Q3 2019 Earnings Call
Good morning, welcome to the cutaneous Realty Trust's third quarter earnings Conference call.
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Oh, no it's called Preservers, Stephen Douglas <unk>, Yes. Please go ahead.
Thank you operator, Hello, everyone. Welcome acute yes, its third quarter 2019 earnings conference call I'm, Stephen Douglas head of Investor Relations acute yes, I'm joined here today, but Chad Williams, our chairman and Chief Executive Officer, and Jefferson, Our Chief Financial Officer.
We're also joined by additional members of our executive team who are participating QNX.
Earnings release, and supplemental financial information are posted in the Investor Relations section of our website. We also provided slides and made them available with the webcast and on our website to make it easier to fall or presentation today.
Before we started let me remind you that some information provided during this call may include forward looking statements that are based on certain assumptions are subject to a number of risks and uncertainties as described in RCC violence and actual future results may vary materially.
Forward looking statements in the press release, so we issued yesterday, along with our remarks today right as of today and we undertake no duty to update them, it's actually been simple.
Today's remarks also includes certain non-GAAP measures, including N.Y. I thought, though operating FFO adjusted operating FFO monthly recurring revenue or why see EBITDA Ari and adjusted EBITDA. We refer you to our press release issued yesterday and our periodic reports from Mr. father, the FCC for further information regarding our youth.
These non-GAAP financial measures and a reconciliation of them to our GAAP results and now I'll turn the call over to Jeff.
Thanks, Steven Hello, and welcome to Q T.S. third quarter 2019 earnings call turning to slide three Q T.S. delivered a strong performance during the quarter the consistency of our financial and operating results continues to be supported by our diversified platform across our key customer verticals Hyperscale Highbred co located.
<unk> and federal the diversity of our sources of growth enables our business to perform we believe in a variety of different demand cycles, even during intermittent periods of slower hyperscale absorption as the industry witnessed over the past year.
Across these customer verticals, we are differentiated through our industry, leading leadership in sustainability, a commitment to fully digitized service delivery model benefiting both customers and Q T.S. employees and a premium customer experience deliver crossed our world class data center infrastructure.
Year to date are signed net leasing has been driven by our broad strength across each of the customer verticals. As you may recall, the first quarter leasing results of 11.3 million were primarily driven by our hybrid colocation business, while our near record second quarter leasing performance of 19.6 million was led by.
Our federal vertical during the third quarter, and so far the fourth quarter [noise].
Our leasing results have been driven by the strength in Hyperscale demand the combination of a growth acceleration opportunities with hyperscale customers and a more diversified higher return opportunities with enterprise in federal customers continues to provide a strong value creation opportunity in a risk adjusted return profile for Q T.S. and its shareholders.
Yeah.
Moving on to slide for our leasing performance during the third quarter reflected a strong acceleration in our hyperscale business combined with steady enterprise demand Qt, yes, I knew it modified leases, representing 17.4 million of incremental annualized revenue, which is above our prior four quarter average of 15 million and.
Brings our year to date averaged more than 60 million of quarterly net leasing.
Included within our Q3 net leasing volume is a four and a half megawatt downgrade from a hyperscale customer in Richmond Mega data Center.
However, this strategic customer subsequently executed an additional 12 megawatt expansion in Q tea essence, Atlanta Metro campus. The 12 megawatt expansion with this customer was signed subsequent to the end of the third quarter and it's not included in our third quarter leasing results. This deployment will anchor the new facility.
And on the downtown Atlanta campus that was announced in conjunction with our earnings release yesterday, excluding the four and a half megawatt downgrade in the third quarter, our net leasing performance.
During the quarter would've been in excess of 22 million well above our prior four quarter average.
On top of the acceleration we experienced in our hyperscale vertical during the third quarter, our hybrid Colocation vertical continues to drive steady growth in our business consistent execution in hybrid co location is built around our platform that offers customers a fully integrated and technology enabled solution delivered across.
Star Scalable data center platform that is combined with a premium customer experience during the third quarter, we signed 40, new logos, a 10% increase year over year with broad strength across our footprint in hybrid co location. In addition pricing on our installed base, which is more weighted towards our enterprise.
As customers remains healthy with same space renewal rates up 2% during the third quarter, which is consistent with our general expectation of rates increasing in the low to mid single digit range.
As a result to the strong momentum in leasing we ended the quarter with our highest ever backlog of signed but not yet commenced annualized recurring revenue at approximately $80 million, which provides tremendous visibility in future growth and with the 12 megawatts already signed in Q4.
We're off to a strong start in the fourth quarter as well.
Next on the slide five as discussed a significant driver in our leasing performance during the third quarter was driven by our strong acceleration hyperscale business, which contributed approximately half of the net leasing volumes in the quarter, we signed multiple significant leases with your strategic hyperscale tenants, including both new.
