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Q1 2019 Earnings Presentation

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QTS Realty Trust presents results from Q1 2019

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Q1 2019 Earnings Presentation

  1. 1. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. First Quarter 2019 Earnings Presentation May 1, 2019
  2. 2. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 1 Forward Looking Statements Some 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 similar 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;  changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates; and  limitations inherent in our current and any future joint venture investments, such as lack of sole decision-making authority and reliance on our partners’ financial condition. 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, 2018 (“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, EBITDAre, 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. As used herein, “Core” refers to our business that primarily consists of our hyperscale and hybrid colocation leases. 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.
  3. 3. © 2019 QTS. All Rights Reserved. First Quarter 2019 Review
  4. 4. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 3 Q1 2019 Review $100.4 $112.7 Q1 2018 Q1 2019 $50.2 $58.8 Q1 2018 Q1 2019 50.0% 52.2% Q1 2018 Q1 2019 Adjusted EBITDA ($M)1,2 Adj. EBITDA Margin1,2Revenue ($M)1 Q1 2019 Leasing Summary 1.Reflects results for the Core business only in Q1 2018 2.Includes QTS’ pro rata share of unconsolidated JV’s • Signed new/modified leases totaling $11.3M of incremental annualized rent  Q1 ’19 net leasing consistent with Q4 ’18 leasing level  Leasing results reflect healthy balance across QTS platform  Booked-not-billed backlog remained strong at $55M2 of annualized rent as of Q1 ’19 vs. near record $63M backlog as of Q4 ‘18  Continues to de-risk financial performance in 2019
  5. 5. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 4 Hybrid Colocation Continues to Drive Consistent Growth • Hybrid Colocation:  Hybrid colocation business contributed the majority of net leasing volume in Q1  Strength in hybrid colocation performance is a function of:  Strengthening economic backdrop  QTS signed 47 new logos in Q1 2019, +15% year-over-year  New logo growth remains a key initiative for QTS sales team given ongoing growth potential of embedded customer base  Continue to see an increase in overall deal size within Enterprise funnel  Increasing contribution from channel partnerships  Nearly 50% of hybrid colocation leasing was sourced through a channel partner in Q1 2019 vs. approximately 15% of leasing three years ago  Differentiation enabled by software-defined data center platform  Industry’s first software-defined orchestration platform  Empowers customers to interact with data and QTS services by providing real- time visibility and control of critical metrics across hybrid IT environments
  6. 6. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 5 Strategic Growth Acceleration Opportunities in Hyperscale Hyperscale:  During Q1, QTS signed a 3 MW lease in its Fort Worth mega data center with a new hyperscale logo  Leverages low basis asset acquired in 2016 which enables an ROIC above the typical hyperscale return expectation in the market  Able to support initial 3 MW deployment in existing Fort Worth facility with limited incremental capital, further supporting QTS’ capital efficient approach  Establishes new relationship with one of the industry’s fastest growing consumers of hyperscale data center capacity  Initial commitment is expected to scale substantially at the site over time  Several larger potential opportunities remain in pipeline that QTS continues to actively pursue with both new and existing customers across multiple markets QTS establishes new relationship with one of the largest and fastest growing consumers of hyperscale data center capacity
