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Q2 2020 Earnings Presentation

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Second Quarter Earnings Call Presentation

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Q2 2020 Earnings Presentation

  1. 1. © QTS. All Rights Reserved. QTS Realty Trust, Inc. Second Quarter 2020 Earnings Presentation
  2. 2. © QTS. All Rights Reserved. 1 Forward Looking Statements Some of the statements contained in this document constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In particular, statements pertaining to the COVID-19 pandemic, its impact on the Company and the Company’s response thereto and to the Company’s strategy, plans, intentions, capital resources, liquidity, portfolio performance, results of operations, anticipated growth in our funds from operations and anticipated market conditions contain forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. The forward-looking statements contained in this document reflect the Company’s current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause actual results to differ significantly from those expressed in any forward-looking statement. The Company does not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: • adverse economic or real estate developments in the Company’s markets or the technology industry; • obsolescence or reduction in marketability of our infrastructure due to changing industry demands; • global, national and local economic conditions; • risks related to the COVID-19 pandemic, including, but not limited to, the risk of business and/or operational disruptions, disruption of the Company’s customers’ businesses that could affect their ability to make rental payments to the Company, supply chain disruptions and delays in the construction or development of the Company’s data centers; • risks related to our international operations; • difficulties in identifying properties to acquire and completing acquisitions; • the Company’s failure to successfully develop, redevelop and operate acquired properties or lines of business; • significant increases in construction and development costs; • the increasingly competitive environment in which the Company operates; defaults on, or termination or non-renewal of, leases by customers; decreased rental rates or increased vacancy rates; • increased interest rates and operating costs, including increased energy costs; financing risks, including the Company’s failure to obtain necessary outside financing; • dependence on third parties to provide Internet, telecommunications and network connectivity to the Company’s data centers; • the Company’s failure to qualify and maintain its qualification as a real estate investment trust; • environmental uncertainties and risks related to natural disasters; • financial market fluctuations; • changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates; • and limitations inherent in our current and any future joint venture investments, such as lack of sole decision-making authority and reliance on our partners’ financial condition. While forward-looking statements reflect the Company’s good faith beliefs, they are not guarantees of future performance. Any forward-looking statement speaks only as of the date on which it was made. The Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the Company’s future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as well as other periodic reports the Company files with the Securities and Exchange Commission, many of which should be interpreted as being heightened as a result of the ongoing COVID-19 pandemic and the actions taken to contain the pandemic or mitigate its impact. This presentation includes measures not derived in accordance with generally accepted accounting principles (“GAAP”), such as FFO, operating FFO, adjusted Operating FFO, EBITDAre, adjusted EBITDA, NOI, ROIC and MRR. These measures should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and may also be inconsistent with similar measures presented by other companies. Reconciliation of these measures to the most closely comparable GAAP measures are presented in the attached pages. We refer you to the appendix of this presentation for reconciliations of these measures and to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations--Non-GAAP Financial Measures" in our 10-K for further information regarding these measures.
  3. 3. © QTS. All Rights Reserved. 2 Second Quarter 2020 Review