And existing customers.
Early last year, we announced the signing of a hyperscale lease in the new facility in Manassas, what the leading software as a service company as part of the lease agreement the customers expected to ramp up from its committed deployment of nine megawatts as of the second quarter ended a full 24 megawatt facility during the third quarter, we're pleased to announce at the customer committed to it.
Third tranche of turnkey capacity, representing an incremental four megawatts, which brings our total committed turnkey capacity to 13 megawatts.
As the Manassas development was contributed to our 50 50 joint venture with the Linda capital earlier this year, our leasing results for the third quarter only reflect the 50% contribution from the incremental four megawatt commitment.
We will continue to recognize the additional leasing performance in our go forward quarterly results as this customer signs additional commitments and ramps into the full 24 megawatts, a turn key power capacity, providing additional visibility in pipeline in future growth.
Moving now to Piscataway, we signed a 500 kw lease with one of the largest consumers of Hyperscale data center capacity in the industry. We initially brought this customer into the queue Ts platform in Fort worth in Q1 of 19. This incremental expansion highlights the importance of incumbency with Hyperscale customer.
We prefer to buy on a recurring basis with existing partners given the complexities and time commitment related to their internal procurement and approved vendor processes. Once you have establish yourself as an approved vendor and our experience hyperscale customers tend to continue to expand what their existing relationships.
This was also the case, what the 12 megawatt expansion in Atlanta that was signed subsequent to the end of the third quarter with one of the largest standing hyperscale relationships. This lease is consistent with our typical hyperscale return on invested capital range of 9% to 11% and the first tranche will commence upon the official opening of the new facility.
In mid 2020. This deployment is significant in that it represents the continued expansion of our relationship with this strategic customer and de risk our new Atlanta campus.
Development aligning with our overall approach to capital allocation.
Consistent with our focused on bringing new strategic hyperscale customers onto the Qtr platform. During the third quarter. We're pleased to sign a 10 megawatt lease with a new hyperscale logo in the Ashburn facility. This customers one of the fastest growing consumers of Hyperscale data center capacity and is expected.
To ramp into the full 10 megawatt commitment over approximately a one year period beginning in mid 2020.
This return the return profile for this lease also is consistent with our typical hyperscale return on invested capital range of 9% to 11%. We believe our pricing on this deal was above our other competitors and yet we were able to secure this commitment leveraging our operational maturity.
Our software defined platform and the quality of our Ashburn facility and onsite personnel building new relationships with Hyperscale customers takes time and persistence and we're pleased to have added a new strategic customer to our platform to drive incremental growth in the future.
Moving on to slide six since opening our newest datacenter in ashburn into mid 2018, we've been pleased with the pace of our growth in demand in fact, it is among our most active sites discussed among our sales team with potential customers across both Hyperscale and Highbred Colocation and just over a year since opening their first.
40, we've already sold 16 megawatts of capacity, including the 10 megawatt Hyperscale lease we signed during the third quarter.
This equates to approximately half of the capacity of the entire facility, which represents a tremendous accomplishment for our team. While we do believe that the supply and aspirant market will increase over the next six to nine months, we're pleased with our current pipeline and the return profile, we've been able to achieve on our signed leases we will continue to.
Monitor the supply in the northern Virginia market and so our capital investments appropriately based on the growth opportunities in our pipeline.
Turning to slide seven in conjunction with our earnings release yesterday, We also announced the commencement of our expansion of our Atlanta Metro Mega Data Center campus. This expansion will include the development of a new data center totaling more than 250000 square feet of leasable capacity and 72 critical megawatts.
Of incremental power capacity adjacent to our existing TTS Metro facility.
Including our adjacent land holdings, we have that capacity to more than double our current footprint over time and the Atlanta Metro market.
We currently expect to deliver the first phase of our new development in mid 2020, we're pleased that the entire first phase of development is pre leased as part of the 12 megawatt lease we signed subsequent to the end of Q3 with a strategic hyperscaler.
This significant preleasing is the new development is consistent with Q T. S. A de risk approach the development and overall capital allocation.
GTS is well established market leader in Atlanta, having served market through our downtown Atlanta, and Swanee, Georgia Mega data centers for over 10 years Qt assets competitive advantages in the Atlanta market will extend to this new facility.
Including strong operating leverage based on our 1 million square feet currently in operation the ability to offer customers the lowest cost power and the markets through our expandable hundred 20 megawatts substation and a large embedded customer base totaling over 500 <unk> customers across our two sites we look forward.
Our two extending our market leadership in Atlanta, and continuing our partnership with the city of Atlanta to further established Georgia as a key destination for Hyperscale and enterprise customers.
With that I'll turn it over to Jeff Berson, our Chief Financial Officer, Jeff.
Thanks, Chad and good morning.
