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QTS Realty Trust Inc  (NYSE:QTS)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon and welcome to the QTS Fourth Quarter 2018 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 Shirley Goza, General Counsel. Please go ahead.

Shirley Goza -- General Counsel

Thank you, operator. Hello, everyone, and welcome to QTS' fourth quarter and year-end 2018 earnings conference call. I'm joined here today by Chad Williams, our Chairman and Chief Executive Officer; and Jeff Berson, our Chief Financial Officer. We also are 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 our Investors tab. We also have provided slides and made them available with the webcast and on our website. 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 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, MRR, ROIC, and core adjusted EBITDA. We refer you to the press release that we issued 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 L. Williams -- Chairman & Chief Executive Officer

Thanks, Shirley, and welcome everyone. QTS delivered a strong performance during the fourth quarter to close out one of the most successful years of execution in QTS history. Turning to Slide 3. At the beginning of 2018, we laid out a strong acceleration plan for our business. This included refocusing the organization around our core hyperscale and hybrid colocation verticals to drive accelerated leasing and growth, enhanced profitability, and improved predictability in our business performance. Now a year later, I'm pleased to report we completed the implementation of our strategic growth plan with strong success and ahead of our schedule. And as you can see in our results, our business is performing at a meaningful higher level across nearly every key operating and financial metric.

For the full year of 2018, we generated the strongest year of overall leasing volume in QTS history at nearly $65 million comprised of continued healthy balance between our hyperscale and hybrid colocation verticals. Our 2018 leasing volume represented an increase of approximately 55% year-over-year and resulted in a backlog of signed, but not yet commenced annualized core revenue of approximately $63 million as of the end of the fourth quarter 2018, a near record for our business. Our strategic growth plan also enabled QTS to achieve a core adjusted EBITDA growth margin during the fourth quarter of approximately 53%, the highest level we have ever reported as a public company, which represents approximately 250 basis points of core margin expansion year-over-year and approximately 450 basis points over our consolidated Q4 2017 margin.

The improvement in our overall profitability is a direct result of removing complexity in our business model, capitalizing on the operating leverage inherent in our mega data scale facilities, and leveraging the benefits from our ongoing effort to fully digitize our complete platform end-to-end. In addition, we've been able to generate sustainable improvement in the overall predictability of our business by realizing customer churn rates well below our historical average. QTS reported core rental churn in Q4 of just 0.6%, which is among the lowest in our industry. This brings our year-to-date core churn rate to 3.6% at the low end of our 2018 guidance range. Our full-year 2018 reported core churn represents almost a 500 basis point improvement relative to our consolidated reported results in 2017, which correlates directly to our enhanced topline growth.

Successful implementation of our strategic growth plan initiatives has positioned our business (technical difficulty) differentiated business model and capability to execute on what we believe are the two strongest drivers of demand in the sector, hyperscale and enterprise hybrid colocation. Turning to Slide 4, I'm very pleased with our team's performance against the goals we laid out for our business in 2018. We achieved core revenue growth and adjusted EBITDA of approximately $423 million and $218 million, up 14% and 22% respectively over 2017. We also generated core operating FFO per diluted share of $2.57 in 2018, up 6% over 2017. Excluding the year-over-year impact from non-cash tax benefits, our core 2018 operating FFO per share represented an almost 13% increase year-over-year. Over the course of the year, we enjoyed a number of significant achievements and made numerous key investments in the business to position QTS for long-term sustainable growth.

In early 2018, we announced a 24-megawatt hyperscale lease in Manassas with a leading software as a service provider in a capital efficient structure that represented a strong accelerant to our hyperscale growth strategy. Also in Northern Virginia, we announced the official opening of our newest 450,000 square foot mega data center in Ashburn, Virginia. We broke ground on the undeveloped land during the third quarter of 2017 and completed the greenfield construction within 10 months, which represents world-class speed and execution. Next as part of our strategic growth plan, we laid out a path to narrow the scope of our cloud and managed services that QTS delivers directly. We identified a qualified partner in GDT and successfully completed the migration of the cloud and managed service customers to their platform on budget and ahead of schedule.

To put that in context, this is a business in our customer base that was accumulated over a multi-year period that we successfully transitioned to a partner in less than seven months with significantly higher customer retention than initially expected. This was a tremendous effort for our team and we are pleased with the successful outcome we achieved. I'd like to thank all of our QTS employees for their high level of performance and strong execution on this important transition. During 2018 we also gained significant momentum with our software defined data center platform or SDP. For the year we averaged 16,000 active users of SDP, which represented 27% growth over -- year-over-year. The platform has also started to identify meaningful new revenue opportunities and enable enhanced operating efficiencies. In 2018 we also extended our track record of excellence in customer service and support.

