Q1 2021 QTS Realty Trust Inc Earnings Call
Good morning, and welcome to the QTS Realty Trust first quarter 2021 earnings Conference call.
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Oh, and now I'd like to turn the conference over to Stephen Douglas Head of Investor Relations and QTS. Please go ahead, Sir Thank you operator, Hello, everyone and welcome to QTS as first quarter 2021 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 the effects of the ongoing COVID-19 pandemic as described in our SEC filings and actual future results may vary materially forward looking statements and the press for press release that we issued yesterday along with.
Our remarks today are 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 <unk> operating <unk>, adjusted operating and <unk> monthly recurring revenue ROIC EBITDA and adjusted EBITDA. We refer you to our press release that we issued yesterday and our periodic reports furnished or filed with the SEC for further information regarding our use of these non-GAAP.
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 QTS as first quarter 2021 earnings call turning to slide three QTS delivered a strong performance during the first quarter to kick off what we expect will be another year of consistent robust growth and 2021 and our momentum coming out of 2020 has continued into 2021.
And as Jeff will discuss we are increasing our financial outlook for the year to reflect continued execution and strong demand environment during.
During the first quarter QTS delivered total revenue and adjusted EBITDA of approximately 149 million and 82 million, respectively, representing an 18% and 22% growth year over year. We believe this level of growth is industry, leading and reflects the power of our differentiated platform delivered across the day.
<unk> set a target customer verticals adjusted EBIT margin for the quarter was 55% representing year over year margin expansion of more than 200 basis points reflected continued operating leverage and our platform as our business scales and reflecting the ongoing benefit of digitizing initiatives.
Leveraging SDP.
In 2020, we recognized approximately 3 million of net cost benefit associated with reduced travel utility rates as a result of the pandemic. During the first quarter of 2021, we saw travel expenses begin to ramp up and utility rates approaching more normalized levels consistent with the expectations built.
And so our initial 2021 financial outlook.
As we sell into our existing built out infrastructure and scale of our platform. We continue to expect our adjusted margin to expand over time.
For the first quarter, we generated O F F O per share of 76 cents, which represents approximately 15% year over year growth, reflecting our strong adjusted EBITDA performance in the quarter.
Investing back in our business at a robust level to deliver on our significant book backlog and support strong future growth, we've continued to deliver near and medium term value creation through our consistent <unk> per share growth.
As we've discussed in prior quarters, we continue to view our approach to capital allocation as directly tied to our goal of achieving consistent growth and our O F. F O per share of between 5% to 9% annually. We believe this range of growth combined with a three plus percent dividend yield provides investors.
The consistent potential return opportunity, while providing QTS the opportunity to continue to invest and long term future growth opportunities.
Moving to slide for during the first quarter, QTS signed new and modified leases, representing approximately $20 6 million of incremental annualized revenue, which compares favorably to our average quarterly leasing expectation of between 17 to 20.
We discussed last quarter.
The results represent a very strong start to the year following a record leasing performance last quarter, which further derisk our financial growth expectations in 2021.
We ended the quarter with backlog of signed but not yet commenced annualized GAAP rent of approximately $81 million adjusting for the effects of revenue, which we begin recognizing be a straight line rent. This is up nearly 50% year over year, which is down approximately 7% quarter over quarter as a result of <unk>.
<unk> quarter of leasing commencement and associated in servicing of more than $112 million of development capital on.
On a cash basis, our backlog of signed but not yet commenced annualized rent at the end of the quarter stood at approximately 152 million up approximately 51% year over year this level of backlog and forms and materially Derisk, our development activity for the year more than 80% of which we are directly tied to.
Signed leases.
During the first quarter underlying trends within our installed base remains healthy we reported same space renewal rates up two 2% in Q1 versus the pre renewal rates consistent with our historical average of price increases and the low to mid single digit price range.
And during the quarter also remained consistent with expectations at seven relative to our full year guidance up 3% to 6%.
Next on slide five approximately 50% of our signed leases performance during the quarter was contributed by our Hyperscale vertical since implementing our strategic plan approximately three years ago to be more intentionally targeting hyperscale growth opportunities, we've experienced significant growth and our hyperscale deal funnel.
And signed leasing activity, we have been pleased with our progress and developing strategic relationships within our target hyperscale customer vertical and establishing QTS as an incumbent with many of the largest and fastest growing technology companies and the world incumbency is a powerful differentiator in the hyper.
Skull vertical and we continue to leverage our past performance and strategic differentiation of our platform to drive new growth opportunities. As we noted last quarter. We have increased our annual hyperscale leasing volume target from 2021 to two to four larger five plus megawatt leases up from 1% to three previously.
We are tracking well against this objective and remain encouraged by the opportunities and our pipeline.
In addition to a number of smaller expansions with existing hyperscale customers across our platform. During the first quarter, we signed an eight megawatt lease with a hyperscale cloud provider that will anchor our new 42 megawatt Ashburn D. C. Two development, we officially opened our existing 32 megawatt Ashburn D.