Moving to slide nine for the third quarter 2019, we delivered strong year over year growth across our key financial metrics. We reported revenue of 125 million up 17% over 2018, adjusted EBITDA of 53 million up 14% year over year, and 11, FFO of 41 million, representing a 16% incur.
Year over year, our adjusted EBITDA margin came in at 50.3% for the quarter down 90 basis points year over year during the quarter, we experienced higher than expected power cost in certain locations due to unseasonably hot weather in the south a significant portion of which was passed through to customers, while the third quarter typically results in it.
Increased margin pressure due to seasonally high utility costs relative to other quarters during the year the margin impact during the third quarter was higher than anticipated.
In addition, we were subject to increase property tax expenses in certain facilities, which also contributed to higher operating expenses during the quarter. Although again a portion of this increase was passed through to customers.
The unexpected incremental impact during the third quarter two our adjusted EBITDA results from these items totaled approximately 1.5 million of net incremental expense. Excluding the net effect of these increased expenses, our adjusted EBITDA margin would've been approximately 53% or nearly 200 basis points of margin expansion year over year.
Next on Slide 10, I'd now like to review our current balance sheet position in October we completed an extension of our unsecured credit facility with expanded capacity up to $1.7 billion from 1.52 billion.
We successfully extended the weighted average maturity date of our term loan by nearly one half year expanded the available liquidity on our revolving credit facility by $180 million to a billion dollars and improved overall pricing across the credit facility, reflecting the continued improvement in our overall credit profile.
Also during the third quarter, we settled 2.8 million shares a forward equity raised in March 2019 for net proceeds of approximately 110 million, which was used to pay down our revolving credit facility. This leaves approximately $36 million a forward equity proceeds remaining undrawn from the March 2019 equity raise.
In addition, the ended the second quarter, yes, it incrementally raised through its ATM program, approximately 2.8 million shares of common stock at an average price of approximately $51 per share, which represents approximately $139 million of additional net equity proceeds on a forward basis.
Including a 36 million of Undrawn forward equity proceeds remaining from our March 2019 rate and the aforementioned proceeds raised subsequent to the ended the second quarter, Yes has access to over $175 million of net proceeds through the forward stock issuances.
These proceeds provides significant future capital availability and materially de risk Q Ts is financing plan well into 2020 .
As the ended the third quarter pro forma for the amended credit facility and available forward equity proceeds we had total available liquidity of approximately $961 million, we have no significant debt maturities until beyond 2022, and more than 75% of our indebtedness is subject to a fixed rate, including a series.
As of interest rate swap agreements.
We ended the quarter with leverage of about 5.5 times net debt to annualized adjusted EBITDA is levels consistent with where we have historically managed the business and we remain comfortable in this range in the near term in light of our significant booked not billed backlog.
Including the $175 million of available forward equity proceeds our pro forma leverage as of the ended the third quarter was approximately 4.8 times.
We expect to draw down to Florida equity proceeds over the coming quarters to fund our future development plan, while maintaining leverage at a level consistent with where we have historically operated.
Now onto our financial guidance on slide 11 for the full year 2019, we're increasing our total revenue guidance by $7 million at the midpoint to a range of 470 million to 480 million up from 461 million to 475 million previously.
The primary driver of the increase in revenue guide is higher than expected power and tax recovery and we've experienced over the course of this year as I mentioned previously despite increased costs, we're reiterating our adjusted EBITDA guidance range of between 243.5 million and 253.5 million and our AFFO per share.
Guidance range between $2.61 in $2.71.
Underlying this guy is a full year rental churn outlook of between three and 6% which is unchanged from our initial expectation and compares to our year to date performance of 3.4%.
As a result of our continued focus on capital allocation and aligning our investments with a backlog that is weighted towards second half 2020 Commencements, we're lowering our 2019 capex guidance to a range of between 350 and $400 million.
As we head into 2020, we're pleased with the momentum in our business as evidenced by our year to date performance and record booked not billed backlog.
Based on the visibility in our backlog, we believe our current momentum will support low double digit top line growth in 2020.
In addition, we continue to expect incremental operating leverage across our platform that drive year over year adjusted EBITDA margin expansion in 2020 of at least 50 basis points.
From a capex perspective, we continue to efficiently expand capacity in our existing sites in 2020 at a level consistent with 2019.
In addition to deliver on the attractive opportunity to continue our growth trajectory in the Atlanta market with a 12 megawatt anchor tenant we expected deployed approximately an incremental 100 $150 million in 2020 to open our new expansion in Atlanta.
We're also pleased to be in a position where a significant portion of our preliminary 2020 capital plan is already prefunded due to $175 million a forward equity proceeds as discussed previously combined with incremental capacity on our revolving credit facility.
Overall, we are encouraged by our performance during the third quarter and the visibility we have into our forward growth trajectory.
