QTS Realty Trust, Inc (NYSE:QTS)
Q2 2014 Earnings Conference Call
July 30, 2014 10:00 ET
Jeff Berson – Chief Investment Officer & IR
Chad Williams – Chairman & CEO
Bill Schafer – CFO
Dan Bennewitz – COO, Sales and Marketing
Jim Reinhart – COO, Operations and Development
Simon Flannery – Morgan Stanley
Jordan Sadler – KeyBanc Capital Markets
Barry McCarver – Stephens
Welcome to the QTS Realty Trust Second Quarter 2014 Conference Call. (Operator Instructions). I would now like to turn the conference over to Jeff Berson. Please go ahead, sir.
Thank you operator. Hello, everyone and welcome to QTS’s second quarter 2014 conference call. I’m Jeff Berson, Chief Investment Officer and Head of Investor Relations in QTS. And I’m joined here today by our presenters; Chad Williams, our Chairman and Chief Executive Officer and Bill Schafer, our Chief Financial Officer. We’re also joined by Dan Bennewitz, our Chief Operating Officer, Sales and Marketing and Jim Reinhart, our Chief Operating Officer, Operations and Development, who will participate in the Q&A.
Our earnings release and supplemental financial information is posted in the Investor Relations section of our website at www.qtsdatacenters.com on the Investors tab. We’ve also 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 FFO, operating FFO, adjusted operating FFO, MRR, 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, to 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’ll turn the call over to Chad.
Thanks Jeff. Hello and welcome to our second quarter 2014 earnings call. We’re pleased to be speaking with you today to update you on our recent exciting events and strong continued momentum at QTS. On slide 3 for the second quarter we achieved record revenue of 51.3 million adjusted EBITDA of 23.3 million and operating FFO of 18.4 million, all demonstrating strong year-over-year and sequential growth. In addition to our fully integrated technology services platform in our 3C product mix we have continued to support strong leasing activity providing continued confidence and visibility for our future performance.
During the second quarter we achieved 17.7 million in annualized net incremental leasing activity, the highest level leasing in our company’s history. With the significant leasing momentum that we continue to experience, our book but not billed revenue now represents $41 million of annualized MRR which is significantly higher than the last quarter and the highest level on the company’s history.
In addition to our strong quarterly performance and backlog we have continued to experience strong pricing trends and significant leasing momentum in our Dallas, Richmond and Atlanta facilities. While leveraging our broad product offering for our growth in our existing facilities we also continue to grow our platform in unique ways. We have recently announced two transactions that support our ability to identify opportunities to acquire significant infrastructure at low basis in strong markets. These new facilities will support our unique 3C product mix while earning strong return on capital metrics our recent transactions with McGraw Hill and Atos in the acquisition of our new Chicago facilities are examples of these unique expansion opportunities.
Lastly we recently completed two debt refinancing transactions that we believe strengthens our balance sheet with long term capital at attractive pricing. All of this supports our continued high level performance and successful execution of our business strategy.
Today I will review our sales results, leasing activity and pricing trends. I will also discuss some significant customer wins across our portfolio including significant leasing momentum in Richmond and Dallas facilities and provide an update of our development pipeline. I will then cover in further detail the exciting events that we have announced in the past few weeks regarding our new market expansions and sale lease back transactions. Bill will then provide a summary of our second quarter financial performance, our capital plan for the future development and provide more color on our recent balance sheet transactions. We will then open up the call to questions.
Let me begin with a quick recap of our QTS strategy which has provided our company with unique opportunity to drive strong growth, industry leading returns on capital and performance for our second quarter results. On slide 4, our differentiated strategy that is driving our success is based on two core principles. First we’re driving strong revenue growth through our fully integrated technology services platform supported by our 3C product mix.
This mix enables QTS to provide flexible solutions to meet the very needs of our sophisticated enterprise customers. These customers value and require the high level of security and compliance that is the core of each of our products. Our product mix also enables us to engage in a larger potential market including the fast growing private cloud and managed service market.
It allows us to upsell the services to grow our customer base lastly this unique product mix drive strong pricing of our products and enhances our customer retention. The second key aspect of our strategy is leveraging our world class real estate infrastructure to support the cost efficient delivery of our data center products with mega scale infrastructure rich owned data centers acquired at an initial low cost with significant capacity we can achieve low cost to build metrics of average approximately 7 million per megawatt across our portfolio with better visibility and less risk.
In fact with our 800,000 square feet of fully improved raised floor that is 90% occupied we have the powered shell capacity within our existing facilities to more than double our raised floor capacity to approximately 2.1 million square feet. This capacity supports our growth with known below market cost and gives us the ability to attract larger strategic customers looking for flexible mega scale space without impacting our capacity for significant C2 and C3 business as the engine of our growth.
The infrastructure has been developed to a proven ability to acquire infrastructure rich properties at a low basis which enables our advantage cost to build metrics and our ability to add incremental capacity in just in time capital efficient approach.
These two core strategic focuses drive our financial model that include strong top line growth and operating leverage to produce sector leading growth in operating profit while delivering upon our expectation to provide 15% plus on levered returns on invested capital for our full stabilized portfolio.
Now onto the second quarter performance as seen on slide 5, our strategy continued to result in strong performance for the quarter across our portfolio. We continue to demonstrate operating leverage through our year-over-year operating FFO growth of 66% versus the second quarter of 2013 and adjusted EBIT growth of 32% over the same period. We achieved 25% growth in net operating income versus the second quarter of 2013 and top line revenue increased approximately 20%. We also achieved an annualized unlevered return on invested capital of 15.5% for the second quarter of 2014.
