QTS Realty Trust, Inc.filecache.investorroom.com/mr5ir_qualitytech/317/download... · 2018-02-21 · Active discussions on needs ranging from 4 to 40MW’s Four Hyperblock leases

© 2016 QTS. All Rights Reserved.

QTS Realty Trust, Inc.

Fourth Quarter and Year-End 2017

Earnings Presentation


Forward Looking StatementsSome of the statements contained in this presentation constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to

expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In particular,

statements pertaining to our capital resources, portfolio performance results of operations, anticipated growth in our funds from operations and anticipated market conditions contain

forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,”

“plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or sim ilar words or phrases which are predictions of or indicate future

events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this presentation reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties,

assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that

the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to

differ materially from those set forth or contemplated in the forward-looking statements:

adverse economic or real estate developments in our markets or the technology industry;

obsolescence or reduction in marketability of our infrastructure due to changing industry demands;

global, national and local economic conditions;

risks related to our international operations;

difficulties in identifying properties to acquire and completing acquisitions;

our failure to successfully develop, redevelop and operate acquired properties or lines of business;

significant increases in construction and development costs;

the increasingly competitive environment in which we operate;

defaults on, or termination or non-renewal of, leases by customers;

decreased rental rates or increased vacancy rates;

increased interest rates and operating costs, including increased energy costs;

financing risks, including our failure to obtain necessary outside financing;

dependence on third parties to provide Internet, telecommunications and network connectivity to our data centers;

our failure to qualify and maintain our qualification as a REIT;

environmental uncertainties and risks related to natural disasters;

financial market fluctuations; and

changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. Any forward-looking statement speaks only as of the date on which it

was made. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or

methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements,

see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 (“10-K”) and in the other periodic reports we file with the Securities

and Exchange Commission.

This presentation includes measures not derived in accordance with generally accepted accounting principles (“GAAP”), such as FFO, operating FFO, adjusted Operating FFO,

EBITDA, adjusted EBITDA, NOI, ROIC and MRR. These measures should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and may

also be inconsistent with similar measures presented by other companies. Reconciliation of these measures to the most closely comparable GAAP measures are presented in the

attached pages. We refer you to the appendix of this presentation for reconciliations of these measures and to the section entitled "Management's Discussion and Analysis of Financial

Condition and Results of Operations--Non-GAAP Financial Measures" in our 10-K for further information regarding these measures..


Fourth Quarter and Year-End 2017 Overview


3

2017 Year in Review

Expanded footprint

with strategic land

acquisitions in

Ashburn, VA; Phoenix,

AZ; and Hillsboro, OR

$257.0

$281.3

2016 2017

$402.4

$446.5

2016 2017

$184.3

$208.0

2016 2017

$2.61

$2.76

2016 2017

Revenue ($M) NOI ($M)

Adjusted EBITDA ($M) Operating FFO per Share

2017 Highlights

Signed strategic

collaboration with

AWS – QTS

CloudRamp

Officially launched

industry-first

software-defined

data center platform

Launched

Hyperblock solution

Announced strategic

partnership with

leading SDN platforms

Deepened presence

in existing growth

markets: Atlanta,

Dallas and Chicago


4

Q4 2017 Operating Performance Review

Signed new and modified leases in Q4 ’17 representing $8.7M of incremental annualized rent

- Reflects 49 new logos, up 60%+ vs. Q4 ’16

- Includes 2MW Hyperblock expansion with existing customer in Irving, TX

- Subsequent to the end of Q4 ’17, signed a new tenant in one of QTS’ leased facilities in Northern Virginia

Refills capacity that was previously vacated by a government contractor in early 2017

Had this deal signed during the fourth quarter, as previously expected, Q4 ’17 net leasing would have exceeded $14M

Demand strength in Atlanta, Chicago and Piscataway

Booked-not-billed backlog remains strong at $47M of annualized rent as of Q4 ’17

Pricing continues to reflect a healthy demand environment

- Pricing on new & modified leases up 8% vs. P4Q average

- Renewal rates up 1.2%, consistent with expectation of low to mid single digit percent increases

$ $ $

$ $


Leasing results in Q4 ’17 were below our prior four-quarter average

- Partially driven by delays in wholesale lease signings, which remain in pipeline or were signed in Q1, and downgrade activity in C3 – Cloud and Managed Services business

Churn in Q4’17 of 2.8%, bringing full-year churn to 8.4%

- Q4’17 churn includes unanticipated C3 customer liquidation representing 1.2% of churn

5

Fourth Quarter Leasing Detail

2016 20172015

Average:

$9.9M

Average:

