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QTS Realty Trust, Inc. (QTS)

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QTS Realty Trust, Inc. (QTS)

Q2 2018 Earnings Conference Call

July 26, 2018 8:30 am ET

Executives

Stephen Douglas - VP, IR

Chad Williams - Chairman and CEO

Jeff Berson - CFO

Jon Greaves - Chief Technology Officer

Clint Heiden - Chief Revenue Officer

Analysts

Jordan Sadler - KeyBanc Capital Markets

Robert Gutman - Guggenheim Securities

Ari Klein - BMO Capital Markets

Richard Choe - JP Morgan

Erik Rasmussen - Stifel

Frank Louthan - Raymond James

Eric Luebchow - Wells Fargo Securities

Nick Del Deo - MoffettNathanson

Simon Flannery - Morgan Stanley

Presentation

Operator

Good morning and welcome to the QTS Realty Trust Second Quarter Earnings 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. Please go ahead.

Stephen Douglas

Thank you, Operator. Hello everyone and welcome to QTS' Second Quarter 2018 Earnings Conference Call. I'm Stephen Douglas, Head of Investor Relations at QTS, and I'm joined here today by Chad Williams, our Chairman and Chief Executive Officer, and Jeff Berson, our Chief Financial Officer. We are also joined by 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 Web-site at www.qtsdatacenters.com on the Investors tab. We have also provided slides and made them available with the Webcast and on our Web-site, 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 number of risks and uncertainties, as described in our SEC filings, and actual 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 core revenue, FFO, core operating FFO, adjusted operating FFO, monthly recurring revenue, ROIC, adjusted EBITDA, and core adjusted EBITDA.

As a reminder, in conjunction with our previously announced strategic growth plan, beginning last quarter we realigned various information included in our earnings materials to focus our guidance and key performance metrics around our core business which primarily consist of our Hyperscale and Hybrid Colocation businesses, along with the technology and services from our Cloud and Managed Services business that support Hyperscale and Hybrid Colocation customers, which together will be the Company's primary business following the completion of the strategic growth plan. For informational purposes, QTS has excluded its estimated Non-Core business from certain financial and operating statistics within our earnings materials.

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 Web-site.

And now, I will turn the call over to Chad.

Chad Williams

Thanks, Steve. Hello and welcome everyone. QTS' strong performance during the second quarter reinforces that the strategic initiatives we implemented are successfully driving significant value and growth in our business.

Turning to Slide 3, through our accelerated efforts around Hyperscale and Hybrid Colocation verticals and leaning in on the significant differentiation enabled by our software to find data center platform, our business model is uniquely positioned to capitalize on the two strongest drivers of demand in the sector. And I am pleased to say that our execution on our strategic growth plan has resulted in accelerated financial performance for two consecutive quarters to start 2018.

During the second quarter, we reported year-over-year growth in core revenue and OFFO per share of 16% and 15% respectively. This is consistent with our expectation for an acceleration in top line growth approaching mid-teens by 2019.

In addition, our strategic growth plans has enabled QTS to achieve the highest margin in the Company's history with a core adjusted EBITDA margin of approximately 52% during the second quarter, representing more than 500 basis points of improvement year-over-year.

Our strong financial performance in the second quarter was supported by our continued positive leasing momentum. QTS delivered core net leasing of 13.1 million of incremental annualized revenue in the second quarter, in line with our prior four-quarter average. This performance was particularly strong, considering our higher-return Hybrid Colocation business accounted for most of the volume in the quarter.

Our strategic growth plan has also positively contributed to the predictability of the performance in our business, including a significant reduction in customer churn. Our initial churn guidance for the core business this year was between 3% to 6%, which compares to the churn rate we have historically experienced in the consolidated business of between 5% to 8%. The 200 basis point reduction in the churn correlates directly to the increased revenue growth and provides further support to our expectation for acceleration in our business.

During the second quarter, we reported core rental churn of 0.8%, bringing our year-to-date churn to only 1.8%, which is among the lowest in the industry and is currently on track to be approximately half the churn we have experienced in our consolidated business in 2017.

I'm very pleased with our team's performance through the first half of the year. We have laid out an ambitious plan to drive accelerated growth in our business and our team has executed at a high level. In a very short period of time, we have taken significant strides in positioning QTS to capitalize on the strong underlying demand we are seeing in the market in both Hyperscale and Hybrid Colocation and driving enhanced value creation. And the results of our growth initiatives are showing up in our strong core financial and operating results year-to-date.

Moving to Slide 4, one of the initiatives we were excited to announce last quarter was our strategic partnership with GDT. GDT is an international multi-vendor IT solutions provider, headquartered in Dallas, Texas. GDT is also a current QTS customer and partner, and consistent with our plan to narrow the scope of our Cloud and Managed Services that we directly deliver, we are in the process of transitioning certain non-core Cloud and Managed Services customer contracts and support to GDT.

Read the rest of this transcript on seekingalpha.com