On slide 6, our sales growth and continued momentum can be seen in our second quarter leasing performance. During the quarter we successfully signed new and modified leases representing approximately 17.7 million of net incremental annualized rent. This leasing activity represents a strongest leasing quarter we have had in our history and up approximately 70% from a strong first quarter. I would like to note while we’re pleased with the leasing activity we do not anticipate future quarters to remain as this significantly above our average level.
Our performance during the second quarter also is evidenced of our strengthen of our 3C model and our ability to provide stable profitability with our flexibility in comprehensive product mix. If you remember our strong performance in first quarter you will recall that we had very little C1 leasing activity but the strength of our C2 and C3 product engines drove our continued growth.
During the second quarter our C2 and C3 business remained strong for our business but we also benefited from the significant C1 activity which can provide a profitable upside to our core C2 and C3 cloud and managed service offerings. This continued momentum in our leasing activity is driving our record annualized book but not billed backlog of over 41 million, a 37% increase over our record backlog at the end of first quarter. This signed and committed backlog supports our confidence and visibility in the continued growth of our business for the remainder of 2014 and beyond.
Next on slide 7 we had a number of wins in the quarter across our national footprint that we continue to help push future financial performance. First in Richmond, we experienced continued momentum based on the unique scale and quality of our facility. It's strategic location in our market leading security and compliance. Based on these factors we sold a total of 3.2 megawatts representing our full product mix of C1, C2 and C3 services. Our C1 win was to a top tiered diversified global financial services company that ramps over a multi-year period.
This customer was attracted to QTS by our leadership and security and compliance as well as the strategic location and physical security that our Richmond data center offers. We also signed a new lease with the leading retailer who is utilizing our C2 and C3 products. Similar to our C1 customer win this retailer valued our market leading security and compliance and was looking for a total solution that also can incorporate their managed service and cloud needs. Both of these wins are new customers to QTS and we’re excited to welcome them to the QTS family where we can grow with them for years to come.
Next our Dallas-Fort Worth mega data center facility which is opening in Q3 achieved significant preleasing during the quarter. We have executed new leases for 26,000 square feet which represents the entire initial development space scheduled to come online in 2014. This space was presold to a number of customers including a major C1 customer which operates in the software as a service sector and C2 and C3 space to large leading global Web 2.0 technology provider. A number of these customers were existing QTS customers who continue to see the value and flexibility that we offer and have continued to grow with us in multiple facilities.
We believe the early momentum in Dallas-Fort Worth with the multi-facility customers utilizing all of the 3C products demonstrates the value of our integrated product strategy and the strength of our customer’s relationships. While there will be upto a six month ramp for some of these implementations these activities covers the entire initial development that we have originally scheduled to come online during 2014.
Based on this preselling activity and continued demand that we’re seeing, that we’re planning on accelerating our redevelopment of this facility to bring additional capacity online in early 2015. This is consistent with our flexible capital spin which allows us to manage market demand and drive strong returns by spending our CapEx in an efficient way and through a just in time delivery.
As we have said in the past we are excited to be in Dallas-Fort Worth market with a tremendous facility in an attractive location and our leasing activity confirms our belief that this market will continue to drive strong value for QTS.
Finally we continue to see strong momentum in our cloud and managed service products with a key contract with one of the top IT security service providers to the federal government and commercial enterprises. This customers selected QTS federal cloud as well as our enterprise cloud products based on our ability to support its federal agency business with our high level of security and compliance including our FedRAMP certification which is pending Federal approval.
Another interesting aspect of this deal is our ability to offer a multi-location, national footprint as evidenced by this customer using four different QTS locations to host it's cloud services.
Now on to pricing trends, as detailed on slide 8 in addition to the growth in our leasing activity we continue to see evidence that our differentiated strategy supports pricing stability. Second quarter pricing from new and modified leases in the aggregate was impacted by a higher percentage of C1 activity. On a consolidated basis you will see variability in this number quarter-over-quarter depending on the product mix.
Looking at C1 for the quarter new and modified leases average $230 per square foot which is above our prior four quarter average. This increased pricing level is significant in part because we have had several very large C1 customers who contracted for larger amounts of space during the quarter and yet we were able to sign these larger leases while maintaining strong pricing. Pricing for our C2 and C3 new and modified leases average $1208 per square foot for the quarter approximately 14% above our prior four quarter average.
Regarding renewals on a like for like basis where customers renewed contracts without changing square foot, we experienced renewal rates for the second quarter 2014 at 1% above the pre-renewal pricing rates. This increase in renewal pricing is consistent with our past experience of normalized renewal pricing increases in the low to mid-single digits. Leasing commitments during the quarter were impacted by high percentage of C2 and C3 activity, as a result of this product mix average pricing on commenced leases during the quarter was significantly higher than the prior four quarter.
By product mix pricing on C1 commencements were 30% higher than the prior four quarter average. Pricing on C2 and C3 commencements also was up 31% from the prior four quarter average. We believe that when adjusting for product mix and deal size and market and current leases commencements and renewal rates are consistent with our trailing results and continue to demonstrate the stability and positive trends being driven by our 3C business model.
Now I would like to talk about some recent transactions which we announced over the last few weeks that we believe will provide QTS with strong future path towards continued profitable growth.
