Hyperscale Data Center Leases Deliver QTS a Record Quarter

The third quarter was the “second highest leasing quarter” in QTS Realty Trust’s history, the data center provider’s executives said on an earnings call Tuesday.

Reporting big wins in hyperscale and federal-government verticals, and steady sailing in what QTS calls “hybrid colocation,” the executives said they had raised the company’s revenue and EBITDA guidance – for the second time this year – by 11 percent and 16 percent at the midpoint of the two ranges respectively.

The first of seven publicly traded US data center providers to report the period’s earnings, QTS's business continues to feel little impact from the ongoing pandemic. The company’s executives have gone from cautious optimism on the first-quarter earnings call, no more than one month into US lockdowns, to full-throated optimism six months later.

“While the pandemic continues to impact nearly every industry to some extent, we have continued to see customer payment trends approaching more normalized levels, and our development activity remains on track,” Chad Williams, QTS chairman, president, and CEO, said. “Overall, customer demand remains robust and broad-based across our target customer verticals, supporting consistent growth in our key financial metrics.”

The company expects to have built about 60MW of new data center capacity in 2020 and a similar amount next year. That annual amount is about three times what it built in each of the three preceding years, QTS CFO Jeffrey Berson said.

Related:QTS Says Some Data Center Tenants Have Sought Payment Relief

QTS reported $137.5 million in revenue for the quarter, up about 10 percent year over year. Its adjusted EBITDA was $76 million, up about 21 percent. Operating FFO per share was $0.70, up about 8 percent.

Adding to the recent talk in the data center business community of the flood of new investors looking to take advantage of the industry’s growth and in the process pushing down expected rates of return on investment, Williams said QTS passed on more deals this year than in the past, because the deals did not meet its return expectations.

“We don't necessarily like to walk away from deals, but I've walked away from more deals this year than any year that we've had, because we're going to stay disciplined on capital efficiency and return on invested capital,” he said. “That's how you grow the bottom line. So, we're going to stay focused on that.”

The leases signed during the third quarter will add $26 million in rent annually, the company said.

Three deals, all with hyperscale cloud platforms, made QTS’s third quarter stand out from the rest: an 8MW lease by a hyperscaler in Atlanta, a 3.5MW lease by another hyperscaler in Richmond, Virginia, and a 5MW lease by a hyperscaler to serve a federal customer at an undisclosed location. The first two hyperscalers were existing customers, and the third one was a new logo for QTS.

Related:Investment Bankers Expect the Pandemic to Fuel a Long-Term Data Center Boom

Its Hybrid Colocation business, responsible for about two thirds of the company’s revenue and driving higher return on capital than the hyperscale and federal segments, continued “to deliver leasing performance quarter-to-quarter in a high-single-digit-million range,” Williams said, without specifying the number.

QTS provides colocation space, disaster recovery, onramps to AWS, and other services under the Hybrid Colocation umbrella.