Q4 2020 QTS Realty Trust Inc Earnings Call
Good morning, and welcome to the QTS Realty Trust fourth quarter and year end 2020 earnings conference call.
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And now I'd like to turn the conference over to Stephen Douglas.
Just in relation to QTS. Please go ahead.
And operator, Hello, everyone and welcome to QTS is fourth quarter and year end 'twenty and 'twenty earnings Conference call I'm, Stephen Douglas head of Investor Relations at QTS and I'm joined today by Chad Williams, Our chairman and Chief Executive Officer, and Jeff Berson, Our Chief Financial Officer. We also are joined by additional members of our executive team, who will participate and Q&A.
Our earnings release and supplemental financial information are posted in the Investor Relations section of our website. We also provided slides and made them available with the webcast and on our website to make it easier to 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 FX and the ongoing COVID-19 pandemic as described in our SEC filings and future actual future results may vary materially.
Forward looking statements and the press release that we issued yesterday, along with our remarks today and made as of today and we undertake no duty to update them as actual events unfold.
Today's remarks also include certain non-GAAP measures, including NOI S. S L operating and SSO adjusted operating and <unk> monthly recurring revenue ROIC EBITDA already and adjusted EBITDA. We refer you to our press release, we issued yesterday and our periodic reports furnished or filed with the SEC for further information regarding our use of these non.
Non-GAAP financial measures and a reconciliation to our GAAP results and now I'll turn the call over to Chad.
Thanks, Stephen Hello, and welcome to QTS is fourth quarter and year end 2020 earnings call. We look forward to reviewing the details of the strongest bookings quarter in Q T S history.
However, before turning our attention to the fourth quarter I'd like to spend a few moments highlighting some of our key achievements during a year of exceptional performance.
Turning to slide three QTS strategy of leveraging our core differentiators across three target customer verticals continues to support consistent growth and strong return on invested capital.
For the full year 2020, QTS delivered total revenue growth year over year of approximately 12%, while adjusted EBIT growth grew approximately 20%, reflecting incremental margin expansion of approximately 340 basis points year over year.
A portion of that margin acceleration. We achieved was the result of lower utility cost and corporate travel expense as a result of the pandemic.
And these COVID-19 related cost benefits aggregated to approximately $3 million for the full year of 2020.
Consistent with our previously stated expectations, even excluding these cost benefits, we achieved margin expansion of more than 250 basis points year over year, reflecting continued operating leverage in our business and ongoing digitization and initiatives across the company.
For the year, we delivered O F F O per share growth of 8% year over year at the high end of our longer term stated target of 5% to 9% annual growth while.
While delivering strong current bottom line results. We also invested the most in our history back into the platform and 2020 to support the future growth and value creation underpinning our strong financial growth QTS reported the highest annual leasing volume in our history during 2020, which.
Was up more than 40% year over year and delivered an industry leading level of customer churn.
In addition to our strong financial and operating results. We enjoyed a number of significant achievements that reflected the strong execution of the QTS team and our differentiated platform.
During 2020, we completed the construction of over 60 megawatts of gross power capacity and direct support of our accelerating signed leasing activity, which represents more capacity delivered in the prior three years combined our development activity during the year included new datacenter construction projects.
And Atlanta, Hillsboro, and M shop, and all of which were officially opened in 2020.
In addition, we continued to support significant growth and Ashburn with our 32 megawatt site now largely sold out we look forward to bringing additional capacity and to this market. This year.
In 2020, we also extended our track record of excellence and customer service and support two.
2020 marked the fifth consecutive year that QTS has led the data center industry and customer satisfaction as measured by net promoter score or NPS and.
QTS achieved and NPS score of above 80, which was approximately double the average NPS score for the data center industry.
In addition, TTS extended its record to 12 consecutive years of five nines facility uptime performance.
Finally for the second consecutive year QTS was ranked as a global industry leader, among datacenters and sustainability by grasp the global real estate sustainability benchmark, demonstrating our commitment to the highest standards and corporate sustainability.
2020 was a strong year for QTS. These achievements in the face of the pandemic reflect of our powered by people culture and the commitment of our QTS here is to deliver world class service to our customers and industry leading value to shareholders.
Moving to slide four a key enabler of our consistent performance. During 2020 is our continued focus on innovation through technology, and Digitization of our internal and external systems.
Over the past several years under the leadership of Brent been stand and Jon Greaves, We've successfully consolidated our systems into a handful of core software platforms. This includes QTS is service delivery platform or SDP, which empowers our customers to interact with their data center infrastructure through remote environment.
And the utility of this platform accelerated amidst the pandemic as many of our customers priority shifted towards remote visibility and management capabilities of their infrastructure.
Over the course of 2020 customers reliance on STP grew significantly with increased overall usage and engagement.
During the year, new unique logins to the platform grew 20% year over year and importantly, the average session time across our active STP user base increased to more than 30 minutes during 2020 and for our top SDP users average session time grew to more than one hour, which is approximately double the engagement.
Levels, we experienced in 2019.
STP continues to emerge as QTS as primary customer interaction tool with 80 plus percent increase and total contract value of orders placed through the platform.
Throughout the year, we experienced increasing levels of demand for additional connectivity and ancillary services total connectivity revenue growth grew by more than 20% year over year and connect connectivity now represents approximately 9% of reoccurring revenue up from approximately 8% a year ago.
SDP has facilitated this acceleration with nearly 70% of the new cross connect orders today placed and fully automated through this platform.
Our focus on innovation through technology remains a core differentiator for QTS SDP is driving differentiation with our customers accelerating our win rates and supporting our premium return on invested capital and delivery.
Delivering operating efficiencies to our business the majority of new SDP feature request originate from our customers and we have a robust multiyear backlog of feature enhancements to expand our differentiation.
We believe that customers demand for remote monitoring and management capabilities will only continue to grow and we are well positioned to meet this need through our innovation technology platform.