  4. 4. © QTS. All Rights Reserved. 3 Consistent Performance Enabled by Differentiation Across Diversified Target Customer Verticals • Growth accelerant • Highest credit quality tenants • 5-10+ year contracts and long-term cash flow visibility • Consistency in quarter-to- quarter performance • Customer diversification • Enhanced ROIC opportunity • Enhanced capital efficiency • Growth accelerant • Highest barriers to entry • Premium ROIC opportunity HYPERSCALE HYBRID COLOCATION FEDERAL Cost-advantaged mega scale infrastructure Diversified Across Target Customers Industry leadership in sustainability initiatives Digitized, premium customer experience through QTS’ Service Delivery Platform Operational maturity & track record in highly secure deployments Differentiators
  5. 5. © QTS. All Rights Reserved. 4 SDP Utilization Continues to Ramp Amid Pandemic 17,000+ active SDP users 20%INCREASE new unique log-ins quarter-over-quarter 60MINUTES Approximately double pre COVID-19 level Average session time for top SDP users of more than 30MINUTES Approximately double pre COVID-19 level Average session time for QTS user base of approximately Recurring revenue signed fromRecurring revenue signed from Cross ConnectsIP Bandwidth Upgrades YEAR-OVER-YEARYEAR-OVER-YEARYEAR-OVER-YEAR Customers utilizing Remote Hands & Eyes +85% +30%+40% Customers leveraging QTS platform and SDP to enable remote infrastructure tracking and management
  6. 6. © QTS. All Rights Reserved. 5 Q2 2020 Financial Highlights $62.2 $72.8 Q2 '19 Q2 '20 $119.2 $131.6 Q2 '19 Q2 '20 52.2% 55.3% Q2 '19 Q2 '20 $0.65 $0.70 Q2 '19 Q2 '20 Revenue ($M) Adjusted EBITDA ($M) Adjusted EBITDA Margin (%) Operating FFO per Share ($)
  7. 7. © QTS. All Rights Reserved. 6 • Hybrid Colocation and Federal verticals contributed the majority of leasing performance • Third consecutive quarter with leasing above $20M • Demonstrates the value of QTS’ diversified business model • Average ROIC on leases signed in Q2 ‘20 of 14%+ due to premium pricing typically associated with hybrid colocation and federal leases • Average rent per square foot on new and modified leases signed in Q2 of $548, +24% above the prior four quarter average • Ended Q2 ‘20 with a record booked-not-billed backlog of $111M2 • Backlog continues to provide visibility into QTS’ future growth • Healthy underlying trends within embedded customer base • Same space renewal rates increased +2.6% during Q2 ’20, consistent with general expectation of low to mid-single digit percent increases • Q2 ’20 churn of 0.5% and YTD churn of 1.1% • Based on strong YTD customer retention and visibility into customer activity for the remainder of 2020, QTS has reduced its full-year ‘20 churn guidance to 3 - 5%, from 3 - 6% previously Signed new and modified leases totaling $21M of incremental annualized rent1 Q2 2020 Leasing Review 1. Reflects incremental annualized rent, net of downgrades 2. Backlog of signed but not yet commenced annualized monthly recurring revenue as of 6/30/20
  8. 8. © QTS. All Rights Reserved. 7 Federal Vertical Remains a Core Focus Area for QTS • Q2 leasing results include a 5MW+ expansion for an existing hyperscale customer supporting the Federal Government • Deployment across multiple existing QTS facilities is set to commence in mid-2021 • Represents an expansion of the 5MW+ federal lease QTS signed in Q2 ’19 • Further demonstrates the value of incumbency in the Federal vertical Expanding growth opportunity • Unique security, personnel and operational requirements • Incumbency and industry expertise are powerful differentiators for QTS • Higher barriers to entry create opportunity to achieve premium ROIC Higher barriers to entry targeting the Federal vertical • Strategically invested in the necessary processes, operational capability and talent, capable of supporting highly compliant government agencies • Track record of success in Federal vertical with strategically located powered shell footprint further supporting enhanced returns on capital Uniquely positioned to succeed in Federal vertical 7
  9. 9. © QTS. All Rights Reserved. 8 Second Quarter 2020 Financial Update
  10. 10. © QTS. All Rights Reserved. 9 Cloud & IT Services, 32.0% Content & Digital Media, 18.9% Financial Services, 15.3% Government & Security, 5.3% Network, 7.1% Healthcare, 7.4% Retail, 5.2% Other, 8.8% Business Momentum Remains Steady Amidst COVID-19 • Well diversified customer base across industries • 50%+ of in-place revenue is generated from Content & Digital Media and Cloud & IT Services industries • <10% of in-place revenue is generated from retail, transportation, hospitality and oil & gas customers • As of Q1 earnings release, QTS had received a modest increase in requests for extended payment terms from customers representing approximately 5% of Q1 ‘20 revenue related to impact of COVID-19 • Pace of additional incoming requests for payment relief moderated significantly during Q2 • A number of customers who had previously asked for extended payment terms have since resumed payments 1,200+ Customers Industry & Tenant Diversification1 Customer Highlights 1. Percentage of in-place MRR as of 6/30/20 • Year-to-date QTS has successfully delivered on key commitments to customers across all QTS markets • Remain on schedule to deliver on development commitments to customers tied to QTS’ booked-not- billed backlog in 2020, assuming current trends continue Development activity remains on track