QTS achieved its ninth consecutive year of five nines or higher in facility uptime. And 2018 marked the third consecutive year that QTS has led the data center industry in customer satisfaction as measured by net promoter score or NPS. QTS achieved an NPS score in 2018 which exceeded companies well known for their customer service including Apple, Amazon, and was nearly double the average NPS score for the data center industry. 2018 was a strong year for QTS' team and achievements reflect the momentum we have in our business. I am confident we can maintain our current pace of performance and look forward to continuing to execute our business plan. Moving to Slide 5, our fourth quarter leasing results continue to reflect a healthy balance in our hyperscale and hybrid colocation platforms. For the quarter, QTS signed leases representing $12.2 million of incremental annualized core revenue, up 43% over the fourth quarter average a year ago.

The performance was particularly strong considering our higher return hybrid colocation business accounted for approximately 75% of the leasing in the quarter. For the full-year 2018 we signed leases representing nearly $65 million of incremental annualized core revenue, which is the highest annual leasing volume we've achieved as a public company. Our record leasing volume resulted in a backlog of signed but not yet commenced annualized core revenue of approximately $63 million as of the end of the fourth quarter, nearly the highest in our Company's history, which has significantly derisked our growth into 2019. Even as most of the conversations in the industry and among investors centered around hyperscale leasing this past year, QTS' core engine of growth hybrid colocation which makes up two-thirds of our revenue base had a tremendous year in 2018.

While we continue to pursue larger opportunities with hyperscale companies, we are committed to providing solutions to more than just the Top 30 technology companies. We see that thousands of other potential enterprise customers in the market has an equally attractive vertical and an opportunity to diversify our sources of future growth. We strongly believe that having a business approach that balances the steady performance of a diversified higher return hybrid colocation business and growth acceleration opportunities with strategic hyperscale customers is the best path to optimize growth and risk adjusted performance for QTS. The enhanced performance that we've experienced in our hybrid colocation platform in 2018 was driven in part by a meaningful increase in the overall size of enterprise deals that we're seeing in our pipeline.

As we've discussed in prior quarters, during 2018 we signed nine hybrid colocation deals in the 500 kilowatt to 2 megawatt range including five during the fourth quarter, which compares to only two enterprise deals signed of that size during all of 2017. Turning to Slide 6. In addition to the overall increase in the deal size, our software defined data center platform continues to represent a key differentiator for QTS and is supporting the acceleration of our hybrid colocation performance. QTS' strategy to execute on the growth opportunities with enterprise customers is built around a platform that offers a customer a fully integrated technology enabled data center solution delivered across scalable data center platform. Our customers represent among the most sophisticated enterprise and technology customers who are accustomed to consuming resources in a seamless digitized experience.

Our software defined platform, which was introduced in 2017, empowers customers to interact with their data and services both within QTS and through our partners by providing real-time visibility, access, and dynamic control of critical metrics across the hybrid IT environment from a single platform. SDP effectively replicates the visibility and control customers would have if they own and manage the data center environment themselves. Over the course of 2018, customer usage of the SDP platform grew 27% over 2017 with 16,000 active users on average across a base of 1,100 plus customers. As the primary user interface for customers, SDP not only serves as an effective means for customers to see and manage their respective environments, but also as a tool for QTS to identify incremental sales opportunities.

Customer usage of STP applications like power analytics that detects when a customer is approaching power thresholds and automatically notifies them contributed to new power upgrades representing over $700,000 of annualized revenue. This represents new opportunities that may not have otherwise been identified. In fact SDP identified new sales opportunities for nearly every QTS hybrid colocation sales person during 2018. This includes new cross connects which can now be ordered directly through SDP. In 2018 approximately 10% of all cross connect orders were fully automated through SDP across 14 data centers and we expect this percentage to grow meaningfully in the coming quarters. In addition to new sales opportunities, SDP also continues to enhance the efficiency of QTS operations. During 2018 SDP contributed to a 40% improvement in implementation time from when an order is placed to the provisioning of the new services.

This type of improvement not only streamlines our operational efficiency, but also accelerates billing and revenue recognition. We remain encouraged by the continued adoption of SDP platform and we expect our growth opportunity with enterprise to continue to expand. Now moving on to hyperscale on Slide 7, which contributed approximately 25% of our leasing volume in the quarter. Hyperscale remains a core area of focus for QTS as an opportunity to strategically accelerate growth with the largest and fastest growing technology companies in the world. During the quarter, we signed new leases were two core Hyperscale customers aggregating to approximately 3 megawatts in QTS'existing Atlanta and Chicago facilities supporting strong capital efficient growth. For the full-year 2018, our hyperscale vertical contributed approximately a third of our overall leasing volume, including the 24 megawatt lease signed during the first quarter of 2018.