QTS’s recently implemented a strategic to unlock the largely untapped enterprise outsourcing market by utilizing our full integrated technology services platform. We believe we have a unique ability to provide enterprise users with the technology capabilities to support this significant IT shift matched with critical security and compliance capabilities that they require. We can offer these services over a real estate infrastructure approach which will enable these enterprise customers to monetize underutilized data center assets.
We offer enterprise customers the opportunity to leverage QTS’s operating efficiencies and our security and compliance measures to improve performance for their existing facilities. We do this through our newly created critical facilities management or CFM Group where we utilize our integrated platform to manage enterprise data centers. We can utilize our CFM services in enterprise own facilities or in connection with QTS taking ownership of the data center in a sale lease back structure where QTS can increase the value by using our services to broaden the customer base in a multi-tenant environment. Through this new strategy on slide 9, we have recently completed the sale lease back transaction with McGraw Hill Financial and Partnership with Atos.
This transaction fits our strategy and that it supports our 3C product offering was purchased with significant infrastructure at a low cost basis is a large scale facility and in an attractive location and has significant capacity for expansion.
The facility located in New Jersey is 560,000 gross square feet on a 194 acres. There are currently 58,000 square feet of raised built out in 12 megawatts of power available. The site also includes one of the largest privately owned net metered solar fields in the world. The solar field is 50 acre, 14 megawatt structure from which the data center will receive 3 megawatts of free power annually. The solar field is additional feature that supports QTS’s continued efforts to be a leader in green initiatives.
Consistent with our past expansion we purchased a facility at a low basis with a total all-in acquisition cost of approximately 75 million including transaction cost. Also this site supports future organic growth. There is additional capacity more than double the facility adding another 100,000 square feet of raised floor and 20 megawatt to power as well as significant additional land that can be further developed.
In connection with this acquisition, QTS has signed a lease for the existing 58,000 square feet and 12 megawatts to Atos, a leading international information technology services company. This lease is 10 year triple net lease with annual escalators and a 15 years’ worth of extension options.
Under this arrangement QTS will provide Atos with its customized data center C1 offering as well as its new CFM service. Atos will then package QTS’s C1 and CFM services with its own IT sourcing offering McGraw Hill Financial who will continue to use the New Jersey facility for its data center needs. This lease should generate in initial return for QTS of 10% plus with the additional capacity to support our ultimate return goal of 15% plus annualized unlevered return on invested capital on a fully stabilized basis.
In addition to New Jersey transaction the Atos arrangement represents the launching of a new strategic relationship between QTS and Atos in which QTS will act as Atos’ North American data center partner supporting Atos’ service offering with QTS data center ownership and facility management options for Atos and its customers. We’re excited about this transaction and the fit with our overall strategies for a number of reasons. On the business side this will allow us to sell our 3C product offering and will give us additional capacity in the North East market with an infrastructure rich mega scale facility acquired at a low basis.
We’re excited about the new customer relationships with both McGraw Hill and the broader partnership with Atos. We believe these relationships will continue to grow and support future business opportunities for QTS. In addition to the strong upfront return from the contract, we will provide stability and derisk future expansion at the site and it's consistent with our strategy to grow our business in a lower risk capital efficient approach.
Next on slide 10, we also recently announced the QTS closed on a mega scale data center in Chicago. This facility fits well into our strategy and business model, in that it will support a 3C product offering and is a mega scale infrastructure rich property acquired at a low cost basis. This side has plenty of capacity that can be brought online at a below market redevelopment cost and is in a great location in which we believe to be extremely attractive market.
Chicago is a Tier 1 market which we have had been looking to enter for some time and have been waiting for the right opportunity and entry point. The facility, the former Chicago Sun Times print facility at 2800 South Ashland Avenue was built in 1998 and had over a 100 million of capital invested into the site. In addition the facility fits on 30 acres and it's located in the heart of the Chicago high demand downtown corridor. We believe this amount of space in such a strategic location represents a unique opportunity for QTS.
The purchase of this facility $18 million consistent with our low risk approach to market expansion. The 317,000 gross square feet facility has capacity of approximately a 134,000 square feet of raised floor and 24 megawatts of power.
We intend to redevelop the facilities of our 215,000 square feet of raised floor and 37 megawatts of power. In addition the property is 30 acres of land provides us with future expansion capacity to approximately double the existing facility. The development plan for the Chicago Facility which is consistent with our approach across our portfolio is to build out in smaller increments and at a below market cost to manage our capital efficiency and build in response the real-time customer demand. We expect construction again in 2015 with a moderate initial build similar to the deliberate capital efficient approach we took in Dallas-Fort Worth facility.
We do not anticipate meaningful revenue contribution from the Chicago Facility until 2016 and consistent with our other mega scale infrastructure-rich low-basis assets we believe we will be able to drive strong double digit returns on the facility quickly and achieve our 15% plus unlevered return on invested capital on a fully stabilized basis. We believe the market trends in Chicago are extremely favorable with stable pricing and enterprise market that will support a broad product mix of wholesale, co-location and cloud and managed service business.
This location will help us continue to diversify our revenue across our nation-wide footprint and provide a path for future growth and expansion for years to come. We’re extremely excited about this opportunity and we will keep you updated on ongoing progress over the upcoming quarters.
In summary on slide 11, these are exciting times at QTS, we continue to deliver strong financial results as seen by our second quarter performance, our growth and profitability trends are continuing to demonstrate the strength of our business model. In addition our leasing momentum, pricing stability and record backlog gives us continued confidence that our profitable growth will continue.