C. One site a little over two years ago and are pleased to announce last quarter that we largely sold out of the entire facility.
And the new 42 megawatt development, which is expected to come online and the middle of this year, we will extend our strong momentum and the ashburn market and support the breadth of our target customer verticals, including the eight megawatt anchor tenant lease signed during Q1. We are currently pre leased approximately 10 megawatts of capacity and the new Ashburn.
<unk>, representing nearly 25% of the stabilized capacity of the site.
Now moving to slide six our enterprise hybrid Colocation vertical contributed the remaining on approximately 50% of leasing performance. During the first quarter hybrid Colocation remains a core source of growth for our platform as an enterprise customers continue to look to outsourced model to solve their growing infrastructure.
And <unk> requirements, while leveraging the enhanced visibility and remote orchestration capability enabled by QTS is software defined data center platform coming out of a slower year of new enterprise logo growth and 2020 as a result of the pandemic last quarter, we discussed our recent increase and enterprise activity in our fun.
On this.
This resurgence in activity includes opportunities that temporarily stalled in 2020 as well as new requirements largely concentrated in the financial services health care and technology verticals.
Typically approximately 30% to 50% of our incremental growth is sourced from new logos. However, during 2020. This percentage came in at approximately 20% and.
As we discussed last quarter, we expect the new logo activity and returned to more normalized levels in 2021 in fact during the first quarter, new logos contributed approximately 37% of our total hybrid colocation leasing during the first quarter, we were successfully and signing 30 for new enterprise logos.
This is nearly 50% higher than the average quarterly new logos signed during the height of the pandemic and Q2 and Q3 of 2020 of approximately 23.
We've also experienced an increase and the average size of our enterprise deployments. During the full year 2020, we signed 14 enterprise leases of 250 kw or greater with an average deal size of approximately 650 kw debt year to date, we have already signed seven enterprise leases of 200 for.
Kw or greater with an average deal size of nearly one megawatt including two one megawatt leases signed subsequent to the end of the first quarter, which positions us well for continued strong enterprise leasing and the second quarter. The list of larger enterprise leases signed year to date includes a two megawatt requirement from one of the largest.
Commercial banks and the country, a one eight megawatt deployment for a fortune 500 diversified financial services company and a one megawatt lease with a large independent advertising firm.
The enterprise hybrid Colocation business continues to support consistency and diversification in our quarterly performance, while driving enhanced return on invested capital two of our Mega data center sites that have largely been leased and grown through hybrid colocation deployments are piscataway and Chicago These sites.
And year over year growth and annualized rent of approximately 21, and 36% respectively. As of the end of the first quarter of 2021 as these sites continue to ramp.
NOI as of the first quarter has grown approximately 43% and 25% year over year, respectively, demonstrating the operating leverage embedded in our mega scale infrastructure.
Overall, we are pleased with the acceleration we have seen and are signed leasing activity and funnel within the enterprise hybrid colocation vertical combined with a strong mix of attractive growth acceleration opportunities and our pipeline in our Hyperscale and federal we continue to believe that a balanced business approach across our target.
Customer verticals provides the opportunity to maximize our risk adjusted return on invested capital, while delivering consistent financial and operating results.
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 our current balance sheet and liquidity position.
As of our Q4 2020 earnings released on February 16th QTS had access to approximately $582 million of net proceeds through forward stock issuances. During the first quarter of 2021 QTS settled three 9 million shares of forward equity representing net proceeds of approximately $216 million.
To support our ongoing development activity.
In addition, subsequent to our fourth quarter 2020 earnings call through our ATM program additional equity representing approximately $127 million and net proceeds was sold on a forward basis, continuing our strategy of pre funding our development capital needs three to four quarters in advance.
This result, and net proceeds through forward stock issuances available the QTS of approximately $493 million as of yesterday's earnings release.
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 and the mid to high five times range.
We ended the quarter with leverage of approximately four three times net debt to annualized adjusted EBITDA, including available forward equity proceeds.
Excluding forward equity proceeds and our leverage at the end of the first quarter was approximately five eight times, including available forward equity proceeds we had total available liquidity of over $1 1 billion as of the end of the first quarter. We currently have no significant debt maturities until 2023 and beyond and approximately 70% of.
Our indebtedness is subject to a fixed rate, including a series of interest rate swap agreements.
In April we're pleased that the S&P upgrade QTS is issue level credit rating by one notch to double B, plus and recognition of our consistent performance conservative balance sheet and strength of our business model.
This now positions QTS is one notch below investment grade with S&P.
And a capital intensive industry, reducing our cost of capital will remain a core initiative.
We expect that through continued consistent performance, increasing scale and profitability and the eventual refinancing of our outstanding preferred equity, we are well positioned to achieve and investment grade rating.
Overall, we remain pleased with the health and flexibility of our current balance sheet, but as always we'll continue to evaluate opportunities to extend our debt maturities and reduce our overall cost of capital.
Now onto our financial outlook on slide nine.
We are revising our 2021 financial guidance to reflect year to date outperformance, our updated capital expenditure outlook and our expectation of performance for the balance of 2021.