Diversified business model continues to provide cute, yes, the opportunity to deliver consistent financial and operating results at attractive risk adjusted returns and we remain focused on efficiently allocating capital to drive incremental shareholder value.
I'll now turn the call back over to Chad.
Thanks, Jeff strong execution combined with a diversified business model that balances the steady performance of our Highbred colocation business and select growth acceleration opportunities with strategic Hyperscale customers continues to support consistent growth and financial performance for Q2, yes.
Our key pillars of differentiation include an industry leadership position in sustainability and innovation a fully digitized operating model through our service delivery platform and a premium customer experience, which continues to support our growth objectives. We're pleased with the performance during the third quarter and our momentum.
Already in the fourth quarter, and we look forward to continuing to execute against our strategic initiatives.
I'd like to thank our powered by people Qt answers across the country for their hard work and commitment to service to our customers and communities I'd also like to thank our customers and shareholders for their continued trust and confidence in Q Ts with that we'd be glad to take your questions operator.
Thank you we will now begin the question answer session.
To ask your question you read Press Star then one on the Touchtone phone.
You are using the speakerphone, please pick up your handset for pressing the keys.
So it's all your question Please press star one too.
Today's first question comes from Richard show of Jpmorgan. Please go ahead.
Hi, I was wondering if I could get a little more color around the drawdown from Richmond and the move.
The customer comfortable and being able to do such a big move.
What were the advantages of they saw and in terms of the drawdown.
What was the financial.
Thank you.
Hey, Richard this Chad.
Customers are migrating and balancing load on a fairly.
Especially hyperscalers on a fairly consistent.
Adam So this was strictly a customer driven initiative, where they wanted to consolidate a load into another facility and you know from a standpoint on being flexible with customers. It's always a conversation that we'd like to think about and talk about in if we can if it works for us and ER and and.
And it's good for the partnership then we'll try to accommodate that but just just something they wanted to consolidate and something to do on their compute side, Jeff do you want to take the impacts your hey, Richard So we think we're pulling down about four and a half megawatt and we can't give pricing on anyone customer, but generally for hyperscale. If you assume we're doing annualized revenue.
About a million dollars per megawatt that helps you put that in context, and so you know that pulls down revenue for a short period until the 12 megawatts that customer signed in Atlanta starts ramping in mid 2020 and beyond.
Certainly numbers that we can easily support with the momentum in the business and a and an upgrade in terms of capacity with that customer we're pretty excited about.
Great. Thank you.
Thanks Richard.
Our next question today comes from Jordan Sadler of Keybanc capital markets. Please go ahead.
Thank you good morning.
First question just on.
Ashburn you talked about.
Once you sort of become an approved vendor for certain end use customers usually there's some repeat business I'm curious in that context, if you could maybe offer a little but that of color of how you won.
That deal in such a competitive market.
Ashburn, obviously being perceived to be among the most oversupplied markets in the country.
And what the deciding factors might have been for that and then I've a follow up.
Hey, Jordan this is Chad.
We were thrilled to.
To bring on a new hyperscale customer into our platform.
It was a job it was a process that really was one of the best run processes, we've seen in a long time and they this group truly valued the significance of what the in world class in customer support and operational maturity really means for their business.
Certainly economics, and and and those type of things matter, but.
Our differentiation around our Digitization our platform the tools that enable a those hyperscalers to really have an extension of almost being their own facility with the level of data and control. They have at the same time delivering world class service in a premier facility I mean the team.
Builds a first class and data center from top to bottom and the speed the execution and the world class infrastructure. It's just a great combination. It truly is something we feel like that every chance we get to tell the Q T. S. A story around our customer experience in relationships.
It's a powerful message and it is a competitive environment, we don't take that likely ER and we had some wonderful competitors, but but in this case Q Ts was it was able to differentiate themselves to a brand new buyer for us.
And we do see a lot of opportunities, where we continue to grow with existing clients and that that is a hallmark of a once you're in the hyperscale incumbency asking at tag says and ER and it is something that it just streamline some process because a lot of times has got to move fast you got have good relationships you have to have a lot.
Got a trust in both your ability to get things done and meet the meet the objectives and Qt ssrs shine in that regard. So we're thrilled to have that opportunity.
I guess as a follow up I'm just curious.
If incumbency is king.
What were the one or two factors that helped you edge out the incumbents in this case, because obviously they have customers already dealing with others in the market and then as a follow up just in terms of pipeline.
The backlogs hit a record level of 80 million can you speak to where it would be sort of in a pro forma basis, including the 12 megawatt customer and then any insight on the a 9% of leases that are rolling into Fourq. You. If you have any insight on terms of known move outs that might be helpful. Thank you.
Good I think very simply.