Over the past year, we've gained a lot of insight into the future data center infrastructure requirements of our targeted hyperscale customers. The magnitude of their infrastructure needs suggests we are still in very early stages of executing on this growth opportunity. And we believe QTS with over 1 million square feet of cost advantaged power shell capacity in the top US data center markets and 650 plus acres of fully entitled land available for development is well positioned to continue to serve as a strategic partner to these customers. While we had originally anticipated closing one of the -- one additional larger hyperscale transaction during 2018, ultimately the late stage deals that we were tracking pushed into 2019. Importantly, each of these deals remains in our pipeline and they represent an attractive future growth opportunity for our business. We remain encouraged both by the size and diversity of our hyperscale sales pipeline and continue to expect to deliver one to three larger 5-plus megawatt hyperscale transactions each year.

With that, I'll now turn it over to Jeff Berson, our Chief Financial Officer, to discuss our development plan and outlook in more detail. Jeff?

Jeff Berson -- Chief Financial Officer

Thanks, Chad, and hello everyone. Moving to Slide 9. Before discussing the joint venture agreement that we announced in conjunction with our earnings release, I'd first like to review our current balance sheet position. As of December 31st, 2018 we had over $575 million in liquidity in the business and we ended the quarter with leverage of approximately 5.7 times net debt to annualized consolidated adjusted EBITDA. As we discussed last quarter, supported by a near record current backlog of signed but not yet commenced revenue, we are comfortable maintaining leverage in the mid to high 5 times range in the near term to support our capital development plan. During the fourth quarter, we extended the maturity of our unsecured credit facility by one year and reduced the interest rate on the facility by 20 basis points. This represents a meaningful reduction in QTS' interest cost and reflects the continued improvement in our overall credit profile.

In addition, as part of our conservative approach to balance sheet management, during the quarter QTS entered into additional forward interest rate swap agreements that effectively increased our pro forma exposure to fixed rate debt to approximately 74% of our debt as of December 31, 2018. We believe these swap agreements represent a cost-effective option to lock in the long-term rate visibility and opportunistically capitalize on a flattening yield curve. Next turning to Slide 10. We've demonstrated a track record of growth in our business and based on our current backlog and sales pipeline, we have an expectation of continued strong growth in 2019 and beyond. It's always been clear that our business requires capital to fund that growth. In evaluating capital that we bring into our business, we have consistently demonstrated a focus on balancing both near and long-term return horizons as well as funding growth in the most shareholder friendly means.

As an example, last year we funded the business through two separate perpetual preferred equity raises. These transactions opened up a new potential source of funding for QTS in the future and demonstrated our commitment to fund the business in a shareholder-friendly manner while minimizing near-term equity dilution. Moving into 2019, we've continued to evaluate a range of additional financing options to expand our sources of funding and enhance our balance sheet efficiency. To that point, we spent the greater part of 2018 specifically evaluating a range of joint venture opportunities, structures, and potential capital partners in an effort to expand our access to capital and support our future growth. After many months of diligence and negotiation, we were pleased to announce the formation of a joint venture agreement with Alinda Capital Partners, one of the industry's leading infrastructure investment firms with over $7 billion in assets under management.

This JV represents potentially the first closed transaction as part of a broader strategic partnership with Alinda, which outlines a programmatic framework under which Alinda will be given the opportunity to partner with QTS and contribute equity capital for specific data center development projects. Including equity capital associated with the initial JV, the strategic partnership contemplates that Alinda may contribute up to $500 million of equity capital over a five-year period at a cap rate valuation comparable to the initial JV. Including potential debt on future joint ventures, this would represent in excess of $1 billion of potential JV funding at an attractive cost to QTS. We view the JV structure as an important incremental lever to fund our future hyperscale growth strategy while continuing to leverage traditional capital markets to fund core growth, finding a balance of investing in existing facilities to still support both short term and long-term shareholder value creation and OFFO per share growth.

As part of the agreement, QTS contributed its 118,000 square foot hyperscale data center under development in Manassas, Virginia to the venture at a stabilized value of approximately $240 million representing an attractive 6.75% fully stabilized cap rate. QTS and Alinda will each own a 50% interest in the venture, which will be reflected as an unconsolidated joint venture on QTS' reported financial statements beginning in the first quarter of 2019. As a reminder, in early 2018 we signed a 24-megawatt lease with a global cloud-based software company on a 10-year term in a new data center development in Manassas. This customer initially signed commitments to lease the entire powered shell as well as 5 gross megawatts of turnkey data center capacity and they have subsequently committed to lease an additional 4 gross megawatts of turnkey space.