For the full year 2021, we're increasing our revenue guidance by $3 million at the midpoint to a range of $602 million to $616 million, representing a 13% growth year over year at the midpoint.
Our higher revenue outlook is a function of outperformance in Q1 strength and the hybrid colocation leasing and associated commencement timing and and updated expectation of performance for the balance of the year.
As a result of our higher revenue outlook and continued effective cost controls, we're raising the midpoint of our 2021 adjusted EBITDA guidance by $1 5 million at the midpoint to a range of 332 million to 341 million, implying an adjusted EBITDA margin of 55, 3% at the midpoint.
Moving to <unk> <unk> per share, we now expect operating <unk> per share in 2021 to be between $2 94, and $3 four reps.
Representing five 3% growth year over year at the midpoint our outlook incorporates total cash capital expenditures, excluding M&A of between $875 million and $975 million up $75 million at the midpoint relative to our initial guidance range, reflecting continued strength and leasing as well as.
And supply chain inventory planning to derisk future infrastructure deliveries.
Our updated Capex outlook remains largely pre leased with more than 80% of capital of development tied directly to customer leases.
Overall, we're pleased to start the year with strong financial performance in Q1 with leasing momentum and are largely pre leased and pre funded development plan that materially Derisked our performance for the balance of the year.
We look forward to continuing to accelerate our market share, while balancing near and long term financial growth objectives.
I'll now turn the call back over to Chad.
Jeff We're pleased with our performance during the first quarter and our momentum already and the second quarter and we look forward to continuing to execute against our strategic initiatives. The demand environment for data centers remains very healthy and we are well positioned to expand our market share leveraging our core differentiators across our target.
Customer verticals.
In closing I'd like to thank our QTS is across our footprint for their hard work and service to our customers communities and each other and I'd also like to continue to recognize our critical operations employees, who have remained working and our sites supporting our customers throughout the pandemic our powered by people culture continues to differentiate.
QTS with our customers, which is backed up by our industry, leading customer satisfaction scores and retention I'd also like to thank our customers 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.
And so.
And for some time, we ask you. Please keep yourselves to one question at a time.
And he would like to join the questions for you. Please press Star then one.
And remove yourself from the question queue. Please.
Please press Star then two.
We will pause momentarily to assemble our roster.
And today's first question comes from Jordan Saddler with Keybanc capital markets. Please go ahead.
Thank you and good morning.
Wanted to just touch base on the eight megawatt lease signed with the Hyperscale.
CSP in Ashburn and could you provide any incremental insight there was this a new logo.
And it's first sort of large lease we've seen certainly this quarter in the biggest market and the country, just any characterization around pricing and sort of just and just the nature of the lease itself.
Yes. Thanks, Jordan. This is Chad I mean, I would just call it down the fairway it was a existing customer.
We have a strong relationship based on operational maturity and trust and it was just down the fairway, so great to see get done and competitive market.
And.
Ready to move and the next one.
Okay and.
And then maybe on.
Guidance Jeff.
76, and the quarter great quarter.
And just obviously and annualize is two three years for which is the high end of your range.
Any insight you could add regarding sort of trajectory and that's all I know last quarter and this.
We've spoken about <unk>.
Being a lower more typically lower margin quarter and.
And we see sort of a step back before sort of re ramping back up so any insight into what the headwinds will be.
And <unk> and <unk>.
Yes sure George.
Not expecting headwinds and what you should read into that is that the business is continuing to.
And to grow and drive strength I think part of the <unk> sequencing was given that we had a very strong EBITDA quarter and Q4.
And maintaining our leverage we were able to go through Q4 without additional equity and funding the business and so you saw some benefits of that flow through into Q1.
Over the course of the remainder of this year through the flow of proceeds we've already got in place. We will continue to be funding the business Youll see some more equity come out, which moderates a little bit debt <unk> growth.
But overall very excited that while increasing capital investing and the future and a very healthy way, we're continuing to put up near term growth and value for shareholders and and continuing to create over time.
Thank you. Our next question today comes from Colby <unk> with <unk>.
Please go ahead.
Great. Thank you.
I'm wondering if you could just talk about the pacing of ramp and so obviously when you win a lease and and and it commences and we see the straight line benefit to GAAP results.
But obviously theres, some interesting and whats happening on the cash side and things like E F and so.
Curious if you could just talk about what youre expecting from a ramp and over the remainder of this year and how we might be able to close the gap between <unk> and <unk> as a result, and then secondly, you guys made on land purchase and San Antonio and late 2020, just curious if you could just talk about what youre seeing and that market and the opportunity to gain and.
I guess and anchor deal taxi and start to build on that land. Thank you.
Hey, Colby I'll take the San Antonio and Jeff can talk a little bit about all of that though.
On the San Antonio, We just think Texas is a great market.
We are currently reside and a couple of spots and Texas and we think San Antonio is another strategic dot for time, and we will see how momentum builds but.
And I wouldn't look for us to get real active and San Antonio and until we can feel a little better about like an anchor tenant type of deal, but it's great. There's not a ton of land left.
