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QTS Realty Trust Inc (NYSE:QTS)
Q4 2019 Earnings Call
Feb 19, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the QTS Realty Trust Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today's event is being recorded.

I would now like to turn the conference over to Stephen Douglas, Executive Vice President of Finance. Please go ahead.

Stephen W Douglas -- VP, Investor Relations & Strategic Planning

Thank you, operator. Hello, everyone and welcome to QTS' fourth quarter and year-end 2019 earnings conference call. I'm Stephen Douglas, Head of Investor Relations at QTS, and I'm joined here today by Chad Williams, our Chairman and Chief Executive Officer and Jeff Berson, our Chief Financial Officer. We're also joined by additional members of our executive team, who will participate in Q&A.

Our earnings release and supplemental financial information are posted in the Investor Relations section of our website. We also provided Slides and made them available with the webcast and on our website, to 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 NOI, FFO, operating FFO, adjusted operating FFO, monthly recurring revenue, ROIC, EBITDA, ROE, and adjusted EBITDA. We refer you to our press release that we issued yesterday, and our periodic reports furnished or filed with the SEC, for further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results.

And now, I'll turn the call over to Chad.

Chad Williams -- Chairman & Chief Executive Officer

Thanks, Stephen. Hello and welcome to QTS' fourth quarter and year-end 2019 earnings call. We look forward to reviewing the details of the strongest fourth quarter bookings in our company's history. However, before turning our attention to the fourth quarter, I'd like to touch on some of the highlights of what has been an exceptional overall year for QTS.

Turning to Slide 3. QTS delivered another strong performance during the fourth quarter, closing out a record-setting year of execution. Importantly, this performance was driven by significant contributions from each of our customer verticals, Hybrid Collocation, Hyperscale and Federal. The diversity of our sources of growth enables our business to perform, we believe, in a variety of different demand cycles.

Even during periodic slowdowns in Hyperscale absorption that the industry witnessed at times over the past year, our ability to combine the steady performance of our higher return Hybrid Colocation and federal businesses with select growth acceleration opportunities in Hyperscale continues to support a level of consistency in our performance from quarter-to-quarter.

Differentiating our customer solutions within in each part of our business remains a core focus to drive enhanced risk-adjusted returns and performance both today and in the future.

These differentiators include industry leadership in sustainability initiatives, cost advantage mega-scale infrastructure, operational capability and track record in federal business and our continued strong commitment to a fully digitized, premium customer experience through QTS' software-defined data center platform.

Our base of 1,200 plus customers continues to demonstrate their willingness to value these unique capabilities and we are pleased with our resulting growth in the market share, as evidenced by our financial performance and leasing momentum.

Moving to Slide 4. For the full year 2019, QTS demonstrated a strong acceleration in our business. Total revenue grew 14% year-over-year while adjusted EBITDA grew 15%, reflecting incremental margin expansion of approximately 50 basis points year-over-year.

Over the course of the year, we enjoyed a number of significant achievements that positioned QTS for long-term sustainable growth. In early '19, we announced the closing of our first joint venture agreement with Alinda Capital Partners, in which QTS contributed its Manassas Hyperscale data center development. Through the JV structure, we were able to leverage the low-cost of capital from a sophisticated infrastructure investor as an incremental lever to fund future Hyperscale build-to-suit opportunities, while accelerating our return on capital profile.

Also, early in 2019, we successfully executed and integrated QTS' first international mega-scale data center acquisition in the Netherlands. Our two assets in Eemshaven and Groningen extended QTS' growth opportunity internationally, with a material cost advantage that provides a significant future upside opportunity, particularly for our Hyperscale vertical.

We currently expect to position the Eemshaven site with sellable capacity for Hyperscale customers in mid-2020. In Groningen, we've had -- have been pleased with the integration and performance of the site. Since closing the acquisition, we've signed 10 new or expansion customers and renewed multiple others, driving revenue and outperformance relative to our acquisition model of more than $0.5 million on annualized basis.

Although small in absolute terms, new revenue in the combined Netherlands footprint represents a strong incremental return on invested capital opportunity, given our low basis.

Next, during the second quarter, QTS published its first ESG initiatives report. This annual report is intended to provide transparency to key stakeholders and allow them to evaluate the progress we're making in delivering on our commitments to the highest standards in environmental, social and governance principles.