$12.0M

Average:

$10.4M

Net Incremental Annualized Rent Signed ($M)


QTS Strategic Plan to Accelerate Growth and Profitability


Strategic Plan to Accelerate Leasing and Growth in 2018 and Beyond

QTS is seeing significant momentum in both Hyperscale and Hybrid Colocation; need to further align the business with those primary growth drivers

Plan reduces complexity and cost in business and enhances growth, margin and predictability

+ +

Broader Cost Reduction

Initiative

Align cost structure with

more simplified

business model

Realign Salesforce and

Organization

Further Narrow Focus of

C3 Product Portfolio

Focus exclusively on

solutions that

complement colocation

Initiatives

Purpose

7

Benefits

Increase margin

Increase profitability

Enhance OFFO/share

growth and performance

Increase leasing volume

Accelerate revenue

growth

Reduce complexity

Improve predictability

Operating efficiencies

Hyperscale

+

Hybrid Colocation


8

Differentiated Capability to Drive Success in Both Hyperscale and Hybrid Colocation

Significant Growth Capacity – 1.3M SF of powered shell

capacity in top U.S. markets with ability to scale quickly and

efficiently

Operating and Build Cost Advantage – Low basis focus +

mega scale approach provide permanent cost advantage

New Market Expansion in Ashburn, Phoenix and

Hillsboro – Provides future path to growth capacity in

markets where hyperscale customers want to be

Premium Customer Experience and Service Delivery –

Software-defined platform and service delivery track record

provide further differentiation for hyperscale customers

Software-Defined Data Center Platform – Provides

infrastructure visibility and dynamic control to customers

Enhanced Hybrid Solutions through QTS CloudRamp –

Strategic partnerships with public cloud providers expand

hybrid colocation opportunity

Seamless Connectivity – SDN-enabled universal connectivity

to carriers, service providers and CSP’s

High-End Security and Compliance – Dedicated team to

help enterprises manage cyber risks against their data

Premium Customer Experience – Portfolio of managed

services and industry-leading customer service

Hyperscale Customers Need: Hybrid Colocation Customers Need:

QTS Solution:World-Class Infrastructure &

Mega Data Centers

Hybrid Colocation

Platform

Integrated Hybrid Solution

Premium Customer Service

Scale

Speed

QTS Solution:

Economics

Location

Seamless Connectivity

Secure & Compliant


9

Hyperscale Growth Strategy Ramping

Recent land acquisitions in key markets have enabled expanded hyperscale customer dialogues

Hyperscale opportunity pipeline is 4X vs. beginning of 2017

Active discussions on needs ranging from 4 to 40MW’s

Four Hyperblock leases signed since product introduction in Q2 ’17

- 2MW Hyperblock expansion in Dallas during Q4’17 brings customer’s total deployment up to 12MW with QTS

- Participated in multi-location public cloud RFP through two Hyperblock leases in Atlanta and Dallas during Q3’17

Plan to bring 124k square feet of raised floor capacity online in 2018, with the majority to satisfy current and future hyperscale demand


10

Software-Defined Platform Differentiating QTS in Hybrid Colocation Market

Re-leased formerly vacated facility in Northern VA during Q1 ’18

- Further validates QTS Federal focus

- Had deal signed during Q4 ’17, as previously expected, Q4’17 net leasing would have exceeded $14M

Recent customer wins driven by software-defined data center

platform

- University Hospital - Piscataway

- Global financial services firm - Piscataway

- Transportation and logistics company - Chicago

SDN partners driving accelerated pace of cross connect growth

- Q4 ‘17 connectivity revenue up 15% year-over-year

QTS CloudRamp partnership with AWS ramping

- Signed multiple CloudRamp customers in Q1’18

- Pipeline continues to build consistent with expectations


11

QTS Piscataway: A Hybrid Colocation Success Story

Mega scale: capacity to double raised floor SF to 176,000 and expand critical MW to 26MW within powered shell

Low basis: purchase price <$7M per MW for a facility constructed at >$14M per MW

Growth opportunity: drive higher utilization and returns through hybrid platform

Annualized MRR:

Customers: 19

$7.5M $13.9M $15.4M

26 34

Facility acquired in June 2016 for $125M

Return on Invested Capital – Piscataway, NJ

5.9%

8.8%

12.0%

Acquisition(June 2016)

Current Run-Rate(Q4 '17)

Current Run-Rate +Signed Backlog


Expect realignment to drive accelerated core leasing and revenue growth rates

12

Restructuring Plan Step #1 - Realigning Organization Around Hyperscale and Hybrid Colocation