Left and certain areas of San Antonio and we felt like it was strategic.
In terms of the GAAP between <unk> and <unk>.
Really drove that over the last two years with the significant acceleration and our business of the larger deals and and in particular, obviously hyperscale, but also federal.
Which are much longer timeframe deals with escalators and so theres a lot of straight line associated with that as well as ramps associated.
And so over time, I think youll see that GAAP between <unk> and <unk> start to come back into more of a balance now im hoping it continues to be and GAAP because I expect we'll continue to accelerate those larger deals going forward and as long as we do youll still see some of that straight line, but the kind of acceleration we saw over the last two years off of frankly and much lower base is much more.
And we're likely to moderate going forward and so you will see that GAAP come <unk>.
Mr. Together.
Okay. Thank you. Thank you.
And our next question today comes from Erik Rasmussen with Stifel. Please go ahead.
Yeah, Thanks for taking the questions.
The federal business.
Appeared to slow in the quarter, but was there any notable events that you can highlight and maybe you can address with that what your expectations are for the remainder of the year based on the deals that the team is tracking.
Yes, Eric I wouldn't characterize it as slowing federal is going to be like Hyperscale youre going to have some some quarters and youre not others.
This is a process, it's a long game, it's complex customers and deployments.
And I think we're as well positioned and 21 and beyond but this is something that youre going to see come in from time to time when you when you do and it'll be meaningful and Youll see probably price.
Price pickup and the numbers and when you don't have federal show up.
Just because the timing and complexity.
We built the business on the diversification of Hyperscale hybrid enterprise and federal.
I don't expect all three to show up each quarter, but when it does could be special.
Great.
And then maybe just switching.
Switching to Europe.
No updates there but can.
Can you just give us a.
Some insights on the deal pipeline, and maybe and Chubb and in.
Any desire to expand further into Europe.
I think right now with 30 megawatts in Amsterdam, we couldnt be more excited we're more excited about the ability for it to impact the financials and a positive way draw and again has outperformed everything we had on a piece of paper, which is always great to see customers retained and grew.
And without even have and M shop and opened its been a very positive impact to our financials M shop in shop, and is opened and reposition for Hyperscale and I expect our Hyperscale team and 21 and two to have some fun wins over there that are going to be significant on bottom line performance. So couldnt be more excited about it.
Not wrapped around the wheel right now on trying to go big or go go home and Europe, but we're always patient and thoughtful about where to deploy capital and couldn't be more excited about Amsterdam and the scale that we have there and growing again and M shop and to have a positive impact on the business and our customers.
Thank you. Our next question today comes from Mike Funk with Bank of America. Please go ahead.
Yeah. Thank you for the questions and good morning, everyone on.
A couple if I could just back to Ashburn can you discuss the returns on our written on the Ashburn deal this quarter.
Yes, I mean, we talk about our ashburn or a hyperscale returns and 911% I'd say, they were right and that lower part of that range, but well within the strike price.
Great. Thank you and then.
Enterprise side as well you mentioned recent acceleration, there and larger deals and.
Well, maybe some commentary on the on the share of deals that you're winning and then what is driving the larger size and the deals and as their durability to that.
I'm gonna have Clint take that.
Yeah. So we're seeing a good pick up I think some of it's coming out of the.
And the pandemic and the pause that we had and that's probably impacting or benefiting everybody, but I think we're feeling very comfortable.
On the percentage that we're winning really relates to the investments we've made going back years into SDP and innovation.
On a big trend we're seeing.
And and interest from our customers and prospects is really how do they.
And get visibility and control into the data centers. So that that's been a nice position for us to have and we're seeing like you said the deals are getting bigger, they're accelerating and frankly, they're spread across our entire footprint.
Thank you. Our next question today comes from Eric <unk> with Wells Fargo. Please go ahead.
Great. Thanks for taking the question, so and kind of related to that enterprise hybrid Colo question. Just wondering I know you, obviously have a 9% to 11% target for Hyperscale I'm wondering how these yields compare for <unk>.
Some of these hybrid colo deals, particularly the larger enterprise deals and how competitive they are.
And it did and the market or are you do you think you're winning more than your fair share because of your SDP platform.
Clint I'll have Clint way and but the differentiation does matter and I'll have Clinton, yeah, absolutely I mean, we're.
We're in the.
Nine to 10 up to the mid teens is what youre going to see from a competitive hybrid deal. We we'd like to think we're going to be on the upper end of what the market.
Would get just due to some of the.
Things, we bring bring to the situation like the innovation. So we think that counts for something gets us a little bit of a premium to the competition.
We do think we're seeing most of the deals out there and then you know we think because of the way we're positioned where we have the right infrastructure and the right market that we're positioned to win that deal.
Great and then just a follow up to that obviously, I think you've targeted $6 million to $8 million of hybrid Colo bookings per.
For quarter. It seemed like you overachieve that this this quarter about $10 million, given what you've seen and the pipeline. Some of the larger enterprise deals do you think you can overachieve that going forward. This year and is there a new range. We should think about in terms of your quarterly performance.