Following the publishing of this report, we've been pleased to receive a number of awards for our leadership and sustainability, including, ranked by GRESB as the #1 Data Center Company Globally In Sustainability, which was an amazing achievement for our team.

During 2019, we also gained significant momentum with our software-defined data center platform or SDP. During the year, we averaged more than 17,000 active users on SDP across the base of 1,200-plus customers, with an average session time on the platform doubling year-over-year to nearly 20 minutes. SDP remains a primary differentiator with our customers and continues to drive value for QTS in three primary areas.

First, as evidenced by our strong leasing activity over the past two years since introducing the platform, SDP is increasing our win rate in customer engagements and allowing us to grow our market share. In addition, we've leveraged SDP as a valuable tool to identify qualified leads for large -- majority of our sales team. And third, we are actively using SDP internally to drive operating efficiencies, which you can see in our continued margin improvement.

In 2019, we also extended our track record of excellence in customer service and support. 2019 marked the fourth 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 of 88 in 2019, which was approximately double the average NPS score for the data center industry. 2019 was a strong year for QTS' team and our achievements are reflective of the underlying momentum in our business.

Turning to Slide 5. This momentum was also evident based on the strength of our leasing results during the year. In 2019, QTS delivered the strongest leasing performance in our history with significant contributions from all three of our target customer verticals.

QTS signed new and modified leases, representing $76 million of incremental annualized revenue in 2019, which represents a year-over-year growth of approximately 18%. Based on our win rates and ongoing success in the business, we are confident we are continuing to gain market share.

Our 2019 leasing performance reflected a strong acceleration in both our Hyperscale and Federal businesses, combined with steady enterprise demand. Key Hyperscale wins during the year included a 10-megawatt lease with one of the industry's fastest-growing consumers of Hyperscale data center capacity in Ashburn, a 4-megawatt expansion in Manassas with a global Software-as-a-Service provider, as part of their continued ramp into the facility, and a 12-megawatt lease with a large social media company that will anchor our new expansion in Atlanta.

Leveraging our cost-advantaged power shell capacity and differentiated platform, we are pleased that the majority of our Hyperscale leases signed in 2019 come in toward the higher end of our 9% to 11% target of Hyperscale return on invested capital range. Since our financial model was built on the assumption of signing only one to three larger 5-plus megawatt Hyperscale opportunities each year, our approach allows us to be more selective in the strategic growth acceleration opportunities we pursue.

We also demonstrated strong momentum in our Federal vertical with the signing of a 5-plus megawatt multi-site deployment for strategic Hyperscale customer, supporting a large Federal program.

We remain encouraged by the growth opportunity in Federal, as these requirements generally represent return opportunities in excess of our typical return on invested capital we see in the market for full multi-megawatt deals, which represents an attractive value creation opportunity for QTS and its shareholders.

Even as we experienced a strong acceleration in our Hyperscale and Federal verticals, QTS' core engine of growth remains our Hybrid Colocation, which continues to represent approximately 2/3 of our recurring revenue base. We strongly believe that having a business approach that balances the consistent 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.

Our Hybrid Colocation business has had another solid year in 2019 with relative strength in enterprise demand in Atlanta, Ashburn, Piscataway and Chicago. During the year, we signed 158 new Hybrid Colocation logos, reflecting the increase in average deal size of more than 40% year-over-year, and we remain encouraged by the growing number of larger enterprise deal in our pipeline so far in 2020.

Now, moving on to Slide 6. During the fourth quarter, QTS signed new and modified leases, representing $27.7 million of incremental annualized revenue, which is nearly double our prior four-quarter average of $15 million, and represents the single largest quarterly leasing result we've achieved as a public company.

Hyperscale contributed approximately 2/3 of the overall leasing activity in the quarter, including the 12-megawatt anchor tenant lease in Atlanta that was previously announced. Despite the larger mix of Hyperscale leasing in Q4, we are pleased that the average pricing per square foot across all incremental leases signed during the fourth quarter was consistent with our prior four quarter average. Further highlighting the value to customers, including hyperscalers, continue to see in QTS' differentiated platform.

In addition to the large 12-megawatt lease, we signed a number of smaller 1 megawatt to 2 megawatt leases across our footprint with existing Hyperscale customers, as is typical over the course of the year in our business.

