Q2 2020 QTS Realty Trust Inc Earnings Call
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Thank you operator, Hello, everyone and what can be Qts's second quarter 2020 earnings Conference call. Stephen Douglas had a investor relations are cute, yes, and I'm joined here today by Chad Williams, our chairman and Chief Executive Officer, and Jespersen, Our Chief Financial Officer. We also are joined by additional members of our executive team will participate in Q&A.
Alrighty is released in supplemental financial information or posted an investor Relations section of our website. We also have provided slides and made them available with the web cast and all of our website to 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 and are subject to a number of risks and uncertainties, including those related the effects of the ongoing cobin 19 pandemic as describing her S. N P filings, an actual future results may very materially.
Forward looking statements in the press release, so you should yesterday, along with a remarks today are made as of today and we undertake no duty to update them, it's actual events unfold.
There's a box also include certain dogs get measures, including N O Y F. F O operating F. F O adjusted operating hassle, So must've recurring revenue R Y C EBITDA Ari and adjusted EBITDA, We refer you to our press release her we you should yesterday and our periodic reports furniture, followed with you I can see prefer their information regarding are usually these nonjet financial.
[noise] measures and a reconciliation to them dark app results and now I'll turn it a call over to chat.
Thanks, Steven Hello, and welcome to Qts's second quarter 2020 earnings call turning to slide three we are pleased to deliver another strong performance during the second quarter, including one of our strongest quarters of sign leasing activity and financial performance that gives us confidence to increase our financial outlook for the year.
Importantly are consistent performance comes I'd Miss unprecedented economic disruption as a result of Cove at 19 walkover at 19 is created far reaching challenges and disruptions across the world the relative strengthened resiliency of our business further demonstrates in our view the value of our differentiated and diversified platform.
As has been the case over the last several quarters are performance has been driven by contributions from each of our customer verticals Highbred co location Hyperscale in federal we believe the diversity of our sources of growth maximizes or risk adjusted return on investment capital opportunity and reduces quarter.
Over quarter volatility wall, enabling part business to grow effectively through a variety of industry and economic cycles. This approach provides the opportunity for our business to participate in select strategic growth acceleration opportunities with hyperscale and federal customers, while continuing to generate consistent.
Quarter over quarter performance enabled by our diversified Highbred co location platform.
[noise] Cross our three target verticals, we are able to leverage our core differentiators to drive continued market share growth, including leadership and sustainability initiatives cost advantage Mega scale infrastructure operational maturity on track record and the federal business and I continued strong commitment to fully digitized.
Medium customer experience through Qts's software defined data sooner platform or S. D P.
Moving you slide for S. D. P remains a powerful differentiator driving the success and our business given the ability for the platform to empower our customers to interact with their data and QTS services through a remote environment.
Enterprises, and Hyperscale customers appetite for data is accelerating and we're able to serve an important role in unlocking the various datasets, enabling key services that are critical for customers to effectively manage their mission critical I T infrastructure.
This is particularly true during cove at 19, pandemic, which has significantly limited customers ability, they're physically manager I T assets on site and increase their appreciation for stp's capability than able remote infrastructure tracking and management.
As we discuss last quarter, we've continued to experience elevated S. P. P utilization among our customers since the Cove at 19 outbreak during the second quarter unique log instead of a platform are crossed our 1200 plus customers increased approximately 20 per cent quarter over quarter.
They average STP session times across are more than 17000 active users base remains at approximately 30 minutes and for our top S. T. P. Users average session times continues to exceed one hour.
This level of engagement, what's the S. V. P platform is roughly double the levels, we experienced pre cope at 19.
It it it shouldn't consistent with our leasing activity in the first quarter during cute too we continue to experience elevated demand for additional connectivity, an ancillary services, including remote hands and is in part driven by we believe by the effects of Cove at 19 during the second quarter QTS sign incremental Ria.
Revenue from IP bandwidth upgrades up 85 per cent and cross connects up 30 per cent year over year. In addition to T. S realized 40 per cent increases in the number of customers leveraging a remote hands and I services over the same quarter a year ago. Why these additional services with customers are unable to be provision remotely.
E S D P and aggregate represent a relatively small incremental contribution to the financial profile of business. They represented in an additional valuable opportunity for QTS to service, our customers and drive incremental high margin revenue and value on top of our datacenter real estate.
Moving to slide five during the second quarter QTS delivered another strong performance with consistent growth across arkie financial metrics Q T. S generate a total revenue and adjusted EBITDA of $132 million and 73 million, respectively, representing a year over year growth of approximately 10.5 per cent and <unk>.
17% respectively.
Just said EBIT a margin during the second quarter of 2020 was 55 three per cent.
[noise] presenting year over year marching expansion of approximately 310 basis points, which reflects continued operating leverage as our business scales combined with our ongoing efficiencies, we're seeing from our various digitization initiatives.
In addition, as Jeff will discuss in more detail are strong adjusted EBITDA results. During the second quarter benefited from a reduction in utility rates as well as reduce corporate travel expense as the result of Cove at 19 pandemic.
The combination of lower utility rates and corporate travel expense net Ah other additional covered related expenses resulted in a benefit to our second quarter. Adjusted EBITDA result of approximately 1 million relative to our initial expectations for the second quarter, we delivered O F F O per share of 70 cents, which room.
[noise] presents approximately eight 5% year over year growth, reflecting are strong adjusted EBITDA performance in the corner.
[noise] nexon to slide six during the second quarter, Gtsi, new and modified leases representing $21 million, a incremental annualized revenue, which represents the third consecutive quarter. We've delivered leasing results above 20 million continued strengthen our leasing performance resulted in a backlog of sin, but not yet.
Convince annualize revenue of approximately 111 million at the end of the quarter of up approximately 10 per cent quarter over quarter in an environment, where Cobra at 19 is creating far reaching disruptions and uncertainty across a variety of industries. We are pleased at the significant backlog continues to provide strong ville.
[noise] ability into our future growth.
In addition, overall trends within an embedded customer base remains healthy same space renewal rates during the second quarter increase by 2.6%, which is consistent with our general expectation of renewal rates, increasing in the low to mid single digit percentage range.
