Q3 2020 QTS Realty Trust Inc Earnings Call
Good morning, and welcome to the Q2, EPS Realty Trust third quarter earnings Conference call.
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I would now like to turn the call them. So we're just even Douglas <unk> Investor Relations for Q2 hours. Please go ahead, Sir Thank you operator, Hello, everyone and welcome acute yes. Its third quarter 2020 earnings conference call I'm, Stephen Douglas head of Investor Relations acute, yes, and I'm joined today by Chad Williams, our chairman and Chief Executive Officer, and Jeff Berson, Our Chief Financial Officer.
We also joined by additional members of our executive team, who are participating in Q1 <unk> earnings.
Our earnings release and supplemental financial information are posted in the Investor Relations section of our web site. We also provided slides and made them available with the webcast at <unk> and on our web site to make it easier to follow our 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 to the effects of the ongoing COVID-19 pandemic as described in our SEC filings and actual future results may vary materially forward looking statements in the press release that we issued yesterday along.
Our remarks today are made as of today, we undertake no duty to update them as actual events unfold.
Today's remarks also include certain non-GAAP measures, including Hawaii, FFO operating FFO adjusted operating FFO monthly recurring revenue ROI see EBITDA Ari and adjusted EBITDA.
I refer you to our press release that we issued yesterday and our periodic reports furnished or filed with the FCC for further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results and now I'll turn the call over to Chad.
Thanks, Stephen Hello, and welcome to <unk> third quarter 2020 earnings call.
Turning to slide three Cuti EPS delivered a strong performance during the quarter, including one of the strongest quarters I've signed leasing activity and financial performance. It gives us confidence to increase our financial outlook for the second time this year.
Well the pandemic continues to impact nearly every industry to some extent, we have continued to see customer payment trends approaching more normalized levels and our development activity remains on track.
Overall customer demand remains robust and broad based across our target customer verticals supporting consistent growth in our key financial metrics.
During the third quarter Q T. S generated total revenue and adjusted EBITDA of approximately 138 million and 76 million, respectively, representing year over year growth of approximately 10 and 21%.
Our adjusted EBITDA margin during the third quarter of 2020 was 55.2% representing year over year margin expansion of approximately 490 basis points, which reflects continued operating leverage as our business scales combined with the benefit we discussed last quarter from lower utility cost in corporate travel expenses as well.
So on the pandemic.
The benefit we recognized from these expenses during the third quarter was approximately $1 million, which is consistent with the expectations. We laid out last quarter for full year cost benefit of approximately $2 million to $3 million.
For the third quarter, we delivered on what that FFO per share of 70 cents, which represents approximately 8% year over year growth, reflecting our strong revenue and adjusted EBITDA performance in the quarter combined with our continued focus on capital efficiency.
Moving on to slide four our performance in Q3 included contributions from each of our customer verticals I break co location Hyperscale and federal.
We believe the diversity of our sources of growth provides the opportunity to maximize our risk adjusted return on invested capital and reduce this quarter to quarter volatility, while enabling our business to grow effectively through a variety of industry and economic cycles.
Within these target customer verticals, we continue to successfully leverage our core differentiators to accelerate our market share. These.
These differentiators in crude include leadership in sustainability initiatives cost advantage Mega scale infrastructure operational maturity and track record in our federal business and our continued strong commitment to a fully digitized premium customer experience through Q T. S software defined data center platform.
Or SPP.
Our hybrid co location business, which represents approximately two thirds of our annual rent is diversified across enterprise and fortune 1000 customers from a variety of industry verticals and continues to deliver leasing performance quarter to quarter and a high single digit million range.
This business is critical in driving higher return on invested capital across our platform with greater diversification and provides a healthy and consistent floor for leasing performance in any given quarter.
Our consistent high grade Colocation business is complemented by our Hyperscale and federal business, which provides opportunities to participate in select strategic growth acceleration opportunities.
Although these opportunities tend to have longer sales cycles, then our hybrid business. The site in term of the Hyperscale in federal business provides an attractive complementary value creation opportunity for Ts.
Next on slide five during the third quarter Q T S signed new and modified leases, representing approximately 26 million of incremental annualized rent, which represents the second highest leasing quarter in our company's history.
Our third quarter leasing performance was somewhat unique in that we experienced an acceleration in leasing volume in both our hyperscale and federal business combined with the continued steady performance within a hybrid co location.
Continued strength in our leasing performance, resulting in backlog of signed but not yet commenced annualized recurring revenue of approximately 131 million at the end of the quarter up approximately 17% quarter over quarter adjusted for the effects of revenue, which had been recognized me a straight line rent are.
Backlog as of the end of the third quarter was approximately 77 million, which is up 21% sequentially. This.
This level of backlog provides strong visibility into our future performance and materially de risk our development activity. We remain pleased with the momentum we continue to see.
And build for our sales engine over.
Over the past year, our trailing 12 month average net leasing has increased approximately 60%, while our book, but not built backlog has grown by over 60%, which represent a tremendous performance considering the economic backdrop and further demonstrates the differentiation of Q2 EPS This platform.
On top of the acceleration, we experienced in our Hyperscale and federal verticals during the third quarter. Our hybrid co location vertical continues to drive steady growth in our business during the third quarter pricing on installed base, which is more weighted towards our enterprise customers remain healthy with a space renewal rates up 1.8.
Or said, which is consistent with our general expectations of rates increasing in the low to mid single digits. In addition year to date churn up 2.9% remains consistent with our expectations and full year guidance of 3% to 5%, which was already reduced from our initial guidance for the year, a 3% to 6% arch.
During the quarter of 1.7% represented an increase quarter over quarter. However, this was largely driven by timing as customers attrition in the first half of the year generally trended better than initially anticipated with some churn events getting pushed from the first half into the second half of the year.
Moving on to slide six this quarter's leasing performance included several multi megawatt deal signed in Hyperscale and the federal business, starting with Hyperscale, which contributed approximately 50% of our quarterly signed leasing activity, we signed several larger leases with existing strategic hyperscale tenants further demonstrating the importance.
Porton seven incumbency with Hyperscale customers, our third quarter leasing results included an incremental eight megawatt expansion in our new Atlanta data center with a large hyperscale customer, including this new commitment. We've now pre leased more than 24 megawatts and the new Atlanta facility, which officially opened its first phase three.