Next onto slide five during the fourth quarter fourth quarter, QTS signed new and modified leases representing $43 million of incremental annualized revenue, which represents the single largest quarterly leasing results. We have achieved as a public company.
And nearly 70% increase relative to our prior four quarter average. This brings our full year leasing total to approximately $109 million of incremental annualized revenue representing a year over year increase of more than 40%. We are pleased to close out the year with such a strong momentum which sets.
2021, as another year of robust financial growth and performance.
The acceleration and our leasing performance resulted in a backlog of signed but not yet commenced annualized reoccurring revenue of approximately $154 million at the end of the quarter, which is up approximately 18% sequentially.
Adjusted for the effects of revenue, which have begin to recognize via straight line rent our backlog as of the end of the fourth quarter was approximately $87 million up 14% quarter over quarter. This level of backlog is the highest and our history and de risk our financial performance and development activity in 2020.
And one.
Pricing on new and modified leases signed during the fourth quarter was up approximately 4% relative to prior four quarter average, which is particularly noteworthy considering the large increase and signed leasing volume in the quarter strong pricing trends reflect a balanced mix of leasing across our target customer verticals.
Including steady performance within our hybrid colocation vertical.
Enterprise hybrid Colocation remains a core engine of growth for QTS enterprise customer support enhanced diversification and capital efficiency and are typically associated with a premium return on invested capital for QTS as.
As we have discussed in prior quarters. During 2020, we experienced a slower pace of new enterprise logo activity, resulting from the pandemic.
Despite this trend we continued to generate steady performance within hybrid co location over the course of the year by supporting the continued growth of our embedded customer base.
We are encouraged that during the fourth quarter, we experienced a slight uptick and new new enterprise logo performance relative to the second and third quarters of the year, while new logo activity remains below historical levels, we have begun to see an acceleration in our enterprise deal funnel and are encouraged by the pace of <unk>.
Activity, we are seeing across our markets.
We currently expect to return to a more normalized level of new enterprise logo activity as we move through 2021 supporting accelerating hybrid Colocation performance this year.
During the fourth quarter pricing on installed base, which is more heavily weighted towards our enterprise customers remained healthy.
We reported same space renewal rates down one 5% and Q4. However, this is primarily driven by the renewal of one of our larger enterprise customers as a part of a broader multi site expansion plan.
Excluding this specific customer same space renewal rates increased approximately two 3% relative to pre renewal rates and churn during the quarter also remained consistent with our expectations at 0.8% churn for the full year 2020 up three 7% came.
And at the lower end of the guidance of three to five and our initial guidance range of three to six overall, we remain pleased with both the velocity and return profile of our leasing activity and look forward to executing on and expanding enterprise leasing pipeline in 2021.
Turning to slide six the acceleration and leasing activity, we experienced during the quarter was primarily driven by our hyperscale and federal verticals.
Starting with Hyperscale, which contributed more than half of the overall leasing activity and the quarter, we signed several multi megawatt expansions during the quarter with an existing hyperscale customers. Our fourth quarter leasing results included an incremental 12 megawatt expansion and our new Atlanta data center with a large hyperscale customer.
Including this lease we have now sold more than 40 megawatts in our Atlanta DC to data center, which is a tremendous performance for our team considering we just opened a new facility a few months ago at full stabilization and the facility will be able to support a total of 72 megawatts of critical power capacity and <unk>.
<unk> 50 acres of adjacent own land QTS as Metro Atlanta Metro campus is expected to support more than 275 megawatts of power capacity upon full build out Atlanta remains a market of strength for QTS based on our power cost advantage and significant operating leverage.
<unk> embedded connectivity ecosystem, and and existing customer base, which continues to expand with us.
We look forward to extending our momentum and the market leadership leveraging these differentiators to support our customers' continued growth.
Moving now to Manassas, we signed an incremental five megawatt lease with a leading software as a service company. As a reminder, this customer previously signed a build to suit agreement for a full 24 megawatt powered shell and Manassas and has since gradually expanded into a turnkey capacity within the facility. This latest expansion.
Brings our total committed turnkey capacity to more than 17 megawatts and we expect them to continue to ramp into the balance of the remaining capacity over the coming quarters. As this been assets men assets facility was contributed to our 50 50 joint venture with the Linda capital our leasing results for the fourth quarter only reflect a 50.
3% contribution from the incremental five megawatt commitment.
Overall, we are very pleased with the pace of Hyperscale leasing activity, we experienced in 2020 in total we signed five hyperscale leases that were more than five megawatts or greater size well ahead of our initial target of 1% to 3%.
This in addition to a number of smaller one to two megawatt hyperscale expansions and the acceleration we experienced and our federal vertical we expect 2021 to represent another year of strong hyperscale growth as a result of our momentum and funnel visibility we have increased our hyperscale leasing volume target and <unk>.
2021 to two to four larger five plus megawatt leases, we continue to view hyperscale as an attractive opportunity to strategically accelerate growth with the world's largest and fastest growing technology companies supplemental by continued momentum in our hybrid colocation and federal verticals.
Shifting now to federal as we recently announced via press release during the fourth quarter QTS signed a five plus megawatt lease with a hyperscale cloud provider supporting the federal government. This represents the third consecutive quarter, and which we've signed a multi megawatt lease with federal within federal demonstrating.
And you'd momentum and differentiation of our capability to support federal deployments.
Including the lease signed during the fourth quarter QTS signed leases representing in excess of 15 megawatts in 2020 supporting federal deployments.
This level of activity represents more than double the aggregate federal leasing volume during 2018 and 19 combined over the last several years, we've positioned the platform for success within the federal with.
With strategic investments and necessary processes operational capability and talent. These investments combined with a growing track record of building and operating data center infrastructure and support a federal agency requirements have established QTS as a leading federal data center services provider.
Federal remains a strategic focus area for our business and we expect this growth opportunity to continue to support a unique value creation opportunity for shareholders.
Overall, we are excited to close out 2020 with such strong performance our balanced business approach leveraging core Differentiators continues to support consistent results and our record booked but not billed backlog provides tremendous visibility into another year of strong growth and.
