying periods and digestion periods.

And right now, if you kind of look at the charts, obviously, fourth quarter and first quarter have a little bit of digestion of what the big purchases were in the middle of the year. And those things kind of cycle through a 6- to 12-month period.

I will tell you, I've been in a number of hyperscale meetings in the last 1.5 quarters, and those meetings are not taking their forecast of need down. In fact, as we sat with one hyperscale team not long ago, the capacity that they're planning to deploy over the next 2 to 3 years is dramatically increased over the prior periods of any cycle in their business.

So we continue to feel that the momentum and pipeline is growing. It's still going to be a lumpy business. We want to find the right places to intersect, because not all hyperscale is created equal, both from a capital intensity of deploying capital at a rate that outpaces your ability to grow earnings per share, at the same time, the ability to find the higher return nuggets of opportunity like in our infrastructure-rich low basis.

So we think there's plenty of opportunity. Even at a time where competition is growing in the hyperscale space and competitors from the private markets are trying to step in, we think the balance of all that is still going to be good to companies that are capable to deliver. And we feel good about that.

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Operator [38]

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

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Simon William Flannery, Morgan Stanley, Research Division - MD [39]

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Just coming back to Europe. Can you just go into details what you need to do in terms of recommissioning the facility? And given the opportunistic approach, does that mean that you would consider other locations if the right buildings came up there? And then just your renewal pricing was up about 1.5%. Can you just comment on the overall pricing and competitive environment?

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

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Yes, Simon, Chad. I'll just take the first part. Very much blocking and tackling. The facilities have been maintained consistently, even the vacant facility. But we're going to go in, upgrade some of the security features, redeploy some of the PDUs and the infrastructure, refresh some of the batteries, just do some of the blocking and tackling.

I'd say the normal maintenance has been managed throughout the entire process. So nothing spectacular or overwhelming. In the Groningen facility, we'll look to optimize and free up some space to get some of the excess power deployed to it, enhance some of the cooling and raise some of the density and those type of things. But all just pretty much blocking and tackling with the $15-plus million of capital that we've kind of laid out. So nothing heroic there, and we're excited about that opportunity.

I don't think -- we are always opportunistically looking, and I know that as -- over the years, we kind of -- people have often commented, well, you got lucky once or twice. And now kind of 7 or 8 deals later on infrastructure-rich low basis, I think people are starting to say, hey, it's just kind of a core competency of QTS' capital -- efficient capital allocation approach where we're looking for outsized returns to deploy capital.

And so we're always looking, but you shouldn't read into that that we feel any need that to be successful in Europe, we have to be in 3 docks in Europe. We're going to be successful in the Netherlands, because it's a great location, it's growing. We have a lot of interest and demand, and we have a great profile and derisk entry point. And that's really what it is. Jeff, do you want to take the other part?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [41]

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Yes, Simon. We continue to see stability in pricing. That renewal rate up just over 1.5%. We see renewal and you've seen a history with QTS over multiple years of renewal rates in the low to mid-single digits of percentage. And I think it just demonstrates a consistency, a service and a support with our customers that we're driving higher pricing over time.

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Operator [42]

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

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [43]

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Regarding the $2 million per megawatt price. Well, first, the seller that entered into bankruptcy, was it because of the data center business? Or was this a bigger company that went bankrupt for other reasons unrelated to the data center business?

And secondly, were there any other circumstances, whether it's regional costs or the economics of the area or anything specific to the facilities that would sort of bring some logic to that $2 million per megawatt price tag?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [44]

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Yes, I think we couldn't be more thrilled with the acquisition price, and I think it was just a strategic opportunity that we had that we were patient and persevered through a process that's not for all people. And I will tell you that the data centers were not directly involved in any part of the bankruptcy other than they were the asset that had value that they could monetize.

So it was certainly a parent upstream bankruptcy with completely unrelated businesses to the data centers. It is one of the reasons why the data centers had an appointed trustee and operated successfully for multiple years during this parent bankruptcy. So it was something that we worked through. And obviously, we feel that the opportunity sets a tone for us that gives us a great jump-off point.

As far as incentives in renewable power and was there anything else going on, after a lengthy review, we couldn't be more excited about the jump-off point of the sites and the location and also the power and fiber infrastructure that's available to them.

And I think that, like I said earlier, it's not by accident, there's a 500-megawatt data center being built down the street. And I would expect for that area to continue to see robust growth with the local authorities' support and expansion and also power access, which is very tight in the southern part of the Netherlands now for scale infrastructure. So I think it's a trend that you'll continue to see, and we couldn't be more excited to be part of it.