In the third quarter ultra.
Ultimately the new site is expected to support 72 megawatts of power capacity upon full stabilization.
Q2, EPS remains the well established market leader in Atlanta, having served the market through our Atlanta Metro and Swanee data centers for over 10 years Qt EPS is competitive advantages in Atlanta market include strong operating leverage across our more than 1 million square feet a capacity currently in operation the ability to offer customers.
The lowest cost of power in the market through our dual sub stations and large embedded customer base of over 500 customers. We are pleased with the strong level of preleasing in the site and look forward to extending our market leadership position.
Moving now to Richmond, we signed an incremental three and a half megawatt lease with one of the large largest customers of Hyperscale data center capacity in the industry Q2, EPS assigned its first lease, but this customer and Fort worth in early 2019. This customer since expanded into four additional Q.T.S. sites and we look forward to continuing to.
Support the continued growth in their business.
Next within federal we signed an approximately five megawatt lease with the Hyperscale customer supporting the federal government. This is Q T. S. First signed lease with this customer representing an incremental source of potential growth in the future.
This initial deployment demonstrates the continued momentum were seeing in the federal vertical as we've discussed in the past due to the unique security requirements for this customer base and higher barriers to entry federal deployments represent a unique value creation opportunity for Q2, EPS. We remain encouraged by the federal momentum we see building.
In our funnel and look forward to continued growth in this unique segment of the market.
Overall, we are pleased with the successful execution of our business plan in the third quarter across each of our target customer verticals. Our differentiation is driving increased win rates and leasing activity and positioning our business for continued growth and performance I.
Against a volatile economic backdrop, the consistency of our results is something we had Q Ts are proud of and we look forward to maintaining our momentum and close out the year strong.
With that I'll turn it over to Jeff Berson, our Chief Financial Officer, Jeff.
Thanks, Chad and good morning.
Turning to slide eight I'd like to begin by reviewing Qt EPS is recent debt capital markets activity since the end of the second quarter.
In early October acuity has completed a successful 500 million dollar offering of eight year senior unsecured notes in a private offering the offering was upsized from an initial side, the 400 million and priced at three and 78%. This represents nearly 100 basis points inside our existing high yield bonds, reflecting the continued improvement in Q2 EPS is.
Credit profile and consistent performance.
Net proceeds from the offering were initially used to repay a portion of the amount outstanding under Q2, EPS is unsecured revolving credit facility.
Subsequently last week, Keith Yes provided notice of our intent to use the corresponding availability under the revolver to call our $400 million of outstanding for three quarters senior unsecured notes due 2025 at the first call date of November 16th 2020. This.
This transaction successfully extends our debt maturities, while locking in historically attractive rates to further support our ongoing development activity.
Additionally on October 16th Qt has completed a new $250 million term loan with a five year maturity. We believe this represents the first five year term loan completed by a public week since the onset of the pandemic earlier this year.
The applicable spread on the new term loan is generally consistent with the pricing acute yes, it existing credit facility, which was completed in late 2019.
Including the new term loan and high yield notes and factoring in the repayment of Q2 EPS is existing high yield notes in mid November over the last 12 months Q2, EPS has successfully extended its weighted average debt maturity by nearly two years to approximately five and a half years and reduced its weighted average cost of debt by approximately 50 basis points to a.
Approximately 3.1% as of September Thirtyth, 2020, including a series of interest rate swap agreements.
Lastly in early September Q2, EPS is pleased to announce that Moodys upgraded Qt EPS is credit rating by one notch to be Athree key priority for Q2, EPS is achieving an investment grade rating over the next few years.
We anticipate continued improvement in our credit profile and ratings to ongoing growth in the scale and diversification of our platform conservative balance sheet management and consistent operating performance, even admit a volatile economic backdrop.
Now moving to our equity funding activity on slide nine.
As of our Q2 earnings release on July 27, Q2, EPS had access to approximately $585 million of net proceeds to forward stock issuances.
Subsequent to our second quarter 2020 earnings call through our ATM program equity representing approximately $23 million of net proceeds we sold on a forward basis. In addition, during the third quarter acute settled approximately 2.9 million shares the forward equity for net proceeds of approximately $152 million to support our.
Ongoing development activity.
This resulted in net proceeds to forward stock issuances available the Qt EPS of approximately $456 million as of yesterday's earnings release.
As we've discussed in recent quarters, given continued volatility across capital markets combined with our accelerating leasing momentum we expect to maintain a proactive approach to prefunding the capital needs in our business three to four quarters, where more in advance with.
With capital funding needs that are currently prefunded into the middle of next year combined with continued growth in our booked not billed backlog. We believe our future performing is materially de risked which positions us well to continue to deliver consistent operating results.
Next on slide 10, I'd like to review, our current balance sheet and liquidity position.
As of the end in the third quarter pro forma for our recent high yield offering and incremental term loan and assuming the repayment of a portion of our unsecured revolving credit facility and refinancing of our existing for three quarters high yield notes in November we had total available liquidity of approximately $1.3 billion, including the $456 million.
The available forward equity proceeds.
Also including these pro forma effect, we currently have no significant debt maturities until 2023 and beyond and approximately 75% of our indebtedness is subject to a fixed rate, including a series of interest rate swap agreements.
We ended the quarter with pro forma leverage of approximately 4.1 times net debt to annualized adjusted EBITDA, including available forward equity proceeds.
Excluding forward equity proceeds our leverage at the end of the third quarter was approximately 5.6 times.
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, we remain comfortable operating the business at this leverage level, considering the size of our booked not billed backlog and associated pre leased development in it.
Mission to de risked equity funding.
Next on Slide 11, we are revising our 2020 financial guidance to reflect year to date outperformance, our updated capital expenditure outlook and our expectation of performance for the balance of 2020.
Through the third quarter, we've continued to outperform our initial expectations for recurring revenue due to strong leasing activity year to date as a result, we're revising our revenue guidance range for 2022 between 531 million and $537 million, which represents an increase of $4 million at the midpoint relative to our prior.
Outlook.
Due to continued outperformance of recurring revenue and successful cost management, we are again, raising the midpoint of our adjusted EBITDA guidance for 2020 to a range of 288 million to $293 million up from 280 million to 290 million previously.