In addition, churn within our customer base year to date has traded toward the lower end of our historical range Sharon during the second quarter was 0.5 per cent, which brings year to daycare into approximately one <unk> one person as a result of our strong year to date customer retention and visibility into customer activity for the balance.
A year, we're revising are full year churn guidance to three to five per cent down from three to six per cent previously.
The quarters leasing performance was weighted towards our hybrid co location in federal verticals.
Which combined contributed the majority of our quarterly sign leasing activity due to the premium pricing typically associated with our hybrid colocation in federal leases. We're pleased that are average return on investment capital for Lisa signed during the quarter, what's in excess of 14%.
Evidence of this is also a parrot and the average written per square foot on the new and modified leases sign during the quarter of $548, which is approximately a 24% above the prior for quarter average strong pricing during the quarter is particularly encouraging considering aggregate cute too leasing activity represented.
One of the highest leasing quarters, we've delivered as a public company.
[noise] ourselves pipeline across our three target customer verticals remains robust as we've discussed in the prior quarters opportunities in the high security federal space typically involve longer than average sales cycles, which can approach two years or more in some cases do the link to the sales engagements and generally their attached.
[noise] to specific federal contracts, we have not seen any material change in the velocity a federal deals as a result of the pandemic. Similarly, the hyperscale sell cycles typically multiple quarters and this customer base on average has seen an acceleration in their underlying business as opposed to the disruption related to Cove at 19, which has resulted in <unk>.
Thing you'd strengthen the data sooner demand as would be expected, though we have experienced modest logistical delays and the contracting processes associated with the broader remote work environment.
On the hybrid co location side, we've continue to see strong opportunity for growth as evidenced by a solid leasing performance and the second quarter. We've continued assigned new logos in combination with supporting incremental growth from our embedded customer base. We recognize however that sales engagements with enterprises are typically much shorter than those from high.
[noise] for scaling federal customers, that's naturally creates less visibility on enterprise leasing which could be impacted in in the future should there be elongated disruption from Cove at 19 as evidence of this typically between 15 70 per cent of our quarterly leasing volume of source from our existing customer base. However, during the second quarter R.
Existing customer base represented in excess of 70% of our quarterly sign leasing where encourage that regardless of our model still enabled us to deliver one of the strongest leasing performances in our history supported by the growth within our existing enterprise customer base and combined with the incremental contributions from bedroom and hyperscale.
[noise] [noise], turning to slide seven or second quarter at least your results include the signing of a five plus megawatt expansion from an existing strategic hyperscale customer supporting the federal government. This deployment across multiple Q T. S site is set to commence in mid 2021 and represents an expansion of <unk>.
Plus megawatt federal Leafs, we signing cute too of 2019.
The federal vertical remains a core focus for Q T. S. And this lease represents another example of the expanding opportunity for growth, we expect in our federal business due to the unique security requirements for this customer base and higher barriers to injury their return on capital profile for federal data sooner deployment, it's typically well in excess of the return.
[noise] profile, we see and other customer segments, we intentionally position to our platform to succeed in federal several years ago with strategic investments and the necessary processes operational capability and talent, including QTS personnel capable of supporting highly complying government agencies, where now seeing the benefits of these.
[noise] investment is larger federal opportunities have started to materialize and move forward to the deployment and remain excited about the momentum we see building in there.
We believe our year to date leasing performance highlights the value of our diversified platform outside leasing volume and Hyperscale drove R. Q1 results what federal contributed meaningfully cute too importantly, during both the first and second quarters, we've continued to deliver consistent performance in our high bread.
<unk> location business across each of these target customer verticals are differentiation is driving increase when right and leasing activity and positioning our business for continued growth and performance.
With that I'll turn it over to Jeff person, our Chief Financial Officer, Jeff.
Thanks, Chad and good morning.
Turning to slide nine Qts's diversified business model and strong customer base continues to support resilient operating and financial performance image to one of the most challenging economic environments on record.
Last quarter, we discussed receiving a modest amount of requests for some form of extended payment terms from customers representing approximately five per cent of revenue concentrated in the industries more directly impacted by Cove at 19, including retail transportation oil and gas and hospitality.
Over the course of the second quarter, we seen this number stabilize as the pay some additional incoming request is moderated while the number of customers who had previously asked for extended payment terms have since resumed payments.
From a development perspective, I'm pleased that our commitments to customers remain on track and we currently do not anticipate any meaningful delays and delivering on our book not build backlog in 2020, assuming current trends continue.
This represents a tremendous achievement far development and operations teams and they have navigated extremely unique circumstances related to Cove at 19.
Now moving to our equity funding activity on slide 10.
As if coupon earnings release on April 27th QTS had access to approximately $338 million of net proceeds to forward stock issuances.
Subsequent sure first quarter 2020 earnings call. So our a T. M program any overnight forward equity offering we completed in June equity, representing approximately $304 million a net proceeds with so about a forward basis.
In addition, during the second quarter QTS settled approximately a million shares afford equity for net proceeds of approximately $51 million to support our ongoing development activity. This resulted net proceeds to forward to stock issue inches available to Q T. S. A approximately $591 million as of yesterday's earnings release.
As discussed last quarter, giving current capital markets volatility, we will continue to look to pre fun the capital needs and our business three to four quarters or more in advance we're pleased to be in a position where a capital funding needs are pre funded through the middle of next year and when combined with a record book not bill backlog are visibility into future performance positions as well to <unk>.
Continue to deliver consistent shareholder returns.
Next on slide 11, I'd like to review, our current balance sheet and liquidity position.
As of the end of the second quarter pro forma for $591 million of available forward equity proceeds we had total available liquidity of approximately $1.1 billion [noise].
Currently have no significant that maturities until 2023 and beyond and approximately 70% of our indebtedness is subject to have fixed rate, including a series of interest rate swap agreements.
We ended the corner with pro forma leverage of approximately three seven times net debt to annualized adjusted EBITDA, including available forward equity proceeds excluding forward equity proceeds are leverage at the end of the second quarter was approximately five eight turns.
We remain comfortable with our current leverage profile, which is supported by our significant book not bill backlog and Derisked equity funding. We currently expect to draw down our forward 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 in the mid to high five times range.
Turning now to a capital expenditure outlook on slide 12th.