Operational maturity World class customer support and facility and our service delivery platform clearly differentiated this person to choose above unencumbered and you're right. They had to pick Q Ts in this market as a new vendor and that's a high hurdle and we're thankful for that.
Jeff do you want to sure Jordan in terms of backlog impact again without going into the specific pricing. If anyone customer you can think about 12 megawatts equating to plus or minus about $12 million of annualized revenue.
So that would be added that is not currently in our booked not billed backlog at the same time as we update backlog at the end of Q4 will also have delivered capacity. So you want to see that backlog jump up by $12 million at all to come back down in terms of delivery space and Thats really the impact of that and provides us great visibility going into 2020 and de risked the perform.
Once in a year as it relates to leasing and our expectations that we can coming up for renewal in Q4, a number of those have actually already been renewed subsequent to that we feel very comfortable with where we are and.
The best comfort I can give you as weve reiterated our overall churn in year, 3% to 6% and tracking towards well in sort of the middle of that range.
Thank you.
Thanks Jordan.
Our next question comes from Robert.
Guggenheim Securities. Please go ahead.
Hi, Thanks for taking my question first I, you went pretty fast on the the funding side I was wondering just sort of like a gives quick review of the pre funding and the access to capital for next year and also as it relates to Capex I'm, a little more color on the reduction this year.
And looking at the tables, I can't tell really which facilities that relates to so because it's a 100 million big difference. So if you give us a little more color on that that would be helpful.
Sure Rob so from a funding standpoint.
Generally we have had from the February 2019.
When you transaction that we executed.
At times, we had about $150 million of capacity in forward proceeds that we had not utilized that point in the quarter. In Q3, we used about 110 of the 150 million.
You continue to fund the business and maintain a healthy balance sheet and maintain that leverage level at the five and a half turn that you see in the quarter. So that left us with just under 40 million of continued equity capacity that we'd effectively already raised in February 19, subsequent to the end of Q2 through the forward ATM we raised the.
Additional hundred $40 million, a again not funded yet but raised identified and now available to us at prices that are approximately 51 Bucks a share during that period. So between 140 that we've got subsequent to the end of Q2 and the 40 that we had remaining from the February 19 Echo.
Good idea, we've got about 180 and can be exactly $175 million.
Equity funding that we have now tap from the market that we have available to utilize over the course of the next year, we like that because it gives us visibility to fund our business well into 2020, and a goal or target of Prefunding, our business two to three quarters and advance is that right. We think balance between de risking our future knowing we've got the capital of.
Level, but at the same time not overfunding the businesses, we've got confidence in the strength and momentum in the business and expect that we'll see cost to capital a adjust as we continue to grow the business.
On the Capex standpoint, basically the Capex drop in Q3 was pretty simple, we we had expectations of some nice signing did hyperscale at the end of Q3, which you saw and actually the 12 megawatt beyond Q4, and as a result of always managing our capital carefully and allocating our capital towards where we see demand in.
Opportunities for near term return, we pushed back and capital during Q3, while we waited visibility on these let latest couple of Hyperscale deals and so that was really just to push back until we saw and new where we had that that growth and the trajectory of the leasing and what you should expect going forward that capacity will.
Get moved back up again in Q4 and into 2020 on the core business as well as building out the new Atlanta campus.
Great. Thanks.
Our next question comes from already kind of human capital. Please go ahead.
Thanks, It looks like a a significant percentage at the Commencements are expected. After 2020 can you just talk to the risk if there isn't any that some of these get pushed out or Conversely could any of them start maybe earlier than you're expecting.
I think.
Just like we see in the book, but not build backlog, it's consistent and we don't expect any delays.
Always have customers from time to time, the once you to deliver sooner or so but I think just in the balance and the tightness of this spread we feel it's going to be consistent with what's what we've put.
All right and then it seems like you're obviously exceeding expectation the hyperscale leasing at least as it relates to the one to three deals a year. How does your pipeline kind of look now that the deals signed and do you think that want to threed deal the year numbers the right way to look at the business going into 2020.
I think it is I like that were not overweighted in any one area their strength acute Ts is a strong highbred colo business, a strong federal vertical and the opportunity accelerate growth with hyperscale. It keeps us disciplined on choosing the deals that matter most of the bottom line. It gives us the opportunity to be efficient in the way that.
We do things and I think one to three deals or is the right number.
We certainly you know a feel good about the two brand new logos that we've acquired this year or in the Hyperscale space that was a goal that we had the beginning of the year was to put two new logos into the queue Ts facilities, because that just makes inherent growth opportunities and we think thats the right mix imbalance to have Ah.
Have good performance.
Thank you.
And then that's question today comes from Brett Feldman of Goldman Sachs. Please go ahead.