At the midpoint, our revised guidance range reflects an adjusted EBITDA margin of 54.4%, representing approximately 230 basis points of year over year margin expansion.
As a reminder, our current outlook includes a full year aggregate benefit of approximately $2 million to $3 million relative to lower than expected corporate travel and utility expenses as a result of the ongoing effects of COVID-19 that we discussed last quarter.
While these reduced costs have increased our adjusted EBITDA margin performance in 2020, we would expect these costs to return to a more normalized level in 2021, assuming koby 19 related disruption begins to subside.
However, even excluding these benefits our updated adjusted EBITDA margin guidance still represents more than 100 basis points of year over year margin expansion, reflecting continued operating leverage in our platform.
Moving to Capex due to the strength of our booked not billed backlog, resulting from strong signed leasing activity year to date, we are raising our capital expenditure guidance for 2020.
For the full year 2020, we now expect 2020 cash capex, excluding M&A of between 700 million and $800 million up from 650 to 750 million previously are.
Our updated Capex outlook incorporates an additional approximately 40000 square feet of raised floor capacity that we now expect to deliver and in service relative to our previous 2020 expectations, reflecting sales momentum in Richmond, Chicago, Piscataway and Hillsboro.
We have also updated our 2020 or FFO per share guidance to reflect our higher revenue and adjusted EBITDA outlook and updated capital development plan. Our updated 2020, Oh, that's AFFO per share guidance range of 275 to 283 reflects in excess of 6% growth year over year at the midpoint.
This represents an increase relative to our previous guidance range of 273 to 83 and our original guidance for the year of 269 to 23.
Now turning to slide 12, I'd like to spend a few minutes reviewing Q2 EPS is overall approach to capital allocation and.
As we discussed in the past our approach to capital allocation is directly tied to our goal of achieving consistent annual growth in FFO per share of between 5% to 9% building and managing data center is inherently a capital intensive business since the capital is deployed in some instances well before the associated revenue commences.
On a signed lease as a management team one of our primary job is to constantly reallocate and Reprioritize, our capital development to find the appropriate balance between near term and long term returns.
Additionally, our funding strategy, including use the forward equity plays a critical role in de risking our future development activity, while minimizing near term equity dilution.
While our capex expectations and associated equity funding needs have increased over the course of 2020. This is a direct result of the acceleration in site leasing activity. We've experienced as a result more than 80% of the development capital. We will have spent in 2020 is directly tied to supporting sign customer leases.
In addition, we've been successful in maintaining a strong companywide return on invested capital, which continues to represent a significant value creation spread above our cost of capital even before the material improvements to our cost of debt we executed over the past 12 months.
Due to the lag between capital that is developed in revenue commencement, we would typically expect oh AFFO per share growth to trend towards the lower end of our 5% to 9% target during years of higher capital intensity like 2020.
Despite the increase in capital deployed this year, we've still been able to achieve our AFFO per share growth within our target 5% to 9% in fact based on the midpoint of our updated FFO per share outlook for 2020, we anticipating growth of over 6%.
As we head into 2021, we're pleased with the momentum in our business in sales funnel, we believe the visibility in our backlog and expected leasing performance will again support low double digit revenue growth in 2021.
In addition, we continue to expect incremental operating leverage across our platform to drive year over year adjusted EBITDA margin expansion in 2021, adjusting for the $2 million to $3 million of coven related cost benefits in 2020 that I referenced earlier.
Based on the accelerated pace of leasing activity in 2020, and our current booked not billed backlog. We expect total cash cap ex in 2021 to be consistent with 2020 levels. This outlook reflects the efficient expansion of capacity in our existing sites. In addition to opening the previously announced new 40 plus megawatt facility.
In Ashburn in mid 2021.
Year to date, our average quarterly net leasing of approximately $23 million is more than 50% above our target level of 15 million, which directly drives our capital expenditure outlook.
In 2020, we expect to complete a total of over 60 megawatts of gross power capacity driven by accelerated leasing volume in 2019, and 2020 and 2021, we would expect to deliver a similar amount. This compares to the prior three years between 2017 and 2019 that averaged approximately a third of.
That level.
Based on a robust and largely pre leased development plans for 2021 and corresponding adjusted EBITDA growth, we remain committed to achieving year over year growth in AFFO per share within our target range of 5% to 9%, although likely at the lower end of that range in 2021 due to accelerated capital deployment expectations when it comes.
And with our dividend yield this approximate that double digit annual value creation opportunity for shareholders, while positioning our business for continued strong growth in the future as our booked not billed backlog commences.
Overall, we're pleased with the consistent performance of our platform, particularly amid the dynamic economic environment with continued strength and diversification in our leasing activity and the development plan that is fully funded into the middle of next year, we're focused on continuing to deliver consistent financial and operating results.
Ill now turn the call back over to Chad.
Thanks, Jeff I'm pleased with our execution and business performance the relative consistency of our results and the visibility into future growth further demonstrates in our view the criticality of our business in todays digitized society.
As the pace of digital transformation accelerates, we believe the growth opportunity for Q2, EPS will continue to expand and we look forward to leveraging our core differentiators to drive continued market share growth.
I'd like to thank each of our Q TSS for their continued execution and commitment to serving each other our customers and our local communities. We believe too much just given much as expected and we have a unique opportunity in the current environment to accelerate our support of our surrounding workplaces and communities.
Finally, I also would like to thank our customers and shareholders for their continued trust and confidence in Q2, EPS with that we'd be glad to take questions operator.
Thank you we will now begin the question answer session.
You asked the question, we reimbursed Star then one on a touchtone phone.
We are using a speakerphone please pick up your hands.
Pressing the keys.
Well George Your question. Please press Star then too.
Today's first question comes from Jordan Sadler with Q.
Trouble markets. Please go ahead.
Thank you and good morning, everybody so.
Wanted to start off on the acceleration of the Hyperscale business that you spoke to in your prepared remarks can you can you maybe characterize the nature.
What's driving this if you're starting to see a bit more of an acceleration that feels.
Pandemic related or is this.
More of a continued.
Result in sort of the work that you guys have put in over the past several years.
Hey, Jordan this is Chad it really as a result of the work we really haven't.