Yes, Eric ill jump in on that we absolutely have a strong pipeline on enterprise continue to be pretty excited we already mentioned a good start into Q2 and a couple of larger deals kicking off so we've got some good some good enthusiasm at the same time.
We still have a lot of work to do and we're not looking to raise the hurdle beyond where we've been but we come into and continent.
Thank you and our next question is and when it comes from Jonathan Atkins with RBC capital markets. Please go ahead.
Thanks.
I was interested and slide six I think you showed Chicago NOI growth growing slower than revenue growth and.
And just was wondering the reason for that and then.
And as it pertains to.
Maybe upsizing your presence in.
And state and northern California, or establishing and our new president and a place like Phoenix, where you've got land and wondered.
What your.
Thoughts on what it would take two to underwrite those sorts of investments. Thanks.
Thanks, John on the expansion I mean, we couldnt be more excited I was just and Hillsboro last week and.
That's a new market for us and the momentum that we're seeing there we're excited about the opportunity for Hyperscale and enterprise.
<unk> taken advantage of some connectivity options that Clint and the team have rolled into our new Hillsboro side couldn't be more excited about.
Having that new location I think with anything we need to see good pipeline or kind of build to suit opportunities to kind of jumpstart our facility I will tell you that someday, we will be and Phoenix.
Have 90 acres.
And we've pre positioned pre permitted and struck a renewable power deal.
With one of the most favorable power companies in the area and we couldnt be more excited and it's just going to be the right customer and right match to go to Phoenix, but again, we can't allocate capital everywhere. All the time, we have to continue to be disciplined around that so we'll wait till we see the right pipeline the right entry point and go but great to have Hillsboro.
Open and are excited about the future and Phoenix, Jeff, Yes, John and then and in terms of the that slide I mean, what we love is you see the great growth and both Piscataway, and and Chicago, which is really for us predominantly enterprise facilities and so you're seeing the strength of our hybrid team driving both at the top and <unk> seen great operating leverage on that.
Piscataway side, and frankly, we have seen and you'll continue to see great operating leverage and the Chicago side. What you saw from the quarter is that in that quarter. We did have a customer churn event.
And certainly not in the top 10 customer and on the scope and a business within that 7% churn was not really material, but when you isolate it down just to Chicago, you did see an impact and the NOI and the quarter we.
And we need the space frankly, and we've already got a good pipeline and we feel on it so no concerns there.
Thank you.
And another question today comes from Nate Crossett with <unk>. Please go ahead.
Hey, good morning.
And I wanted to get your thoughts on inflation and as it relates to increased build costs.
Curious.
What are you guys seeing right now in terms of costs are there any issues and sourcing materials or labor and.
Do you think you'll be able to pass on a lot of these higher costs.
To your tenants and.
For them of higher pricing.
Hey, Nate this Chad I mean, we do expect to see it.
We haven't seen dramatic increases and inflation to date on build costs, but we think inflation's coming like for like most of the rest of the people I think one of the things that our development team day <unk> and the team have done is we've standardized almost our entire product offering now so our ability to kind of pre buy and get ahead of some of that.
On the supply chain risk both for production and pricing has really changed the game for us on the ability to take risk out. So you think about 'twenty, one and 'twenty two we're already materially de risking that both from a supply chain and cost standpoint, and yeah, I think customers will be reasonable when you have a value prop to sell customers.
Customers understand cost are going up and I think we'll be able to kind of see that flow through into our numbers.
Okay, and then just one we keep hearing about chip shortages and I'm just wondering what you're hearing from your customers and how that.
Could affect deployment this year.
Gonna have Brent take that because he's a chip expert.
Hey, Nate how are you. The reality is we're certainly hearing it.
From the markets, but the reality is it has not impacted our pipeline at this point and.
And obviously, we deploy a lot of our own infrastructure, that's chip dependent and we have seen absolutely no impact for us so as any as anyone would do we're watching it closely but no impact to date.
Thank you and our next question today comes from for an exclusive with Raymond James. Please go ahead.
Great. Thank you.
Can you talk to us a little bit about the new logos that you're attracting what industries and are you seeing now and can you can you characterize the type of workloads that that debt.
Our seeking out your product right now.
Thanks, Frank and my up Clint answer that yes.
We're strong and financial and health care and the technology vertical in General I think also you get into <unk>.
Sled activity and accounts that are looking for.
Compliant data centers and infrastructure.
In terms of the workloads on might shift that question, a little bit over to Brent on what he thinks share I mean, the workloads are pretty typical to what we had seen in the past across the enterprise. So this is mostly transformative and kind of digitization programs. Some small scale from large scale moving out of corporate owned facilities into larger co location facilities like Etfs again.
And I wouldn't say, there's anything dramatic any dramatic shift there other than that stall that Clinton talked about earlier picking up. So we're just seeing kind of that period now now accelerate and when I am going to come back real quick when I say sled I'm talking about state local and education, which is a strong market for us just wanted to clarify that.