They are expected to sign additional commitments scaling to the full 24 gross megawatts of turnkey power capacity available at the data center over approximately a two-year period. Through this initial joint venture, QTS is able to raise upfront net capital proceeds of approximately $53 million at closing, which will grow to approximately $87 million as the asset stabilizes comprised of equity contributions from Alinda and joint venture debt. QTS expects to use the net proceeds from the joint venture to pay down outstanding borrowings on its revolving credit facility and for general corporate purposes, including ongoing data center development. As incremental development at the Manassas facility takes place and future phases are delivered to the customers, QTS will draw additional proceeds from the venture based on the preset stabilized 6.75% cap rate.

Moving to Slide 11, we believe the joint venture agreement has multiple benefits to QTS and its shareholders. First, as I mentioned, the Manassas joint venture represents only the first closed transaction as part of a broader strategic partnership with Alinda. Through the programmatic nature of the broader strategic partnership with Alinda, we have the opportunity to structure additional joint venture agreements that Alinda may participate in at terms comparable to the initial joint venture in support of QTS' go-forward hyperscale growth strategy. By leveraging the low cost of capital from the sophisticated infrastructure investor like Alinda, we're able to decrease our overall reliance on the public markets and fund our business. In addition, through the joint venture structure, we're able to reduce QTS' capital funding requirement by an aggregate of approximately $120 million over the course of the full development of the stabilized Manassas facility.

While reducing capital expenditures by well over 50% and driving capital efficiency, we will be retaining a 50% plus proportionate stake in the NOI generated by the facility plus incremental management and development fees. This will result in increasing QTS' return on capital of Manassas from approximately 9% to approximately 12%. In addition, by locking in a cap rate that factors in asset valuation at full stabilization, QTS is not sacrificing future value from the joint venture's expected growth. Finally, the 6.75% cap rate valuation encompassed in the joint venture agreement highlights the strong underlying value of QTS' core data center assets. We believe the JV represents an attractive incremental source of capital to fund our business along with traditional capital markets funding and we look forward to the opportunity to potentially leverage the joint venture structure in the future to support our growth.

Next on to our 2019 development plan on Slide 12. Currently we anticipate bringing online approximately 154,000 square feet of raised floor in 2019, which includes just over 50,000 square feet of raised floor in Dallas between our Irving and Fort Worth facilities and approximately 32,000 square feet in Ashburn to support continued strong momentum we're seeing. We also anticipate bringing online additional capacity in Manassas, Chicago, Atlanta, Piscataway, and Santa Clara. The total cost to bring the space online is estimated to be approximately $327 million, of which $231 million has already been spent and $96 million will be spent in 2019. For the full-year 2019, we currently expect to spend between $450 million and $500 million in cash capital expenditures excluding any M&A, which includes QTS' proportionate share of the cash capital expenditures in Manassas.

Next on to our 2019 financial guidance on Slide 13. The joint venture which closed on February 22nd will be reflected as an unconsolidated joint venture on QTS' reported financial statements beginning in the first quarter of 2019. Consistent with GAAP accounting standards, revenue from the unconsolidated joint venture will be removed from QTS' reported GAAP financial statements. Also consistent with GAAP accounting and Nareit redefined standards, QTS anticipates including its proportionate ownership of EBITDAre and funds from operations from the joint venture in its reported EBITDAre and funds from operations results respectively. We expect the closing of the joint venture will result in a reduction in QTS' full-year 2019 reported revenue of approximately $12 million representing 100% of the expected revenue from the Manassas facility.

In addition, we expect the closing of the joint venture will result in an approximately $3 million reduction in our reported 2019 adjusted EBITDA to reflect the impact from QTS' 50% reduced proportionate ownership in the Manassas facility contributed to the unconsolidated joint venture. For the full-year 2019, including the impacts from the closing of the joint venture that I just outlined, we expect reported total revenue to be between $459 million and $473 million. Excluding the impact from the JV, this represents a range of $471 million to $485 million, an approximately 13% growth over 2018 at the midpoint. We expect 2019 reported adjusted EBITDA to be between $243 million and $253 million again including the impact from the JV and QTS' reduced proportionate ownership in the Manassas facility. Stripping out the impact of the JV, this represents a range of approximately $246 million to $256 million reflecting 15% growth over 2018 at the midpoint.