Seen any irregular behavior from the Hyperscalers again, we target one to three deals not every deal works for Q Ts.
We make sure that we're focused on you know, whereas a capital efficient for us with our powered shell inventory.
Where's the return on invested capital look attractive for us to intersect a and you know we have just a there's a good uptick in opportunity.
But it's really just normal course business I think the digitization and the plans with the clouds and how the SaaS and cloud companies continue to grow as just an attractive marketplace and we're excited to participate where we feel like we're you know where it fits for us.
Yeah.
Interesting because.
0.2 for 2021, Capex continuing to be in about the same range I think.
This year.
Curious you mentioned ROI see.
What are you achieving now.
Could you do that quite a bit.
Freescale and federal leasing in the quarter, what are you achieving termed overall returns or maybe a range of returns for the hyperscale and federal deals done in the quarter.
It depends on which market, but we feel very good about our 9% to 11% rate return and you know a number of those deals this year for us which has been very attractive it's been on the higher end of that range, because it's been where we have a strong competitive position our cost is in a in a great alignment or it doesn't mean all.
So that we havent.
Done some deals where markets are more competitive but it's.
It's just it's it we feel good about 9% to 11% range and I think the way we've talked about federal consistently as you know we it's at the higher end and in some cases exceeds the hyperscale returns. So we feel good about the return metrics and I think the best opportunities. We have as you know we have a a pace about that discipline and.
The capital efficiency it matters to us.
Thank you.
Thank you.
And our next question today comes from Jonathan Atkin with RBC capital markets. Please go ahead.
Thanks, So I wanted to kind of drill into the capex topic as well for next year and can you give us a little.
You are kind of a way to clean at roughly the directionality of Thats by how much and then the capex per megawatt given that.
You might be a different mix of phase ones versus phase two onward types builds the unit cost for the Capex would be interesting to get your perspective John.
Sure John So the Capex guidance for this year at 700 800 to your point I think we said we anticipate Capex next year in that same range or.
Now what we're very proud of is that we've we've had a history of adjusting capex based on the demand that we're seeing and and being very flexible in terms of where we move that so embedded within that seven to 800 is one a knowledge that we've got a record booked not billed backlog and so a lot of that Capex is already committed in our book.
Build in signed contracts and then secondarily continued confidence into next year that leasing will continue to support that level in terms of the timing of it again, because a lot of that is already in our current booked not billed backlog for projects that need to get delivered towards the middle of next year, you'll see that more front end loaded so.
You should think about that as you're modeling it.
And.
Jonathan on the cost per unit, we continue to kind of talk about our cost per unit at $7 million to $8 million per megawatt.
There are examples where we're going to be much more competitive than that but theres also examples where we're on the higher end of that I think the biggest thing that we've done over the last couple of years is.
Put together kind of what we call the freedom design line up in the in the systematic uniform infrastructure changes that Dave Roby in that team have made have have really helped us on speed and cost and we continue to be a feel like that's an attractive metric for us and we continue to work towards standardization across the platform.
It's really helping on efficiency of supply chain cost and speed.
On the timing of the Capex, then given the volume moves or just development capital going into the industry.
I imagine there might be competition for labor.
Competition for long lead time items.
How does that kind of play into your thinking around around the outlook for next year and the cadence of the timing yes.
It depends on which market you are but we have not had any issues with that and probably the biggest impact. This year has been the potential around the pandemic. Our teams have done a excellent job working with our partners.
To make sure that our sites are safe our people are safe and we've accomplished our goals we've delivered well.
We'll deliver or build or develop a approaching 70 megawatts of infrastructure. This year and have hit every date that we've laid out for customers, which has been important for them and important for us. So we think the impacts have kind of worked through and we think the standardization of our ability to order a product.
That can kind of ship anywhere with the standardization of Dave and the team have done is really helping us with supply chain risk also.
Thank you. Our next question comes from Eric Genco with Wells Fargo. Please go ahead.
Great. Thanks for taking the question.
Just wondering I know you still continue to talk about one to three hyperscale deals per year.
You've obviously been well above that over the last 18 months or so so.
Any update to your kind of your analog annual expectations or maybe if you.
Had been kind of targeting that vertical a little more.
On a more directly if we should expect.
That range to continue or perhaps you'll be above that in the foreseeable future and then on the federal side.
Nice to see new logo and not just wondering.
What kind of opportunity you see there.
Are there other new logos out there that you could pursue or where a lot of it be just existing expansions just don't have a great sense for what kind of your market shares and the federal vertical. So some color there would be great. Thank you. Thank you two great questions. We don't we don't feel or since a lot of pressure on trying to change the hyperscale numbers.
One to three we're going to stay very disciplined on that I think the thing that I'm. Most focused on is the balance and diversification of our business.
I love it that we get up every day with a with a business. That's a hybrid enterprise focused and gets out and works with the hundreds of hundreds and hundreds of enterprises that need you know a digitized co location product at a high level of compliance and service.
Love It that our Hyperscale team has continued to have traction in the market with their value prop.
In federal as you mentioned has been something that we've worked on for about a decade it.
It's great to see how begin source to outsource is taking traction in the federal space. It's really Oh, I think something that everybody felt like was had become at some point I'm just.
Excited that we're in a position where there's a group of partners that were working with that our challenge a challenging us to step up and help and we look forward to continuing both to expand existing ones in search for new ones.
Thank you. Thank you.
I remember.
Our next question today comes from Colby, so easily with Cowen.
Okay.
Great a few if I may can you tell us which of the.
Deals that you referenced earlier with the Triple net lease.
I mentioned already I apologize and then also on I'm. Just curious are you seeing incremental demand.
For Triple net leases and also.
Different product, but are you also seeing increased interest for shell capacity.
As opposed to the more typical turnkey just trying to get a sense where.
Where the demand trend from the Hyperscalers is going and then also you mentioned enterprise leasing.
I'm just curious what's it within that six to 8 million range.
That you referenced is your is your typical target and then one more if I could actually just sneak it in there.
I was wondering as you continue to see very strong demand you've kind of committed to this 5% to 9%.
AFFO per share.
Growth and to the extent you see an opportunity that would argue they require increased capex intensity dilution below that 5%.
On your target what is the alternative what will you do are you simply going to walk away from that.