We’re also very pleased with the momentum on our more recent initiatives including the redevelopment and leasing at Richmond and Dallas and our new federal cloud product. Lastly, the acquisition announcements of the last few weeks will position QTS for continued growth well into the future and support our ability to continue to build a diversified national platform in a capital efficient derisk manner with the right scale facilities in the right markets and at the right time.
We’re driven by our belief that the 3C product offering continues to differentiate us in the marketplace, we will deliver this fully integrated premium technology service offering through our world class infrastructure with capacity to enable us to deliver these products at a below market cost we believe strongly that this approach is the right way to continue to build our business delivering strong growth and profitability, low risk in capital efficient manner.
Now I will ask Bill Schafer to give you further color on our financial performance, capital plan and balance sheet management. With that over to you Bill.
Thanks Chad. And I would like to say hello to everyone as well. I will begin my remarks today first by reviewing our second quarter financial results. Second I will provide an update regarding our capital spend plan and finally I will review our balance sheet and the recent activity we have undertaken to strengthen the balance sheet and increase liquidity of the company.
For the second quarter results as seen on slide 13, we have continued to demonstrate strong and accelerating growth and in addition to strong top line momentum our operating leverage continues to drive increasing margins which supports even stronger growth and our operating profit. For the quarter ended June 30, 2014 our operating FFO was 18.4 million an increase of 66% over the second quarter of 2013. Our fully diluted operating FFO per share for the second quarter was $0.50 per share for the second quarter was $0.50 per share. Our second quarter adjusted EBITDA was 23.3 million an increase of 32% over the second quarter of 2013 and our net operating income for the second quarter was 33.7 million an increase of 25% over Q2, 2013.
On the top line revenue for the second quarter was 51.3 million a 20% increase over the second quarter of 2013 and our MRR or monthly recurring revenue was 16 million at June 30, 2014 reflecting a 26% increase over the June 30, 2013 MRR.
At June 30, 2014 MRR level of 16 million includes the Atos lease that was executed on June 30, 2014. We also saw a strong sequential growth in the second quarter, looking at Q1, 2014 to Q2, 2014 sequential performance operating FFO grew 6.4%, adjusted EBITDA grew 7.6% and NOI grew 6.9% and total revenue increased 4.9% and MRR grew 10%.
But looking at our second quarter EBITDA it is important to note that our quarter was impacted by a previously announced onetime charge of over 1 million due to restructuring and relocation of remote employees to our operation service center in Suwanee and our corporate headquarters. We expect that additional charges of approximately 200,000 will be incurred in the third quarter relating to this restructuring. In addition our second quarter EBITDA was impacted by transaction cost primarily associated with the New Jersey acquisition of approximately 1.1 million.
Both of these charges were added back for purposes of calculating adjusted, operating FFO and operating FFO per share. We have continued to see improvement in our net operating income in all of our facilities throughout the country, as outlined on slide 14, our business has also continued to benefit from increasing margins due to operating leverage in our cost structure over the past year. Our operating leverage resulted in adjusted EBITDA margins increasing by approximately 420 basis points over the prior year period to 45.4% up from 41.2% in the second quarter of 2013.
We continue to expect our operating leverage will drive margin improvement as our business realizes efficiencies of scale and we continue to be comfortable with our target EBITDA margins approaching 50% within the next few years. On slide 15, our backlog of annualized booked not billed revenue from signed but not yet commence leases was over 41 million of annualized revenue as of June 30, 2014.
As Chad mentioned this is record high for the company, well above our last quarter’s prior record of nearly 30 million and gives us great comfort on the growth embedded in the business today. We expect leases representing approximately 13.5 million of annualized MRR to commence in the balance of 2014 which will contribute an additional 4.7 million of MRR in 2014.
Leases representing approximately 13.6 million of annualized MRR will commence in 2015 and the balance of 13.9 million of annualized MRR will commence in 2016 and beyond. The stability of our customer base also was evidenced in our low churn for the quarter.
Rent churn is the MRR impact of customers completely leaving the QTS platform any given period compared to the total MRR at the beginning of the period. Churn for the second quarter was 1.9% bringing churn for the first six months of 2014 to 3.4% providing further confidence in our expected business plan of 5% to 8% annual churn.
On slide 16, from a development standpoint, we leverage our flexile capital spent to allocate capital to achieve the highest returns. We do this by taking advantage of the excess capacity to redevelop data center space in our existing footprint while maintaining a high utilization rate. We currently have only developed 40% of the raised floor in our existing footprint providing the capacity to more than double our raised floor footprint within our current facilities.
This capacity provides us with a known low cost and lower risk path to support our future growth. In addition of the space that we have currently built out and is available for lease we’re currently operating at a utilization rate of over 90%. This high level of utilization demonstrates our ability to shift capital, to meet our growth and just-in-time approach which further drives our capital efficiency. Regarding second quarter development during the quarter we brought online approximately 40,000 square feet in our Atlanta Metro facility in-line with our prior plans for one of our large C1 customers based on a large expansion we have previously announced.
We also brought on 58,000 square feet of raised floor in our data center in New Jersey and approximately 5000 square feet in Suwanee. Based on our philosophy of maintaining a flexible capital spend plan which allows us to drive our returns, in Richmond we shifted approximately 11,000 square feet into 2015 and in accordance with an executed customer lease.
We still anticipate bringing on 11,000 square feet in the third quarter of 2014. This shift is based on the ramp of our recent customer wins extending into 2015 and our ability to leverage the existing capacity we have in Richmond. Next in Dallas our expected cost of bringing on the first 26,000 square feet has decreased to 42 million from our previous estimate of 56 million.