Got it that's helpful and then.
Chad you mentioned that the 9%.
For the deal up in Northern Virginia, So the lower end of that range at 9% to 11% where is that trending and is that upper end of the range still realistic.
Yeah, I think it is I mean, when we have customers that expand you know 50 plus percent of our business continues to expand with existing customers I think we see a different conversation with customers. So customers are willing to stay and be part of our value change and operational experience and scale. Yeah. You can see that when you are trying to acquire new logos.
Tag and the team will tell you that it's a more competitive environment and we're probably going to be more towards the bought on the range and here's here's the here's the fact I've said more no more deals this year than we had even all of last year. So we're not going to try to win every deal and that's.
That's fine.
Thank you and our next question today comes from Richard Choe with Jpmorgan. Please go ahead.
Hi, I just wanted to clarify something with the enterprise Colo part with the new logos coming on are you seeing kind of that balancing out and maybe a little bit of a pullback from the existing logo customer base given that maybe some stuff was put forward last year or do you think both will kind of grow.
And so well this year.
Yeah. Thanks for the question no we're seeing actually debt book, both are growing and we have a very strong new logo funnel and our existing.
Base is also growing at a very attractive rate.
And then with churn I guess started off pretty well outside of maybe the Chicago issue, but.
It seems like it's trending.
And so last year pretty low.
And anything in terms of what might impact churn. This year, maybe that's different from last year's churn coming from different sources or is everything and kind of typical so far.
I'd say, it's right on track.
No no no big indication or change.
Thank you. Our next question today comes from Tim Long of Barclays. Please go ahead.
Thank you.
Two if I could as well first on the pricing front. It seems like it was down for new leases and up for renewals.
Just kind of walk us through your pricing assumptions as we look look through the year or any any changes expected there and then.
Second on STP sounds like it had a pretty good benefit to margins and the quarter.
Much more room is there for internal benefits and then maybe just update us on what you're hearing as far as deal wins and pricing because of because of STP. Thank you.
Tim on pricing, it's a competitive market, but we don't see any big changes I think this quarter is just a reflection that you didn't have federal and the numbers. This quarter. So I don't think theres any big indication of direction and our change, but we're competitive.
But but we feel good about it I might have Brent take on the STP question, a little bit and talk about the trending and the wins there. Yes. So absolutely we are still seeing a premium for customers coming in and wanting the technology that we've that we deploy with STP.
The reality is we used to see and kind of on the tail side on a sales cycle and now we're seeing customers coming in and requesting that on the front side of the sales cycle. So it's a nice it's a nice motivator to get folks and through that funnel efficiently for us as it relates to kind of margin expansion and we're hopeful that as we continue to deploy additional features which we do every six weeks on the platform and we'll continue to.
Drive additional incremental value and the platform I think youll see that across cross about our cross connects.
And some of the other new things that are coming and the next couple of months.
But the reality is yes, we're definitely seeing that helped drive additional margin.
Thank you.
And our next question today comes from Simon Flannery of Morgan Stanley. Please go ahead.
Great. Thank you very much good morning.
When you talk about Hyperscale errors and your pipeline how many companies are we talking about at the moment.
Do we expand it would be on a small group for a larger group and the 10 and 12 or any color around that would be great. And then what are you seeing in terms of their appetite to in source versus outsource has there been any changes around <unk> and a post COVID-19 world.
And then I might have tag answer that question.
Hey, Simon and thanks, a lot. Good morning question, when we think about the Hyperscale universe, we have kind of our eyes on about 30 names.
Well defined.
Targets and the Hyperscale market.
Actively are working on deals anywhere from eight.
Eight to 12 of those names at any given time and so that kind of gives you a flavor on what that universe looks like.
As it relates to the second part of your question.
Ultimately, we see the hyperscale market continuing to.
To lean forward in their capacity planning and we are encouraged by what that means for us and and and our pipeline.
Okay, and what are the decisions that make them decide to do it with you rather than to build it themselves.
It differs by each one of the Hyperscale and they each have kind of a threshold of how many percent of their compute needs theyre going to build internally. It fluctuates based on the region and their ability to build on their own and their comfort with partners like QTS and so we see a wide range.
Percentages of build versus lease what I have seen in the past couple of years working with our team is as our incumbency grows and the trust in the partnership that we have those percentages start to ship in our direction and generally towards the leasing side of that equation.
And Simon and the one thing I'm on the.
Simon and the one thing I might add to that is I do think maybe people underestimate the value of 700 acres of strategic ground across the country, that's tied to power and infrastructure because sometimes it gets down to tag being differentiated because he has something that a partner needs which is infrastructure REIT.
<unk> power access those type of things. So I think when you have the kind of land bank debt, we have over the last for five years.
It's a very strategic advantage and starts a lot of conversations.
Thank you and our next question today comes from David Gory, though with Green Street. Please go ahead.
Hey, guys, Chad and I know you are a real estate guy at heart and it feels like the transaction market for data centers and really favor and sellers right. Now so are there any non core data centers and the portfolio that might be worth monetizing as a source of funds to keep funding the development pipeline.