  11. 11. © QTS. All Rights Reserved. 10 Proactive Capital Raising De-risks ’20/’21 Performance Summary of Forward Equity Funding Activity ($M) QTS’ capital development plan is fully funded through middle of 2021 • During Q2 ’20, QTS settled 1.0M shares of forward equity, for net proceeds of approximately $51M • Subsequent to QTS’ Q1 ’20 earnings call, approximately 4.9M incremental shares of common stock have been sold on a forward basis at an average gross price of approximately $65 per share • 0.5M shares through the Company’s ATM program • 4.4M shares through an overnight forward equity offering in early June • QTS currently has access to approximately $591M of net proceeds through forward stock issuances to support future development activity Approach toward pre-funding capital needs dictated by capital markets environment • Funding approach has historically been focused on pre-funding capital need 2-3 quarters in advance • During periods of increased capital markets volatility, QTS has shifted its approach to pre-funding capital needs 3-4+ quarters in advance of need $338 $51 $32 $272 $591 Net Forward Equity Proceeds Available as of 4/27/20 Net Forward Equity Proceeds Settled during Q2 2020 Net Forward Equity Issued Through ATM Program Since 4/27/20 Net Forward Equity Issued Through Overnight Equity Offering on 6/1/20 Net Forward Equity Proceeds Available to QTS as of 7/27/20 1. Proceeds available reported in the first quarter earnings release were $342 million. The $4 million decrease is due to reductions of unsettled forward shares related to QTS dividends 1 (10.3M shares) (6.4M shares of forward equity) (4.4M shares) (0.5M shares)(1.0M shares)
  12. 12. © QTS. All Rights Reserved. 11 • Pro forma leverage of 3.7x3 net debt to annualized adjusted EBITDA, including forward equity proceeds; net debt to LQA adjusted EBITDA of 5.8x at the end of 2Q 2020 • Approximately $1.1B of available liquidity, including $591M4 of undrawn forward equity proceeds • No significant debt maturities until 2023 and beyond • ~70% of debt is subject to a fixed rate, including interest rate swap agreements Highlights Balance Sheet and Liquidity Summary Capital Structure ($M) Debt Maturities ($M)5 $6.6B Enterprise Value6 Market Cap 2, $4,512 Senior Notes, $400 Pro Rata Share of Unconsol. JV Debt, $43 Series B Convertible Preferred Stock, $316 Series A Preferred Stock, $107 Finance Leases & Other, $46 Unsecured Credit Facility 1, $1,208 $1 $3 $5 $554 $229 $905 2020 2021 2022 2023 2024 2025+ 1. Includes three term loans ($700 million in aggregate) and approximately $508 million of borrowings on revolving credit facility as of June 30, 2020 2. Market Cap calculated as: Class A and Class B common stock and OP units of 70.4 million incl. common stock sold in forward structure using treasury stock method, multiplied by 6/30/2020 stock price of $64.09 per share. 3. Pro forma for the effects of cash expected to be received upon the full physical settlement of, and issuance of, 10.3 million shares of common stock pursuant to forward equity sales through the date of this report, assuming such proceeds were used to repay a portion of the Company’s outstanding debt. The company expects to use the proceeds from these forward equity agreements to fund future capital expenditures. 4. Reflects net proceeds available at the Company’s election to physically settle the forward equity sales 5. Includes QTS’ pro rata share of debt at the joint venture 6. Net of cash and cash equivalents
  13. 13. © QTS. All Rights Reserved. 