Q4 2019 Earnings Call

also provided slides and made them of

With the webcast and on our website to make make it easier to follow a presentation today before we start let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions off and our base and are subject to a number of risks and uncertainties as described in our SEC filings and actual future results May Vary materially forward-looking statements to the press release that we issued yesterday along with our remarks today or Thursday. As of today. I will undertake no duty to update them as actual events unfold today's remarks also include certain non-gaap measures including n a f f o operating ffo adjusted operating apathetic monthly recurring revenue and adjusted ebitda. We refer you to our press release that we issued yesterday and our periodic reports furnished or filed with the SEC for further information regarding our use of these non-gaap Financial measures and a Reconciliation of them to our Gap results. And now I will turn the call over to Chad.

Thanks, Steven. Hello, and welcome to qts is fourth quarter and year-end 2019 earnings call. We look forward to reviewing the details of the strongest fourth-quarter bookings in our country's history. However, before turning our attention to the fourth quarter, I'd like to touch on some of the highlights of what has been an exceptional overall year 4 qts took you slide 3 qts delivered another strong performance during the first fourth-quarter closing out a record-setting year of execution importantly this performance was driven by significant contributions from each of our customer verticals hybrid colocation hyperscale and federal the diversity of our sources of growth in a tables our business to perform. We believe in a variety of different demand Cycles even during periodic slow downs and hyperscale absorption as the industry witnessed at time.

over the past year

Ability to combine the steady performance of our higher return hybrid co-location and federal businesses with select growth acceleration opportunities and hyperscale continues to support a level of consistency in our performance from quarter-to-quarter.

Differentiating our customer Solutions within each part of our business remains a core Focus to drive enhanced risk-adjusted returns and performance both today and in a future.

These differentiators include industry leadership in sustainability initiatives cost Advantage mega-scale infrastructure operational capability and track record in Federal Business and our continued strong commitment to a fully digitized premium customer experience through qts. A software-defined data center platform are based off of 1200 + customers continues to demonstrate their willingness to Value these unique capabilities and we are pleased with our resulting growth in the market share as evidenced in a financial performance and leasing momentum.

moving you

For for the full year 2019 GTS demonstrated a strong acceleration in our business total revenue grew 14% year-over-year while adjusted even a 15% reflecting incremental margin expansion of approximately fifty basis points year-over-year over the course of the year. We enjoyed a number of significant achievements that position q50s for long-term sustainable growth in early. Nineteen. We announced the closing of our first joint venture agreement with Alinda Capital Partners in which GTS contributed. It's Manassas wage scale data center development through the JV structure. We were able to leverage the low cost of capital from a sophisticated infrastructure investor as an incremental lever to fund future hyperscale off the suit opportunities while except accelerating our return on Capital profile.

Also early in 2019. We successfully executed an integrated qts is first international mega-scale data center acquisition in the Netherlands are two aspects of it and chronic in extended qts as growth opportunity internationally with a material cost advantage that provides a significant future upside opportunity particular issue hyperscale vertical we currently expect to position the in shop in sight with sellable capacity for hyperscale customers in mid 2020 in Grand again, we've had have been pleased with the integration and performance of the site since closing the acquisition. We've signed ten new or expansion customers and renewed multiple others driving revenue and outperformance relative to our acquisition model of more than half a million dollars of annualized basis, although small in absolute terms new revenue and the combined Netherlands footprint represents a strong incremental return on Thursday.

to Capital opportunity given

Arlo basis

next during the second quarter qts publish its first ESG initiatives report. This annual report is intended to provide transparency to key stakeholders and allow them to evaluate the progress. We're making and delivering on our commitments to the highest standards and environmental social and governance principles following the publishing of this report. We've been pleased to receive a phone number of awards for our leadership and sustainability including ranked by gresb as the number one data center company globally in sustainability, which was an amazing achievement for our Tech Team.

During 2019. We also gained significant momentum with our software-defined data center platform or sdp during the year. We averaged more than seventeen thousand active users on STP across the base of $1,200 plus customers with an average session time on the platform doubling year-over-year to nearly twenty minutes sdp Remains the primary differentiator with our customers and continues to drive value for qts in three primary areas first as evidenced by our strong leasing activity over the past two years since introducing the platform sdp is increasing our win rate in customer engagements and allowing us to grow our market share in addition. We've leveraged sdp as a valuable tool to identify qualified leads for large majority of our sales team and third we are actively using sdp internally to drive operating efficiencies, which you can see. Yep.

in our continued marching

Treatment in 2019. We also extended our track record of excellence in customer service and support 2019 marked the fourth consecutive year that qts is download the data center industry in customer satisfaction as measured by net promoter score or MPS qts achieved an MPS score of eighty-eight in 2019, which was approximately double double the average score for the data center industry 2019 was a strong year for qts. Esteem in Archie's are reflective of the underlying momentum in our business.