David Jeff has been very disciplined about constantly challenging us around every aspect of capital I would say that everything is on the table as we think about things, but our customer engagement and our operation of those facilities still remain a key differentiation for us so cash.
Capital is a driver of our business, but also customer engagement relationship and continuity of operation is too. So I don't think youll see us exit a facility or market and handoff customers to somebody but if there was some strategic JV Jeff's always looking for those type of creative ways to capitalize our optimized capital.
And.
Okay, and then would you have been able to provide some color also on the occupancy and rent decline at the Richmond data center and this quarter.
Yes, I think and Richmond, we had a customer contract that came up.
And they consolidated to their internal data center, we knew that some time ahead of time and we had another customer that Clint had in fact, a financial another financial institution that gobbled up the space and you've just seen the kind of moving out and the ramping up of that space that it's already been re purpose to a new customer.
Thank you. Our next question today comes from Ari Klein with BMO capital markets. Please go ahead.
Thanks, and good morning, I just on the Capex, Inc. Capex increased talk about what specifically drove that it doesn't seem like leasing list and necessarily materially higher than expected. So is that just reflecting on what youre seeing and pipeline.
Yes.
Its two things, but it is absolutely driven by pipeline and enthusiasm that we're going to continue to perform and have the opportunity to meet the needs of those customers and grow into all of that.
Putting up near term results and increasing our guidance near term, but the second aspect and some of that Capex increase with what Chad mentioned in terms of leaning in on supply chain and just making sure that we're getting orders and a little bit earlier, frankly than we had and the path to make sure that we don't have any disruption on that.
Got it thanks, and then maybe just looking out for 2022, you do have some significant renewals from our large customers is there any risk to releasing spreads or churn risk from some of that debt.
And anticipate.
I think the benefit with what we're looking at and 'twenty two as Theyre all established long term relationships and we've got tremendous confidence there'll be continuing QTS customers.
Okay. Thanks.
And our next question today comes from.
Okay.
Please go ahead.
Hi, Yes, good morning, everyone and congrats on a solid quarter.
At the beginning of the year, but there was just general concerns about sales cycles elongate eating and everyone was kind of talking about that now that you've had a quarter under your belt would you kind of talk a little bit about is that still what the environment feels like I mean, it doesn't sound that way given how bullish you saw on on your enterprise business in particular, but.
Just kind of curious.
Talk about what the world's thought like you know.
A quarter ago versus today.
Oh, I'm gonna have Clint take that yeah. Thanks, Chad.
And what we're seeing is we feel like our deals are accelerating through the through the RFP or through the proposal process.
Customers are getting the decisions much faster.
And as Chad noted, we've already got two deals that have come in and in Q2 that struck very quickly. So we're feeling like they are accelerating their getting larger and we feel good about our pipeline and momentum.
And then just.
A quick second.
Chad very early on you kind of talked about potential margin expansion over time and can you just kind of talk a little bit about is that the economies of scale that from a credit that is it SPT, that's helping you and kind of do that just kind of help us think through how the absolute sense and they're going to happen and if possible and kind of quantifying what it could look like.
Hey.
It's a great question I think it's a combination of a lot of things at the scale of the operations on our operational scale at the facility level as we continue to take facilities and optimize them. It's also SDP its differentiation around that it's.
Being on the.
Competitive side of pricing, but still profitable side of pricing. It's a combination of all those things and I think we will continue I mean, we're not going to see the pace of expansion that we've seen over the last two years or three years and.
And certainly COVID-19 has some impact to expansion last year that we're already seeing normalized as people and get out and travel and and and do things, which we want them to be.
And we want to be part of that but.
We still have some we still have some wood to chop and we're going to keep working on it I mean digitizing the platform has transfer transition and transform the way, we think about business and the way, we deploy and we're going to continue to optimize around the edges. Because once you have it done you can you can really start optimizing and that's what we're going to work on.
Thank you and our next question today comes from Sami Badri with Credit Suisse. Please go ahead.
Hi, Thank you.
On area I wanted to hit was and the industrial supply chain for components and we have heard that lead times for those have actually elongate it quite a bit and just wanted to get kind of a quick take on what you guys are seeing and maybe just.
Some quantitative for.
Framework around how long it even gets and how long it takes to get say something like and industrial generator shipped to the U S from wherever in the world that's coming in from just an idea on the components of the data center and the lead times. It would be helpful. Yes, Mr. Robey do you want to take that.
Sure absolutely.
Certainly and continue to monitor obviously, all the components we've seen some variability.
On a large components such as generators to be honest, we have not seen a significant shift in but.
There are components that are due.
And do fluctuate given different supply chain challenges that folks are dealing with.
As we have standard earlier, we continue to stay ahead of that and are being very proactive are recognized and recognizing those trends ahead of time and making sure that we're securing our availability of those components to.
Make sure our deliveries are on time.
And Sami I might add I think Dave's work around standardization of our product, which has not always been the case of QTS, but the last two or three years with Dave's redesign of freedom design and standardization of product, it's really helped our ability to control supply chain and watch it.