12 Robust Development Plan to Support Signed Backlog Increasing capital development plan reflects strong YTD leasing activity and pipeline • Relative to initial expectations at the beginning of 2020, QTS has increased the amount of capacity expected to deliver and in-service in 2020 by more than 100,000 square feet of raised floor • ~70% of this incremental capacity is concentrated in Ashburn, Chicago, Fort Worth and Atlanta facilities • QTS expects to complete a total of over 60MWs of gross power capacity in 2020, representing approximately the same amount of capacity that was delivered in aggregate over the prior three years Commenced pre-development of a new mega scale data center in Ashburn • ~30% of booked-not-billed backlog is related to signed leases in existing Ashburn site totaling 20MW+ • QTS has leased more than 75% of the available capacity in its existing 32MW Ashburn facility since officially opening less than two years ago • Updated 2020 capital plan now incorporates the commenced pre-development of a new site in Ashburn on owned land adjacent to QTS’ existing Ashburn site • New Ashburn data center is expected to support more than 40MWs of sellable power capacity, allowing QTS to extend its strong momentum in the Ashburn market Raising 2020 capital expenditure guidance to $650 million - $750 million • Represents an increase relative to prior guidance of $550 million - $600 million • 75%+ of QTS’ capital development plan is directly tied to signed leases 12
  14. 14. © QTS. All Rights Reserved. 13 Full Year 2020 Guidance Summary 1. Consistent with GAAP accounting standards, revenue from the unconsolidated joint venture is not included in QTS’ reported GAAP financial statements as of the closing date of the JV. 2. Consistent with NAREIT-defined standards, QTS has included its proportionate ownership of EBITDAre from the unconsolidated JV in its reported EBITDAre and adjusted EBITDA results. 3. Consistent with NAREIT-defined standards, QTS has included its proportionate ownership of Funds from Operations from the unconsolidated JV in its reported Funds from Operations, Operating Funds from Operations and Operating Funds from Operations per diluted share results. Reflects fully diluted share count. 4. Reflects cash capital expenditures and excludes acquisitions. Includes QTS’ proportionate share of cash capital expenditures in the unconsolidated Manassas joint venture. Updating full-year 2020 guidance Note: The Company’s 2020 guidance assumes, among other things, that its facilities continue to operate and it does not experience significant work stoppages or closures, it is able to mitigate any supply chain disruptions for its development activities, and it is able to collect revenues in line with current expectations. The Company is also monitoring the impacts of COVID-19 on the fair value of its assets. While the Company does not currently anticipate any material impairments on its assets as a result of COVID-19, future changes in expectations for sales, earnings and cash flows related to fixed assets, intangible assets and goodwill could cause these assets to be impaired. While these are the Company’s current assumptions, this is an emerging situation and these assumptions could change, including if the duration of the pandemic is extended, which could affect outlook. • Increased 2020 adjusted EBITDA guidance primarily reflects outperformance in recurring revenue year-to- date associated with strong leasing activity, continued operating leverage in QTS’ platform, reduced utility expenses net of recoveries and lower corporate travel costs • Updated 2020 adjusted EBITDA guidance incorporates a full-year aggregate benefit from lower-than- expected net utility expense and reduced corporate travel costs, net of other additional COVID-19 related expenses, of approximately $2-3M • Continue to view approach to capital allocation as directly tied to QTS’ goal of achieving consistent growth in OFFO per share of between 5 - 9% annually 2019 Midpoint $M except per share values Reported Low Midpoint High Low Midpoint High Growth Y/Y Revenue1 $481 $523 $530 $537 $523 $530 $537 10% Adjusted EBITDA2 $250 $275 $280 $285 $280 $285 $290 14% Operating FFO per Share3 $2.63 $2.69 $2.76 $2.83 $2.73 $2.78 $2.83 6% Annual Rental Churn 5.2% 3.0% 4.5% 6.0% 3.0% 4.0% 5.0% Capital Expenditures4 $348 $550 $575 $600 $650 $700 $750 Prior 2020 Guidance Current 2020 Guidance
  15. 15. © QTS. All Rights Reserved. 14 Closing Remarks
  16. 16. © QTS. All Rights Reserved. 15 QTS publishes second annual ESG Initiatives Report Committed to Deliver on Highest Standards in ESG Principles Procure 100% of power from renewable sources by 2025 (32% today) Pursue LEED certification at 90% of QTS properties by 2025 (55% today) Install EV charging stations in 75% of our facilities by 2025 Conserve at least 15 million gallons of water per year, up from 10 million in 2019 Recycle 600 million pounds of material by 2025 Environmental GovernanceSocial
  17. 17. © QTS. All Rights Reserved. 16 Thank You! ir@qtsdatacenters.com
  18. 18. © QTS. All Rights Reserved. 17 Appendix