This decreasing cost is associated with customers that we have presold space to. As these customers ramp into their space in 2015 we can incur those redevelopment cost associated with the incremental power in a more efficient way to meet their needs. Also the acceleration of the next phase in Dallas which is expected to come online in early 2015 will allow us to be more efficient with some of these costs over the broader footprint to be developed.
On slide 17, CapEx spend is based on market demand, successful leasing and our flexible capital efficient model which drives strong returns. Our success based capital spend is demonstrated by our 90% utilization on leased space as a percentage of built-out capacity available to be leased.
We’re developing in small increments of space in response to customer backlog and real-time demand. Real estate related capital expenditures excluding acquisitions incurred during the second quarter were approximately 51 million a breakdown of those capital expenditures is summarized in the supplemental information provided with our earnings release.
Given our successful leasing momentum in Dallas and the acceleration in development of additional capacity to meet this demand we expect aggregate capital expenditures for 2014 to be at or slightly above 200 million. As further evidence of our success based capital spend embedded in our 2014 and beyond capital plan is approximately 45 million of development cost relating to our booked not billed leases that are signed and in our current backlog.
It is worth noting that the acquisition of our new Chicago facility will not incur any material CapEx spend in the balance of 2014 as development is scheduled to begin in 2015.
Our continued growth in capital efficiency drove an annualized return on invested capital for the second quarter of 15.5% for business this still has tremendous capacity available to drive incrementally higher returns.
This continues to exceed our target level of 15% but will vary based on the timing of new development projects, acquisitions and other expansion opportunities. As a reminder we may see average returns drop during the latter half of 2014 as we bring certain projects under construction online including our Dallas-Fort Worth facility. We anticipate returns moving back to a more typical historic levels by the end of the year.
Moving to the balance sheet, on slide 18, I will start by reviewing some recent activities we undertook to strengthen our balance sheet. In June we modified our Richmond credit facility; we extended the term on the credit facility from December 2015 to June 2019 and reduce the interest rate which provided ranges from 4% to 4.5% to the current 2.1% to 2.85%.
In connection with this modification the total capacity temporarily decreased from 100 million to 80 million of which 70 million is currently outstanding. At the same time we increased the uncommitted accordion feature from 25 million to a 120 million bringing the total capacity of the facility including the accordion feature to 200 million in aggregate.
We have recently received additional commitments aggregating $40 million of capacity which is scheduled to close in the third quarter. We’re pleased with the fact that we have been able to increase the total capacity, reduce the rate and extend the term of the facility.
We have also received an additional 10 million of commitments relating our unsecured revolving credit facility that is also scheduled to close in the third quarter. Furthermore subsequent to the end of the quarter we issued 300 million of senior unsecured notes due in 2022.
Proceeds were used to repay 75 million outstanding under our unsecured term loan with the balance being used to repay a portion of amounts outstanding under our unsecured revolving credit facility. We look to this transaction as a way to assess unsecured capital from additional sources, extend the maturity date on a significant portion of our debt to 2022 with the ability to call the debt at our option after three years.
We are also pleased with the ability to lock in a fixed rate on this debt at 5% and 7%, 8% coupon taking advantage of the current rate environment. Lastly this transaction will provide enhanced liquidity having substantially paid down the revolving credit facility.
On slide 19, I will review our resulting balance sheet position. As of June 30, 2014 our total leverage was 531.2 million including capital leases. This leverage includes the 75 million purchase price for our New Jersey facility which closed on June 30. Pro forma for an appropriate 8 million of additional annualized adjusted EBITDA from the New Jersey facility and the subsequent 18 million in borrowings associated with the purchase of our new Chicago facility, our debt to second quarter annualized adjusted EBITDA was approximately 5.4 times.
As we have said in the past we are comfortable with leverage above five times as we pursue certain growth opportunities that require upfront capital that have a clear path to delevering as revenue increases from the additional investment. We will continue to target a long term state-wise debt to EBITDA ratio of between 4 and 5 times and are comfortable with our current leverage and ability to delever as we continue to grow our EBITDA.
Additionally we believe we have significant liquidity capacity in our balance sheet. As of June 30, pro forma for the senior notes issuance and the Chicago facility acquisition and the recently obtained additional commitments on our credit facilities. We have a total of approximately 450 million in liquidity in the business made up of 442 million available under our credit facilities and 7.5 million in cash.
We’re pleased with the strengthening of our balance sheet and the liquidity that we have available at attractive pricing and we’re comfortable that we have the right balance sheet structure and capacity to continue to support the growth of our business.
Finally on slide 20, with respect to guidance we have had a number of moving pieces during the second quarter that have impacted our business. Our core business performance has continued to be strong and we expect we will outperform the earlier estimates we incorporated into our prior guidance.
In addition the Atos, McGraw Hill Financial transaction will further expand our performance estimates. The impact from Atos, McGraw Hill will be more moderate during the third quarter based on incremental cost we will incur in the transition services agreement as we bring the facility management activity on to our platform during the second half of 2014.
As a result of the improved core performance along with the ramping of the Atos, McGraw Hill transaction expected in the fourth quarter. We’re raising our 2014 full year adjusted EBITDA guidance to 97 million to 101 million up from our prior guidance of 94 million to 99 million.