Our 2019 financial guidance assumes rental churn for the full year of between 3% and 6%, which is consistent with our initial target range for 2018. Moving to FFO per share, we expect reported operating FFO per share in 2019 to be between $2.61 and $2.71. QTS does not anticipate a material impact to its reported OFFO per share in 2019 as a result of the closing of the joint venture. Through the JV structure, we expect to be able to effectively generate a comparable level of reported OFFO per share contribution in 2019 from Manassas by achieving a higher return on invested capital with lower capital intensity. At a full stabilization, QTS expects the Manassas joint venture to ultimately result in approximately $0.02 to $0.03 of OFFO per share accretion. QTS' operating FFO per share guidance assumes we maintain net debt to adjusted EBITDA leverage over the course of 2019 in the mid to high 5 times range, including our proportionate share of JV debt.

Importantly, our OFFO per share guidance reflects the full financing cost of our capital development plan for 2019. Our outlook for 2019 reflects our continued focus on balancing long-term investments for future growth with a commitment to delivering near-term results and consistent growth of shareholder value. Overall, we are very pleased with the financial and operating success we achieved during the fourth quarter and 2018. With a significant booked not billed backlog and strong momentum in our sales pipeline, we have great visibility into growth in 2019 and look forward to continuing to deliver consistent performance in our business.

I'll now turn the call back over to Chad.

Chad L. Williams -- Chairman & Chief Executive Officer

Thanks, Jeff. Turning to Slide 15. Looking back over 2018, the QTS team successfully delivered on the stated objectives which resulted in a significant acceleration in our performance. We generated the highest core annual leasing volumes in our Company's history, which represented a 50% increase relative to the average consolidated leasing over the prior three-year period. Also we achieved a nearly 600 basis point increase in our core profitability and a 40% reduction in core customer churn relative to our average consolidated performance over the past three years. Strong execution on our strategic growth plan is accelerating QTS' performance and we are pleased with the momentum we have so far seen in 2019. I have never been more excited about the growth opportunities in front of us and the ability for QTS' platform to execute on them. I'd like to take this opportunity to thank our QTS employees for their continued hard work and dedicated service to our customers and surrounding communities. As always, I'd like to thank our customers and shareholders for their continued trust and confidence in QTS.

With that, we'd be glad to take your questions. Operator?

Operator

Before we begin the question-and-answer session, I'd like to turn the call back to Shirley Goza for some final remarks.

Shirley Goza -- General Counsel

Before we begin the Q&A session, you may have seen our announcement regarding the launch of our common stock offering. As I'm sure you can understand since we are in the offering process, we cannot comment on the offering during this call and because we are launching today, we would ask that each of you keep your questions to just one question a piece with no follow-up.

With that, we'll go to the Q&A session.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Jordan Sadler of KeyBanc. Please go ahead.

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Thank you. Good afternoon. So a year ago you guys repositioned yourselves and refocused the strategy for your strategic growth plan focusing on hyperscale and your colo businesses, you had success on the leasing front in the year. As we look into 2019 and this guidance you've provided, can you offer up maybe some expectations in terms of what's embedded here overall in terms of either quarterly leasing or separately maybe you can opine on whether or not the $64.5 million you achieved in '18 is achievable again in '19? Thanks.

Jeff Berson -- Chief Financial Officer

Thanks, Jordan. Sure. This is Jeff. So if you remember our leasing in '17, we averaged just north of $10 million or so per quarter. Our expectation in '18 given the accelerated growth that we were looking to see in the business we were looking to do between $12 million and $14 million of annualized net leasing per quarter on average. We were happy that in Q4 we did do $12 million and that's without significant hyperscale demonstrating the strength of hybrid colo and the acceleration in hybrid colo of the number of transactions that we've closed with enterprise customers north of 0.5 megawatt or ranging between 0.5 megawatt and 2 megawatts. We wound up with average leasing over 2018 of north of $16 million so significantly above the $12 million to $14 million that we had modeled in anticipation of the business.

And as a result of that, felt very good and feel very good about the momentum of the business going into 2019 with the booked not billed balance that we've got of over $63 million. Given that our expectations in '18 were $12 million to $14 million of average leasing per quarter and we do expect to maintain growth on a higher basis, we would look to do north of $12 million of average leasing per quarter in 2019 with the obvious caveat as we've always said that that number will be somewhat lumpy so we could have some quarters above that, we could have some quarters below that. But given in -- that the fact that in '18 we were at north of $16 million, being able to achieve north of $14 million next year assuming we just maintain the leasing momentum that we've got in the business, we feel very good about achieving our goals in 2019.

Operator

Our next question comes from Aryeh Klein of BMO Capital Markets. Please go ahead.

Aryeh Klein -- BMO Capital Markets -- Analyst

Thanks. Can you maybe talk about how competitive the process was as far as the decision to go with Alinda and maybe why you decided on this -- on this structure? And then to the extent you can, how does that coincide with the decision to issue equity?