Realigning QTS leadership team around Hyperscale and Hybrid Colocation

Dan Bennewitz, COO – Sales and Marketing, plans to retire in 2018

- QTS has commenced an executive search for a Chief Revenue Officer as a replacement

- Tag Greason, EVP of Sales, will continue to lead hyperscale sales

David Robey, formerly VP of Facilities will be named QTS’ Chief Operating Officer

- Succeeds Jim Reinhart, who will be transitioning out of the organization

Hyperscale sales team

focused exclusively on top

30 Hyperscale accounts

C1-Wholesale Sales Team

Hybrid ColocationHyperscale

C2-Commercial Sales Team

Hybrid Colocation team

enabled to pursue all non-

Hyperscale opportunities

C3

C2C1


13

Restructuring Plan Step #2 – Further Narrow Focus of C3 - Cloud & Managed Services Unit to Support Hybrid Colocation

Simplifying product portfolio to exclusively focus on solutions that complement hybrid colocation product

Reduce product portfolio from >100 products to approximately 15

Simplification of product portfolio will significantly improve predictability and operating efficiencies while

reducing complexity in the business

Total revenue associated with exit of “Non-Core” products of approximately $65-75M

Revenue impact from exit of lower margin “Non-Core” products offset by direct and indirect costs

associated with operating full C3 – Cloud & Managed Services platform

Proven strength in “Core” products that are strategic to QTS’ long-term growth and differentiated colocation

Software-Defined Data

Center Platform

QTS CloudRamp

Partners

High-End Security &

Compliance SupportManaged Services

Hardware

Assure

Secured

LogisticsRemote

Hands


Aligning cost structure with simplified business model enables increased margin and profitability and

enhanced OFFO/share growth and performance

14

Restructuring Plan Step #3 - Cost Reduction Initiative

Broader cost reduction initiatives + narrowing the scope of C3 product portfolio enables QTS to achieve adjusted EBITDA margin in “Core” business of approximately 53% in 2018

Enables business restructuring with relatively modest impact on bottom line performance

_______

_______

_______

_______

Narrow C3 Focus

53% Core1 Adjusted

EBITDA margin

in 2018

Rent expense associated with certain leased data centers

Software licenses

Communications expense

Hardware depreciation

Personnel-related expenses

1.Core business includes Hyperscale and Hybrid Colocation businesses and excludes Non-Core Business unit. Non-Core business includes specific products within C3 – Cloud and Managed Services business that QTS plans to exit over the course of 2018 in addition to an estimate of C3-attached colocation revenue.


Financial Outlook


Full Year 2018 Core Guidance Summary

Over the course of 2018, QTS will provide guidance and disclosure around its Core3

business to isolate trends in the go-forward business and will separate out Non-Core4

business financials which QTS is in the process of exiting.

Annual rental churn for Core business: 3% - 6% (vs. historical target range of 5% - 8%)

Capital expenditures of $425-475m, front-end loaded in 2018 related to new development in

Ashburn, VA; excludes additional success-based development in Hillsboro, OR and Phoenix,

AZ

Expect to maintain leverage in the mid-5x range over the course of 2018 and will evaluate a

range of funding options including: 1) ATM program, 2) structured financing, 3) JV

partnership opportunities, and 4) potential asset divestitures.

1. Reflects cash capital expenditures and excludes capital expenditures from acquisitions2.2018 guidance excludes results from Non-Core Business unit, which QTS expects to exit over the course of 2018 as part of restructuring plan3.Core business includes Hyperscale and Hybrid Colocation businesses4.Non-Core business includes specific products within C3 – Cloud and Managed Services business that QTS plans to exit in addition to an estimate

of C3-attached colocation revenue.

16

2018 Core Guidance2

Low Mid High

Core Revenue $408m $415m $422m

Core Adjusted EBITDA $218m $223m $228m

Core Operating FFO per diluted share $2.55 $2.60 $2.65

Capital Expenditures1 $425m $450m $475m


2018 Guidance Bridge – Investor Day vs. Current View

17

2018 Core Revenue Guidance ($ in millions)

Exit of Non-Core

Revenue

2018 Core Revenue

Guidance(Current View)

2017

RevenuePreliminary

Implied 2018

Revenue

Guidance (Investor day)

C3 Customer

Churn in Q4’17

Q4’17 Leasing

Impact

($50)

Non-Core C3 Revenue

($45)-($50)

C2 Revenue attached to C3

deals ($20)-($25)

$447

$500

($65) – ($75)

($7) ($5) – ($10) $408 - $422

$250

$300

$350

$400

$450

$500


2018 Guidance Bridge – Investor Day vs. Current View

18

2018 Core Adjusted EBITDA Guidance ($ in millions)

Exit of Non-

Core Revenue2018 Core Adj.