Thanks in kind of sticking with that theme you know we came into the year worrying about a slowdown hyperscale and it looks like Hyperscale is going to be the biggest factor among the biggest factors driving your bookings in the back half of the year. So I guess I'll flip it around and say now that were mostly the way through the year, how has the retail colo booking environment shaped up relative to your expectation.
And then since you've given us a glimpse into the topline next year I was curious if you can maybe just give us a little more insight I'm curious, how you're thinking about the contribution of the new international properties in that and that forecast. Thank you.
Yes, we continue having a 70 plus percent of our bookings for the year has been in Highbred. So highbred continues to be the engine acute yes, we have seen acceleration in hyperscale, but quite frankly, we expected that so it's just I'd say business as usual and well continue to see good growth we have good opportunities both.
Within Highbred, federal and Hyperscale, and even though a hyper skills or accelerated at the end of this year. We think one to three deals is the right target for 2020 and have full confidence in that.
The international property or in the Netherlands is one that will come online in a summer of next year for us for our one location of course, the other location in a growing again has been one that has performed.
Exceeding our expectations customer retention growth opportunity and it's just been a seamless transition in the Netherlands, and we're just excited about the opportunity to bring a the m. shaaban facility online summer of next year, and we have confidence that we'll see some good pickup in traction as a as your comes online for US a next year.
Thank you.
Our next question comes from <unk> Rasmussen Stifel. Please go ahead.
Yeah, Thanks, and maybe just circling back on just Ashburn you seen any sort of shift you know, where there's sort of less pressure on pricing. Obviously, we are hearing the opposite.
But I.
I guess more in the lines of what you're talking about customers leased the larger customers seen significant value operational excellence and some of the technology offering and then with that do you see any more trade offs, a I guess in the market that could open up more opportunities for you and others.
Yeah, I mean, I think from from our standpoint asked for into competitive market, but it's always been a competitive market. There's always been a lot of space in that market and I think as an operator or you have to figure out where to your where are your focus is and what your differentiation is and I think what what you're seeing is TTS has strong differentiation in the market we.
Did not when is the low bid provider that's not kind of what we are that's not our focus.
And you know, we're not balanced and having to win every hyperscale deal we're going to win the deals that we find the best opportunity to partner with people and I think maybe the last thing I'd say on this there's a lot of hyperscale enterprise customers that care more than about price, they're putting substantially everything they have in there.
Surprise on the line when they pick a partner so I know that everyone wants to talk about price and there is competition, but there is a lot of customers out there that value operational maturity experience quality of delivery customer engagement partnership interest and that that fits well with TTS.
Great and then maybe just my follow up you on the federal business. It seems like Thats is very strong pillar for you guys for growth than last quarter. You have you see had that large deal you signed.
Can you comment on any other sort of activity the team is tracking.
That would suggest that there's good momentum in this business and then maybe just with that what are your thoughts on Microsoft's win.
The Pentagon stood 10 billion Jed I contract and what that means for this space.
I think the thing that you should think about federal is long game.
The federal government has been working through this process for over a decade, we do see tremendous traction and opportunity, but the last thing we're going to do as sit here and forecast the efficiency of outsourcing at the federal government, it's going to be lumpy, but I will tell you that we are preparing a in executing at a high.
Hi level in a very specialized space.
It's a it's something we think we can have tremendous strength in opportunity in and you're going to continue to see that focus for us I think Microsoft's when fantastic for Microsoft I think most people thought that that was probably getting yet minimum be split a Microsoft has a big win a I think thats great for Microsoft.
Often and good for a outsourcing and data centers.
Great. Thank you.
Our next question comes from frankly, Raymond James Please go ahead.
Great. Thank you keep looking at the expansion in Atlanta, I guess, we could count the the 12 megawatt customer you have like you give us other indications that level of pre leasing you have other customers in that and you have any other plans to build additional campuses in Atlanta is one of the new properties being built or in some different areas.
And where you are located and any thoughts.
Of needing to be closer some of those areas as you expand that market.
I couldn't be more excited about the Atlanta expansion I think the best up a piece that I could give you as there is 250 GTS customers next door to this building 50 plus percent of our business still comes from customers expanding so there is a ripe opportunity for us to go farm opportunities into new build.
And what you had here in this anchor client is a customer that's expanding with GTS. So we're excited about that we'll continue to build we were thrilled to get going on it and have an anchor client of course, we want to de risk capital at every juncture, even in markets, where we have a strong position, we're going to look to de risk opportunities for growth. So that's what we.
Did I think the pipeline for expansion is starts with our incumbency of our customers and and the partnership we've had and we will be a continuing to expand we have adjacent acres that totaled almost 70 acres.
So when you talk about the Atlanta facility, we have decade of growth in Atlanta at a at our mature facility and that will be a quite a technology innovation campus in the center of a Atlanta couldn't be more excited to partner with the city and the local community on our continued.
Spansion of that side, it's really a special site.