Opportunity or is that when we should expect to see you doing more jvs. Thank you for that.
That was the best five question answer I've ever seen and so let me take it one at a time here Hey, we're going to stay disciplined on the 5% to 9%. We've got investors that have all sorts of different ranges on what their expectations, we need to be consistent it's going to.
Be something that we stay focused on to try to stay within that range.
Jvs are always an option and we'll continue to look at that we don't necessarily like to walk away from deals, but I've walked away from more deals this year than any year that we've had because we're going to stay diffs discipline on capital efficiency and return on invested capital. That's how you grow the bottom line. So we're going to stay focused on that.
Enterprise.
Opportunities within our Triple net was enrichment and do we see more of that not necessarily we do have some hyperscalers that prefer that structure I don't actually minded at all it's a it's a great structure just explain that that makes us building all of the expenses.
Have a base rent, so taxes and insurance and power and all those type of things and.
So it's just a little bit a risk off the table. So that's a great structure I'd say, probably the trend is to go away from Triple net leases not go towards him, but if somebody shows up and that's their preferred method, where we're game to do that we don't typically like to give up our powered shell inventory to some.
You know shell buyer there are hyperscalers I want to do a lot of that stuff themselves. That's just not really our model. We think that the infrastructure is going to be hard to replicate over the years to come and that shell capacity as an embedded opportunity for growth for us that strategic and most of our markets. So don't like to give that up too much. So.
Thank you Colby.
And our next question comes from Eric <unk> with Stifel. Please go ahead yeah.
Yes, thanks, and congrats on the solid execution.
Just following up maybe it gets a little more clarity on the hybrid Colo business. You had mentioned some steady performance there, but can you comment are you seeing any weakness or slowdown as we've sort of been hearing.
From other avenues.
And then potential for push outs.
For further projects in the pipeline.
I'd like to hear your thoughts there then I've a follow up yes. Thanks, Eric for save me on the Colby question I missed there the $6 million to $8 million range is consistent.
What's great is that's kind of where our hybrid business has been a continues to perform.
I would be saying that obviously, we've had more incumbency driving that 68 million range over the last couple of quarters, but.
But we are definitely seeing a little bit of uptick from enterprise on kind of.
Getting their feet underneath them on the pandemic, we havent seen any pull forward.
And we're excited about the opportunity that high breads need to get their plans figured out for 21, and we think that will be consistent ability for us to focus on it so pretty consistent its performance.
Great that sounds good and then maybe just on the federal business circling back on that.
Can you just comment on the deal pipeline and maybe just what's driving the strong leasing year to date are you seeing any changes in customer behavior.
An acceleration there maybe some comments there would be helpful. Yeah, I think the biggest thing I'd take away is federal is very hard to get to a place to do business. Because you can't do it unless you have the track record security and compliance behind it and you can't get that unless you can get a deal. So it's this perpetual circle, that's hard to get into I think that the work.
A year's worth of work is put us in a good position. We've got a lot of trust with a certain clients that have entrusted us with this important mission and service for the government and we're going to continue to build that it's very hard to predict this type of business, but we're.
We're going to continue to have as an opportunity and we're going to continue to serve our country and and our customers. The best we can.
And our next question comes from Me Cross It would burn Berger. Please go ahead.
Hey, Good morning, guys, maybe just a question on overall pricing.
This quarter, new lease pricing was a little bit below trend, even when you strip out that large hyperscale. These.
I was wondering if you could give us some color on pricing was that just because you did.
A number of larger deals.
And then if you could just also comment on current interconnect pricing helpful. Yeah, Nate on on the pricing if you really pull out that triple net we really feel like that where you know in that 440 range, which is in line with kind of historical so we think pricing is in line. It was just the nature of that cross connects continue to be a driver.
For us the automation and the SDP platform. The software defined platform that sits on top of our data centers is enabling our customers in a digitized world to intersect with this with less friction and we think thats going to continue to drive. So we continue to see the right type of trends in that area, we're adding to that network.
All the time and we're excited about that area of our business and the growth.
Okay. Thank you and then just one on EBITDA margin can you just kind of give us a guidepost for 2021 and you know what levers you have to pull to keep margins going up.
Sure Nate So if you look at the midpoint of our guidance in 2020, we're at about call. It the 54.5% we love the fact that that over 200 basis points higher than where we were last year. So clearly we're seeing some good operating leverage in the business. Some of the margin benefit in 2020 as we discussed is just from.
Some reduced expenses related to travel and power coming out of Covance at $2 million to $3 million. So if you normalize that's about 75 basis points of margin improvement in 2020 coming out of Cove. It that we expect will reverse next year.
So our expectation that is continuing to see operating leverage where we can grow our core margins by 50 basis points plus or minus so effectively if 2021 margins are in line with the 54 and a half that you saw in 2020, it's it's increasing the costs from from travel and entertainment and then off.
Operating leverage to to make up for.
And our next question comes from Michael would be.
Go ahead.
Hey, good morning, guys. Thank you for the questions first one if I could.
Let's turn benefited in 2020 from coated.
I guess, if so you know what what are your expectations for 21 incorporate maybe for an uptick in churn as some customers that may have delayed push that out in the next year.
You know Michael I think if anything this year, we've seen a little bit above have it be a backend loaded so probably some of the earlier stuff, but probably pushed into a little later in the year, which you saw the uptick but.
As we did earlier this year, we tightened the range down and that 3% to 5% we feel good about and I don't see anything in 21 that would necessarily change anything that we're seeing this year I don't I don't think there's anything that's plopping over into 21, that's necessarily any kind of a significant difference to this year.
And then one more if I could please your six facilities coming online in four key wipe bag.
You gave some initial thoughts about 2021 with growth maybe help us think about the associated operating expenses are in property operating expenses were those facilities coming online the sequencing.
During 21.
Sure Mike So in terms of some of the facilities coming online I mean, one of the things that you'll see in the expectations for Q4 is we added capex above our expectations in Q3, and some of the markets, where you see that our markets like Richmond, Oligo Piscataway and the night.
Thinking about some of those as those are not markets, where we've historically seen some of the bigger hyperscale deals and it just demonstrates the continued growth as well on the hybrid Cola side right. The the Piscataway market. The Chicago market those have been very strong enterprise markets for us and we're increasing capex associated with those markets because the growth of the enterprise business that we're seeing from an.