  7. 7. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 6 QTS Netherlands Acquisition Overview Transaction Summary  Acquired two data centers in the Netherlands on April 23, 2019 for $44M, including closing costs  Facilities acquired opportunistically from TCN  Approx. 158,000 SF of raised floor capacity and 30 gross MWs of combined power capacity built out currently  Initially expected to contribute approx. $3M of recurring revenue and $1M of adj. EBITDA on an annualized basis  Current built out capacity:  45,000 SF of raised floor / 10 gross MWs  Largely stabilized facility with approximately 20 colocation tenants  Weighted average remaining tenant lease term of 3.5 years  Highly connected colocation facility with more than 10 network providers and internet exchanges  Current built out capacity:  113,000 SF of raised floor / 20 gross MWs  Originally constructed to support single hyperscale tenant and is currently fully available  Facility supports QTS’ hyperscale growth strategy  Adjacent to multiple hyperscale customer-owned facilities including 500+ MW hyperscale campus  Strategically located in close proximity to multiple transatlantic fiber cable landings Groningen Facility Eemshaven Facility
  8. 8. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 7 Netherlands Acquisition Accelerates Global Expansion De-risked entry into new international market with acquisition of large scale infrastructure at a low basis with significant capacity for growth Low basis: Purchase price represents ~$2M per MW2 which is materially below any reasonable average cost to build in the market Mega scale: 30 MWs of aggregate built out capacity, including 20 MWs in Eemshaven facility which is fully available and built out Platform for int’l expansion: Represents QTS’ first mega scale expansion outside U.S. De-risked execution strategy: Low basis new market entry leveraging local partnerships to de-risk execution in new international market P P P P Growth opportunity: According to CBRE, absorption in the top 4 European markets totaled ~190 MWs in 2018, +60% Y/Y driven in part by increased hyperscale leasing1 OFFO/share accretion opportunity: As a result of low basis purchase price combined with contracted in-place revenue, acquisition is breakeven to QTS’ 2019 OFFO/share, assuming no incremental leasing; opportunity to drive significant future accretion P P 1 CBRE Data Centre Marketview – Q3 2018 2 Including approximately $15M of additional capital spend related to recommissioning of the sites
  9. 9. © 2019 QTS. All Rights Reserved. Financial Update
  10. 10. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 9 Balanced Approach to Capital Allocation Focused on delivering consistent OFFO/share growth while continuing to invest in long-term growth Strong value creation opportunity  Consistently able to generate ROIC of 12%+  Premium ROIC enabled by business approach that balances higher return hybrid colocation with select growth acceleration opportunities in hyperscale  ROIC represents significant spread relative to QTS cost of capital, among the widest in the real estate industry Flexible capital plan to drive near- and long-term OFFO/sh growth  Constantly evaluate priority of capital spend to balance the needs of customers with OFFO/share growth  Maintained thoughtful approach to not only the amount of capital spend, but also the source and timing of that capital Focused on funding capital plan in most shareholder-friendly means  Demonstrated track record of managing both timing and structure of capital to fund the business while minimizing near-term equity dilution  Recent examples include:  Two separate perpetual preferred equity raises in 2018  Joint venture agreement signed during Q1 2019
  11. 11. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 10 Benefits of Joint Venture Agreement to QTS Multiple drivers of incremental value Outlines a programmatic framework under which Alinda will be given opportunity to contribute equity capital for specific data center projects in support of QTS’ hyperscale growth strategy Reduces QTS’ reliance on public markets and leverages low cost of capital from sophisticated private investor with large capacity to fund capital development plans Reduces QTS’ capital deployment requirements in Manassas development by approximately $120 million while retaining 50% proportionate share of NOI generated by facility Enhances QTS’ overall ROIC based on cap rates below the ROIC of development projects combined with incremental fee streams (development & management fees) P P P P Highlights strong underlying value of QTS’ strategic data center assets at 6.75% cap rate Manassas joint venture delivers immediate enhanced value by locking in cap rate well below the ROIC of Manassas data center development and accretion upon stabilization P P Joint venture factors in asset valuation of Manassas data center with cap rate value at full stabilization, thereby not sacrificing future value from the joint venture’s expected growth P