Turning to slide 5 during the year in 2019 GTS delivered the strongest leasing performance in our history was significant contributions from all three of our Target customer verticals qtsi new and modified lease is representing $76 million of incremental annualized Revenue in 2019, which represents a year-over-year growth of approximately 18% based on are win rates and ongoing success in the business. We are, we are continuing to gain market share.

Our 2019 leasing performance reflected a strong acceleration in both our hyperscale and federal businesses combined with steady Enterprise demand key hyperscale walk ins during the year included a 10 megawatt lease with one of the industry's fastest-growing consumers of hyperscale Data Center capacity in Ashburn, a four megawatt expansion in Manassas with a guy wears a service provider as part of their continued ramp into that into the facility and a 12 megawatt lease with a large social media company that will anchor our new expansion pack in Atlanta leveraging our cost Advantage Powershell capacity and differentiated platform. We are pleased that the majority of our hyperscale leases signed in 2019 income in towards the higher end of our nine to eleven percent Target of hyperscale return on invested Capital range since our financial model is built on the Assumption of signing only one dead.

two three larger

Plus megawatt hyperscale opportunities each year. Our approach allows us to be more selective in the Strategic growth acceleration opportunities. We pursue

we also demonstrated strong momentum in our federal vertical with the signing of a 5 plus megawatt multi-site deployment for a strategic hyperscale customer supporting a large Federal program. We remain encouraged by the growth opportunity and federal as these requirements generally represent return opportunities, in excess of our typical return on invested Capital. We see in the job market for full multi megawatt deals which represents an attractive value creation opportunity for qts and its shareholders.

Even as we experienced a strong acceleration or a hyperscale and federal verticals qts is core engine of growth remains are hybrid co-location which continues to represent approximately to Thursday of our reoccurring Revenue base. We strongly believe that having a business approach that balances the consistent performance of a diversified higher-return hybrid colocation business office and growth acceleration opportunities with strategic hyperscale customers is the best path to optimize growth and risk-adjusted performance 4 qts.

Colocation business has had another solid year in 2019 with relative strength in Enterprise demand in Atlanta Ashburn Piscataway and Chicago off during the year. We signed a hundred and fifty-eight new hybrid co-location logos reflecting the increase in average deal size of more than 40% year-over-year and we remain encouraged by the growing number of larger Enterprise deal in our pipeline so far in 2020 now moving on to slide six during the fourth quarter qts side new and modified lawyer representing 27.7 million of incremental annualized Revenue, which is nearly double our prior forequarter average of 15 million and represents the office Google largest quarterly leasing result. We've achieved as a public company hyperscale contributed approximately two-thirds of the overall leasing activity in the quarter including the 12 Meg's.

Anchor tenant lease in Atlanta that was previously announced despite the larger mix of hyperscale Leasing and Q4. We are pleased that the average pricing per square foot across all income no leases signed during the fourth quarter was consistent with our prior forequarter average further highlighting the value that customers including hyper scalers continue to see in office differentiated platform in addition to the large 12 megawatt lease. We signed a number of smaller one to two megawatt leases across our footprint with existing High Prestige customers as is typical over the course of the year in our business as an example in Q4. We signed a multi-site expansion aggregating to approximately 1.5 megawatts with an existing hyperscale customer since signing. His first lease with qts in Fort Worth and early 2019. This social media company has incrementally expanded wage.

Yes, and three separate instance.

And is now deployed across 3 qts facilities. We have previously discussed the importance of incumbency in hyperscale as these customers typically prefer to expand the structure on a reoccurring basis with existing Partners given the complexity and time commitment related to the incremental procurement and approval vendor processes as we continue to see the diet Dynamic play out in our business bringing new hyperscale logos on to the qts platform remains a core initiative during 2019. We were pleased to sign three new hyperscale logos, including a global cloud services provider during the fourth quarter as part of a one megawatt multi-site deployment.

In addition as we announced in our press release in conjunction with our earnings results are hyperscale momentum has carried over into 2020 with the announcement of a 4.5 megawatt lease offer existing Global software-as-a-service customer. This customer commitment will serve as the anchor of a new data center development in Hillsboro, Oregon which Jeff will discuss in further detail strength in our overall leasing volume resulted in our highest-ever backlog of sign, but not yet commenced annualized reoccurring revenue of approximately 93 million at the year-end.

the backlog

Provide strong visibility into our future growth and materially D risk our financial performance in 2020.

Moving on to Renewal activity pricing on our installed base remains healthy same space renewal rates during the quarter represented a decline of 2.2% However, this was largely due to one customers change in power density upon renewal excluding this one customer renewal rates on a per square foot basis would have represented a 2.7% increase relative to pre renewal rates, which is consistent with our general expectation of renewal rates increasing in the low-to-mid single-digit range.