Opex standpoint, we feel very good that over the last couple of years as we've continued to expand the footprint moving to new facilities and new markets, which clearly takes some opex investment early on that we've maintained pretty steady margins in opex actually slightly improving and then a lot of the operating leverage is coming from DNA and we'd anticipate that going forward.
As well so definitely some pressure as you move into new markets on Opex, but but also focusing on efficiencies leveraging STP to manage the facilities.
With good capital and cost efficiencies and.
And so I'd say some of the operating leverage going forward, you'll see a little bit of that in opex, but a lot of it and DNA.
Hey, Thank you for the time guys. Thank you.
And our next question today comes.
Brett Feldman with Goldman Sachs. Please go ahead.
Yes, thanks for taking the question guys. So I mean, we've obviously had several quarters here, where you had bookings that have just been so far above.
The target you have and as you noted.
A lot of this is coming out of Hyperscale Federal and you made the point that these tend to have longer sales cycles. So I imagine earlier in the year. When you were sort of setting expectations you sort of knew with the opportunity set was in front of you and you just seem to be doing way better than that even if we adjust for a natural degree of conservatism that I'm sure you embedded in that outlook something's got to be hitting well.
Above expectations and so I guess the question is are you are you getting a higher win rate or are you just closing things more quickly did the funnel actually expand early in the year in a way that you hadn't expected I just think anything that you can offer to help us think about it would be helpful. Because modeling 50 million of book quarter bookings right now this feels way too low.
Not entirely sure what the rate base line should be going forward. Thank you.
Brett Thanks, maybe we go to 16 or 17 next year, but I mean, it's kind of a combination of all of that it's just been a we're going to base our business on where we see the consistency and reliability in our commercial enterprise business, our hybrid co location business and you're right the federal space and the Hyperscale space does not always play in.
Consistent fashion. So you may have no hyperscale or no federal in any given quarter. So you know what I, what I don't want to do is end up where we have a quarter, where the hyperscale in federal did not participate in that quarter and then everybody says on what went wrong well nothing went wrong, it's just the way that business cycles.
And we want to build a consistent and reliable base for people to build their models and be consistent on and that's really what we've tried to do and yeah. It's been a very fortunate last couple of years, we've been able to win the right type of deals with the right returns in the right markets.
But we want to build consistency going forward and we want to set the right expectations.
If you don't mind is one more follow up on this.
As noted in the last question you, obviously are going to be bringing in more inventory you can sell next year and one of the questions. We've gotten is that this increase execution risk in part because you'll be in some new markets and you have to establish yourself or does it actually.
De risk the ability to hit your bookings target because you have more inventory in new locations you can sell into your system [laughter]. It's great question, you know whats great as many of the expansions we've done or net in adjacent to our Mega scale campuses, where we already have tremendous resource you take a plan of example, I was there last week I mean, the new for.
Silver these open they booked 24 megawatts, that's a historic number for Q Ts, we've never opened a building with that type of leasing but to have the scale and operations in Atlanta. It is a de risk opportunity because we've got 500 customers now that can grow and see a very visible path Uh huh.
It's very I would say on the other side to your point, it's great that clean and tag now have opportunities to sell in Hillsboro right. So you know it adds both a feature of ability to expand in important locations important tier one markets for the future acuity EPS and it's also great to show.
Customers that are have been with us for years that embedded growth in those scale facilities, whether its Richmond, Chicago Dallas Atlanta.
It's a great it's a great combination.
And our next question comes from Richard Choe with JP Morgan. Please go ahead.
Great. Thank you just wanted to go a little bit deeper on why you were being so successful in Richmond, and then also talk about ashburn, given how competitive that market is and what makes you feel confident and putting more capital in both those places I think Greg you know Richard.
It in Ashburn, I mean last quarter. It was about 75% occupied this quarter its going to tip over 90%. So it's not that we're leaning forward. It's that we want to make sure that Clinton tag are competitive in the marketplace. Ashburn is one of the most competitive markets. I think there was some concern when we opened in ashburn in the midst of a build big up but we truly do believe.
Q Ts that were doing stuff differently, where we're delivering value to customers in a very differentiated fashion, whether its our customer engagement scores, whether it's our product offering whether it's our software that gives visibility and data management, whether its our SDP platform can for connectivity.
Those things are mattering to customers and you're seeing it show up in our business and that's not to say ashburn is not a highly competitive market and lots of people are there and have success there, but we feel that we've got a great product offering both in hyperscale in hybrid.
And we're going to continue to push on that in Richmond.
Weve owned Richmond about 10 years, it's done tremendously well I think the the brightest days for Richmond are still ahead of it and that's a pretty unique position to be and I think with the trends you know the trans Atlantic fiber now coming through that facility in Richmond is changing the communication conversation and Richmond, a degree that we've not seen before I think you're going to.
Continue to see people think about Richmond, as an alternative opportunity for growth both from a connectivity and connection to the Trans Atlantic fiber.
And also the ability to have scale power efficiency cost tax advantage in a whole bunch of other things. So I'm just glad we're positioned with a long runway in Richmond, because it's going to continue to be a builder of growth for this company for the next decade.
And one quick follow up on comments you made earlier about Capex being front end loaded for next year.
And with such a large booked not billed backlog.
Should we assume that a lot of the backlog is coming through in the middle to second half of next year or are we should we expect it to be steadier, yes.
It'll be kind of more front end loaded and throughout the middle of the year budget, yet about the capex will be more front end loaded the contracts that youre going to see start leasing up are going to be delivered towards the middle to back half of the year. So you will see the performance ramp as we deliver that that space.
And our next question today comes from Sean.
Jeremy Please go ahead Greg.
Great. Thank you very much I.
I Wonder if you could just touch on Europe for a while.
Strong growth there could you just touch on what's going on in the Netherlands, and just update us on your opportunities you've talked a lot about the organic growth opportunity. So what about inorganic either going into new markets in Europe.
Perhaps thanks.
Thank you Simon I mean, right now we're focused on our Netherland assets couldn't be more thrilled with them a brown again, it's been a continue outperformer for the portfolio, it's really the highbred co location asset, but its just its outperformed everything.
