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QTS Realty Trust, Inc. (QTS)

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QTS Realty Trust, Inc. (QTS)

Q3 2018 Earnings Conference Call

October 30, 2018 08:30 AM ET

Executives

Stephen Douglas - IR

Chad Williams - Chairman and CEO

Jeff Berson - CFO

Jon Greaves - Chief Technology Officer

Clint Heiden - Chief Revenue Officer

Tag Greason - Chief Hyperscale Officer

Analysts

Erik Rasmussen - Stifel

Jordan Sadler - KeyBanc Capital Markets

Eric Luebchow - Wells Fargo

Ari Klein - BMO Capital Markets

Robert Gutman - Guggenheim Securities

Sami Badri - Credit Suisse

Michael Funk - Bank of America

Frank Louthan - Raymond James

Richard Choe - JP Morgan

Sydney Marks - MoffettNathanson

Jonathan Atkin - RBC

Nate Crossett - Berenberg

Presentation

Operator

Good morning and welcome to the QTS Realty Trust Inc. Third 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' Third 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 website 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 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 core revenue, FFO, core operating FFO, adjusted operating FFO, monthly recurring revenue, ROIC, adjusted EBITDA, and core 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. Good morning and welcome, everyone. QTS’ financial results during the third quarter demonstrate the strong performance of our team and differentiated platform and this performance is supported by an industry demand backdrop that is as robust as we've seen as a company. Earlier this year, we laid out multiple strategic initiatives that we had high confidence would drive an acceleration in our business performance. And as you can see in our third quarter results, QTS has delivered on those initiatives with strong execution.

We have put up the strongest performance in the first three quarters of 2018 that we have had as a public company. Our strength and momentum has been a direct result of the changes we implemented at the beginning of the year. We have now firmly put the restructuring behind us and our success is poised to carry us into equally strong 2019. During the third quarter, we generated one of the strongest quarters of leasing volume in QTS’ history with a broad based strength across our balanced Hyperscale Hybrid co-location verticals and our Hyperscale sales pipeline is the strongest we've ever had.

Hyperscale contributed about third of the leasing volume in the quarter. With the momentum carrying over into Q4, this caps off a record 52 million of year-to-date bookings for QTS. Next, we significantly outperformed our initial expectations and have fully completed the transition of customers to GDT's platform, both ahead of schedule and with significantly higher customer retention, which now positions our business for an acceleration in 2019.

In addition, our core profitability has expanded by over 500 basis points year-to-date. Churn has reached a record low for our core business and our revenue and profitability growth is accelerating. QTS’ successful execution of our strategic initiatives has positioned our business for a new level of performance, setting the stage for continued strong growth, heading into 2019.

Turning to slide 3, our third quarter results reflect QTS’ solid execution across our Hyperscale and Hybrid co-location platforms. QTS delivered a very strong Q3 leasing performance, building on the sales momentum that we exhibited during the first two quarters of 2018. QTS’s signed leases representing 18.1 million of incremental annualized core revenue in the third quarter, well above our prior four quarter average and representative of expanding pipeline of opportunity.

Moreover, this leasing reflects a very healthy mix of customers and locations across our footprint and the strength in the Hyperscale vertical that we've discussed in recent quarters. Year-to-date, we've signed leases, representing more than 52 million of incremental annualized core revenue, which is the highest in our company's history through the first three quarters of a year. Accelerating leasing performance continues to support the growth in our financial metrics.

During the third quarter, we reported year-over-year growth in core revenue and adjusted EBITDA of 14% and 20% respectively. On a year-to-date basis, through the third quarter, core revenue and adjusted EBITDA are up 15% and 24% respectively. This remains consistent with our expectation for an acceleration in our top line revenue growth for ’19 and beyond.

We have also been able to generate a meaningful improvement in our overall profitability through a streamlined go to market strategy and efficiency gain by leveraging our software defined datacenter platform. During the third quarter, QTS reported a core adjusted EBITDA margin of approximately 51%, which represents a 250 basis point improvement year-over-year. In addition, we've been able to enhance the predictability of our business by realizing customer churn rates well below our historical average through execution on a more simplified product mix.

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