  19. 19. © QTS. All Rights Reserved. 18 NOI Reconciliation $ in thousands Net Operating Income (NOI) Net income $ 10,209 $ 8,120 $ 7,535 $ 18,329 $ 28,683 Equity in net loss of unconsolidated entity 590 677 401 1,267 675 Interest income (2) — (36) (2) (81) Interest expense 6,924 7,162 6,459 14,086 13,605 Depreciation and amortization 47,554 45,070 41,481 92,624 80,269 Other (income) expense — (159) 40 (159) 40 Tax expense (benefit) of taxable REIT subsidiaries 138 (169) 199 (31) 410 Transaction, integration and impairment costs 381 216 1,039 597 2,253 General and administrative expenses 21,391 20,683 20,124 42,074 40,015 Gain on sale of real estate, net — — — — (13,408) NOI from consolidated operations $ 87,185 $ 81,600 $ 77,242 $ 168,785 $ 152,461 Pro rata share of NOI from unconsolidated entity 927 844 842 1,771 1,076 Total NOI $ 88,112 $ 82,444 $ 78,084 $ 170,556 $ 153,537 June 30, 2019 Three Months Ended Six Months Ended March 31, 2020 June 30, 2020 June 30, 2019June 30, 2020
  20. 20. © QTS. All Rights Reserved. 19 EBITDAre & Adjusted EBITDA Reconciliation $ in thousands EBITDAre and Adjusted EBITDA Net income $ 10,209 $ 8,120 $ 7,535 $ 18,329 $ 28,683 Equity in net loss of unconsolidated entity 590 677 401 1,267 675 Interest income (2) — (36) (2) (81) Interest expense 6,924 7,162 6,459 14,086 13,605 Tax expense (benefit) of taxable REIT subsidiaries 138 (169) 199 (31) 410 Depreciation and amortization 47,554 45,070 41,481 92,624 80,269 Gain on disposition of depreciated property — — — — (13,408) Pro rata share of EBITDAre from unconsolidated entity 924 819 863 1,743 1,078 EBITDAre $ 66,337 $ 61,679 $ 56,902 $ 128,016 $ 111,231 Equity-based compensation expense 6,082 4,875 4,296 10,957 7,596 Transaction and integration costs 381 216 1,039 597 2,253 Adjusted EBITDA $ 72,800 $ 66,770 $ 62,237 $ 139,570 $ 121,080 Three Months Ended June 30, 2019 Six Months Ended June 30, 2019June 30, 2020 June 30, 2020March 31, 2020
  21. 21. © QTS. All Rights Reserved. 20 FFO, Operating FFO and Adjusted Operating FFO Reconciliation (1) The Company’s calculations of Operating FFO and Adjusted Operating FFO may not be comparable to Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use the same definition. $ in thousands FFO Net income $ 10,209 $ 8,120 $ 7,535 $ 18,329 $ 28,683 Equity in net loss of unconsolidated entity 590 677 401 1,267 675 Real estate depreciation and amortization 44,196 41,700 38,544 85,896 74,471 Gain on sale of real estate, net — — — — (13,408) Pro rata share of FFO from unconsolidated entity 399 278 344 677 385 FFO 55,394 50,775 46,824 106,169 90,806 Preferred stock dividends (7,045) (7,045) (7,045) (14,090) (14,090) FFO available to common stockholders & OP unit holders 48,349 43,730 39,779 92,079 76,716 Transaction and integration costs 381 216 1,039 597 2,253 Operating FFO available to common stockholders & OP unit holders (1) 48,730 43,946 40,818 92,676 78,969 Maintenance capital expenditures (4,220) (1,662) (2,233) (5,882) (2,942) Leasing commissions paid (6,805) (8,998) (6,528) (15,803) (13,043) Amortization of deferred financing costs 991 987 979 1,978 1,957 Non real estate depreciation and amortization 3,358 3,370 2,937 6,728 5,798 Straight line rent revenue and expense and other (5,702) (3,755) (979) (9,457) (2,401) Tax expense (benefit) from operating results 138 (169) 199 (31) 410 Equity-based compensation expense 6,082 4,875 4,296 10,957 7,596 Adjustments for unconsolidated entity (88) 66 (42) (22) (20) Adjusted Operating FFO available to common stockholders & OP unit holders (1) $ 42,484 $ 38,660 $ 39,447 $ 81,144 $ 76,324 June 30, 2019 Six Months EndedThree Months Ended June 30, 2019March 31, 2020June 30, 2020 June 30, 2020
  22. 22. © QTS. All Rights Reserved. 21 MRR Reconciliation $ in thousands Recognized MRR in the period Total period revenues (GAAP basis) $ 131,640 $ 126,292 $ 119,167 $ 257,932 $ 231,856 Less: Total period variable lease revenue from recoveries (12,528) (12,275) (12,672) (24,803) (23,465) Total period deferred setup fees (4,520) (3,924) (3,822) (8,444) (7,053) Total period straight line rent and other (9,327) (8,032) (5,485) (17,359) (9,428) Recognized MRR in the period 105,265 102,061 97,188 207,326 191,910 MRR at period end Total period revenues (GAAP basis) $ 131,640 $ 126,292 $ 119,167 $ 257,932 $ 231,856 Less: Total revenues excluding last month (87,538) (82,446) (77,863) (213,830) (190,552) Total revenues for last month of period 44,102 43,846 41,304 44,102 41,304 Less: Last month variable lease revenue from recoveries (4,350) (4,156) (4,222) (4,350) (4,222) Last month deferred setup fees (1,533) (1,410) (1,322) (1,533) (1,322) Last month straight line rent and other (2,480) (3,669) (3,349) (2,480) (3,349) Add: Pro rata share of MRR at period end of unconsolidated entity 352 352 369 352 369 MRR at period end $ 36,091 $ 34,963 $ 32,780 $ 36,091 $ 32,780 Six Months EndedThree Months Ended June 30, 2020 June 30, 2019 June 30, 2019March 31, 2020 June 30, 2020