And 2021.
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 QTS as development plan for 2021 over.
Over the course of the year, we currently expect to deliver over 300000 square feet of new raised floor capacity and Atlanta, Ashburn, Irving Chicago, Piscataway, Richmond, Santa Clara and Manassas.
Included in our capital plan is the formal opening and commissioning of the first phases of development and our new 42 megawatt facility and Ashburn.
And since opening and our existing Ashburn facility two years ago, we've largely sold out the entire 32 megawatt site and look forward to extending our momentum and our new facility supporting and additional customer growth and what is still the largest and fastest growing data center market in the country.
Also included in our 2021 development plan is the commissioning of a new site and Manassas supported by leasing success during 2020 and visibility and our funnel to incremental demand the new construction and Manassas will be able to support the breadth of our target customer verticals. However, it is currently expected to skew towards our hyperscale customer base and.
New site will support approximately 42 megawatts of total critical power capacity upon full build out to date, we've already pre leased more than 20% of the site, which is consistent with our de risked approach to development and overall capital allocation.
To support our record booked not billed backlog and particularly strong momentum exiting the fourth quarter. We're currently projecting cash capital expenditures in 2021 of between 800 and $900 million excluding acquisitions.
Accordingly, more than 70% of our current development capital spend expectation in 2021 is directly tied to leases that have already been signed as.
As always we will continue to evaluate the amount and timing of our capital allocation to align with customer demand balancing our focus on achieving both near term and long term growth and shareholder value.
Next on slide nine I'd like to review, our current balance sheet and liquidity position during.
During the fourth quarter, we completed a number of debt capital markets transactions that extended the weighted average maturity of our outstanding debt and reduced our weighted average interest rate.
In October we completed a successful $500 million offering of eight year senior unsecured notes with a 3% and seven 8% coupon and use the proceeds to fund the redemption of our previously outstanding $400 million of four and three quarter Senior notes. In addition, during the fourth quarter, we completed a new $250 million term loan with a five.
And maturity with the proceeds used to pay down a portion of amounts outstanding on our revolving credit facility.
As of our Q3 earnings release on October 26th QTS had access to approximately $452 million and net proceeds through forward stock issuances.
Subsequent to our third quarter 2020 earnings call through our ATM program additional equity representing approximately 135 million and net proceeds was sold on a forward basis. This results in net proceeds through forward stock issuances available to QTS of approximately $588 million as of yesterday's earnings release.
Based on QTS as current Capex guidance forecasted growth and adjusted EBITDA and retained cash flows. These available equity proceeds represent funding sufficient to largely fund QTS is current capital development plan for 2021.
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've historically operated in the mid to high five times range.
And we plan to maintain a proactive approach to funding our forward business plan, largely leveraging our equity ATM program to derisk future funding needs, while minimizing equity dilution.
We ended the quarter with leverage of approximately three nine times net debt to annualized adjusted EBITDA, including available forward equity proceeds excluding forward equity proceeds our leverage at the end of the fourth quarter was approximately five seven times, we will continue to monitor capital markets conditions for opportunities to enhance the health of our balance sheet further.
And improve our overall cost of capital.
Now onto our financial outlook on slide 10.
For the full year 2021, we expect total revenue to be between 599% and $613 million. We expect full year 2021, adjusted EBITDA to be between 330 and $340 million, implying an adjusted EBITDA margin of 55, 3% at the midpoint.
As Chad mentioned during 2020, we recognized approximately $3 million of Covid related net cost benefits, which we are not currently forecasting will recur in 2021.
Adjusting for the year over year impact of these net cost benefits. Our current 2021 adjusted EBITDA guidance reflects approximately 50 basis points of year over year margin expansion.
Our 2021 financial guidance assumes rental churn for the full year of between three and 6%, which is consistent with our initial target range and 2020.
In addition, our 2000 and 'twenty one guidance assumes quarterly net leasing will average and the $17 million to $20 million range per quarter dependent.
And depending on product mix and timing our ability to outperform this target could drive upside to our current financial outlook.
Moving to <unk> <unk> per share, we expect operating <unk> per share in 2021 to be between $2 92, and $3 and <unk>.
Our outlook reflects our continued focus on balancing long term investments for future growth with an expectation of continuing to deliver <unk> per share growth consistent with our historical target range of 5% to 9%.
Overall, we're pleased with the financial and operating success, we achieved during the fourth quarter and full year 2020, with a record booked not billed backlog strong momentum and our sales pipeline and a capital plan that is largely funded we believe our 2021 financial performance has materially derisked well.
We will remain focused on capital allocation decisions that accelerate our differentiation and market share gains, while delivering consistent growth and shareholder value over the course of 2021.
Now I'll turn the call back over to Chad.
Thanks, Jeff and despite the many unforeseen challenges that we were presented in 2020 QTS delivered the strongest year performance in our history.
We continue to execute effectively against our long term strategy capitalizing on our core differentiators to win market share and deliver consistent growth and our shareholder value.
This performance is a testament to our QTS and their servant leadership culture and I'd like to thank each one of them for their continued focus resiliency and commitment to delivering world class service to our customers and our surrounding communities.
It's an honor to serve with you.
I would also like to thank our critical operation employees, who have remained working and our sites supporting our customers throughout the pandemic.
Before closing I'd like to highlight one of our newest board members Ms. Joan Dempsey, who officially joined <unk> Board of directors in December.
Joe and brings extensive operating experience with a particular expertise and cyber security and federal having served in various leadership roles at Booz Allen Hamilton and the federal government across the 35 plus year career. Jones addition to the board also further demonstrates QTS is continued focus in <unk>.
Minimum and providing data center solutions for federal government customers.
I'd like to close by thanking our customers and shareholders for their continued trust and confidence in QTS.
With that we'd be glad to take questions operator.
Thank you we will now begin the question and answer session.
To ask a question and you May Press Star then one.
And if youre using a speakerphone please pick up your handset before Katrina.