In addition to these transactions we’re pleased with the balance sheet transactions that we have undertaken to fix our rates, extend our maturities and improve our liquidity. These transactions however have increased our overall interest expense. We expect that this incremental interest expense will be largely offset by our improved core performance and our Atos, McGraw Hill transaction. As a result we are reaffirming our prior 2014 full year operating FFO guidance at 73 million to 77 million and our operating FFO per share guidance of a $1.95 to $2.05 per share.
As it relates to our full year guidance I would like to add additional color on the expected ramp of our performance. We anticipate that the majority of the second half 2014 financial performance improvements and growth will occur in the fourth quarter with the more moderate third quarter which is expected to be comparable with our slightly below the Q2 operating FFO levels.
This is based on a few factors including typically higher utility cost during the summer months. Some additional moderate cost increases in our internal product development and security and compliance products that will be incurred during the third quarter. And the increased interest impact from our recent 300 million debt transaction during the quarter.
Offsetting these expense increases includes the timing of our booked-not-billed coming online which is weighted towards the fourth quarter and the ramp associated with the Atos, McGraw Hill acquisition. Regarding our broader performance expectations we expect top line revenue growth for 2014 to be at the higher end of our prior guidance of mid-to-high teens growth given both our improved core performance estimates and our recent transactions. We also continue to expect annual churn of 5% to 80%. We continue to have a flexible capital expenditures plan that allows us to be efficient with our development and gives us the ability to shift capital to where we get the best returns. Given the momentum we’re seeing in Richmond and Dallas as well as opportunities in Chicago we’re anticipating capital expenditures to be slightly above our historic levels.
For 2014 in particular, in light of the accelerating bill out of our Dallas-Fort Worth facility we expect capital expenditures to be at or slightly above 200 million. We will be providing 2015 guidance during our third quarter earnings release.
Overall we’re pleased with the financial success we’re achieving and the growth in our core business. We’re excited about the incremental profitable growth that our recent acquisitions will support and finally we’re pleased that we were able to strengthen our balance sheet and improve our liquidity while maintaining strong expectations for future performances.
With that I will turn it back to you Chad.
Thanks Bill. We’re excited at the momentum of the business and the growth that we continue to achieve. We believe that our revenue model based on our differentiated 3C product offering is driving our success and is meeting the needs of our customers. Our full integrated service officering and premium customer service enables us to provide our customer CTOs and CIOs with the options flexibility and value that they increasingly require. We’re pleased that the engine of our business our core C2 colo and C3 cloud and managed service products continue to provide profitable and predictable results.
We also appreciate the upside created by our C1 product capabilities and scale capacity that was demonstrated on our second quarter results. Our C1 product can be an important factor to accelerate revenue in the early stages of facility development and enhance utilization and stability of our mega scale facilities with longer term cost benefits. This was clear from our recent activity in Richmond and Dallas where we saw significant C1 customer wins. Not only will these wins accelerate revenue in both of the facilities we were able to deliver this capacity with strong profitability and 15% plus fully stabilize return on invested capital metrics based on the low-basis and significant capacity in these mega scale facilities.
In addition to driving our financial performance our product mix is continuing to support the overall momentum in QTS leasing activity, our record leasing quarter and our all-time high booked but not billing backlog demonstrates a continued success that we’re experiencing based on our product mix and premium customer service strategy. We also are leveraging our higher end products and services to support strong rents per square foot while maintaining pricing stability and customer retention.
In addition to our product differentiation our world class infrastructure is further supporting our financial success with our mega scale own facilities at a low-basis we have significant capacity to more than double our operating platform within our existing footprint. This model has supported our operating leverage, low cost of build, and enabled customers to continue to grow with QTS.
We also have been able to demonstrate the ability to continue to grow our platform and diversify our locations in a similar mega scale cost advantage approach with our recent announcements in New Jersey and Chicago. All of this supports the financial performance that we have demonstrated including our strong growth and leading 15% plus targeted fully stabilized return on invested capital.
Which we believe will continue to drive our business and none of this would be possible without the exceptional efforts and capabilities of our people. We’re powered by our people driven by our core values and are proud of the 400 plus employees at QTS who are delivering premium customer service every day to our 800 plus customers with the right flexibility and scale that truly drives QTS’s success.
Now I would like to open up the call to questions. Operator?
(Operator Instructions) Our first question comes today from Simon Flannery of Morgan Stanley. Please go ahead.
Simon Flannery – Morgan Stanley
The leasing activity was very strong. You gave us some good color on that. I wonder if we could dive a little bit deeper onto it. Can you break it out between the new customers and growth from existing customers? And can you give us some sense of where this business is coming from? How much of this is coming from company owned data centers? How much of it is from sort of the competitive colo facilities or other sources or just new business or new applications, new installations that wasn't in existence before? Thank you.
I’m going to tag team this a little bit with Dan Benne, with our Head of Sales and Marketing but I think we continue to be affirmed in the model that the consistency of our business continues to be the commercial engine of our C2, C3 business as in the first quarter we didn’t really see a lot of C1 activity and still put up a great quarter and first quarter on leasing but you can see the power of the platform when you have that opportunity to be thoughtful and strategic about certain C1 customers I can tell you that in this quarter there was a number of net new customers to the platform even though historically 60% plus of our revenue has been coming from just existing customers expanding this quarter the ability to bring in new opportunities in Richmond and in other locations a complement with the C1s really powerful when you put that together and Dan you may want to comment a little bit more in detail on that.
So Simon in the second quarter our upgrades were about 60% of the bookings and new logos were about 40% and the first quarter is about a 2/3rds 1/3rd split. So we think that is sort of our history and what we continue to see moving forward and we like that mix because it shows that customers come with us and grow with us with strength of our 3C platform as well as our platform is attractive for new customers to join the QTS family.