Everything that we had internally on it and we're excited to get a small a small piece of the m. shop and opened but it really opens mostly the rest of this year and to have a you know almost 20 megawatt facility Hyperscale facility. That's now been a kind of re established in re opened in will open by the end of the year the rest of.
It is it is an exciting opportunity, we feel that the growth and opportunity and Hyperscale and Europe looks good we're glad that were in the Netherlands participating in it and as we told people we're going to see our success as we build we.
We are inorganic builder of value has been our tradition.
The Netherlands is a great example of that and I think it's a huge opportunity for us. The next couple of years are really create some great shareholder value with the basis that we have in those assets and the momentum that we are.
Can participate in this at scale in the Netherlands.
Great and just a quick follow up on churn now you you gave the 3% to 5% range, but getting from 2.92 to <unk>.
Lower or higher I'm, just it's a big difference so any thoughts on does Q4 look.
Similar or better to Q3, how start going slow yeah. We're we're not looking at anything historically deferred I think it'll be consistent.
We'll end up in the range.
Okay, great. Thank you.
Our next question today comes from Jon Petersen with Jefferies. Please go ahead.
Right. Thanks.
On the on Federal I guess I'm, just curious you talked about how you've been working on this for 10 years and it's nice to see some wins.
I guess I'm curious if you'd help us characterize the demand is it something acute he asked that they collect you guys have been working on it for a while and you are finally able to convince.
A number of these deals to go through or is it on the other side of thing other side of it with the federal government.
Kind of ramping up their data center needs and then also I guess kind of along that can you kind of help us characterize how big the market is I I assume you're winning some federal deals, but I assume you're losing some deals here and there and maybe talk about why you why you lose some.
Some federal deals and when some others.
Yes, great John I mean, its the you know the efficiency of Ah you know we have been working on it for 10 years, but you have to have somebody that's willing to buy and the federal government's been working on kind of that plan really for the last decade, and I think what you're starting to see is that the realization that the biggest data creator still or one of the largest.
Peter creators in existence is the federal government the us federal government and I think that the ability for them to in source has just become unsustainable and I'm just glad that we're in a position where we can have the trust and confidence of of of integrators and companies.
That that need this solution provided to the government and.
We're winning our fair share I I don't want to speculate on all the deals that we've lost we've won our fair share and we're going to continue to do that it's a unique business.
It's a strong barrier to entry and in the in the scope of that market is big.
Okay, I guess I'm, just trying to figure out your market position within because they are not a lot of transparency here with the government side of things like are you guys are you guys, 50% of the market in terms of the deals that come out as a far less than that as a far more than that and then maybe just kind of another follow up on that it could you just remind us what the returns are on a multi.
Megawatt federal deal versus a multi megawatt wholesale hyperscale deal.
Yes.
You know the markets Big we've been successful and the returns are good.
It's it's just kind of the three points right I mean, the returns we feel good about their at the high end.
And in some cases exceed our 9% to 11% range.
You know, it's really hard to quantify the market. It's big it truly is and I think that we're going to try to put ourselves in position.
We're not going to build our corporate model based on the outsourcing in the federal government size and timing, but.
It continues to show up and we think that will be a consistent theme going forward.
John what I'd add is we can't we can't speculate on what deals others might be winning but I can tell you.
The biggest uncertainty we have when we're chasing deals also it just the ultimate government agencies ability to move forward and decision to outsource that still a real challenge and it's why the business is so unpredictable.
Our next question today comes from Frank Louthan with Raymond James. Please go ahead.
Great. Thank you can you can you talk to us a little bit about the potential to get some additional business around the jet I contract has been some conversations that thats become politicized exactly some agencies may just be going around that are you seeing any any strength. There and then can you comment on on enterprise strength any any areas, where you're seeing customer.
Densely delayed decisions or is it net on the on the inflow side customers sort of it accelerates digitization.
The wake of coated thanks.
Yes, we really haven't seen any you know huge pushes or pulls it does seem like enterprise are getting more focused on 21 planning and I think that's a good sign we're hearing that consistently across the board and remote work and Digitization of the workforce is a top priority. So I just think there is going to be a lot of things that come out.
That that that that are on People's priorities list and we're going to be in a position to help them with those priorities.
As far as a government contracts one of the things that gets a little challenging just to be.
A little more clear about this we can't really talk about the details of contracts and where they sit and what they are and who they are so I can't really talk about specific contracts or how those really play out it's really part of the the security around a federal outsourcing they don't want to integrate.
He is talking about that so it's hard to speculate but I would say that it's it's a I know people are focused externally on kind of one big contract that got in the press a lot I would characterize the stuff that we're working on as many different parts. So it's not just one.
Our next question today comes from some long with Barclays. Please go ahead.
Thank you.
Two two if I could first could you mentioned the STP a few times can you give us.
A little more color on kind of some of the metrics there and what you see.
As far as deal wins or or increased deal sizes, because because of STP and then second I just wanted to follow up again on the hybrid Colo.
More and more on the sales cycle go to market it sounds like in the quarter, you've seen a little bit more from existing customers. So what do you see the cadence of.
Kind of new logos and go to market is that is that going to be kind of.
Collided related or how do you see that the recovery on on acquiring new customers. There. Thank you yeah I'll start with the second one you know from a co Lo standpoint, we are starting to see as I mentioned earlier that enterprises are focusing on 21 objectives. We also have seen a embedded.
Gross or 50 plus percent of our customer our business comes from existing customers. We saw that probably peak in any at quarter close to 70, but we are starting to see those trends in the pipeline build that the new logo enterprise area of the business is starting to.
You know be be strong again, so I think going into 21, you will see that normalize back probably more of a 50% of our business comes from existing customers. So I think that trend is we'll get back to more of a normalized level as far as SDP goes John Greaves, and Brent had been taken on a number of those things.
In fact, John Let me, let you just take on the SDP conversations in the win rates.
Yeah, absolutely, thanks, Chad and Tim what was seen just in terms of usage.
Quarter over quarter, it's very consistent so you remember we did talk about Q2 being obviously much elevated from where we were pre togut I'd say, probably about double the usage on SDP companion.
Compared to the start of the year before Cdnineteen, what's kind of your outlook heavily so it's definitely.