Got it and then one other question and this is kind of more thinking about QTS over the next couple of years, but.
Is the plan really to be.
And the objective.
And 50% of leasing to be Hyperscale is that kind of the two to three year plan or is there going to be.
A situation here, where enterprise begins to start overtaking.
A number of deals that come in and.
And that starts to increase as a percentage of leasing mix over time.
Sami I'd like to think that I get up and control that every day, but I don't so we're going to get out there and do the deals that work for QTS, both from an enterprise, our hyperscale and federal perspective.
The beauty of it is as we get up and work hard and can find opportunities and a lot of different places it lets us be a little more selective on what we do.
But I'm not I'm not losing a lot of sleep on exactly what percentage were fine on the right deals and we're doing them.
Got it thank you.
And our next question today comes from mix and I'll do with Matson, Nathan said and please go ahead.
Hey, good morning, Thanks for taking my questions well, one on hybrid Colo and one on the balance sheet.
So first you know.
The average hybrid Colo deal sizes increased why do you and that's been the case is it just natural that larger enterprises are the first to come back post pandemic or is it mixed because smaller enterprises, maybe moving more towards cloud or something else.
And then on the.
On the balance sheet, Jeff you talked about the long term growth getting to investment grade I think you have the option of calling your preferreds and 2023 so.
So would it be reasonable to think of maybe 2020 for as an appropriate timeframe for getting to IGT and what do you think the ratings agencies are looking for.
I'll have Clint take hybrid and then Jeff can finish on the balance sheet, yes, So I'll jump in on the why why are they growing.
I think in general part of that's just a reaction to where we are in the industry and Digitization and.
Enterprise is converting more and more to that infrastructure and then frankly.
We are in a position we believe to get a larger share of that shift over with the way we've positioned our infrastructure and innovation. So I think I think a lot of it's just.
Where we're trending with Digitization I think youll continue to see that trend move.
Moving forward deals getting bigger and our momentum increasing zone and the one other thing I'll add to a hybrid real quick for Jeff takes on the balance sheet is a little bit of this is where we might not see as many of the cage and cabinet single cabinet deals.
567 years ago, what we are seeing is a little tendency for some of the larger enterprises to bring some stuff back out of the cloud and that dynamic is bring and theyre not bring and amount of the cloud with two or three cabinets are coming back out of the cloud with 500 kw megawatt. So I think that's the dynamic that we're seeing play out in the.
Industry, which is not negative you're still going to see dramatic growth in cloud and Theres, a great adoption to cloud, but you also see and enterprises make some choices on what comes in and what comes back out.
And Nick on the balance sheet.
And we absolutely have a plan and getting to investment grade and.
And I don't have for patients to wait till 2020 for so we're very happy and in about six months ago, Moody's upgraded US and then most recently and we've got an upgrade from S&P and they've got us and a double b issuer level, but at the bond level already double b, plus and S&P and and frankly, all theyre looking forward and continued execution and continued scale and and the big trigger.
And your point is is the Prefs that are callable in early 2023, so that alone from a rating agency standpoint would be looked at as a full turn of deleveraging and I think that's really all we got to do and keep executing and called it an early 2023, and we're effectively only one notch away from getting that.
Okay, great. Thank you.
And congratulations.
From a volume.
Deutsche Bank. Please go ahead.
Hey, guys. Thank you for taking the question.
First of all on enterprise, you talked a little bit about some of the new logo and momentum I'm. Just wondering if you've seen any improvement in demand from some other verticals that were little bit weaker and more heavily impacted by COVID-19 last year.
And then just a follow up on Hyperscale I guess more broadly.
If you know tag or anyone on the team could give a little more color around the demand backdrop, and <unk> and whether you've seen any sort of capacity digestion, taking place among some of the larger hyperscale or <unk>.
And just track it.
Sounds good and tag why don't you take the Hyperscale and I'll have Clint do the enterprise.
Okay, great yes.
We saw that that great digestion period back in 19, and we're not seeing that now theres still good planning cycles and Baldwin when you're talking to the incumbents and looking at their capacity planning, we're not seeing that same trend.
Gesture and or a pull back and so we feel pretty good about what the market is showing us and what our pipeline looks like going into the year. So feel good about that.
Hey, Matt on on demand and where we're seeing it from we're really seeing it from all verticals. So it's not particularly slanted towards those that might have been impacted by the pandemic or not.
We've had a enterprises and in hospitality and travel.
And be part of the pipeline and funnel that we're seeing so.
We're not seeing it in a particular vertical or in a particular region, it's really been across all aspects of what we're seeing.
Great. Thank you.
And ladies and gentlemen. This concludes the question answer session and I'd like to turn the conference back over to Chad Williams for any closing remarks.
Just want to thank everybody for participating this morning, and again, thank our TTS as across the country that continue to.
And to make QTS, who we are and serve our people our customers and our communities. So thank you and talk to you next quarter.
Thank you Sir This concludes today's conference call and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
Okay.