<unk> activity remains robust to support our record book not bill backlog.
Relative to our initial expectations at the beginning of the year, we have significantly increase the amount of capacity, we expect to know deliver and in service in 2020 by more than 100000 square feet of additional raised floor, even the sales momentum we've experience.
The majority of this incremental capacity he's concentrated in our Ashburn Chicago Fort worth in Atlanta facilities. In addition to active projects enrichment Irving M shopping in swanee.
Over the course of 2020 [noise], we expect to complete a total of over 60 megawatts of gross power capacity, which represents approximately the same amount of capacity that we delivered in aggregate over the prior three years.
In addition, approximately 30 per cent of a book not feel backlog is currently tied to leases signed in our ashburn facility totally more than 20 megawatts a capacity.
It's officially opening on our ashburn facility less than two years ago, we've already sold more than 75% of the available capacity and continue to see a potential path to fully leasing the entire 32 megawatt facility by the end of this year, assuming current trends continue.
As a result are updated 2020 Capex plan now incorporates the commenced pre development of a new side in ashburn on land that we own adjacent to our existing facility.
We currently expect a news site will be able to support in excess of 40 megawatts a cell both power capacity, allowing us to extend our strong momentum and the ashburn market.
As a result of signed leasing activity year to date that is outperformed our initial expectations and a sales pipeline visibility for the second half of this year, we are raising a capex guidance for the full year 2020, we know expect 2020 cash capital expenditures, excluding M&A of between $650 million to $750 million.
Up from 550 million to 600 million previously <unk>.
Importantly, more than 75% of our capital development plan is directly tied to sign leases.
Next on slide 13, we're revising or 2020 financial guidance to reflect year to date outperformance are updated capital expenditure outlook and our expectations of performance and the second half of 2020.
Through the second quarter, we've outperformed our initial expectations for a recurring revenue as a result of strong least an activity year to date.
However, as a result of materially lower than expected utility rates, particularly in Atlanta, our largest market.
Are lower margin power recovery revenue is trended lower than our initial expectations for the year.
Factoring in the net effect of these two items. We have reiterating are previously disclosed revenue guidance for 2020 between $523 million and $537 million.
We are raising our adjusted EBITDA guidance to arrange a 280 million to 290 million up from 275 to 285 million previously.
Are improved adjusted EBITDA outlook, primarily reflects outperformance and recurring revenue year to date associated with strong leasing activity.
Continued operating leverage in our platform and reduced utility expenses net of recoveries I just referenced.
In addition is Chad mentioned, we experienced lower than expected corporate travel expenses during the second quarter associated with the effects of Kobe 19.
Lower than expected utility expense and corporate travel costs net of other additional cove. It related expenses positively impacted are cute too adjusted EBITDA performance by approximately a million dollars and we've incorporated a full year aggregate benefit of approximately $2 million to $3 million into our updated 2020 outlook relative to our initial guidance ranch.
<unk>.
These reduced cost increase our adjusted EBITDA margin performance in 2020, we would expect these costs to return to more normalised levels in 2021, assuming Kobe 19 related disruption begins to subside.
We've also updated our 2020 O F F O per share guidance to reflect our higher adjusted EBITDA outlook and updated capital development plan.
Our updated 2020 O F F O pershare guidance range of $2.73 to $2.83 representing increase of two cents at the midpoint relative to our previous guidance range.
We continue to view our approach to capital allocation is directly tied to our goal of achieving consistent growth in O F F O per share of between 5% to 9% annually.
When combined with our three plus per cent dividend yield. This provides investors with a consistent return of approximately 10% annually.
In general relative capital intensity in any given year will be a key determinant of whether R. O F F O per share growth trends towards a higher or lower end of the 5% to 9% target range.
In order to achieve consistent O F F O for sure growth in this range, we constantly evaluate and prioritize R capital spend to find the right balance of driving both near term results, while continuing to invest in the long term growth opportunity for the company and maximizing a risk adjusted return on capital profile.
Overall, we remain pleased with the performance of our platform against the volatile macroeconomic backdrop with a record book not bill backlog robust sales pipeline healthy embedded customer base and strong liquidity position with equity funding that supports our growth capital plan through the middle of next year, we believe our businesses position to continue to deliver.
Consistent financial and operating results.
[noise] now turn the call back over to chat.
Thanks, Jeff turning to Slide 15, we recently published the second installment of our annual ESPN issue. This report, which provides an overview of the various initiatives are crossed our business that we believe position QTS to deliver on our commitment to the highest standards and environmental social and governance principles.
This report represents an important opportunity to update our key stakeholders and hold ourselves accountable on the progress we've made in the unfinished work ahead of us.
I believe ESG within corporate America has accelerated is key stakeholders recognize that the long term viability of any company is in part predicted on its commitment to serving something greater than ourselves as we care about each other our customers and our communities.
Wild growth and profitability are clearly important to our business, establishing a culture in an environment that enables our employees to pursue excellence and positively impact each other and our communities is equally critical to our longterm strategy.
As I reflect back on the first half this year I'm. So proud of the way that are qts's have stepped up in the many challenges that were presented and delivered for each other our customers in our communities demonstrating their commitment to our culture of service to others.
I'd like to think each one of our qts's for their resilience and determination as well as a health care workers in first responders that continue to put themselves in harm's way to ensure the safety of our surrounding communities I'd also like to think our customers and shareholders for their continued trust and confidence in Cutie.
D S O.
Overall, we're very pleased with our financial and operating performance through the first half of 2020 that consistency of our results during one of them most challenging economic periods on record related to Cove. At 19 is a testament to the resiliency of our diversified business model continued strong execution by the QTS team and the robot secular.
[noise] growth in demand for third party datacenter capacity, we look forward to continuing to leverage our strategic differentiators to maintain our momentum and the second half of 2020.
With that we'd be glad to take questions operator.
Thank you well no I'll be getting the question on this assertion [noise].
They're asking question you my <unk> been one on your touchdowns huh.
Question is already been address you'd like to remove your question. Please first of all of them too.
And the answer some time, we do asking you limit yourself. So one question, what's the single follow up.
Today's first question comes from.
Red Solomon with Goldman Sachs. Please go ahead.