Can you to rise I think weve not seen the new baseline we are seeing customers continue to embrace kind of those online transactions of Sep I know, we talked earlier about cross connects and virtual cross connects and the cool again those numbers also look very very healthy and continue to remain at the high level.
And then lastly, it certainly is a big play when we took into both enterprise and hybrid customers.
Around kind of SPP can bring to that solution as they digitize more more than more and more looking for companies that can affect them in the same way in providing data that they can digester better understand their own capacity plans et cetera.
And John I think.
From a or Tim John's point on that is it's probably one of the things that we're most encouraged about with new logos is its a strict differentiator. When you can sit down with a new enterprise customer and talk to them about the data flows that they can have in the visibility they can see and their platform. So that's another thing I feel.
Encouraged about new logos, it's just a very differentiated story.
Our next question today comes from everybody.
With credit Suisse. Please go ahead.
Hi, Thank you very much for the question.
What I wanted to know a little bit when you enter 2020, there was probably a very good pipeline of enterprise activity on coal that happened some of that got pumps it out.
As you enter 2021, it sounds like the one to three deals that you aim to sign on on average every quarter.
Is probably going to be applying more to the federal the hyperscale customers, but the first question I have is does that include enterprise customers and does not include enterprise customers do you expect that enterprise customer deals that got pushed out that are going to be signed or potentially signed a 2021 could those be big enough to really make your head.
Line bullets with major leasing activity just to give us a sense on how big the potential pipeline of enterprise activity may be at 2021 and beyond.
So couple of things you know it may surprise people, but we we played out the year in 2020 or have played out the year in 2020 with a number of our major initiatives not delaying any decisions and not necessarily accelerating so I know that the pandemic has created a lot of.
Of the system noise, but I will tell you. It's just not been a huge part of our everyday business is as <unk> as a as difficult as it has been for so many I do think beginner price pick up Clint and I were talking about that yesterday.
Continues to be encouraging on people, having a long list of things that they want to go take after how will that change the overall dynamic.
I'm not sure, but I think that we feel like between the three verticals that we have one to three hyperscale deals some federal opportunities in our core kind of engine with hybrid we feel good about the year ahead of us and I think thats. The best thing we can say.
And our next question today comes from <unk> <unk> with Deutsche Bank. Please go ahead.
Hey, guys. Thanks for getting me in.
Just two if I could first on the competitive backdrop. If you could just talk about what you're seeing in your bigger markets from both public and private peers, whether anything has changed in recent months and then secondly on the balance sheet.
Maybe for Jeff can you talk about the path to getting to investment grade over what time frame and what sort of leverage target youd like to get to over the long term. Thanks.
I'll take the first one on competition and.
We see competition, it really depends on which market even with the private and the public peers, they're not in every market in the same way at every place but.
But we get up every day, it's a very competitive business, it's going to mature and get more competitive not less competitive obviously people can tell that we're prepared for that I think thats why we feel strong about the differentiation the scale of our asset to diversity our business I mean that that's what we rely upon and that's what we're focused on each day, we feel like we can truly separate.
Our sales from the competition I think you're seeing that play out this year, Jeff you in talking with sure I'd say from a balance sheet management standpoint, where we're very excited about some of the things we've implemented implemented over the course of the last 12 months.
Out maturities materially by a couple of years, bringing down overall cost to capital from a leverage standpoint.
Actual quarter leverage in that mid to high five turns consistent with where we've been historically and we think the right level to continue to manage the business going forward. The reality is given the way that were leaning into funding the business using forward equity as well the net leverage.
At a 4.1 turns for the quarter and I think you'll continue to see more forward equity proceeds over the next few years as a way to fund the business. So a difference between that gross net leverage and net leverage I think helps us that helps us with the rating agencies and and that net leverage along with continuing scale and and consistency.
Of operations is putting us well on the path for investment investment grade within the next few years, where we're very excited about Moody's upgrade that we got about a month ago and and are working hard to make sure that that's just the beginning and we continue to see upgrades from the agencies.
With that target towards investment grade as I said hopefully coming soon.
Thank you and today's final question comes from Robert Moskow. Please go ahead.
Hey, Thanks for fitting me in one for Chad one for Jeff Yes.
Chad Youve always talked about being happy with the two thirds hybrid co Lo and one third hyperscale mix. The actually you emphasize that point responds to up to an earlier question by how much did that two thirds, one third mix shift before you got uncomfortable with having too much hyperscale exposure.
And then for Jeff how should we think about the trajectory of Mr.
Straight line revenue from here, it's obviously been well above historical levels for the past couple of quarters.
And I had to jump in more a function of.
Hyperscale leases with escalators, turning up or or initial free rent periods.
The first part of that is we have we do have.
You know two thirds in co Lo and one third in Hyperscale, but that's not really what we wake up and worry about everyday what I. What I focus on is are we doing the right deals at the right returns with the right capital allocation and those numbers can shift I mean, I'm sure Hyperscale is going to continue to grow as a percentage of our revenue and if we're doing deals that are 9% to 11% make.
Accelerate new markets or they get us open in some markets and give us an ability to put more dots on the map at you know in in a productive way. We just think the the engine together is the strongest right. We think that if you think about it as a three legged stool. We think all three legs are important fourth to stand and I don't get up necessarily.
We worried about what exact percentage are we doing the right deals in the right markets with the right capital efficiency and it's kind of fun opportunity just to kind of navigate and see where the business goes with those kind of three focuses and I'd say on the straight line.
We were absolutely delivering and and starting to build customers on some of those larger deals but at the same time, the larger hyperscale and federal deals you've seen an enormous increase in that business over the last 18 months and that's what's driven the higher straight line in terms of what's behind that it's much more long.
Term leases escalators and importantly ramps.
So it's less about free rent up front and more about the ramp that these larger deals take over time as there as they are scaling up.
For these large commitments.
Going forward, we have enthusiasm that you are going to continue to see some big Hyperscale business from US you are going to continue to see federal business from us and as a result of that we were anticipating straight line in the future that sort of in line with what you've seen this year.
And ladies and gentlemen. This concludes our question answer session I would like to turn the.
Conference back over to Chad Williams for his final remarks well.
Well. Thank you for your time and consideration and look forward to talking you next quarter and thank you.
Thank you Sir we thank you all for attending today's presentation. You may now disconnect your lines another wonderful day.