As an example, in Q4, we signed a multi-site expansion aggregating to approximately 1.5 megawatts with an existing Hyperscale customer. Since signing its first lease with QTS in Fort Worth in early 2019, this social media company has incrementally expanded with QTS in three separate instances, and is now deployed across three QTS facilities.

We have previously discussed the importance of incumbency in Hyperscale, as these customers typically prefer to expand their infrastructure on a recurring basis with existing partners given the complexity and time commitment related to the incremental procurement and approval vendor processes. As we continue to see the dynamic play-out in our business, bringing new Hyperscale logos onto the QTS platform remains a core initiative.

During 2019, we were pleased to sign three new Hyperscale logos, including a global cloud services provider during the fourth quarter, as part of a 1-megawatt multi-site deployment. In addition, as we announced in our press release, in conjunction with our earnings results, our Hyperscale momentum has carried over into 2020, with the announcement of a 4.5-megawatt lease with an existing global Software-as-a-Service customer. This customer commitment will serve as the anchor of a new data center development in Hillsboro, Oregon, which Jeff will discuss in further detail.

Strength in our overall leasing volume resulted in our highest ever backlog of signed, but not yet commenced annualized recurring revenue of approximately $93 million at the year-end. The backlog provides strong visibility into our future growth and materially de-risk our financial performance in 2020.

Moving on to renewal activity, pricing on our installed base remains healthy. Same space renewal rates during the quarter represented a decline of 2.2%. However, this was largely due to one customer's change in power density upon renewal. Excluding this one customer, renewal rates on a per square foot basis would have represented a 2.7% increase relative to pre-renewal rates, which is consistent with our general expectation of renewal rates increasing in the low to mid-single-digit range.

Finally, as part of our continued focus on operational efficiency, during the quarter, we exited two non-strategic leased facilities in Hong Kong and London, as well as consolidated customers in our Dulles campus from two buildings to one, to free up space for incremental expansion. The two leased facilities that we exited in Hong Kong and London were subscale, with below average profitability and limited path for incremental growth. Proactive management of our strategy in these facilities is consistent with our constant effort to evaluate our platform for opportunities to enhance operating efficiency.

Churn during the fourth quarter and full year of 2019 of 1.7% and 5.2% respectively included the intentional customer churn associated with our deliberate strategy to exit these facilities, non-strategic leased facilities. Excluding the impact related to the exit of these facilities, churn would have been 0.8% for the fourth quarter and 4.3% for the full year.

Overall, we're pleased with our financial and operating performance in 2019. Importantly, our leasing performance in 2019 sets the stage for continued strong growth in 2020 and increased visibility and momentum.

With that, I'll now turn it over to Jeff Berson, our Chief Financial Officer. Jeff?

Jeff Berson -- Chief Financial Officer

Thanks Chad, and good morning. Turning to slide 8, in conjunction with our earnings release yesterday, we announced the commencement of development of a new mega data center campus in Hillsboro, Oregon. The initial development will feature the construction of 158,000 square foot data center, encompassing approximately 85,000 square feet of leasable capacity and 27 megawatts of gross power capacity. We're pleased that the entire first phase of development at the site, representing 4.5 megawatts, has been pre-leased to an existing Software-as-a-Service customer. The significant pre-leasing in our new Hillsboro development is consistent with QTS's de-risked approach to development and overall capital allocation.

We currently expect to deliver the first phase of the new Hillsboro development in mid-2020 with additional power capacity available for customers in the second half of 2020 based on demand. Hillsboro has emerged as one of the fastest-growing data center markets on the West Coast.

We strongly believe the strategic importance of the Hillsboro market will continue to grow as Hyperscale and Enterprise customers focus their data center infrastructure strategies around low-cost markets with strong access to power and a multitude of connectivity options, including subsea cable landing.

In addition, QTS currently expects to provide customers with 100% renewable power upon opening the Hillsboro site, consistent with our commitment to provide 100% renewable power across all of our data centers by 2025. We

Look forward to extending our strategic footprint on the West Coast in support of the continued growth of our Hyperscale and Hybrid Colocation customers.

Next, on Slide 9, I'd now like to review our development plan for 2020. Over the course of 2020, we currently expect to deliver approximately 167,000 square feet of new raised floor capacity in Ashburn, Atlanta, Dallas-Fort Worth, Piscataway, Chicago, Manassas and Hillsboro. Included in our capital plan is the formal opening and commissioning of the first phase of development at our adjacent mega data center in Downtown Atlanta and initial development on our Hillsboro campus.