Keith.
And regarding your question. Please press Star then two and once again, ladies and gentlemen, and the interest and Todd. We ask you. Please limit yourself to a single question.
Today's first question comes from Eric <unk> with wells.
Argo.
Yeah.
Great. Thanks for taking the question.
And I'm curious if maybe you could talk a little bit about your sales funnel given how strong you you executed this past year.
$17 million to $20 million and guidance I mean, what do you see.
Kind of the mix between Hyperscale, federal and and enterprise and it sounds like Youre expecting perhaps enterprise at some point this year could be an increasing percentage of your business. So could you talk a little bit about that.
And then and the Hyperscale side do you see more new deals coming from kind of existing customer expansions or or new logo opportunities. Thanks.
Thanks, Eric this Chad on hybrid.
Encouraged about Highbred part of our differentiation and that's been the engine of our business.
To deal with hundreds of enterprise customers and our focus on the Fortune 1000, and we just feel like there is a lot to do and that area.
Companies were resilient during 2020, and the pandemic and continue to be but they have a pretty sharp list of things they want to accomplish and we're starting to see that pick up so largely across the board.
2020 was about strong incumbency, both and hybrid and Hyperscale for us and the continued growth of those custom.
Customers that have been with us a long time, but we just feel like that people are going to be focused in 2021 to get back to a list of things that they definitely want to see whether it's digitization or enhancement of their business services across their platform. So we're encouraged across the board.
Tag and the Hyperscale team continues to find great success within our current customer base, but we also put a couple of new logos.
And in each year and they continue to grow the year after and that's the dynamic that we're excited about we are getting opportunities, but it's a pretty mature list of hyperscale customers now within QTS. So as we think about that we see good growth and the embedded base, which is absolutely.
And the <unk>.
Cleanest path to expansion is just being able to kind of work with the customers that you have and the portfolio that rely upon your day to day and have great relationships with so we're encouraged about both.
Great and just one follow up.
Given your success that you've had and northern Virginia, and now building out more capacity and Manassas.
And maybe comment just on the returns and price and you've seen I think we've heard that supply demand, maybe and slightly better balance and northern Virginia versus a year ago.
So I'm wondering if you've seen any kind of favorable movements and new lease pricing or what the supply outlook looks like competitively as you look out the next 12 months yes.
I think it's pretty stable I mean, we opened our ashburn facility, our first Mega data center, there and ashburn, probably and the most competitive market.
That had been and Ashburn for some time I know people were pretty focused on that we do believe that we are truly differentiated not just and hybrid colocation and federal but in Hyperscale.
It's been a long time ago, but when we put our first hyperscale anchor in that Ashburn facility. There was a price difference between QTS and and.
And the next bidder of approximately 10%.
So we sell value we're not we don't apologize about that because we do believe we are differentiated and and deliver service in a much different way through their platform and technology and customers value that and so.
So we've seen a pretty stable environment, but it is you know ashburn is a robust market you've got a lot of capital that continues to go there and.
It's a competitive market Manassas may be a little less so just because it's not quite as mature market, but it is a growing market and certainly the offshoot of where ashburn is going to go is manassas and some other areas and that that part of the country, but we're encouraged about both ashburn Manassas and feel like our.
Weighted product.
Gives us a good opportunity and we feel confident enough to invest.
Okay. Thanks, Chad.
And our next question today comes from Jonathan Atkin with RBC capital markets. Please go ahead.
Thanks, So I have a follow up on the comment about the new logos.
And I wanted to ask you about just the.
And kind of the margin expansion prospects longer term, but on the new logos can you share with us.
And what portion of these have been new to Colo as opposed to.
And just placing.
And demand that was with a competitor.
You know Joe.
John This business is as you know very resilient and you don't catch a lot of customers that are coming out of one deployment to go to another you really catch customers and expansion modes and.
And some new acquisition modes as they have new loads pop ups. So it's fairly resilient business. The majority of our deployments like most is just growth in the sector. So.
We do feel like we are differentiated and I'm not saying that we've never taken a hyperscale are hybrid customer away from a competitor, but the good thing is they are resilient and and.
Unless you're doing something.
Wrong to impact that customer there and they generally stay and so we mostly see new acquisition of growth and platforms, where they're growing.
Yeah.
And then and then on the margins I think the guidance calls for mid 50% EBITDA margins and you've got peers that are above that level as well as below that level and do you feel like that's kind of the right level.
What would you.
Thinking about your longer term goals for that and metrics.
Sure John.
If you look at the margin at the midpoint of our guidance for 2021 technically that's flat from 2020, but when you adjust for the $3 million of benefit coming out of lower travel entertainment and and utilities and 2020, it's effective operating leverage margin improvement year over year of about 50 basis points, that's consistent with what.
We've looked and and focused on trying to drive from margin improvement over the last few years, although obviously in 2020, we saw a much bigger jump and improve margins, which we're quite happy with so going forward I think continuing that target of about 50 basis points of improvement is realistic.
And then lastly, and the guidance that you gave can you feel.
A little more specific on which capital markets activities are included how much of the forward equity for instance.
We plan to take advantage of it.
Yes, I mean generally obviously the way we are funding our business is retaining cash flow is after dividends and then utilizing as our EBITDA grows the leverage capacity and maintaining leverage in that mid to high five turns and then beyond that forward funding it with equity.
And specifically on the just under $600 million of forward equity proceeds we believe that that gives us the ability to effectively fund the business largely through the year.
And our next question today comes from Jordan Saddler with Keybanc capital markets. Please go ahead.
Okay.
Thank you and good morning so.
And then circle back and.
The volume this year and sort of sustainability.
And ability so obviously fantastic year in terms of overall volume and I think.
And number of Hyperscale deals likely.
<unk> significantly exceeded the one to three.
Target and framework.
Circling back on this question a couple of times, but.
Over the last several quarters I think but just kind of curious how we should be thinking about and what's being baked in to sort of a 2021 guidance as we look at.