Just second part of your question, we see first off building off on what Chad said is the PCO total cost model of leasing versus building is resonating in the marketplace. We see that continuing to drive demand. In addition is that the application workload, it continues to grow and whether it's cloud or legacy they both continue to grow and that drives continued growth for our customers as well as obviously attracting new customers to us.
Our next question comes from Jordan Sadler of KeyBanc Capital Markets.
Jordan Sadler – KeyBanc Capital Markets
I wanted to get a little bit more granular on the booked not billed pipeline, if possible. Specifically curious about flow through and maybe I guess mix is sort of part of the discussion in there, but as it relates to EBITDA as that comes on line. Thanks.
I think the thing we’re most proud of is to have the highest level of book but not billed visibility in the platform in the company’s history of 41 million. I think we continue to feel that’s a strong indication of kind of the platform and where the business is going. Bill do you want to talk a little bit about the flow through on that?
Yes, again we talk about there is about 4.7 million that we will record in total revenues in 2014, again it's a little bit more weighted towards the fourth quarter and I think when those revenues come online and so for if you look historically, we have probably been is what’s dropped to NOY has been probably in the mid-70s to low-80% because of the leverage we have within the existing platform. Again it comes, these revenues are coming through all the different assets including the recently opening Dallas facility which will probably have some obviously some startup cost associated with that facility but again I think we have seen a pretty significant amount of the increased revenues currently flowing down from the NOY.
Jordan Sadler – KeyBanc Capital Markets
Is it safe to say that this is -- the majority of this, say 75% is C1 customers?
If you look at the booked not billed and the revenue in 2014 and I will say the early part of 2015 is primarily C2 and C3. The longer booked not billed, so last half of 2015 and after is heavily weighted towards C1.
But Jordan you’re right, you will typically see a much higher weigh in C1 in booked not billed just because of the time between booking and billing versus the 1 to 2 months of typically getting C2, C3.
In the supplemental we break that out by year and you can see the booked not billed in after 2015 is just under 40 million in annualized revenue.
Jordan Sadler – KeyBanc Capital Markets
And then, I guess along the same lines, Bill, maybe could you help me with a pro forma leverage number as you think about at least the booked-not-billed -- what's done here as opposed to last quarter annualized? What's leverage, roughly, on that basis?
With regard to the booked not billed, we have about another $45 million worth of cost to incur associated with that booked not billed and again this gets into how we manage our development spend and dealing with the ramps in the contracts and kind of bringing the power on as needed. And some of that stuff, as you know isn't going to be needed until 2015 and maybe even a little bit beyond that. So and then the balance of our capital spend is pretty much discretionary but certainly we evaluate that based on the market demand leasing activity we see at each of the sites. So again we have indicated that we would look to probably spend around 200 million maybe a little north of that in all of ’14. We will probably spend a little over a half of that in the first half of the year. So again we will probably look at another 100 million or so for the balance of the year in capital spend.
And pro forma for leverage, when I think we put in the supplemental is if you put -- add the impact of the cost of Chicago which was not a lot and then you add the impact from McGraw Hill Atos transaction. As of the end of the quarter pro forma for those two adjustments were at about 5.4 times leverage. If you wanted a pro forma on top of that the value of the booked not billed you could and in 45 million of cost to deliver and whatever flow through you want to estimate on 40 million of revenue.
Jordan Sadler – KeyBanc Capital Markets
Lastly, just on the acquisitions, maybe for Chad -- curious how do you get from $75 million at sort of a 10% plus return to a 15% plus return on New Jersey? What sort of the pathway to that 15% plus and maybe the potential timeframe?
Jordan, couple of things. I mean I think what we feel comfortable about in and it's probably a little harder on paper to kind of see but this is a 200 acre campus, 500,000 square foot facility and all we have leased so far to Atos and McGraw Hill is the initial build of 58,000 square feet and 12 megawatt that is built out and fully improved and leased to them on a 10 year triple net lease which gets us to that 10% plus return which was -- what was interesting about the transaction for us is the ability to kind of go into a transaction with great visibility, long term kind of double digit return and then still have the capacity of almost a 180,000 square feet of fully improved shell and the ability that Atos as a U.S. data center partner for them has ambitious plans for that facility beyond McGraw Hill Financial and to bring other clients in. I think as we think about having an organic customer continuing to grow and leasing space, in fact they have a ROFR for about another 20,000 square feet of space in that building and then the ability to bring additional C1, C2 and C3 business in which we think is a nice offset to opportunities where people are little more focus on being a little further away from the water now.
And the opportunity is to still be 50 miles from Philly and 50 miles from New York really kind of puts this location near Princeton at just a very optimal location for us at a time that we feel like we have a cost advantage mega scale campus with unique infrastructure and a great client roster to start.
So it's much about the same, we have bought an infrastructure rich asset of what we think is about 50% of replacement cost. Got 200 acres of land to boot and a got a 50 acre solar field that provides 3 megawatt of free power to the facility and a world class IT outsourcing firm and Atos as a partner to expand in the U.S. with as we open other sites and have opportunities to work with their customer. So all in all it feels good to us from a derisk and opportunity and I think we feel comfortable like everything with our cost basis that will continue the next few years to kind of allocate and work towards our 15% plus return.
(Operator Instructions). Our next question comes from Barry McCarver of Stephens Incorporated.