Okay. Thanks for taking the question you know you you've talked about the federal opportunity for a long time, because I sorta look at this presentation in a couple of the recent ones. It seems like it's really standing out now as a major distinct vertical where segment within the company alongside hybrid co location and Hyperscale until I was hoping you can maybe give us a little context, what is it that is really.
Cause this opportunity to emerge how much of it is behavior of the government itself, maybe the benefits that you're seeing a certain investment that you've been making and then you know what else can you tell us about this customer categories. It look more like hybrid co location look more like Hyperscale and then lastly to what extent.
Is the tracking you're seeing with vertical with federal vacuuming into your accelerated capital appointment. Thank you.
Hey, Brett. Thank you. This is Chad you know I I do appreciate people are starting to notice that but I just wanted to remind people that there's no overnight success. We started intentionally investing in federal eight years ago ish you know, it's it's taken a tremendous commit.
Bye the board and by the management team to put ourselves in a position for future success and you're starting to see some of that come or direction, partly because I think you know the government is always you know slower at moving Ah just because they're so.
Ah, it's so complex and so large and so it's still gonna be a very lumpy longer sales type cycle like we've talked about but I do think the work that we've put in place both from our facilities and operational and you know, it's a really a commitment across the organization in technology innovation people.
Will talent.
And in the right facilities in the right locations and we're going to continue to harvest that I I think to your point about it it could be hi, bread Ah co location opportunities with strong connectivity, but it also will look a lot like you know what we call are smaller hyperscale deals two to three mega.
[noise], what's I think that what you're gonna see as you know it continued trend aware, there's some opportunities that pop up it'll continue to be lumpy, but we put ourselves in that position that that's <unk>. That's a really strong ah vertical focus for us and we'll see how it plays out over the years had come but it will accelerate some capital.
[noise] down the road, but but we feel good about the opportunities we see.
Thank you.
That's a nice person when it comes with Jordan Sadler with came back a couple more kids. Please go ahead.
Good morning, and thank you for taking the question.
Oh, just started the sales pipeline you talked about.
[noise] ability.
Specifically pointed to the additional eight megabytes of leasing in Ashburn that you see by your own is there anything else specific that you would point too.
Maybe corresponds to the increase Catholic spend it not only Ashford will also Chicago, whereas in Atlanta.
Hey, Jordan this Chad Ah you know, we just see good continued opportunities we've been pretty disciplined this year as we said and the last quarter's call <unk> said noticed some deals this year that just didn't meet the right return or locational Ah targets for us, but we just we just feel like the consistency of the hybrid business.
ER diversification, a federal the opportunity to do some more hyperscale potentially it's just a good balance and I think you're you know you're seeing the capex spread out around the facilities that we're seeing leasing activity and we just see good balance.
Okay.
He pointed specifically to the Mega lots of National Night, She was a diaper scaler.
Or maybe that's just a couple of Ah deals.
Or just a bunch of your ball Python, I'm curious, but Ah it changes.
Leasing bogey that you guys, who had more recently.
15 million in a corner now and the 20 plus million dollars per quarter last three corners.
Can we expect this to try and higher and is the one to three Hyperscale D O P U metric, where mark still relevant.
Hey, Jordan, so yeah, just a little bit more on the on the Capex side, where where do you see the heavy cat back in Atlanta in Ashburn with the the eight megawatt that that's in a book not feel backlog right now in Chicago, what you're seeing as Capex trending with where we're seeing a lot of wheezing and a lot of growth in the business jazz point, we're seen activity across the.
Portfolio.
So you've also seen it in some smaller facilities you've seen it in piscataway and others.
But Ah Chicago on the hybrid side has actually been one of our fastest growing facilities over the course of the last 12 months and then Atlanta in Ashburn is really where a lot of that book not bill backlog is from some of the larger hyperscale deals. So that's what's Trenton, there on the leafing bogey.
We talked about a model with $12 million to $13 million, a average quarterly leasing two years ago or target was increasing that to $14 million last year and $15 million. This year and that's really the model that we need to to drive the guidance and the revenue growth and the expectations of our business. So the fact that we've been well above.
[noise] 15 for the first half of this year is great. It obviously helps us to be off to a strong starting a year and is what part of what enabled us to increase our guidance for the year, but <unk> importantly, the model hasn't changed and and that's true with the $15 million a quarterly meeting talking it's also through with the one to three Hyperscale heels, we are model or.
Growth rate that we like to expect we can continue will work at that meeting level and and those hyperscale levels. Obviously at the base gets bigger we'd expect our target listening to grow sequentially. Each year. So we're $15 million this year probably needs to be at 16, plus if we want to continue to grow topline a double digit next year and there was one of three height.
[noise] scaled yoga at some point as a base gets bigger, we'll we'll increasing as well, but one to three <unk> deals. This year is still or target and I still feel good about.
So the 15th could still be and the calculus here at lightning in other words.
You're talking about include sales visibility Ah so cycling visibility you've done 20 per year.
It's reasonable to assume that we could do a D. S L.
And the loosing volume and the second half.
Oh, that's neat Jordan I mean, yeah that the point of the call is to not tell people that we think <unk> gonna decelerate, we still have confidence in the business, we wouldn't be raising guidance. If we expected a deceleration the business, but at the same time leasing on a quarter to quarter basis ready to quarters 12 weeks and so we don't want to get pin down and.
Terms of targeting a specific number each quarter, but I don't want people to walk away from this call thinking that we're talking down leasing we're just maintaining the expectations, we had coming into the year and given the strong start in the first half of the year, obviously, we feel very good.
Oh, that's cool thank you.
And a nice person today comes from too long Barkley's. So let's go ahead.
Thank you just <unk>, maybe one on on the F. D. P front, you put a lot of lots of good.
That's out there in the in the presentation could you talk a little bit about what you think is happening maybe I'm I'm kind of when rates in pricing.
With with S D P doing better.
Anyway, you can quantify that and maybe talk about any enhancements that you <unk> that C. D. S. D. P portfolio, helping that and then I had a follow up on pricing sounds good I'll I'll talk a little bit about that and then I'll have John talk about some opportunities we see for STP roadmap, but you know it's squarely differentiating.
Every conversation we have so if everybody's working on Digitization.
You know cloud adoption.
