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QTS Realty Trust, Inc. (QTS)

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QTS Realty Trust Inc. (NYSE:QTS)

Q1 2017 Earnings Conference Call

May 2, 2017 8:30 AM ET

Executives

Stephen Douglas - Head of Investor Relations

Chad Williams - Chairman and Chief Executive Officer

Bill Schafer - Chief Financial Officer

Dan Bennewitz - Chief Operating Officer, Sales and Marketing

Jim Reinhart - Chief Operating Officer, Operations

Jeff Berson - Chief Investment Officer

Analysts

Matthew Heinz - Stifel Nicolaus

Andrew DeGasperi - Macquarie

Jonathan Atkin - RBC Capital Markets

Jordan Sadler - KeyBanc Capital Markets

Robert Gutman - Guggenheim Securities

Paul Morgan - Canaccord

Richard Choe - JPMorgan

Frank Louthan - Raymond James

Jon Petersen - Jefferies

Eric Luebchow – Wells Fargo

Simon Flannery - Morgan Stanley

Vincent Chao - Deutsche Bank

Presentation

Operator

Good morning and welcome to the QTS First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Stephen Douglas, Head of Investor Relations. Please go ahead sir.

Stephen Douglas

Thank you, operator. Hello, everyone and welcome to QTS's first quarter 2017 earnings conference call. I am Stephen Douglas, Head of Investor Relations at QTS and I am joined here today by Chad Williams, our Chairman and Chief Executive Officer; Jeff Berson our Chief Financial Officer and Dan Bennewitz, our Chief Operating Officer, Sales Products and Marketing. We're also joined by and additional members of our executive team who will participate in Q&A.

Our earnings release and supplemental financial information are posted in the Investor Relations section of our website at www.qtsdatacenters.com on the Investors tab. We also have provided slides and made them available with the webcast and on our website, which we hope will 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 certain number of risks and uncertainties as described in our SEC filings and actual future results may vary materially. Forward-looking statements in the press release that we issued yesterday, along 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 FFO, operating FFO, adjusted operating FFO, MRR 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 financial measures and a reconciliation of them to our GAAP results. These documents are available on the Investor Relations page of our website.

And now I will turn the call over to Chad.

Chad Williams

Thanks, Stephen. Hello and welcome to QTS's first quarter 2017 earnings call. Our growth continues to be driven by our QTS core strategy of providing fully integrated datacenter solutions across the broad footprint of mega scale infrastructure.

On Slide 3, from QTS’s inception, our fully integrated and flexible model was built from the understanding that not every IT requirement fits into a single standardized infrastructure bucket. Our ability to grow and evolve with customers as their IT infrastructure changes, allows QTS to continue to support the future needs of their IT stack.

We continue to see evidence that demand for hybrid IT datacenter services is not only accelerating, but rather becoming the standard IT infrastructure model for enterprise customers. According to Rightscale 2017 State of the Cloud Report, leveraging hybrid cloud is the top priority for enterprise central IT and based on IBM’s 2016 Applied Insight Survey, 70% of hybrid IT implementers report they will always have a blend of traditional IT and cloud.

QTS has invested in the technology and the service capability to deliver a truly integrated hybrid solution that customers can manage from a single user interface as opposed to alternatives in the market, which require coordinating multiple disconnected partner relationships and products. As an example, we were pleased to recently announce that QTS is now one of the few select companies to achieve AWS Advanced Consulting Partner status. Achieving this partner level requires compliance with a rigorous set of certification and requirements which now opens up additional revenue opportunities for QTS. In addition to our ability to provide customers to access to AWS public cloud to our direct connect solution, our enhanced partner status gives QTS the unique ability to provide expert management of customers AWS public cloud solutions.

Through QTS’s integrated platforms customers continuously provision dynamic workloads on AWS which will then manage as part of the QTS delivered fully integrated hybrid cloud solution. Our enhanced partnership status is further evidence that the public cloud providers continue to look to a partner with datacenter companies like QTS that can provide the hybrid datacenter solutions that enterprise customers need.

Look for additional announcements from QTS over the coming weeks on ways we are innovating and digitizing the datacenter customer experience and further enabling our customers’ diverse hybrid datacenter strategies.

In addition, we have the premium support staff in place and securing compliant solutions to differentiate ourselves in the market, develop lasting relationships with our customers and deliver increasing value and support over time. The market opportunity from growing hybrid IT demand is significant for datacenter providers and we have a unique ability to capitalize on.

Turning to the quarterly leasing performance on Slide 4, for the quarter we signed new and modified leases totaling approximately $4.3 million of net incremental annualized rent. This was below our four quarter average and was not in line with our internal leasing targets. Our leasing performance was partially impacted by several potential C1 opportunities which we had expected to close in the first quarter, but ultimately were pushed beyond Q1 in addition to a somewhat lighter C2 leasing quarter.

As we discussed in previous quarters, wholesale deals can be uneven as customers do not buy in quarterly windows but when they hit, they offer the opportunity to accelerate growth. This can create volatility in reported quarterly leasing results as we’ve experienced in certain quarters in the past and we will continue to see in certain quarters in the future.

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