And your ability to sustain the pace and 2020.
Jordan This Chad we feel good about the pace. We have went from one to three years to two to four so that's an increase.
But we're not this platforms not built to go chase everything in fact, as I've said before we've said no two more deals in 2020 and even in 2021 than we ever have as a company that means we're getting a lot of at bats, which means the quality and the focus on returns on invested capital continues to be a.
Driver of those choices plus partnerships that we have with embedded base and new opportunities. So.
The new guidance is two to four.
And built the platform to go chase everything could we dialed it up yes, but we're also managing our bottom line <unk> per share growth that we've satisfied and to 9%. So we want to be able to invest and the future at the same time, maintaining bottom line performance and we think we found that balance in 2020, and we're going to.
Do it in 2021 to <unk>.
Jordan one thing I'll just add.
17% to 20 of average leasing and we're looking to do E per quarter and 2021.
And that supports the model we've laid out so that's really the target that we're gearing towards.
Okay.
No and I didn't catch that.
Step incrementally and I guess I'm just looking at that.
And the prior four even before this quarter and it was a higher level above that but and I know it doesn't necessarily make sense and set the bar too high.
My follow up is a little bit of a non sequitur on Texas.
You speak to.
The cold snap there may be understating it.
And sort of potential impacts I know you guys have meaningful exposure in terms of Inc. Rent, but can you talk about actual exposure in terms of to what's going on in terms of utility prices and outages.
Yes, Jordan Cove is a perspective and Kansas and this morning. It was nine degrees so anyway.
And there isn't.
There is a cold streak in Texas.
We're certainly.
Focused and that area first to protect our people and provide service to our customers.
We're participating in that I think we've had a pretty long term strategy and sustainability about the way, we purchase power and obviously you've seen the commitment to renewable energy, which we've been a leader in but we also with that come contract pricing. So our power is.
Pricing is stable because of our long term contracts and the power purchasing arrangement.
It really drives our renewable commitment so.
Everything has been moving moving forward and we're keeping our people safe and keeping our customers engaged in and get through this together.
Some tenants have no exposure to <unk>.
Spiking power prices, yes, our contract structure is a long term contract, yes, so our customers.
We'd be sheltered from some of this.
Market volatility that they are seeing down there, which is a great benefit and thats something that our energy and sustainability group have worked on for years.
Yes, and Jordan.
And as contracts, it's a fixed price and so we're not anticipating net.
And any material impact for customers or for QTS.
And any outages and I didn't hear if you guys had sustained any.
No.
Okay great.
Thank you.
And our next question today comes from.
Colby zone.
Colin Please go ahead.
Great. Thank you two if I may.
You beat your EBITDA.
And <unk> guidance pretty meaningfully.
And the fourth quarter and then ultimately for.
2020, and I'm just curious.
What happened in the two months since when you gave that guidance on that third quarter call that you weren't anticipating.
And then I guess was any of that.
One time in nature, because if you take your fourth quarter EBITDA and you just multiply it by four you're effectively at the midpoint.
Of your guidance for 2021, so it would seem that we're going to see a step down.
And the first quarter and I'm just curious if you could kind of talk about that and then secondly.
As it relates to the Netherlands and.
Just curious if you can give us an update on activity conversations.
And what you think the likelihood is that you could sign some type of multi megawatt hyperscale type deal in 2021. Thank you.
Yeah, Colby I'll take the Netherlands first.
We couldnt be more excited about our entry into Europe with our two assets.
Non largely based on hybrid Colo, we've just seen a higher retention rate of customers because that was and operating data center and then a pretty meaningful uptick of customers that were in the facility continuing to grow and.
AD business and new logos, so that facility has been and grown again just a wonderful addition.
And at scale, we went through the Repurposing of the large hyperscale facility largely last year and just brought on the first phase of that which gives us about 20 megawatts of Hyperscale and NIM Chavez.
Meaningful footprint with lots of expansion capability, some unique power renewable power aspect, where the Netherlands have struggled with power availability that is not an issue and our facility, which we think will be attractive to a lot of hyper scaler.
And then some very unique fiber opportunities with some trans Atlantic fiber, that's coming in to that landing station. So we couldnt be more excited we're meaningfully in Europe now with close to 30 megawatts and a lot of expansion and Youre going to continue to see us really execute we have a senior executive.
In the Netherlands, Mr. J D. Lux that we're excited to have on the team and with us over a year.
And a very experienced datacenter executive and.
And we're building on that and and Couldnt be more excited to get that asset up and going and have meaningful impact financially and a very profitable way force. So we're moving forward on that Jeff do you want to sure Hey, Colby.
A couple of.
Areas there so for the Q4 beat versus where we were at the end of September.
Nothing that honestly is materially one time that drove those numbers in an unusual way I think part of the beat was that we just had lower power cost and Q4 than we'd anticipated and then a bigger aspect. It really is helping us and driving the business going forward as we had some customers that took on some early commencements towards the ladder and took towards the end of the year.
And that we were anticipating really commencing early in 2021, so that helped us come in at the high end of our expectations for Q4 in terms of Q4 relative to 2021, we always have seen the circumstances, where our Q4 numbers and margins in particular are very high and then step back down in Q1.
And that's driven by a couple of things. One is we just we always have a situation where payroll and other accruals tend to pull down the margins a little bit and the first two to three quarters of the year and then once that sort of gets fully paid off and accrued you get some margin benefit in Q4, and then you also have the benefit in Q4, just generally because of the winter months that power cost.
And are low and so we always see big margins in Q4, and then that steps down in Q1, and typically it's not unusual for that margin and stepped down and 150 to 200 basis points.
So that's just sort of all normal performance.
Thank you and our next question today comes from Michael Funk with Bank of America. Please go ahead.
Yes, hi, good morning, Thank you for the and thank you for the questions.
I wanted to come back to the leasing commentary and the seven day.
Our 2000 $17 million to $20 million leasing per quarter and.
And in 2021.