Hi, bread I T, giving in serving the data to customers in a transparent and open way about every aspect of their data center is just a compelling opportunity for so you know we see the we see it as squarely of differentiator N a.
You know a win rate increase and I think the roadmap that we have with SVP in the Digitization is John Rolls out with his team's you know updates every six to eight weeks. It's it's getting your data sooner upgraded every six to eight weeks John do you want to talk a little bit about some of the roadmap that you're seeing on S. D. P.
Yeah, absolutely and Tim one of the things I I'm pretty highlight is a majority of a roadmap features nah shake I mean directly from our customers and prospects, which is really great to see these items that we kind of generating internally. So that's been really really good. We're also using S. E P very heavily internally, helping us with managing our own data send that portfolio.
I'm looking for ways to kind of further optimize huh, even if we look at what's been going on with C. V 19, just some of the real time day do we have on kind of personnel movement inside the data center, it's been really essentially I'm going to managing all my plan throughout the day to send the in general if I look through the next couple of quotas was seen a lot of interesting customers in kind of ways that they can you.
Use all platform to the integrate into their own platform. So we've seen a lot of uptick in customers using the a P. I N fully integrating kind of a QTS platform into their own tools like service now and Salesforce, which isn't flipping a couple of the key integrations that would bill over the the last couple of years.
Okay, Great. Thanks, and then says maybe I'll follow up on the on the pricing that sounds sounds like it's been been pretty strong just help us of course, I have a little bit how much.
Do you think is mix for you how much you'd think is industry.
And and dynamics and how much do you think is just maybe the strength of a portfolio. Maybe you can kind of of course that out for us. Thank you.
Well I mean as far as pricing pricing is always a competitive conversation, but it has never been our objective to to be a low cost provider. We just deliver too much of a premium service, whether it's represented by our Ah leading a M. P. S scores for customer engagement or whether it is our technology.
One of the benefits is if you invest in innovate in your business and you deliver world-class service the conversation around prices always how to be competitive, but it's not about the leading candidate of how to put ourselves in a position of selling by happened to be a low cost provider. It's never been our dynamic. So we continue to feel can.
Assistant it's about the right locations, it's about innovation, that's about delivering world-class service and we continue to feel good about our load up mid single digit type of <unk> renewal rate increases. So it's just been good consistency in our business.
Okay. Thank you.
It's kind of a nice person to it it comes from Kobe.
With college.
Oh.
Great. Thank you I was wondering can you comment on your expectations for enterprise demand.
In the back half of the our our our checkbook suggested that.
Slowed down towards the end of the second quarter, and we'll stouffer than a third quarters wondering if you're seeing the same thing also I was wondering if you can give us a dollar amount that came from Heidbreder enterprise.
Leasing specifically in the second quite thank you typically talk about six to 8 million dollar.
Target Bogey and then my second question I'm, just curious what your thoughts on our potentially expanding into new markets, particularly in the U S based on that.
The men conversations you're having with customers and where they're looking to go in in particular, the the Denver market. Thank you.
Thanks called me this Chad enterprise demand second half year, I think we're gonna see it pretty good contingent Ah Ah consistency on that there are certainly industries that have a long gated sales cycles and focused on a different aspects of their businesses and Jeff's mentioned that in some of the areas oil and gas.
That's in hotel and airlines and those type of things and obviously, you're gonna see a long <unk>, but there are certainly for every one of those people that are continuing to accelerate digitization and Ah and the path ahead to get the clouds. So I I think.
The enterprise demand will be consistent for the second half of the year I think.
Probably biggest differentiator for us as usual, we've got a lot of diversification, whether it's our hyperscale are hybrid Colo our federal team, we feel like we're going to have a consistent ability to put the right. The right deals together for the second half the year, So where we feel it's gonna be consistent and we think the fast start to the you're only helps at.
New market Wise, you know one thing that's nice as a few years ago, we took a big step and and move some markets into the portfolio.
Really transition didn't helped us continue to grow Ashburn to stand out example, monasticism example.
We brought you know Chicago on Hillsborough is coming online, we really look at that map in the U S and say it really is strong where we need to be at and we always are looking and we're always be thoughtful in a customer engagement or an infrastructure rich opportunity, but right now we feel really.
Good about the roadmap here in the U S.
Hey, Colby.
And split.
You're right on the hybrid side sort of six to eight typically is where we've been in the quarter, we were within that range and actually.
Even towards the higher and if not higher than that so the hybrid business was still very strong.
[noise] diversification that model, obviously with the federal on top of that are in the past with Hyperscale hopes you get to some of those higher numbers, but we've seen strengthening hybrid as as <unk> as we mentioned earlier a lot of that's coming from our existing customer.
<unk> continuing to grow to check point, we're still seems in new enterprise logos as well at the tougher business to predict based on the diversification. We've got we still have confidence with our visibility amazing guidance.
The numbers.
Thank you.
Thank you.
Hello. This question today it comes from Earth <unk> Wells Fargo. Please go ahead.
Alright, thanks for taking the question. So I'm wondering on the Hyperscale side, you guys have talked about kind of the value of incumbency. So I think you're trapped about 30 accounts here. So how can any of those are existing customers currently and as you kind of look at your pipeline you know how much do you see in Hyperscale based on expansion from those customers versus opportunities to kind of when.
New logos within that vertical that to grow over time.
Eric This Chad thank you.
The good news is it's it <unk> Hyperscale team has seen a good balance in both I I would say about half of the tracking top 30 or existing incumbents and it is much easier contractually and just you know the ability to kind of continued to mind in those.
<unk> for growth, but we're also seeing a good balance with some of these new locations coming online and expansion capabilities Ah Ah to talk to a new customer. So it's a good balance on both and we continue to forecast and feel that the consistency of that business, especially with our target on one to three is going to be very consistent rely.
<unk>.
Great. Thanks, and one for Jeff quickly given you have about almost 600 billion a undrawn equity. So it would kind of appear that you're capex, there's going to remain fairly elevated even beyond this year. So it gets to just give them what you see in the pipeline. There are there any kind of broad guideposts, you can provide and how we should think about capital intensity even beyond.
2020.
Sure Eric So what part of why you saw the elevated capital. This year. There's a couple of aspects. One is just the the strong leafing across our portfolio and so.