EBITDA

Guidance(Current View)

2017 Adjusted

EBITDA

Preliminary

Implied 2018

Adj. EBITDA

Guidance (Investor day)

C3 Customer

Churn in Q4’17

Q4’17

Leasing

Impact

2018 Core OFFO

Per Diluted

Share Guidance(Current View)

$208

$235

($4) – ($5)($3) – ($4)

($4) – ($5) $218 - $228

$2.55 - $2.65

$150

$170

$190

$210

$230

$250

47.0% Margin

46.6% Margin

53.7% Margin*

* Midpoint


19

Updated QTS 2020 Vision

Investor Day View (Nov. ’17)

Updated Core1 View (as of Q4 ’17)

Revenue Growth 12% in 2018; Ramping to Mid-

Teens % Growth by 2020

Accelerated Ramp to Mid-Teens % Growth in Core

Revenue in 2019 and 2020

Adjusted EBITDA

Margin

• 50bp Margin Expansion

Annually

• Implied ~48% Margin by 2020

• 53%+ Core Adj. EBITDA Margin in 2018, Up 600+ bp

vs. Prior View

• 50bp Margin Expansion Annually in 2019 and 2020

• Implies 54% Core Adj. EBITDA Margin by 2020

OFFO Per Share

Growth2

300bp Below Revenue Growth • 300bp Below Revenue Growth

• $3.50 OFFO per Diluted Share Run-Rate by End of

2020, In-Line With Prior View

Leverage3 Low to Mid 5x Range Low to Mid 5x Range

1. Core business includes Hyperscale and Hybrid Colocation businesses2. Excluding non-cash tax benefit3. Long-term target leverage remains 5x or lower


20

Restructuring Plan Summary

Broader cost

reduction initiative

to align cost structure with

more simplified business

model

Realign salesforce

and organization

around

Hyperscale and

Hybrid Colocation

Further narrow C3

product portfolio

to focus on managed

services that enhance

colocation

Key Steps

Benefits

Reduce complexity

+

Improve predictability

+

Operating efficiencies

Increase leasing

volume

+

Accelerate revenue

growth

Increase margin

+

Increase profitability

+

Enhance OFFO/share

growth & performance

$


Thank You


Appendix

22


22

NOI Reconciliation

1. Includes facility level general and administrative expense allocation charges of 4% of cash revenue for all facilities, with the exception of the leased facilities acquired in 2015, which

include general and administrative expense allocation charges of 10% of cash revenue. These allocated charges aggregated to $5.6 million, $5.5 million and $5.3 million for the three

month periods ended December 31, 2017, September 30, 2017, and December 31, 2016, respectively, and $21.6 million and $20.6 million for the years ended December 31, 2017

and 2016, respectively.

2. At December 31, 2017 includes 11 facilities. All facilities are leased, including those subject to capital leases. During the quarter ended March 31, 2017, the Company moved its

Jersey City, NJ facility to the “Leased data centers” line item. In October 2017, the Company finalized the buyout of the Vault facility in Dulles, VA that was previously subject to a

capital lease agreement, and as such has moved it to a separate “Dulles data center” line item

3. Consists of Miami, FL; Lenexa, KS; Overland Park, KS; and Duluth, GA facilities. During the quarter ended March 31, 2017, the Company moved its Miami, FL facility to the “Other

facilities” line item

Three Months Ended Year Ended

December 31, September 30, December 31, December 31,

$ in thousands 2017 2017 2016 2017 2016

Net Operating Income (NOI)

Net income (loss) $ (16,113) $ 7,394 $ 5,481 $ 1,457 $ 24,685

Interest expense 8,049 7,958 6,125 30,523 23,159

Interest income (1) (65) - (67) (3)

Depreciation and amortization 37,140 35,309 33,093 140,924 124,786

Debt restructuring costs 19,992 - 194 19,992 193

Tax benefit of taxable REIT subsidiaries (4,374) (2,454) (707) (9,778) (9,976)

Transaction, integration and impairment costs 9,449 1,114 1,521 11,060 10,906

General and administrative expenses 20,820 21,652 21,450 87,231 83,286

NOI (1)$

74,962 $

70,908 $

67,157 $

281,342 $

257,036

Breakdown of NOI by facility:

Atlanta-Metro data center $ 20,845 $ 18,588 $ 20,187 $ 80,648 $ 81,074

Atlanta-Suwanee data center 12,778 12,206 11,937 48,365 45,760

Richmond data center 12,613 11,687 8,324 40,919 30,752

Irving data center 9,666 8,707 4,952 32,870 16,608

Dulles data center 5,744 5,630 4,877 21,672 19,384

Leased data centers (2) 2,238 2,648 5,504 12,006 24,131

Santa Clara data center 2,653 2,741 3,325 11,378 13,703

Piscataway data center 2,286 2,427 2,871 9,395 5,627

Princeton data center 2,391 2,415 2,364 9,598 9,544

Sacramento data center 1,664 1,525 1,892 6,804 7,734

Chicago data center 1,445 1,285 324 4,652 167

Fort Worth data center (7) 94 3 268 3

Other facilities (3) 646 955 597 2,767 2,549

NOI (1) $ 74,962 $ 70,908 $ 67,157 $ 281,342 $ 257,036


23

EBITDA & Adjusted EBITDA Reconciliation



$ in thousands 2017 2017 2016 2017 2016

EBITDA and Adjusted EBITDA

Net income (loss) $ (16,113) $ 7,394 $ 5,481 $ 1,457 $ 24,685

Interest expense 8,049 7,958 6,125 30,523 23,159

Interest income (1) (65) - (67) (3)

Tax benefit of taxable REIT subsidiaries (4,374) (2,454) (707) (9,778) (9,976)

Depreciation and amortization 37,140 35,309 33,093 140,924 124,786

EBITDA 24,701 48,142 43,992 163,059 162,651


Equity-based compensation expense 3,356 3,693 2,697 13,863 10,584

Transaction, integration and impairment costs 9,449 1,114 1,521 11,060 10,906

Adjusted EBITDA $ 57,498 $ 52,949 $ 48,404 $ 207,974 $ 184,334


24

FFO, Operating FFO and Adjusted Operating FFO Reconciliation

*The company’s calculations of Operating FFO and Adjusted Operating FFO may not be comparable to Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use

the same definition



$ in thousands 2017 2017 2016 2017 2016

FFO

Net income (loss) $ (16,113) $ 7,394 $ 5,481 $ 1,457 $ 24,685

Real estate depreciation and amortization 32,539 31,237 28,703 123,555 108,474

FFO 16,426 38,631 34,184 125,012 133,159


Transaction, integration and impairment costs 9,449 1,114 1,521 11,060 10,906 Tax benefit associated with transaction and integration costs

- - (525) - (3,592)

Operating FFO * 45,867 39,745 35,373 156,064 140,666

Maintenance Capex (848) (2,193) (2,613) (5,009) (5,059)

Leasing commissions paid (6,299) (5,592) (5,154) (20,115) (18,751)

Amortization of deferred financing costs and bond discount 925 992 912 3,868 3,545

Non real estate depreciation and amortization 4,601 4,071 4,390 17,369 16,313

Straight line rent revenue and expense and other (2,054) (1,149) (984) (4,967) (6,794)

Tax benefit from operating results (4,374) (2,454) (181) (9,778) (6,384)

Equity-based compensation expense 3,356 3,693 2,697 13,863 10,584

Adjusted Operating FFO * $ 41,174 $ 37,113 $ 34,440 $ 151,295 $ 134,120


25

MRR Reconciliation



$ in thousands 2017 2017 2016 2017 2016

Recognized MRR in the period

Total period revenues (GAAP basis) $ 118,911 $ 113,767 $ 105,443 $ 446,510 $ 402,363

Less: Total period recoveries (11,053) (9,698) (8,965) (37,886) (29,271)

Total period deferred setup fees (2,979) (2,659) (2,636) (10,690) (9,172)

Total period straight line rent and other (9,442) (6,982) (2,867) (22,848) (16,589)

Recognized MRR in the period 95,437 94,428 90,975 375,086 347,331

MRR at period end

Total period revenues (GAAP basis) $ 118,911 $ 113,767 $ 105,443 $ 446,510 $ 402,363

Less: Total revenues excluding last month (78,746) (76,912) (69,465) (406,345) (366,385)

Total revenues for last month of period 40,165 36,855 35,978 40,165 35,978

Less: Last month recoveries (3,175) (2,631) (3,247) (3,175) (3,247)

Last month deferred setup fees (1,123) (893) (968) (1,123) (968)

Last month straight line rent and other (4,159) (1,704) (873) (4,159) (873)

MRR at period end $ 31,708 $ 31,627 $ 30,890 $ 31,708 $ 30,890

Documents

QTS Realty Trust, Inc.filecache.investorroom.com/mr5ir_qualitytech/317/download... · 2018-02-21 · Active discussions on needs ranging from 4 to 40MW’s Four Hyperblock leases