Does that imply and urban index and or the enterprise side and 2021 versus the historic.
And if it does it's a snapback from a lower leasing in 2024th and a more sustainable level going forward.
I think across the board, we really are confident in the 17 to 20, but also the balance of it youre going to see our continued focus on picking the right hyperscale focusing on hybrid enterprise and then C and the federal vertical which is.
Very lumpy and its timing just because of the way the nature of those procurements work, but we will see a good balance across it and I think and 2021, So we're focused and all the areas.
And then and the lease explorations in 2021, and if I could if look at the renewal rates up and leases expiring in 2021.
It does seem to imply some upside and the renewal rates can you give us any comments on leases expiring in 2021 and the opportunity for renewal rates.
Yes.
And what's best about it is.
As a percentage of our total MRI, it's a smaller percentage, but it's all good existing customer base that is relied upon us so.
It's always competitive in the market, but but these are long lasting customers who have counted on us for years and.
Working through the process and.
Traditionally, we see kind of 1% to two percentage increase and on those and we expect that to be consistent going forward.
Mike One thing I'll add is while at renewal pricing can move around as you know we don't have any embedded customers that we have significant mark to market risk in terms of material downgrades and renewals again that doesn't mean that we won't see any but nothing that we think creates an undue burden on the business.
Thank you and our next question today comes from Erik Rasmussen with Stifel. Please go ahead.
Yes. Thanks.
Taking the questions first and federal business continues to be quite strong could you just maybe comment on the deals you are tracking and then maybe what's driving the strong leasing and then what do you expect in the upcoming year.
Yes, the federal business has been and exciting opportunity I'd like to remind people that we've been working on it for 10 years. So it's a long process of hard skill set to acquire a hard experience to put people's confidence in but it is at a point, where we feel like the in source to outsource is that kind of the very early.
Early innings and so.
And those deals are large and lumpy.
And we're going to continue to track and but we feel like we're putting the right people and the right seats to have a real track record to have success and the future both by working with the integrators, which largely is the way we built the business but.
But also having direct opportunities as we grow and mature that business class, it's just hard to sit down and predict that business.
But we're going to be meaningful and continue to focus on that area and think theres going to be some great opportunities. There are a lot of opportunity. So I know historically, everybody has been kind of pivoted to one program or two programs I think the most encouraging part of what we're seeing is there are multiple programs that are working their way through the system.
And we're going to try to attach ourselves to and many of them as we can.
Great maybe just my follow up.
You gave some some highlights on <unk> and and just Europe in general, but any desire to expand further into Europe and and.
And I guess with that any desire to make acquisitions and enter any new markets that youre thinking it might be like today.
No.
Europe is always an opportunity for us, but we're just not the kind of company that goes and spends a lot of money for something to get some place. We've always kind of created the value and been very comfortable with that that's probably going to be the tendency of us going forward, we build things and thats, what we do and we're going to build our European platform based off our.
Two assets that we have there and and continue to focus on the value creation and the shareholders' return of those assets, we're very happy with having 30 plus megawatts in theater and we're going to continue to build off that and we'll see what happens cuts.
Customers come to us and want us to go someplace that always encourages us or derisk the opportunity, we'll take a look at those opportunities, but we're very satisfied with where we are and we're going to build value against what we have.
Great. Thank you.
And our next question today comes from Richard Shaw at J P. Morgan. Please go ahead.
Great and I just wanted to ask about churn to start and came in at three 7% guidance is for three to six.
Is there any reason that it should be at that higher and or is that just giving kind of the range to start the year are you seeing anything.
And COVID-19 or anything else in terms of raw and beliefs exploration no Richard were not seeing anything I mean, we started last year at the same point at three to six as we get more visibility during the year, we tightened the range of three to five.
Standard business as usual, so we don't see anything and we'll be consistent with what we've done in the past we think.
And Chad you kind of touched on this a little bit, but kind of ask a little bit more clearly I mean, your guidance of 12% growth you're trying to manage growing the business and also providing value, but it seems like this might be a really good time for QTS to push and maybe a little bit harder grow over it faster and be more aggressive is that something you have <unk>.
And or is the organization kind of at peak efficiency right now and it will be harder to kind of make that bigger lead to a bigger platform.
I do.
Don't know if we're ever going to be satisfied with where were at thats part of the goodness of QTS is that we're always feeling we can do something better and get stronger.
Think particularly last year, we kind of entered the year with let's just say round numbers of a $400 million capital plan and ended the year with investing almost $800 million and a capital plan at the same time.
Guiding and delivering not just.
5% to 6% <unk> per share growth, but eight.
So we are constantly monitoring and trying to manage I think capital intensity is in this business everyone knows it.
We've got to stay committed on our bottom line performance and I think the way, Jeff and I talk about that is 5% and 9% we need to get people parameters of what they can count on at the same time, we're going to build the value for the future of this business. So we've turned down deals that didn't meet our return thresholds.
We're not necessarily proud of that but we also don't believe it's all about size and scale. We're at a size and scale, where we're in the game every every day and I don't feel like this is about just growing for the sake of growing bottom line performance is what pays.
People and shareholders and so we're going to manage that and hopefully people will become more and more confident that we're going to invest and the future. That's what we're all talking about but at the same time, we're going to try to do the best we can every day to deliver in year performance because our shareholders have all sorts of horizons on timing and we.
Need to be thoughtful of that as we grow the business. So we're more focused about the bottom line and the investment and the future balancing each other.
Alright, thank you.
And our next question today comes from Nate Crossett with Bloomberg. Please go ahead.
Hey, Good morning, I was wondering maybe just a funding question can you guys and what your latest thinking on the JV with them and.
And could we see some additional projects potentially added to that this year.
I mean, Linda has been a great partner and they continue to be active in the market, Jeff and I continue to be active.
With them.
And ideas back and forth I think it's just a matter of time before we find the right opportunity to kind of fit into that and we're going to take take advantage of that vehicle. They are great partners.