You should think about that is success based capital. That's just meeting the needs of customers as as as they're building their business. She had had mentioned earlier, we are bringing online more power of this year 2020, and our plan than our prior three years in aggregate and so.
Really just putting that capital out to meet the accelerated growth in the business on top of that in 2020, we've got new to new facilities between our new building in Atlanta and in Hillsboro, They were bringing online so that drives additional capital as you think about 2021, we are going to be building out the new building in ashburn. So you'll have some help heavier capital there the rest of the capitals can be based on <unk>.
[noise] ability and momentum that we've got for leasing Ah. It's early for us to start putting that numbers on that but but we continue have confidence in the growth and acceleration in the business.
Thank you.
Thank you.
Alright next question today it comes with <unk> with Berber. Please go ahead.
Yeah good morning.
On the federal I was wondering it the election won't have any effect on those sales cycles.
And then just one on ebay Walmart games, just kind of wondering where I think guideposts go out to 2020, and you know what leverage you have to pull from margin to continue to try and.
It sounded like some of that Cove, it cost dates won't be permanent.
Yeah. This chat on the federal one I don't I don't forecast any big change I think.
The federal entities are slow movers, but once they start moving I think they're fairly consistent across the administration's no matter kind of what happens with that so I I feel like that's not gonna be any big thing I think Cove. It has had a little bit of an impact on their efficiency in their timing of some of that type.
[noise] work, but even that we've been able to navigate in work through that so I think it's just going to continue to kind of be consistent and quarters ahead, and it'll still be lumpy, Jeff do you want to take the sure from from a margin standpoint at the midpoint of our revised guidance. We're looking at EBITDA margins, it's just below 54%.
Exactly right there have been a couple of impact on that one is the $2 million to $3 million of expenses coming out of low cost of power and and Covid related savings that should reverse next year.
And so if you back those expenses.
Or those savings out of the year that brings your normalized Mark you down a little bit. The other aspect is with a low cost of power, we probably have about 1 million and a half of lower revenue from power recoveries now that's zero margin so that million a half of revenue doesn't impact EBITDA at all but that also impacts your effective.
Margin. So when you adjust and you sort of add a million and a half of revenue from normalized power.
Yeah, you add about two and a half a expenses you'd get a normalized margin in 2020.
Just over 53% Ah, we expect that would be operating leverage in the business will enable us to continue to grow our margins, we targeted about 50 basis points and marching grow with a year and so we do expect going into 2021, and you'll see more of an improvement over that normalized 53%.
And then the next question today kosher Simon's website. It's Morganstanley. Please go ahead.
Thank you very much good morning, I Wonder if you could talk to the competitive environment. It's nice to see the Roy see on the Police's you signed you're doing a lot in Ashburn has there been any change and the last few months either.
Just you two I'm trying to supply coming into balance or maybe maybe some private equity getting called back give them. Some of the cove. It of shoes and I did want to follow up you said there was some modest logistical delays continuing maybe you could just fresh that out a little bit more it doesn't seem like I told them back to your capex, but what are the particular area. So you're focused on there.
Yeah. Thanks, So I made a shed.
Kind of been environment really depends on which location and area, but you know if you take aspirin for example, when we open our Ashburn facility a couple of years ago. It was probably at the height of concern of competitive and you know to be approaching having that facility full by the end of this year one of the reasons, we're going to.
Deliver a new facility in Ashburn and 21, it's just it just shows that you know even and competitive environments. When you have the right products that right innovation the right track record.
You can accomplish the work ahead and achieve you return on investment capital goals. So we're just we're being consistent Ah, we don't see any big change in that and and the competitive dynamic does depending on which location, but in most of them. We've seen you know fairly stable behavior and haven't.
That to change even with some of the entry into private equity that's had an interest in the space over the last a year or so.
<unk> on timelines or logistical delays our team if if that's a question about construction, we've seen modest logistical delays, but we've been able to meet each of our objectives and target that's a testament to.
To the QTS development team, Mr <unk>, and and the leadership, they're really make sure that we deliver what the customers expect an.
We've had we've had changes just like everybody has about the process and procedures on the job sites, but the teams have done a fabulous job of working through that keeping people healthy as a top priority and accomplishing our goals and we expect that to continue.
[noise] supply chain is okay.
Supply chain has been resilient and.
We got out ahead of that quite a bit at the beginning of of the pandemic, but but I would even say that that was just a cautionary tale most of supply chain has been able to kick back into gear.
And and deliver what they need to at the right time. So we've seen good consistency across the supply chain and don't expect that to change.
Alright. Thanks.
I Dunno next question today it comes with a Orange one would be M. O capital. Please go ahead.
Thanks, you mentioned, one of the challenges and adding new hybrid customers in this environment.
Have you seen any improvement as you can do through teach you in it and to the early parts this corner.
I'm, sorry, I'm not sure if I heard the question right difficulty in a hybrid.
And adding new new hybrid customers have you seen any improvement moving to me the second quarter and into the early parts of the third of course.
I think we did see 70% of that business come from existing clients I expect that'll moderate over the rest of this year as people.
Get back to more of a business and execution as normal SDP helps in that conversation differentiation helps the right location cell world-class customer service helps so we expect that but I mean, it's also part of just it's great to have customers that need to continue to grow with us. So I would expect that in moderating in.
Probably ship back more to a 50 50 type of environment that we've seen historically.
And then just on churn it it's come in less than expected to start the year.
What's driving that and do you think these are sustainable longer term trends or is it partly a function of of depend on it.
Alright, we think it's a combination of our customers love being with QTS, and and and typically don't pull out unless they're really forced to more often than not when we see churn. It's really just from from our customer that gets acquired by a larger company that has a different data center strategy that tends to be the most common factor in so.
The low chair in the first half of the year, we're very happy with you know, bringing down or guidance for the full year implies that we think that journal will continue to remain manageable for the rest of this year I think going forward. Our expectation is will probably continue and that 3% to 6% level that we've been talking to you for the last few years, we're not seeing any major shifts.
Thanks.
Oh No next question today it comes with Jonathan how can it always been capital markets. Please go ahead.
Thanks.
The.