To support our record booked-not-billed backlog and particularly strong momentum exiting the fourth quarter, we're currently projecting cash capital expenditures in 2020 of between $550 million and $600 million. Importantly, more than 70% of our current development capital spend expectation for 2020 is directly tied to leases that have already been signed.

As always, we will continue to evaluate the amount and timing of our capital allocation to align with customer demand, balancing our focus on achieving both near-term and long-term growth in shareholder value.

Now, on Slide 10, I'd like to review our current balance sheet position. Since the end of the second quarter of 2019 and through today's date, QTS has raised through its ATM program approximately 3.6 million shares of common stock at an average price of approximately $52 per share, which represents approximately $184 million of net equity proceeds on a forward basis. When combined with the approximately $36 million of undrawn forward equity proceeds remaining from our March 2019 forward equity raise, the company has access to approximately $220 million of net proceeds through forward stock issuances. These proceeds provide significant future capital availability and materially de-risk QTS' financing plan well into the second half of 2020.

Based on QTS' current capex guidance, forecasted growth in adjusted EBITDA and retained cash flow, these available equity proceeds represent more than 2/3 of QTS' incremental equity funding requirement for 2020.

At the end of the fourth quarter, pro forma for the available forward equity proceeds, we had total available liquidity of approximately $915 million. We currently have no significant debt maturities until beyond 2022, and more than 70% of our indebtedness is subject to a fixed rate including a series of interest rate swap agreements.

We ended the quarter with leverage of approximately 5.6 times net debt to annualized adjusted EBITDA. This level is consistent with where we've historically managed the business, and we remain comfortable in this range in light of our significant booked-not-billed backlog.

Including the $220 million of available forward equity proceeds, our pro forma leverage as of the end of the fourth quarter was approximately 4.8 times. We currently expect to draw down the forward equity proceeds over the coming quarters to fund our future development plan, while maintaining leverage at a level consistent with where we have historically operated.

Next, on to our financial guidance on Slide 11. For the full year 2020, we expect reported total revenue to be between $523 million and $537 million. We expect full year 2020 reported adjusted EBITDA to be between $275 million and $285 million, reflecting continued operating leverage in our business. Our 2020 financial guidance assumes rental churn for the full year of between 3% and 6%, which is consistent with our target range in 2019.

Moving to OFFO per share, we expect reported operating FFO per share in 2020 to be between $2.69 and $2.83. Our outlook for 2020 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.

As we head into 2020, we're pleased with the extent to which we have de-risked both our revenue performance through our record booked-not-billed backlog and our financing strategy to the $220 million of forward equity proceeds previously mentioned, combined with an incremental capacity on our revolving credit facility. We are encouraged by the momentum we're seeing in our underlying business fundamentals and look forward to the opportunity to continue to execute against our strategic initiatives to drive consistent incremental performance.

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

Chad Williams -- Chairman & Chief Executive Officer

Thanks, Jeff. Looking back over 2019, I'm proud of the significant enhancements we've made to our platform and we remain committed to making the investments in our business to enable QTS to continue to deliver consistent results for our shareholders, our customers, and our QTS employees and communities.

2019 was a year of strong execution for our team, and I am pleased that those efforts were reflected in our strong operating and financial results with tremendous visibility into our growth in 2020 and beyond. Our success in 2019 would not have been possible without the continued dedication of our QTSers across the country. And I'd like to thank each one of you for your commitment to serving our customers, our communities and each other. I'd also 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?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Today's first question comes from Erik Rasmussen at Stifel. Please go ahead.

Erik Rasmussen -- Stifel Financial Corp. -- Analyst

Yes, thanks. Nice results and congrats on the leasing. Hyperscale leasing was once again solid, driving record results. And with the Hillsboro signing, you're off to a good start this year. Are you seeing any changes in the types of opportunities you're tracking that would cause you to do more than a few Hyperscale deals in any given year?