Our asset and Manassas continues to meet everyones objectives, which is nice to have the first one kind of work out like we all thought it would and we're going to look for more opportunities. We think that access to funding is important and a.
A very strategic part of the way that we can grow the platform and back to the last comment. It also gives us the ability to accelerate and some of those situations at work and not impact the bottom line as much. So it's a great partnership we continue to look forward to be active.
Okay. That's helpful. And then could you just give us a quick update on what's going on enrichment and lately.
And the subsea cables and I'm just curious it.
Demand has picked up and the last few months, it's been one of our one of our most active sites.
And the hybrid team continue to kind of build momentum around the technology and the.
Fiber interconnection that continues to develop there it's a special special place.
Obviously, there is some large hyper scalar and the neighborhood who helped bring concentration.
Shouldn't be more encouraged about the opportunity not just for hybrid enterprise and the connectivity story, but also tag and the Hyperscale story continues to have one of the largest opportunity sets there both with our powered shell and our excess land holdings.
Richmond will be a highlight to this portfolio over the next decade.
It is something that we are all very confident in.
Thank you. Our next question today comes from Tim Long with Barclays. Please go ahead.
Thank you.
Just also to two if I could.
Could you talk a little bit about the connectivity business, obviously pretty strong up 20% and.
2020, how do you think about sustainability of that growth and.
And second back to the Hyperscale or is.
It's been a really strong period for you guys.
But we also noticed Amazon last year leaned, a little bit more on internal data centers. So could you kind of maybe just at a high level.
Date us on how you're thinking about hyperscale.
Using their own data centers or co location. Thank you.
It's going to be continued with the hyperscale or conversation, it's going to be a continued balance.
All of these companies have big balance sheets with lots of cash and where they feel like they need to step in and do something for the sake of speed or location or some strategic thing theyre going to continue to be thoughtful on that but we don't see any.
The big shift and the balance that they're going to outsource a percentage of it and theyre going to do some themselves.
WNS is probably the example of probably the most aggressive at doing stuff internally, but everyone else is we're seeing a good balance of internal and external as far as connectivity, yes, we're going to continue to see connectivity Brent and.
And John have done an amazing job of putting this company in a position to become a connectivity leader and one of the ways that they've done that through the platform. Our software our service delivery platform is making the connectivity seamless for the execution of the purchase.
So it is transformed the way that customers engage with us they don't necessarily care about all of the details that it takes to make the connectivity work with all the transatlantic fiber and all the connectivity and the providers. They just need access and ease to get to it and that's what John and Brent have done an amazing job.
And doing so yes, I continue to think about that and I think over the next number of years people are going to think a lot differently about QTS and connectivity than they have and the past.
Thank you. Our next question today comes from Simon Flannery with Morgan Stanley. Please go ahead.
Thanks, very much good morning, so you've made some comments about the enterprise conversations improving versus Q3, but still below historical levels can you just provide a little bit more color on what's going on with the enterprises and their ability to make long term decisions given the current and environment around uncertainty around COVID-19.
And how much have you baked that recovery into your 'twenty, one guidance or is that still going to be a gradual process into 'twenty two and beyond thanks.
Yes, Simon this is Chad I mean, we just.
Probably the clearest way that we're seeing it from Clint and tag both and hybrid and Hyperscale is just customer engagement I mean, just the engagement and the and the metrics. We're looking at people have kind of got their sea legs. This pandemic has been.
Horrible.
And and transformational and so many ways, but people understand they've got to move their businesses forward. So the biggest indication is we're just seeing the engagement level.
And the context that we're making and that fortune 1000, just be much more much more involved yes, we've baked in good success and the Highbred co location, because we actually believe that will play out that year, but I guess the other thing is we believe that the balance of our business is still the strength. So we expect all segments.
To perform and federal Hyperscale and hybrid Colocation during the year and we expect that will play out that way.
And do you think the Hyperscale you went up quite a bit to 37%. This year do you think you will see that pushing more towards 50 50 or do you think it will always be dominated.
Bye.
Hybrid Kona.
We don't we honestly don't wake up trying to hit a specific percentage, we let the right returns and the right deals play out and in our business you're going to continue to see Hyperscale chip away, just because of the size and scale of our platform and those deals.
We're just really trying to find the right balance across the platform. There is no magic magic number from our standpoint on what we what we need to achieve to have success. We just let the individual deals and the returns from those deals and the strategic nature of them drive that mix and our business.
Thank you. Our next question today comes from Frank.
Raymond James Please go ahead.
Great. Thank you can you comment a little bit on SDP and and how much is that driving incremental bookings and do you have any sort of renewal or expansion statistics.
Along the lines of customers that are heavier users versus those that are that are not using the system zone as much.
Frank.
And it's driving a big difference.
SDP is the differentiator.
Brent been sincere with this today and.
And he gets pulled into a lot of these conversations with customers I might have him kind of just give a quick one.
Over view of kind of what customers are asking him and what did they find interesting about STP just to give you a little deeper perspective on that sure sure Frank Good to talk to you again. The reality is SDP has gone from the backside of a conversation to the front side of our conversation customers are coming to us or prospects are coming to us now and <unk>.
And you can see the platform first and foremost so I would say it is changing and then clint's team has done such a phenomenal job of getting the tool out in front of our prospects. So doing 800, plus demos this year and a <unk>.
Time, a very difficult time, and obviously and the world has proven that the platform really is really does have its legs underneath it and we're excited about the continued prospects for for customers using our platform.
Okay and is there is there any metrics you can share with us.
Churn differential when customers start to engage on that or or percentage of.
Renewal.
And we're expansion with customers that use that more that you can give us to kind of quantify that.
Frankly, the value that we're seeing from STP right now is and win rates and differentiating price. It's in operating efficiencies for our own use its and customer flexibility I do expect going forward that it will be an important tool and retaining customers.
And frankly, STP havent been out for just a couple of years, it's too early to really track separately renewals around STP, but logically given customer utilization is just another great way to keep those customers happy and keep them on our platform I do think Frank one statistic that Jeff just mentioned that I pay probably the most attention to is.