The earlier question, maybe kind of think about whether are you seeing anymore engagement customers in terms of in person meetings in person like tours or is that pretty much. The same as it was when you had your last name is call <unk>.
Jonathan that's been pretty consistent I would say that the hyperscale and the hybrid team has done a phenomenal job of course, with John and Brent and the Digitization teams effort to completely digitized experience. So I don't see that trend desktop and in fact, I see that accelerating and with SVP and and.
Outlook that we have in the advantages. We have there were just going to continue to mind that is additional opportunities that we can take you through the full cycle and you never have to touch foot in the data center.
It's an interesting concept, but it is the future and I think digitization I'll leave the way on that.
And then on the Cobot expenses, you talked about some of the savings and has there been.
I'm going hazard to pay throughout.
Or or have that held off what what's the trend in terms of.
Late labor expense.
Related Dakota.
Ah early on we did have some accelerations and some excess pay to help families make that transition in the very difficult height of the pandemic.
Most of that has has come off and we see a normalization on that going forward.
And then finally I was just interested in M&A, whether it's asset divestitures asset recycling and some of your less active markets or Jamie financing with you with your existing partner or other parker's or perhaps even on your own balance sheets thoughts on.
You know get a growth whether it's it just the resources or additional operations and your existing footprint.
Yeah, you know great question M&A are the best discipline around M&A is just not having to do anything and we continue to have some of the best organic growth in the market and that's because of a million square foot of powered shell and infrastructure rich landbank that really powers. This platform. So we're not really outlook in of course, we always.
A thoughtful about one off assets are opportunities to do that I think piscataway is probably the best example out a few years ago. When we bought in underutilized asset and it's just done phenomenal for simple scat away.
So we always will take a look but nothing that's driven by having to do anything and will be thoughtful Jeff continues to think about capital recycling within the JV and whether it's a new opportunities to put stuff in or or optimize the portfolio. We continue to be thoughtful about how to recycle capital and optimize our return on investment.
<unk>. So those things are continuing to be focus points that we continue to look at.
Thank you very much thank you.
Alright next question comes from Michael Songs with Bank of America. Please go ahead.
Alright, good morning, Yeah. Thank you for your time.
Get a comment on the sustainability cross connect growth and maybe some of the drivers.
Applications.
Capacity need your scene, how are you thinking about that longer term.
John you want to take that.
Yeah, absolutely Chad M. Michael on the cross can that growth, let's see we're very pleased with the results that thank you seem really a couple of things and that makes you want seeing customers still kind of having increase usage of this is to collect connect clap clap homes. Another south offerings. We're also taken a lot of benefit from being awesome. It's been like they're all platform with technology.
Like the switchboard off that you'll cross Tonight platform, which is really been growing tremendously walling like that that pool across the next and that'll ask customers to not unreached to class, but also other partners. Another service is within the QTS platform. So very pleased with that.
And what's the best in the virtual birth instead of Doctor that's coming out to go with you were saying.
We haven't broke does at this time around Michael but we are seeing again continued growth and the bird. So I'd say virtual is growing this foster right and the physical cost connects within that pocket as overall growth.
Great. Thank you very much thank you.
Oh. The next question Tonight comes with Fries root bandwidth Raymond James. Please go ahead.
Great. Thank you just a quick question on the guidance that you know the run right in the first half for F. F O kind of gets as low end of the guide what would have to happen to get to to the mid point or better and then a follow up question you talk about getting to 100% renewable in a few years can you quantify what kind of cost savings you <unk>.
Get through that if any thanks.
Yes, Frank in terms of where we end up within the range I mean, we're comfortable with the range is there for a reason the things that we need to happen to keep us towards the high end is continuing to accelerate the business, but frankly, the bigger immediate impact because leasing often has a lag is as it relates to serve churn and downgrade from cussed.
And to the extent that we continue to see lower churn levels that obviously will helping year.
Beyond that is just continue to execute and drive the business, yeah and on the sustainability power.
I wouldn't categorize that you can go 100 per cent and renewable unnecessarily save a bunch of money I do think it's a commitment that we've made on our sustainability and ESG initiatives to be.
[noise] powered by renewable and.
And have that part of the court platform by 2025.
I think what you should expect on that is what we're doing is working hard to maintain.
At least the cost basis that we have and some of the very competitive.
Economy is that we buy power and and still be able to kind of whole pricing and be renewable at the same time and it's going to take a number of years to accomplish that goal, but we're seeing good early indications in a few of the sites that we've already been able to.
To cut renewable power transactions, we've been able to hold pricing or lower it <unk>.
Slightly and so that's really the theme that you should be thinking about it.
Making the platform sustainable by being renewable powered but also maintaining Ah Ah cost basis, that's consistent with what customers who seemed previously which is really the objective.
Okay, great. Thank you.
And the next person who that it comes from Richard show is there anything Morehead and please go ahead.
Just to clarify it seems like you know you've been doing $20 million of leasing the past three quarters has anything changed in the past few weeks or are you just kind of being a little conservatives are things might change.
One of one Paul.
<unk>.
It is just a level of consistency and conservatives.
There is a a worldwide pandemic, that's moving through the world and we want to be able to deliver and be consistent with that so there's always a level of caution.
In these type of analysis, but I think Jeff's point earlier is the one probably.
Best taken which is you know our model works to be disciplined and to deliver our 15, plus a million dollars per quarter and that's kind of that's what makes the model work and it's consistent and reliable on our targets.
Anything that we do in excess of that is gonna be based on acceleration within you know hyperscale or hybrid and will continue to be disciplined on the return on invested capital in the deals that we think work for the platform.
And my follow up to that turns been running lower the normal or at a very low rate what kind of visibility <unk> into turn and is that the biggest issue that you worry about over the next call at six months.
No I think it's just it's been consistent in in the platform for a long time and I don't think we're looking for anything you know second half of the year to be anything dramatically different.
And.
We felt comfortable enough to lower.
Okay, great. Thank you.
Thank you.
And the next question today It comes from Saturday boundary with Credit Suisse. Please go ahead.
Hi, Thank you very much.
Couple of question. The first one is for your address federal in Highwood cold location when traction that you've had in the quarter are they are your customers going malty site multimarket or just deploying into multiple locations at a time and is that partially why you're starting to see the cross connect an IP bandwidth signing start to increase are those too.