Chad L. Williams -- Chairman & Chief Executive Officer

Sure, Aryeh. So, appreciate the question. We have been actively engaged with dozens and dozens of different pension funds, infrastructure funds, and sovereign wealth funds going back probably a year plus at this point. We recognized that there was an availability of deep capital in the private markets at attractive rates and have been actively engaged with a number of partners. We're thrilled with Alinda as a partner. We found them to be unbelievably collaborative as we worked through the process. They have the same approach and thinking about the business as QTS does and importantly what they were looking for was more than just a single transaction. They were really looking for a partnership with someone unlike QTS where we could replicate this structure going forward and utilize the depth of their capital to continue to drive and accelerate our hyperscale business going forward in frankly what we believe is a much more capital efficient and higher return methodology than what we've done in traditional hyperscale or what you see in the market. So, we loved that.

The other aspect that we were very excited about in terms of this particular structure Is that what we've agreed to, if you know -- if you remember about this asset in particular, our customer in Manassas is leasing the entire 24 megawatt powered shell from us and leasing incremental phases from us over time. So far, they've committed to in two different phases 9 megawatts of the 24 megawatts and the expectation is they will continue to lease up additional phases over the course of the next two years. The way this transaction and structure works is that 6.75% cap rate that we've locked in is not only on the existing NOI in the business because the business is frankly just ramping, we just delivered the first phase to our customer at the beginning of this year. But as we continue to deliver more phases over the course of the next couple of years, that 6.75% cap rate has been fixed on the incremental business that comes in assuming that this customer ramps to the full 24 megawatts anytime within the next three years. So, we like the fact that we've really locked in a cap rate.

And importantly, view this in some ways that the promote and value from this instead of at the back end comes in right upfront, as we lease this capacity bringing on that 6.75% cap rate. At the end of the day, the way we really think about where the math results in all of this is that we are saving $120 million in CapEx going to this asset, which represents well over 50% of the overall CapEx in this asset. So, we are now in an asset where we've contributed less than 50% of the CapEx that goes in. And because it's a 50-50 JV where we also get management fees and development fees on top of it, we're effectively pulling out more than 50% of the NOI generated by the asset. And as a result of that if you're putting in less than 50% of the CapEx driving more than 50% of the NOI, it's what enables us to put in lower capital and yet accelerate returns on the asset from 9% to 12%. So, again using this as a template with Alinda and leveraging that partnership going forward enables us to fund hyperscale deals in the future at a much more capital efficient way and higher returns.

Operator

Our next question comes from Robert Gutman of Guggenheim Securities. Please go ahead.

Robert Ari Gutman -- Guggenheim Securities -- Analyst

Thanks for taking the question. I just had a simple one about power costs versus base rent in your guidance and in the quarter just (ph) proportions, is that changing, is it same because I'm more interested in base rent growth over time than total revenue?

Jeff Berson -- Chief Financial Officer

Sure Rob. This is Jeff. So, generally we are seeing some reasonable stability in terms of power cost in the business. We like the fact that if you look at some of the assets we've got like what we've got in Dallas and Atlanta with a substation onsite and the scale we've got, we think we've got access to some of the cheapest power in those very active markets and it gives us a natural advantage. We have seen in some different markets power moving up and down and we've modeled into our expectations the reality and visibility we have in terms of power cost. In terms of core rent when you remove the volatility or some of the movement of power cost, we are modeling in and what we have seen in our business is a pretty good stability in core rent and I think that gets reflected, Rob, in the renewal rate metrics that we put out where you've seen consistent renewals were QTS is renewing with customers and not changing the square footage upon that renewal of low to mid single-digit rent increases.

And you've seen that consistently frankly over the last five, six years we've been public. Now this quarter in particular you saw that number down a little bit, but the reality behind that was there were three particular customers that renewed with us and actually expanded their footprint with us in multiple markets and multiple facilities and increased their revenue with us almost 20%. As a result of that, they got a price break and a discounted price. When you remove those three deals, effectively our renewal rate in Q4 was also up 2.3% and consistent with what we've seen in the past. So, we like where we've gotten with that and feel very comfortable.

Chad L. Williams -- Chairman & Chief Executive Officer

And Rob, I might add -- this is Chad. I might add that on the power side of it on the mega data centers when we do own those substations, it does give us the ability to manage that a little bit differently than if we were just a receiver of the power. And we've also been able to announce and talk about some sustainability initiatives that we've talked about publicly with our ability to actually maintain the power cost, at the same time committing some of the facilities going to 100% renewable, which has been an exciting sustainability message that we've been able to deliver. And it's been well received from our customers to have the scale we do to provide stable, reliable, and cost effective power at the same time we've got an initiative around sustainability and renewables that support the data center customers that have a strong interest in that.