  12. 12. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 11 Balance Sheet and Liquidity Summary  Net debt to LQA adjusted EBITDA of 4.9x, including forward equity proceeds  No significant debt maturities until beyond 2021  82% of debt is subject to a fixed rate, including interest rate swap agreements  Raised $322M of gross equity proceeds during Q1 ’19, including $156M4 in a forward equity structure Market Cap $2,831M2 Series A Preferred Stock $107M Series B Convertible Preferred Stock $316M Senior Notes $400M Unsecured Credit Facility $816M1 Finance Leases and Other $49M Pro Rata Share of Unconsolidated JV Debt $27M 1. Includes two term loans ($700 million in aggregate) and $135 million of borrowings on revolving credit facility as of March 31, 2019, net of cash and cash equivalents 2. Market Cap calculated as follows: total Class A and Class B common stock and OP units of 62.9 million, multiplied by the March 31, 2019 stock price of $44.99 per share. 3. May not sum due to rounding 4. Reflects gross proceeds available at the Company’s election to physically settle the forward equity sale at or before March 1, 2020 $4.5B Enterprise Value $2 $3 $3 $140 $381 $784 2019 2020 2021 2022 2023 2024+ HighlightsCapital Structure Debt Maturities ($M)3
  13. 13. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 12 Full Year 2019 Guidance Summary 1. 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. 2. Consistent with NAREIT-defined standards, QTS has included its proportionate ownership of EBITDAre from the unconsolidated JV in its reported EBITDAre and adjusted EBITDA results. 3. Consistent with NAREIT-defined standards, QTS has included its proportionate ownership of Funds from Operations from the unconsolidated JV in its reported Funds from Operations, Operating Funds from Operations and Operating Funds from Operations per diluted share results. 4. Reflects cash capital expenditures and excludes acquisitions. Includes QTS’ proportionate share of cash capital expenditures in the unconsolidated Manassas joint venture.  2019 core rental churn guidance: 3% - 6%  2019 capital expenditure guidance: $450 - $500M4, excluding acquisitions  2019 operating FFO per share guidance assumes:  QTS maintains net debt to annualized adjusted EBITDA leverage in the mid to high 5x range, including QTS’ proportionate share of joint venture debt  QTS’ 2019 capital plan is fully financed including proceeds from the $322M equity raise in Q1 2019  QTS has updated its full-year 2019 guidance to reflect the April 23, 2019 closing of the acquisition of two facilities in the Netherlands  On an annualized basis, QTS expects the acquired Netherlands sites to contribute approximately $3M of recurring revenue and $1M of adjusted EBITDA, assuming no incremental leasing $ in millions except per share values Prior 2019 Guidance Plus: Netherlands Acquisition Updated 2019 Guidance Low High Low High Revenue1 $459 $473 $2 $461 $475 Adjusted EBITDA2 $243 $253 $0.5 $243.5 $253.5 Operating FFO per Share3 $2.61 $2.71 - $2.61 $2.71
  14. 14. © 2019 QTS. All Rights Reserved. Closing Remarks
  15. 15. © 2019 QTS. All Rights Reserved. Thank You! ir@qtsdatacenters.com
  16. 16. © 2019 QTS. All Rights Reserved. Appendix
  17. 17. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 16 NOI Reconciliation $ in thousands Net Operating Income (NOI) Net income (loss) $ 21,148 $ 10,474 $ (4,072) $ 6,402 5,083 $ (5,335) $ (252) Equity in net (income) loss of unconsolidated entity 274 — — — — — — Interest income (45) (58) — (58) (1) — (1) Interest expense 7,146 6,050 — 6,050 8,103 7 8,110 Depreciation and amortization 38,788 38,259 — 38,259 33,340 2,574 35,914 Debt restructuring costs — 605 — 605 — — — Tax expense (benefit) of taxable REIT subsidiaries 211 38 (161) (123) (767) (1,635) (2,402) Transaction, integration and impairment costs 1,214 269 — 269 920 — 920 General and administrative expenses 19,891 17,551 118 17,669 18,114 4,119 22,233 Gain on sale of real estate, net (13,408) — — — — — — Restructuring — 138 4,108 4,246 — 8,530 8,530 NOI from consolidated operations $ 75,219 $ 73,326 $ (7) $ 73,319 $ 64,792 $ 8,260 $ 73,052 Pro rata share of NOI from unconsolidated entity 234 — — — — — — Total NOI $ 75,453 $ 73,326 $ (7) $ 73,319 $ 64,792 $ 8,260 $ 73,052 TotalNon-Core Three Months Ended March 31, 2019 December 31, 2018 March 31, 2018 CoreTotalNon-CoreTotal Core