[noise] data points are those trends aligned.
I would say that we have had some deployments and multiple sites, but I I wouldn't say that it's the majority of the customers. It's always appealing to customers have multiple options, but usually customers take on deployments and one first and then think about Multicide deployment. Later, so I don't think there's any direct correlation of that I think.
Or cross connect business just continues to move to the next generation across connects and Fortunately, John and Brent and the team have worked through kind of what we think is the next generation of the software define cross connects switchboards, leading the way for US as we continue to have the theme around connect to cloud, which we think is the.
<unk> if the first generation was connected carrier, we think the future of this is connected cloud and we're just fortunate enough to have some large cloud deployments in our Mega data centers and we're going to continue to use that optimization through SDP to really drive. The next generation of what we think is the future Virtualized Cross connects and we're happy to be <unk>.
[noise] during with some of the leaders in the industrial on that.
Got it. Thank you for that and then I just want a shift over to the European region, a little bit one 220th was considered believe it or not a lighter leasing quarter for the entire industry in Europe, but then that should have turned into Q and potentially start to really stabilize three Q for cute.
Can you give us maybe an idea of how these things are activity is going for you guys in Europe and what the expectation is the 32142.
Yeah, I would say that.
Remind you that really we have about 30 megawatts in.
The Netherlands and.
One of those is largely a co location facility and grown again, which is done remarkably well retained its customers and continues to.
<unk> steady co location growth in that facility.
And we're really excited to get our Hyperscale facility open.
Later this year. So we continue to feel good about that market to your point there are.
Pretty good uptick in Europe that you saw on Q1, and we're just going to be excited to be in the game second half of 2020 with some opportunities there in our facility and M. Shopping. So we'll get we'll get kind of more clarity is the year unfolds on that but we are very excited to have.
Close to 20 megawatts that'll come online before the end of the year and M shelving.
My next question today comes from Eric Rasmussen, Let's do four please go ahead.
Great. Thank you taken of questions.
Back to the federal business you had a nice leave so anything there announcement, but you also I think mentioned larger federal opportunities are starting to materialize I just wanted to understand what that meant does that sort of the size of those types of deals. So we could potentially see in excess of that five megawatt or is it just.
The volume you're starting to see more types of deals coming to you guys.
Eric This chat I I think it's probably just more material opportunities I I do think three to five megawatts is a pretty consistent block.
That we're seeing kind of federal interest in and I think the opportunity might be as we might just see a few more of those as as the quarters progress.
Okay, then maybe.
My follow up on Richmond Ah with regards to that facility can you just give us an update on any sort of momentum you're seeing that would lead to better leasing fundamentals, giving you have more capacity available.
Yeah.
The midst of bring in some space online there the hyper <unk> the hybrid team was virtually outer space what their success. There enrichment, we expect to bring some hyperscale and Highbred space online before the end of the year, they're enrichment, which will help kind of give give our team's the right.
[noise] inventory again or Hyperscale neighbors continued to invest heavily in that Richmond location and I think the more recent announcement that we continue to talk about with the subsea cables breaking out in the Richmond facility and the quarters ahead are only going to strengthen the opportunity.
Richmond to have a very differentiated conversation around connectivity and latency to some of the most important subsea cables in the world. So it's going to take some time over the next.
Few quarters.
Or a few years to continue to optimize that opportunity in Richmond, but the scale of that asset.
The runway we have for both Highbred and Hyperscale makes us feel long-term very excited about the opportunity we can continue to monetize enrichment.
And the next question today sounds awesome, well this long with Georgia right.
Hey, guys. Thanks for taking the question.
One of them large and I mean, as we look at some of the progress this quarter and then think about baby on a go forward basis, some more tailwind for things like S. E P.
Churn.
You know I'm just wondering you know that's 50 basis point improvement annually that you've talked about historically does that still apply or is there room for more upside.
Factoring in the items I just mentioned thanks.
Sure Mad I mean at 50 basis points, we think on a normalized basis continues to demonstrate the operating leverage that we're seeing in the business.
You could have periods like in like in 2020, where the increases obviously higher than that but there was some specific things that drove that.
And you could decent periods, where it's a little bit lower if you are coming off of a period like 2020, where you've got some of those benefits, but in general 50 basis point of margin improvement.
Per year is what we're targeting internally.
And today's final question transfer <unk> that'll do it with mustard.
Let's go ahead.
Hi, Thanks for putting me in guys.
You've highlighted the increase in interest for S. D. P. Since the pandemic Kid have you observed any other noteworthy changes in one enterprise customers are interested in they're asking for private atrophies are focusing on types of architecture is that we can deploy anything like that over the past couple of quarters.
Yeah Nick.
Remote hands and is there certainly a.
A common theme that continues to see increase.
Year over year about 40% bandwidth upgrades year over year about 85%.
Just think that if there's ever been a time to talk about the value of a software to find data center.
And a service delivery platform that can deliver your data real time.
With remote work now the new centerpiece for going forward.
A powerful time to tell that story in the industry and.
I think that access and that transparency is unprecedented in customers are engaging.
Okay.
And maybe one quick one for Jeff It looks like straight-line revenue jumped quite a bit and quarter. I know you don't officially guide to it but can you give us a sense of how that's like little involved in the coming quarters, given somebody the larger contract she'll be turn it up.
Sure I think you'll see it at these levels and potentially continue to increase a bit the extent that you see more larger deals, which both are both hyperscale and federal tend to be over longer periods of time with escalators and so.
If you're modeling in more hyperscale or more federal you should be assuming that you'll see some more straight-line coming on with that at the same time as we deliver.
And and continue to accelerate with these customers that moderates too.
Okay, Alright, thank you boats.
Thank you.
Alright, ladies and gentlemen. This includes the question of extra sauce, and I'd like to turn the conference black or over the tried Williamsburg refund horrible.
Well I want to thank everybody for joining any today I want to thank our QTS or is that continue to empower and make reality, our business and our service to others.
Wish everyone safety and health in the days ahead, and we'll talk to your next quarter. Thank you.
Okay. Thank you Sir today's conference Fries I'll conclude it only thank you all for attending today's presentation, you made out of some extra lines and have a wonderful day.