Operator

Our next question comes from Nick Del Deo of MoffettNathanson. Please go ahead.

Nick Del Deo -- MoffettNathanson -- Analyst

Hi, thanks for taking my question. Should we think of this JV as a way to target hyperscale opportunities that you otherwise wouldn't have gone after? Call it incremental to your base plan, if you want to call it that, or is it more of a way to -- more of a different mechanism to attack what was already part of your targets that maybe manage your customer exposure some?

Chad L. Williams -- Chairman & Chief Executive Officer

This is Chad. I actually think it's a great question and a little bit of both. I will tell you that we've talked about the hyperscale business. As we focused on that, we've always done large deals as most people know. But as we've been more intentional about that the last year or so, it does give us another tool on the belt to take on opportunities. Of course the best opportunities are to put hyperscalers in over -- in our over 1 million square feet of powered shell that has a cost advantage, derisk proposition for us. That would largely have those returns on the higher side of our range, which we talk about 9% to 11%. But you can absolutely feel good that -- or it gives or us an opportunity that if we do have transactions that are in markets that we think are relevant and are strategic to accelerate our growth, it might be at the lower end of that range.

I think what Jeff and the team have done a marvelous job equipping us for is to take capital intensity out of our business as much as we can with hyperscale initiatives, at the same time to give us more tools to be able to get to more better returns enhanced like the Alinda transaction. And I know that team at Alinda and QTS have worked really hard over a long period of time to put us in a position to hopefully have an opportunity to do a number of these transactions like this that would be good for both parties. So, we're excited about it and I think it really gives a little bit of both for that.

Nick Del Deo -- MoffettNathanson -- Analyst

Thanks, Chad.

Operator

Our next question comes from Frank Louthan of Raymond James. Please go ahead.

Megan Yang -- Raymond James & Associates, Inc. -- Analyst

Hi. It's Megan Yang covering for Frank. So, how many number -- how many sales people did you have at the end of the year and what's your expectation for 2019? And then the second question is how much do you expect to get management -- how much do you expect to get in management fees from the JV on an annual basis?

Chad L. Williams -- Chairman & Chief Executive Officer

I'll take the first one. This is Chad. Our sales force hasn't materially changed since Clint and Tag or actually Clint came on last April. In fact in an organization of let's just say approximately 50 people, it's actually probably down a few heads. Clint's philosophy around that, both Tag and Clint, are probably to have fewer sellers and more people focused on the ability to drive kind of who is the A players on the team. So, I think that's been a very positive aspect. The other thing I'd point to is that we had a pretty big resurgence within the channel program. Clint has been a big supporter of that. We just ranked in CRN channel network the other day and put out a press release on kind of our ranking as far as the way partners view us.

So, the broker program and the channel program has probably been the biggest part of our acceleration. I think that's also a testament. Jeff mentioned -- Jeff and I mentioned in the script about how in all of last year in '17 we had two deals that were kind of 500 KW or better. This year with the strong performance in the fourth quarter, we did nine transactions that were 500 KW plus. That's a direct result of not just our team performing at a high level, but channel partners and brokers and that network really driving significant progress in that. And SDP has been a huge help with that just with the ability to have a true differentiation on our platform has been another big part of that success.

Operator

Our next question comes from Erik Rasmussen of Stifel. Please go ahead.

Erik Peter Rasmussen -- Stifel, Nicolaus & Company -- Analyst

Yes. Thank you. It's on the JV. Maybe just a little bit of background how you selected Manassas' property? Were there others under consideration? What was the threshold for this? And then what would be some of the other potential regions or data centers that might be interesting for this joint venture going forward in the near term?

Chad L. Williams -- Chairman & Chief Executive Officer

Sure, Erik. I'll tell you that we worked with Alinda and we are very open to multiple assets and in particular, as we talked about, really using this as a great source for accelerating hyperscale going forward with the right structure. The reason this was the first asset and a great test case for us to put in is it is a very solid and traditional hyperscale deal, it's a long-term lease. It's Alinda's high credit quality phenomenal customers that we're proud to have and it's in a market that's a very attractive market. So, it hit all of the right levers for us to enable the right deal and enable the right structure for going forward. That being said, I think Alinda absolutely has an appetite to do more of this. In fact their enthusiasm was to do significantly more than just the size, which is why they've talked about allocating up to $500 million of equity availability, which on top of the leverage capacity gives us the ability to do up to $1 billion of outside capital along with Alinda and leverage which we're excited about. So as soon as we get this done, we closed it last week, we're going to take our breath for about 30 seconds, and then sit down with Alinda and figure out what's next.