And what sort of the initial a matter megawatts appeared on the first phase of the of the expansion and how much of that is the new customer taking.
The contract that we signed was 12 megawatts phase one was six megawatts will deliver summer of next year.
And then will.
Like always combined some form of Ah highbred space available with each build so we're going to continue to supply space. The hybrid and continue to meet our deployment of our 12 megawatts, which has a pretty quick ramp up by the end of next year and into 2021.
Okay, great. Thank you very much thank you.
Our next question comes from Simon Flannery of Morgan Stanley . Please go ahead.
Great. Thank you very much good morning, coming back to Richmond can you just Jeff just clarify what exactly does the.
The movement, the four and a half move out as that happened already or is that during Q4, just for our models and then what's the strategy to to refill that space and the overall.
Leasing environment in Richmond, and then just more generally as we go into 2020, how would you characterize the enterprise funnel is generally as it fairly stable through the year or is it.
The big changes in the kind of the way the enterprises are thinking about 20. Thanks.
Sure Simon that GAAP rate was at the end of Q3, two if you look at the ending period Morar in Richmond, you will see that drop from Q2 to Q3, so that now and the numbers for the rest Chad in Richmond, a you know it's been one of our.
Largest new logo assignments within the Highbred business, we're going to reposition that space for both Highbred co location in federal we need inventory coming back in that market anyway. So it really was a win win which is the only way that would workforce in a in that and we're excited about it it's a our pipeline for hybrid.
It.
Continues to be robust across our platform in all three of our focus area. So we look forward to that.
Moving forward with strength.
Great. Thank you.
Oh, that's worsen today comes from multiple phones.
Please go ahead.
Yeah. Thank you for the question guys. A couple of quick ones. If I could you know thank you for the guidance are under thoughts on revenue growth in EBITDA margin expansion.
For 2020 odd, Jeff maybe kind of tie that back to your commentary about liquidity.
And funding the business and help us understand how you think about the.
FFO per share growth targets that you have.
Sure, Mike and we'll put out formal guidance as we do it into Q4, but what we're trying to do in helping people model that is if you can understand a little bit into that topline growth and how we're moving margin. The other big piece there that they were trying to help you with a bit is thinking about the capex side and you've seen efficiency in our capex.
Spend in 2019 and that range of 350 to 400 that we put out now we think is there a sustainable.
Capex for growing our existing facilities, you can think about us viewing capex next year at that same bucket and then on top of that the new build in Atlanta, which again, we have that really geared again, but that'll add another 100 $150 million capital in year next year. So yeah, I think building in that incremental.
Capex, you'll you'll see some funding cost associated with that but still comfortable that we can grow the bottom line and a healthy way.
Great and maybe one more than two Jeff I could so you are about 22% of expirations in 2020.
That's more weighted towards hybrid colo than this year. So how should we think what the renewal rates during 2020 of exploration.
Sure. So a couple of things first of all when you look at our contract that come up for renewal over the next couple of years, you will see that.
Close to two thirds of those contracts come up for renewal over the next couple of years.
That's not that's not unusual given that two thirds of our business is from the enterprise hybrid co aside which tend to have about three year contracts and so.
What you'll see in terms of the larger hyperscale deals is that the vast majority of those have maturities that are 2021, or frankly far beyond that and so we think that is a good mix in a mix in a balance that we're comfortable with and frankly has been pretty consistent as we've been public over the last couple of years.
From as it relates to renewals for those contracts coming up a part of why we're very comfortable with with that hybrid business, even though it's got two to three year contracts or three year on average and and renewal to come up over the next couple of years is one.
At a churn annual churn of three to sentiment as contracts come up for renewal, we typically don't lose them and then when we do renew them our renewal rate consistently for the last five and a half years, we've been public have been steady in the increase call. It 1% to 4% you saw that renewal increase this quarter of 2%. So we love.
The hybrid business, because the diversification and higher return and although there are shorter contract that those tend to be an opportunity to increase pricing and we typically don't lose the customers.
Hey, Thank you for the question guys. Thank you want to thank you.
Our next question comes from Urs Lubes now of Wells Fargo. Please go ahead.
Hi, Thanks for taking the question I wanted to swing back to Atlanta, I know historically, we've thought of that is more of a and enterprise market than a hyperscale. One. So I was curious if you're a pipeline for the additional Atlanta Bill if you see additional hyperscale requirements and if you could maybe help quantify your embedded cost advantages there and also how.
The new us sales and use tax exemption plays into any competitive advantage you have there. Thanks.
Great. Thanks, Eric.
You know for US, we think about the Hyperscale market.
In in a little bit of two areas, one being the hyperscale cloud providers, which everyone knows a fairly significantly as three or four or five names that that by around the country I would say in that region of the country. You have two of those names that have been building some of their own assets. So they're starting.