Finally as part of our continued focus on operational efficiency during the quarter. We exited to non-strategic lease facilities in Hong Kong and London as well as Consolidated to customers in our Dulles campus from two buildings to one to free up space for incremental expansion.

the two

Facilities that we exited and Hong Kong and London were subscale with below-average profitability in limited path for incremental growth ProActive Management of our strategy game is consistent with our constant effort to evaluate our platform for opportunities to enhance operating efficiency during the fourth quarter of a full year of 2019 of 1.7% and 5.2% respectively included the intensional customer churn associated with our deliberate strategy to exit these facilities non-strategic lease facilities, excluding the impact related to the exit of these facilities and would have been 8% off for the fourth quarter and 4.3% for the full year.

overall, we're

Pleased with our financial and operating performance in 2019 importantly are leasing performance in 2019 sets the stage for continued strong growth in 2020 and increased visibility in momentum with that. I'll now turn it over to Jefferson our Chief Financial Officer Jeff.

Thanks, Chad and good morning turning to slide 8 in conjunction with our earnings release yesterday. We announced the commencement of development of a new Mega data center campus in Hillsboro, Oregon off the initial development will feature the construction of 158000 square foot data center encompassing approximately eighty-five thousand square feet of leasable capacity and 27. Megabits of gross power capacity. We're pleased at the entire first phase of development at the site representing 4 and 1/2. Megawatts has been proved least to an existing software-as-a-service customer.

Significant pre-leasing in our new Hillsborough development is consistent with qts dearest approach to development and overall Capital allocation.

Currently expect to deliver the first phase of the new Hillsborough development in mid 2020 with additional power capacity available for customers in the second half of 2020 based on demand.

Hillsborough is emerge as one of the fastest-growing data center markets on the west coast. We strongly believe the Strategic importance of the Hillsborough Market will continue to grow as hyperscale and Enterprise customers for their data center infrastructure strategies around low-cost markets with strong access to power and a multitude of connectivity options, including subsea cable Landings in addition to UTSA currently off for my customers with a hundred percent Renewable Power upon opening the Hillsborough site consistent with our commitment to provide a hundred percent Renewable Power across all of our data centers by 20 time. We look forward to extending our strategic footprint on the west coast in support of the continued growth of our hyperscale and hybrid colocation customers.

next

I know like to review our development plan for 2020 over the course of twenty twenty. We currently expect to deliver approximately 167000 square feet of new raised floor capacity in Ashburn Atlanta Dallas-Fort Worth Piscataway, Chicago, Manassas and Hillsborough included in our Capital plan is the formal opening and commissioning of the first phase of development at are adjacent Mega Data Center in downtown Atlanta and initial development on our Hillsborough campus the support our record book not billed backlog and particularly strong momentum exiting the fourth quarter page currently projecting cash Capital expenditures in 2020 of between 550 and $600 importantly more than 70% of our current development Capital spend expectation for 20 is directly tied to Lisa's that have already been signed as always. We will continue to evaluate the amount and timing of our Capital allocation to align with customer demand balancing our focus on a Thursday.

both near-term and long-term growth in

Hold their value now on slide ten. I'd like to review our current balance sheet position since the end of the second quarter of 2019 and through today's date to UTSA is raised through its ATM program approximately 3.6 million shares of common stock at an average price of approximately $52 per share which represents approximately $184 million of net Equity proceeds on a full-time basis. When combined with the approximately thirty-six million of undrawn forward Equity proceeds remaining from our March 2019 Ford Equity raise, the company has access to a thousand two hundred and twenty million dollars of net proceeds through Ford stock issuance has these proceeds provide significant future Capital availability and materiality risks UTSA financial plan. Well into the second half of 2020.

recent UTSA is current capex guidance forecasted growth in adjusted ebitda and retained cash flow these available Equity proceeds represent more than two-thirds of qts is incremental Equity Fund requirement 420

At the end of the fourth quarter pro forma for the available for defra proceeds. We had total available liquidity of approximately $915. We currently have no significant debt maturities until June 2022 and More than 70% of our indebtedness is subject to a fixed rate including a series of interest rate swap agreements. We ended the quarter with leverage of approximately 5.6 time to annualized adjusted ebitda come this level is consistent with where we have historically manage the business and we remain comfortable in this range in light of our significant book not built backlog.

Including the 220 million of available forward Equity proceeds are pro forma leverage as of the end of the fourth quarter was approximately 4.8 times. We currently expect to draw down the Ford Equity program over the coming quarters to fund our future development plan while maintaining leverage at a level consistent with where we have historically operated.

Next on to our financial guidance on slide 11 for the full year twenty-twenty. We expect reported total revenues to be between 523 million and 500.