Is it differentiating the ability for us to win and with leasing up so dramatically year over year, we would say, yes, it's making an impact.
Thank you. Our next question today comes from Brett Feldman of Goldman Sachs. Please go ahead.
Yes. Thanks for thanks for taking the question just coming back to the outlook for enterprise and you talked about seeing it returned to sort of normal activity levels.
In the past you tended to average between $6 million to $8 million a quarter of hybrid Colo bookings that kind of what youre talking about that you know maybe you were a bit below that as you exited the year, but as you've stuck to your outlook for this year you have a lot of confidence you'll you'll be back within that average or was there a different point and then just as you talk about how the engagement levels with the enterprise.
Customer funnel and picking up could you give us a little more maybe qualitative color around that funnel is it the usual suspects and meeting the types of enterprise customers. You typically would have expected to see and the funnel and they are just prepared to kind of get back to doing business or are you beginning to see may be a broadening of the base sort of consistent with this general net.
Narrative around.
It acceleration thank you.
Yes.
Brett.
And on the 6% to eight for the enterprise side.
Nice thing is while our new logo activity in 2020 was down given just the activity we have with our existing customer base, which is a robust group of customers growing we still we're within that six to eight so.
Enterprise wasn't light and the quarter just had a different mix now that being said, we are anticipating the growth and enterprise both existing customers and new logos in 2021, and we would expect to see enterprise actually accelerate in 2021, and maybe quintal jumping with little more detail around what we're seeing and that pipeline.
As Jeff mentioned, we're seeing the deals getting larger in terms of what we're seeing in the funnel, we're seeing more deals come in from a new logo focus and a strong fortune 1000 push so it's well round it all the way from.
Okay.
Thank you. Our next question today comes from already calling and the BMO capital markets. Please go ahead.
Thank you on the comment around the early commencement and Q4 is that something you could see more in your backlog, but given the pace of demand and with what looks like 30% of and commencing beyond 2022.
Potentially our and we definitely see more and more circumstances, where customers are anxious to get in as quickly as they can and and to.
To increase their load faster than early anticipation. So there's definitely some upside there I would say nothing material that I would suggest changes the modeling of the business right now, but we definitely see more opportunities and upside there than down.
And then just on Hyperscale and the size of the deals you've been winning and growing partner with some 12 megawatt deal. This past year, historically, maybe shied away a little bit from some of the really really large deals and the market are you more willing to go there now assuming they meet your return thresholds and are those types of deals and the pipeline.
You know the returns are.
Very important to those type larger deals.
But you know.
When you have incumbents that are continuing to grow and we can find the right deals we have the scale and opportunity to do large deals. It's never been an issue. It's just finding the right mix of that so.
We can have a tendency to see more of that just as the platform growth and sheer size.
Thank you. Our next question today comes from David worry, though with Green Street. Please go ahead.
And.
Hey, Thanks, guys question for you Chad on the deal you mentioned that you've turned down due to price can you talk about with the gap between where QTS was willing to price the deal and where it ultimately settle and then specifically I guess, how competitive pricing played out and the Atlanta market given all the new supply there over the last year.
Yes, just taken on Atlanta I mean.
I don't think we have had a more successful story in the company.
Since the beginning.
From a time of building opened to today, having 40 megawatts leased and a new facility is unprecedented.
And that was done with pricing and returns that we're at.
At the high end of our 9% to 11% return range.
In Atlanta, the sheer size of that platform. The one hundreds of customers. The interconnection ecosystem, that's there and the power cost advantage because of the scale of purchasing really does have us and a very.
Lead position and we see the deals that come through that market that market is going to continue to grow and I think.
Play.
<unk> will do well and that market also just because of the sheer size and appeal of what that southeastern market means to the digital economy and I think you are even going to see hyperscale or continue both to source space, there and build space on their own there and those markets. So it is just overall a great.
Great market and great opportunity I'm, so thankful that we led really the tier one transformation of that market and continue price.
Pricing and deals I think the probably the thing I'd point, you back to as I said earlier.
And we can genuinely.
Get a premium for our pricing and our services because people value that.
The range I think that we've talked about before has been 10% kind of range difference on what people have been able to.
To price and and <unk>.
<unk> is a separation and value point.
I don't know all the metrics and all the numbers from competitors.
It's a pretty tight range it really depends on what market, you're in and and what competitor you're against but it's fairly stable in that regard.
Thank you. Our next question today comes from Nick.
Okay.
Please go ahead.
Hey, good morning, guys.
First as we think about your 'twenty one revenue outlook can you Peel back the onion at all and share what what MLR growth might look like as opposed to total revenue growth and I'm, just thinking between utility price fluctuations and hyperscale driving straight line it might make it up a bit trickier to tease out the relationship and most years and.
And second.
Yes, if I'm not mistaken federal is currently probably a high single digit or maybe 10% of your MLR, where was that a few years back and where might that land a couple of years from now.
Well if you go back when we started zero so.
<unk>.
Grown from nothing to something and I do I think youre going to continue to see it uptick as both MRI and total revenue.
Federal space is an area that we're going to continue to focus on and it's very.
Very difficult to acquire and very hard to predict but we have had great success. The last couple of years, we're going to continue to focus on it and I think youll continue to see that inch up as we work through Jeff do you want to talk about 'twenty one for Nick.
We did have more straight line benefits and.
Beyond <unk> and 2020 because of just the size and scale of some of the deals that we got done and so you could see some moderation of that going forward, but the truth is we expect to continue to do some pretty large deals and continue to scale them. So I would say back of the envelope you could assume MLR growth is sort of in line with total revenue growth.
Thank you ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Chad Williams for any final remarks.
Yes, just want to thank our QTS is for an amazing year and 2020 during a very difficult time wish you all the best of health and happiness and we'll talk next quarter. Thank you.
And thank you Sir This concludes today's conference call and thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful.
Good day.
Okay.
And.
And.
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