To put real dollars in that market, which I think bodes well for us for additional capital and market presence from the Hyperscale cloud providers, we have historically and continue to really be thoughtful about the hyperscale enterprise market, which is what I would.
Put kind of most of this quarter and really kind of Q Ts is a historical perspective in having very strong relationships with enterprises that are driving scale in demand and when we start to say words like operational maturity and those type of things, it's not that cloud providers don't value that they are genuine.
Only a little more self sufficient in owning and operating their own facilities, but the hyperscale enterprise customers are very focused on that so I would say that Atlanta has been hyperscale enterprise for us for a long time and will continue and we see tremendous growth an opportunity now those deals may not come in the flash.
10, and 20 megawatt increments all the time, but for US we actually like the ability that whether we're at three to five megawatts as we kind of you know kind of historically have talked about hyperscale being five plus megawatts of deployment.
Those type of deployments just continue to.
Come through once you put that customer in the facility. So it's a little more capital less capital intensive and lets us spread out our capital on our growth. Our continued investment thesis in Atlanta is we have a terrific infrastructure and operational cost basis, both from a 20 per.
<unk> power advantage, just because of the scale and the ownership of our substation, there's going to continue to have tremendous growth. The sales in U.S tax we played a vital role in helping deliver that to the state of Georgia, which really is enjoyable for us for all data center providers in Georgia as long as they're willing to sign up and go through the process to obtain.
Like we have but we just feel like it's hard to replicate a million square foot operational efficiency and scale.
So we've got some tremendous opportunity in advantage, but we will not rest on that we'll continue to be competitive in the opportunity for us to drive all the advantages utilities tax advantages and everything above.
Okay, great. Thanks, and just one follow up if you'll get your Hyperscale pipeline into next year and beyond can you talk about the balance of funding that on balance sheet.
With some of your existing powered shell versus using your joint venture partner to help the rest some of the capital investment and how you're thinking about balancing those two.
I think the great thing is we've got a lot of opportunity to balance it so Jeff and the team have done a wonderful job with having a JV partnership that's a robust and anxious to deploying more capital.
Your point around having a million square foot a powered shell what I can point.
Hyperscalers to our million square foot of powered shell that it certainly gives me a time advantage in a cost advantage and it makes me much more capital efficient. So I think I would say that we feel good about the 2020 opportunities within Hyperscale and and we feel like we have a lot of levers that drives value.
You.
Great. Thanks.
And then this question today comes from Mr., they'll do almost a nuisance and please go ahead.
Hi, good morning.
You guys generally highlight the customer satisfaction benefits of service delivery platform to what degree using STP to help anticipate churn or customer dissatisfaction preemptively address it and are there other non obvious wage are able to use sep them for the performance of the business.
Nick I'm I'll, let John graves to sit here handle that so thanks, Nick So you absolutely we get tremendous insight into the customers plans to roll infrastructure app customers usage of power and any real changes and the customers infrastructure. So we see a lot of valley from that data.
We're also now deploying machine learning on that data to give us a better view as to what the future might look like so extremely valuable tool for managing and predicting June other events.
Okay, Great and then one for one for Clint I assume is there to Clint I've read I read your argument that the internet come into concentrated into brittle given me and Clint is not here to date tell he's not here from our chief Hyperscale off so, yes, so and okay and John John John .
On partners with clients. So okay, well, maybe maybe he can take it then I I think Quinn and presumably on behalf of the firm's making some arguments that the internet, becoming a bit too concentrated or two brittle given the handful of cities that are.
Sort of capturing the bulk of demand globally.
Has that argument didn't been gaining any traction among customers and you know if we see folks you decide that they might want to spread out their deployments more what sort of incremental benefits might there be for acute yes, yes. If you don't dungarees again, so yeah, absolutely I think what we find is the old customers is going to different risk profile, depending on what application that delivering so.
Many customers are actually look in the areas other than some of the classic Internet Nexus points now to deploy.
So we continue to see growth in those areas you had a little bit of at Nic is just this year limitation I mean, I asked burns a wonderful market, we're having tremendous success there, but it's not an infinite market up infrastructure. So we can talk about it on connectivity you can also talk about it on just pure power and infrastructure and I think the way.
Hey that we forecast growth or the way that the internet's forecasted to grow inherently theres going to have to be additional locations and areas that have to grow and I think you know it's great to be in the key markets. It's also great to be helping to define and be part of the future of that market I think thats really the crux of it.
Okay. Thank you guys. Thank you.
Well on behalf of Q Ts.
And.
And everyone. We thank you for the call today. Thanks for your continued trust and confidence in partnership and thank all our Q2, yes. There is all over the country that make it possible. Thank you. Thank you Sir todays conference does not include only thank you all for attending today's presentation. You may now disconnect your lines have a wonderful day.