Operator

Our next question comes from Eric Luebchow of Wells Fargo. Please go ahead.

Eric Thomas Luebchow -- Wells Fargo Securities -- Analyst

Hi. Thanks for taking the question. I was just curious you mentioned there was a delay of some of the hyperscale deals that you would hope to book in Q4 and we heard from one of your peers that there is some uncertainty recently around the timing of deals closing. So, I was wondering if you could maybe shed some light on that and if it's getting more complicated to book these deals? Thanks.

Chad L. Williams -- Chairman & Chief Executive Officer

Thanks, Eric. This is Chad. In a perfect world, you set your expectations high and you work really hard to get there. And we did as we mentioned in the script anticipated getting another transaction done in hyperscale. What I'm happy to say is the transaction that we didn't get closed in the fourth quarter of '18 did slide into the first quarter of '19. And I will tell you that each of the hyperscale clients have different demands and needs and there's just a lot of complexity in their markets and their businesses are moving fast. So, sometimes it's just as simple as not being able to get everything done at the right time because their businesses are growing and there's a lot of demand. But I couldn't be more encouraged about the opportunity.

I think the earlier question, I feel like I've got a few more opportunities on the tool belt now with a capital partner in Alinda to kind of help with this. We're not dramatically going to change our expectations on kind of one to three hyperscale deals a year. I think that the robustness in our hybrid business continues to set the tone for how we think about the business and returns and the capital efficiency and capital allocation that we'll focus on. But as I mentioned earlier, with 1 million square feet of powered shell that's sitting there available in key markets for us, it gives us a tremendous proposition for hyperscalers for speed, cost efficiency, and capital efficiency for their businesses. So, no new complications. It's fast, it's growing, and QTS will work to earn its fair share of that and look forward to continue to be productive as the year unfolds in '19.

Operator

Our next question comes from Colby Synesael of Cowen & Co. Please go ahead.

Colby Synesael -- Cowen & Company -- Analyst

Great. Thank you. It's not my question, but one that was asked of you earlier was around the management fee and how much that is or at least a framework to think about that. So hopefully that's not my question, but it was asked earlier and I was hoping to get the answer to that. And then as it relates to my question is for the facility in Manassas, the 24 megawatts, how long does that customer have to hold that space for or if they don't take it, do you have the ability or right to go and offer it to others? And then secondly, is there anything in the JV structure that requires or is explicit that it has to be that same customer or could you in theory ultimately over time let other customers in or was there something specific about it being that customer with that credit quality and so forth that if it wasn't that customer, it would impact the terms? Thanks.

Jeff Berson -- Chief Financial Officer

Yes. Sure Colby. So, the relationship in the JV that we've got as flexible around that customer. We have seen and will continue to believe based on the delivery and the interaction with that customer. They are very, very excited. They very happy to be there. They continue to scale with us actually ahead of plan. And we have zero expectation that anything will happen in that asset behind -- besides that customer continuing to ramp and staying with us for many, many years as part of that 10-year contract.

Chad L. Williams -- Chairman & Chief Executive Officer

And just one additional note, Colby. Keep in mind, they actually lease the entire building today. So, that is kind of a building that's dedicated and leased to them and their -- they in that capital efficient structure, they took on the obligation of the entire shell.

Jeff Berson -- Chief Financial Officer

To the extent then that at some point if that did unwind or that customer at some point decided to exit the facility, the JV does not unwind in any way. We continue to have the flexibility of Alinda to ramp that and I think they're just excited be partnering with QTS in a high quality asset. On the management fee, we just haven't given that level of detail. But we think it's a pretty traditional and standard management fee and development fee, just helps our returns a little bit and frankly, just compensates us for some of the active ongoing management we'll be performing there.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Chad Williams, Chairman and CEO, for any closing remarks.

Chad L. Williams -- Chairman & Chief Executive Officer

Well, we appreciate the opportunity to speak and we know we accelerated the schedule with everything. And we just thank you for your time and look forward to working with you and talk to you next quarter. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 52 minutes

Call participants:

Shirley Goza -- General Counsel

Chad L. Williams -- Chairman & Chief Executive Officer

Jeff Berson -- Chief Financial Officer

Jordan Sadler -- KeyBanc Capital Markets Inc. -- Analyst

Aryeh Klein -- BMO Capital Markets -- Analyst

Robert Ari Gutman -- Guggenheim Securities -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

Megan Yang -- Raymond James & Associates, Inc. -- Analyst

Erik Peter Rasmussen -- Stifel, Nicolaus & Company -- Analyst

Eric Thomas Luebchow -- Wells Fargo Securities -- Analyst

Colby Synesael -- Cowen & Company -- Analyst

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