  18. 18. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 17 EBITDAre & Adjusted EBITDA Reconciliation $ in thousands EBITDAre and Adjusted EBITDA Net income (loss) $ 21,148 $ 10,474 $ (4,072) $ 6,402 5,083 $ (5,335) $ (252) Equity in net (income) loss of unconsolidated entity 274 — — — — — — Interest income (45) (58) — (58) (1) — (1) Interest expense 7,146 6,050 — 6,050 8,103 7 8,110 Tax expense (benefit) of taxable REIT subsidiaries 211 38 (161) (123) (767) (1,635) (2,402) Depreciation and amortization 38,788 38,259 — 38,259 33,340 2,574 35,914 (Gain) loss on disposition of depreciated property and impairment write-downs of depreciated property (13,408) — 1,288 1,288 — 4,017 4,017 EBITDAre from unconsolidated entity 215 — — — — — — EBITDAre $ 54,329 $ 54,763 $ (2,945) $ 51,818 $ 45,758 $ (372) $ 45,386 Debt restructuring costs — 605 — 605 — — — Equity-based compensation expense 3,300 3,531 — 3,531 3,481 — 3,481 Restructuring costs — 138 2,820 2,958 — 4,513 4,513 Transaction, integration and impairment costs 1,214 269 — 269 920 — 920 Adjusted EBITDA $ 58,843 $ 59,306 $ (125) $ 59,181 $ 50,159 $ 4,141 $ 54,300 TotalNon-Core Three Months Ended March 31, 2018March 31, 2019 Total Core CoreTotalNon-Core December 31, 2018
  19. 19. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 18 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 FFO Net income (loss) $ 21,148 $ 10,474 $ (4,072) $ 6,402 5,083 $ (5,335) $ (252) Equity in net (income) loss of unconsolidated entity 274 — — — — — — Real estate depreciation and amortization 35,927 35,640 — 35,640 31,192 865 32,057 Gain on sale of real estate, net (13,408) — — — — — — Pro rata share of FFO from unconsolidated entity 41 — — — — — — FFO 43,982 46,114 (4,072) 42,042 36,275 (4,470) 31,805 Preferred stock dividends (7,045) (7,045) — (7,045) (328) — (328) FFO available to common stockholders & OP unit holders 36,937 39,069 (4,072) 34,997 35,947 (4,470) 31,477 Debt restructuring costs — 605 — 605 — — — Restructuring costs — 138 4,108 4,246 — 8,530 8,530 Transaction, integration and impairment costs 1,214 269 — 269 920 — 920 Tax benefit associated with restructuring, transaction and integration costs — — (161) (161) — (1,635) (1,635) Operating FFO available to common stockholders & OP unit holders* 38,151 40,081 (125) 39,956 36,867 2,425 39,292 Maintenance Capex (709) (1,460) — (1,460) (930) — (930) Leasing commissions paid (6,515) (5,204) — (5,204) (5,839) (71) (5,910) Amortization of deferred financing costs and bond discount 978 974 — 974 962 — 962 Non real estate depreciation and amortization 2,861 2,619 — 2,619 2,148 1,709 3,857 Straight line rent revenue and expense and other (1,422) (1,958) 6 (1,952) (2,509) (9) (2,518) Tax expense (benefit) from operating results 211 38 — 38 (767) — (767) Equity-based compensation expense 3,300 3,531 — 3,531 3,481 — 3,481 Adjustments for unconsolidated entity 22 — — — — — — Adjusted Operating FFO available to common stockholders & OP unit holders* $ 36,877 $ 38,621 $ (119) $ 38,502 $ 33,413 $ 4,054 $ 37,467 Core March 31, 2019 Total Core December 31, 2018 TotalNon-Core TotalNon-Core March 31, 2018 Three Months Ended
  20. 20. © 2019 QTS. All Rights Reserved. QTS Realty Trust, Inc. 19 MRR Reconciliation $ in thousands Recognized MRR in the period Total period revenues $ 112,689 $ 112,334 $ 3 $ 112,337 $ 100,390 $ 13,307 $ 113,697 Less: Total period recoveries (10,793) (11,629) — (11,629) (11,513) — (11,513) Total period deferred setup fees (3,232) (3,104) — (3,104) (2,888) (5) (2,893) Total period straight line rent and other (3,942) (4,465) (34) (4,499) (3,899) (552) (4,451) Recognized MRR in the period 94,722 93,136 (31) 93,105 82,090 12,750 94,840 MRR at period end Total period revenues $ 112,689 $ 112,334 $ 3 $ 112,337 $ 100,390 $ 13,307 $ 113,697 Less: Total revenues excluding last month (73,809) (73,852) (2) (73,854) (66,790) (8,871) (75,661) Total revenues for last month of period 38,880 38,482 1 38,483 33,600 4,436 38,036 Less: Last month recoveries (3,871) (3,822) — (3,822) (3,107) — (3,107) Last month deferred setup fees (1,242) (1,015) — (1,015) (962) (2) (964) Last month straight line rent and other (2,068) (2,504) (1) (2,505) (1,669) (382) (2,051) Add: Pro rata share of MRR at period end of unconsolidated entity 253 — — — — — — MRR at period end $ 31,952 $ 31,141 $ — $ 31,141 $ 27,862 $ 4,052 $ 31,914 March 31, 2019 Total Core CoreTotalNon-Core December 31, 2018 Non-Core March 31, 2018 Three Months Ended Total

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