Barry McCarver – Stephens
I guess one more question on the acquisitions and the build out. Looking out into 2015 and the leverage level, 5.4 times where it stands now, by the end of next year would you expect that that leverage is going be kind of back down in your normal operating range of 4 to 5?
As we have indicated we do look to maintain a leverage level in the 4 to 5 times on a long term stabilized basis. We have stated in the past we’re comfortable going outside that range as opportunities present themselves and there is a path to bringing that back with our growth in EBITDA and revenues in EBITDA bringing that back in the near term. And again with our booked not billed that exists, we feel pretty comfortable.
The other thing I will mention is we do have significant expansion capabilities within our existing facilities and we will balance -- a lot of the development spend we do is discretionary and we will kind of balance that relative to the returns that we will receive on that along with the balance sheet impact.
It's important for us to have access all different types of capital and we will look to manage our balance sheet appropriately going forward.
And Barry, I will just add, you don’t see that below five turns of leverage as the hard line. If we continue to have the right momentum and we’re putting capital out on a success based performance level at a 15% plus return similar to where we’re this quarter. We don’t look at the end of next year and say we have to be below five.
So we’re comfortable with where our balance sheet is today and depending on the momentum in the business, the booked not billed pipeline et cetera, we will continue to look at that -- look to bring it down overtime.
Barry McCarver – Stephens
And then, on the leasing activity in the quarter, just to expand a little bit, I think you mentioned there was at least one sizeable deal signed. Were there two or three? Can you give us color on any other sizeable deal that was in that bookings number?
So, just for Richmond we had a nice large three megawatt size deal with a large financial institution. We had a success with our federal cloud with a company delivering security solutions to both the commercial and federal space. As well as some C2 colocation and cloud for several other companies including retail. So we’re very pleased with the breadth of wins, it just not one win it was just not one product. And I will say we’re pleased with the continued momentum and the opportunity pipeline we see ahead of us here in third and fourth quarter.
And Barry, I might add to this, our Dallas site preleasing was helpful. It was another great accomplishment for Dan and the team this quarter but you know, you also have to keep in mind that we’re with the mixture of our products C1, C2, C3. It's usually a pretty good mixture of business that drives that and even when you get into the C1 larger customized phase delivery for us our average customer keep in mind in that space is about 500 kw and 3500 square feet. So our profile of customer is historically that enterprise customer that’s got that 3000, 4000, 5000, 6000 square feet and sometimes in the quarter when you out 2 or 3 of those customers together and then through in a large financial institution in Richmond it can make C1 look like it's a very large customer but usually with us it's a pretty diversified set of enterprise customers that’s helping drive the engine of our business. We actually like that from the diversification and customer and size and capacity as we kind of balance the portfolio.
Barry McCarver – Stephens
And then just lastly, if I may, in terms of the cost of building out capacity, you guys talk about 6 million per megawatt is something you've seen here more near term and it's been very achievable. From some of your larger competitors, they're certainly not pointing out QTS, but there's been some question about the overall cost to build and whether or not it's really dropping. Can you kind of break out -- the way you look at the business, is that $6 million number, $8 million number, does that stem more from truly the equipment and whatnot you're paying for? Or does it have a lot more to do with just the very careful purchasing of property and land that you guys have made?
Barry, it's a great question. I love this question and then I will let Jim kind of help me with it. But I think that if you were to look at componentized equipment, UPS's generators, just infrastructure that goes in the data center. You can historically say that those are not going down in cost. So we have been fairly consistent over the years that kind of being kind of that $7 million range.
Now I know the market has moved kind of dramatically over the years towards our number on cost per megawatt and I’m not sure I don’t have the details or the ability to know exactly what everybody is doing nor is that really a concern. What I have to do is be focused on what we’re doing and when you walk around Richmond and Dallas, two semi-fabs we bought in Chicago.
You will see 100s of millions of dollars of investment that with our acquisition strategy of infrastructure-rich low-basis assets, it's led to materially and different economics for us which has led us get into areas and locations in a derisk fashion with great visibility and scale to operate that overtime and then incrementally deliver that space and I think Jim can talk about it in more detail from his standpoint but we love the strategy and we do think it continues to reward us.
Our redevelopment strategy has many components to it but let me break it down into a couple. Obviously it's about successful development and we feel that allows us to match our capital closer to when we actually see the lease up and we feel better all the time and about our ability to building smaller more cost effective increments. But as you look at the components from the cost side, as Chad said our ability to find attractive brownfield redevelopment opportunities at a regular basis is an important part of our strategy and why we’re so excited by what we’re seeing in Dallas already and what we expect to replicate in Chicago and we have already done in Atlanta and Richmond.
But then we do work very extensively to make sure that we’re procuring that equipment from the best of breed suppliers, you know great economics from them and ultimately have a network of design and construction firms that we have partnered with over the years that know our model and know how to make sure that we can build those blocks of power just in time in the way that we like it and feel that our design allows us not only to be cost effective but also support a great revenue model and the 3C model that we have, that gives us that great 15% return.
Certainly there is a combination of several factors and we’re pleased to see that we’re able to continue to replicate that strategy across the United States.
(Operator Instructions). There appears to be no further questions at this time. So I would like to turn the conference back over to management for any closing remarks.
Well we at QTS team appreciate everybody's time today and realize we had a lot to talk about in the script today. So we appreciate your time and patience and interest in our company and we look forward to working and talking with you all over the next quarter’s and thank you for your time and thank you to QTS and the team here for all the hard work and we will continue to look forward to executing our business. Thank you very much.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.