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Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [45]

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And one other question. In reviewing the breakdown of NOI by facility, although it's up nicely altogether year-over-year, just on a specific basis, I just see a nice kind of -- stands out the decline in Santa Clara year-over-year and continued quarter-over-quarter. Can you just tell us what's going on there?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [46]

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Sure, Rob. I mean, we're still growing Santa Clara. You can see the revenues up there. It's a facility that we don't have a ton of capacity remaining, but we're continuing to build it and grow it, and we actually brought some space into service in Santa Clara during the quarter.

In terms of NOI down, that was largely just a little bit of some tax shifting in that market as well as just some repricing on the ground lease that we've got, which is a long-term lease. But in terms of the underlying economics and profitability in that facility, it's as strong as it's ever been.

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Operator [47]

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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 [48]

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I'll just leave it to one. In terms of hyperscale in the U.S., how should we think about any future wins you have this year and the financing of them in terms of -- in markets where you have a lot of shell or land capacity, should we be presuming that those will be financed on balance sheet and that more of your new greenfield builds potentially in Phoenix or in Oregon would be contributed to the JV? Just curious how you're assessing that balance going forward.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [49]

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Well, Eric, thanks for the question. I think it's a great question, because it's both, right? It's a great opportunity for us when -- especially when we get to the higher end of our return profile for hybrid and shell infrastructure that that might be opportunistic to keep more and much more capital friendly or less capital intensity to deploy that.

But also, we love the opportunity with Jeff and the hard work the team did around the JV and the partnership, couldn't be more excited about the Alinda relationship and the flexibility to accelerate hyperscale growth. So coming short of saying, which deal goes where, we have a lot of optionality and a lot of access to capital. And that's what we're focused on.

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

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Eric, the only thing I'll add is what you'll continue to see us focused on in terms of the JV are assets where we're at or close to full stabilization, which enables us to apply a valuation and a cap rate at effectively 100% of the revenue capacity of that asset.

We've been very protective of future growth opportunities in existing assets and retaining that growth and value accretion for existing shareholders and really [maintain] like the Manassas deal and would expect going forward that we'll focus more on that cap rate on a fully stabilized basis.

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Operator [51]

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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 [52]

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It's kind of a related question on the JV. Does the agreement that you have with them include the potential for European assets?

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

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Yes, it does. Again, there's no requirement in any fashion. There's a lot of flexibility that we've got as does Alinda. But their appetite is both domestic and international, and we're excited to find multiple ways to work with them.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [54]

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Okay. That's helpful. And then just a quick follow-up. There was a comment in one of the slides that you guys continue to see an increase in the overall deal size within the enterprise funnel. And so I was just curious for a little bit more detail on, say, the average size today versus a year ago and maybe just some color on how those deals have maybe evolved over the last year.

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

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Yes, so this is Chad. I think what we would say is that a little bit of that was when Clint came in, we artificially kind of removed a former Governor on hybrid colocation deals, which was 500 kW. At the point of 500 kW, they -- that rolled into the -- really the hyperscale team. That no longer exists within the company. So inherently, some of the structuring things that Clint did removed that, so the team is getting a lot more visibility. But at the same time, as I said, the comment about the broker community earlier is that we are starting to see kind of -- we're seeing more enterprise activity, the economy is picking up, you're seeing more enterprises getting out into the area of need.

Certainly, our SDP and our platform, our software-defined data center is differentiating us at a greater scale, and Jon Greaves and that team continue to lead in that initiative. At the same time, we're seeing deals that are kind of anywhere from 500 kW to 1 megawatt for that enterprise, where maybe 3, 4 years ago, you'd see that start at 100 kW and maybe go to 300 kW. So it's just the density and the deals are picking up in enterprise and that combination of differentiation and the way we structured the organization is seeing that.

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Nathan Daniel Crossett, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [56]

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Okay. That's helpful. And are there any like certain industries in the enterprise that you're seeing particularly strong momentum? Or is it just kind of scattered throughout?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [57]

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It really is banking, enterprise, financial, healthcare. It's -- our federal sector continues to be very differentiated with our ability to drive security and compliance. So what's great is we're seeing it pretty much across the business community.

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Operator [58]

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

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [59]

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So can you tell us what sort of your target percentage of investment in capital from JV partners would be long term? And is Alinda kind of the main partner you'd be looking at? Or are there others that you would -- that you're having discussions with?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [60]

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Yes, Frank, this is Jeff. I'd say we don't have a preset target with Alinda. The way we're thinking about it is, when we find the right opportunities and the right assets, we absolutely intend to continue to leverage the -- what we think in the attractive cost of capital and a very attractive structure around it to continue to fund hyperscale growth. So we're not pinning ourselves down to the number of hyperscale deals, and also it depends on whether some of hyperscale deals like what we just announced in the quarter are in existing facilities with significant future growth embedded in that asset or built to suites.

So it depends on what we see there. But we absolutely expect that you'll continue to us leverage that joint venture. As it relates to who we work with, we do have some ties obviously to Alinda. And I think Alinda has provided some nice ties to us. So our expectation is you'll continue to see us working with Alinda. At the same time, we do have flexibility that if there are certain circumstances that just doesn't match up with what Alinda is looking to do, we have the flexibility to bring in additional capital as well.

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Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [61]

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Do they also have flexibility to make investments with other data center companies?

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Jeffrey H. Berson, QTS Realty Trust, Inc. - CFO [62]

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They do with limitations. We were pretty good with each other in terms of making sure that we're each other's preferred partner, but also not any situation where either side is fully handcuffed. It's a good balance.

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Operator [63]

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And our next question comes from Matthew Niknam of Deutsche Bank.

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Matthew Niknam, Deutsche Bank AG, Research Division - Director [64]

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And I'll keep it one as well. Just in terms of valuations in the U.S. and different opportunities, if you can comment on what you're seeing out there in terms of private market opportunities in lieu of the deal in the Netherlands. Just wondering if there are more opportunities you see now overseas relative to the U.S. or if this was, as you've mentioned in the past, a unique opportunistic deal in the Netherlands.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [65]

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I wouldn't want to set an expectation that I think we can be repetitive like this in Europe. I think in general, Europe has a tighter capacity constraint, both on renewable and power, in a lot of different markets. So that's why we felt like this is pretty unique opportunity at scale. So I wouldn't want to set the expectation. But we are always looking -- in the U.S. specifically, I think the work that we've done here over year over the last 5-plus years has really positioned us where I don't feel like there's a big gaping hole in the U.S.

We're competitive in almost every major hyperscale market and the opportunity for us to kind of utilize our existing 1 million square foot of powered shell, which delivers quickly and at a cost -- advantage cost at the same time of having almost 600 acres of strategically located entitled data center ground gives us a footprint in the U.S. that is impressive and capable. So I think in both instances, we feel strong about the opportunity for success with a capital-efficient higher-return approach.

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Operator [66]

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

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [67]

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What are the specific changes you've made that have prompted such a big change in channel bookings? Was it commission changes or just a willingness to except leads or something else? And what sort of guardrails have you put in place to address the risk of conflict between the channel and your internal sales force?

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [68]

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It's a great question. I may let Clint take a little bit at this too. But I think it starts with just being very intentional. I think a lot of channel partners always have this unique competitive dynamic about who's for me or who's against me. And I think we had to do a little bit of work of going out and telling people that we were for them. Money is important, right, but it's not the only driver of a good relationship. Maybe I'll let Clint take a little bit of that.

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Clint Heiden, QTS Realty Trust, Inc. - Chief Revenue Officer [69]

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Yes. To Chad's point, it's been a very intentional viewpoint that we've taken that this is something we're going to adopt and grow. We've really brought them into the business and view them as something that a program that's very important to us. We've also actively started to train the organization around, what Jon Greaves is doing on the SDP platform to get them up to speed on the technology, so they can drive that earlier and quicker with the customers and prospects they're looking at. So that's a big piece of it.

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Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [70]

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Okay. And the guardrails to avoid a conflict?

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Clint Heiden, QTS Realty Trust, Inc. - Chief Revenue Officer [71]

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Well the first thing that we did last year was we pulled out the difference in commission payment to the reps here at the company. So there is no conflict at all within the organization of one of our select sales reps being fully paid and incentivized to work with the channel. We found that we could trim down our force and actually increase our bookings by doing that.

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Operator [72]

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And ladies and gentlemen, in the interest of time, we'll be going to closing remarks now. So I'd like to turn the conference back over to Chad Williams for any follow-on remarks.

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Chad L. Williams, QTS Realty Trust, Inc. - Chairman, President & CEO [73]

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Well, thank you for your interest and support, and we look forward to continuing to drive the business. We're excited about where we are today and the year is bright ahead. So thank you for your questions and time, and we'll talk soon.

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Operator [74]

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