Chad Williams -- Chairman & Chief Executive Officer

Eric, we continue to see great opportunities. Of course, to your -- to the point, we're not out looking for every deal. We're still targeting kind of one to three, 5-plus megawatt deals a year. It allows us to be selective and strategic, because not all Hyperscale deals are created equal. So, where we have great space, great customer concentrations and draw, and get the right returns, those are the ones we focus on. But I think the thing I'm most proud of with Tag Greason and the team was three new incumbent logos for 2019. Our goal was two new logos.

50-plus percent of our business comes from customers expanding with us. It's a higher percentage for hyperscalers. We saw one hyperscaler sign early in Q1, and they've already expanded in two incremental expansions over 2019. So, I'm most proud that we have three new incumbents on our list to be able to work with and build partnership with. And we feel like the opportunities are going to be robust, and it's great to get off to a solid start with an anchor deal in Hillsboro, which we think is going to be a great new facility for the West Coast development of our Hyperscale business.

Erik Rasmussen -- Stifel Financial Corp. -- Analyst

Very good. And maybe just my follow-up on Ashburn. Last quarter you had a nice win. In Q4, was there anything to call out in that market? And what is your assessment of this market as it relates to supply and demand and just the competitive environment? Thanks.

Chad Williams -- Chairman & Chief Executive Officer

It's a competitive market. There's great competitors in Ashburn. It's a very mature market. But there's also a lot of customer demand. So, I know there's been some noise in that market. We saw a robust pipeline both in Hybrid and Hyperscale for the full year, and I think you see that in our numbers.

So, we couldn't be more encouraged about Ashburn as a market. There's great competitors, there's additional sites getting built. I will tell you this, Ashburn will not have an unlimited amount of space power and land. So, it's great that Ashburn continues to have momentum. We also think a lot of Manassas and Richmond Virginia, but we think Ashburn is going to be fine.

Operator

Thank you. Our next question today comes from Richard Choe at JPMorgan. Please go ahead.

Richard Choe -- JPMorgan -- Analyst

Hi. Chad, I'll give you the credit in terms of the signing. But, I have to give Jeff a little bit of share here in terms of the guidance. With the Hillsboro deal and the signings, why is the guidance a little bit higher than where it is?

Chad Williams -- Chairman & Chief Executive Officer

Well, Richard, I appreciate the credit for the success. And I do think, Jeff, can give some insight on this. But it has been a good year, but -- Jeff?

Jeff Berson -- Chief Financial Officer

Yes. Thanks, Rich. So, I think we're very pleased with what we're seeing in terms of revenue growth and EBITDA growth. And you got to remember, that growth is off of a 2019, that had higher revenue because of the particularly hot summer and power pass-throughs, that we don't expect to continue. So, we're growing off of, what was a very strong 2019 revenue level.

And from the FFO side, continuing to put up shareholder returns and value, but recognizing based on the strength of the leasing, and in particular Q4. Our capex for 2020 is a little bit higher than what we had expected last quarter, about $50 million higher. A lot of that going toward Hillsboro and some of that just continues on success-based capital, given the strength of the Hybrid leasing.

And even with that, putting up what we think is a strong bottom-line growth, while increasing the dividend, we think it's a good combination in continuing to drive shareholder value.

Richard Choe -- JPMorgan -- Analyst

And as a follow-up to that, is the Hillsboro back-end loaded? And is that the way -- right way to think about it? And then in terms of leverage, I understand you want to keep it balanced. But in this type of environment, taking up leverage isn't a bad idea. What are your current thoughts on the leverage target?

Chad Williams -- Chairman & Chief Executive Officer

Sure. So, yes, Hillsboro is back-end loaded and we expect that we'll be able to deliver that facility by the middle of 2020. And so, you'll see that revenue come in late in 2020 and really drive 2021.

And from a leverage standpoint, as of now, you see where our leverage is at the end of the year. We do think with the booked-not-billed backlog and visibility that we've got, that we do have flexibility to be able to manage the balance sheet effectively.

We've been comfortable, historically, in leveraging the mid-to high five churns. But depending on what happens in the business, we're going to look at that on a regular quarter-to-quarter basis.

Operator

And our next question today comes from Jordan Sadler of KeyBanc Capital Markets. Please go ahead.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Thanks, and well done in the quarter. I wanted to just come back to, the Hyperscale deals. This has been a pretty nice area of success for you guys. Chad, in your comments, you remarked that you've not really been under pressure, given sort of the one to three target for the year. So, I'm just curious, are you -- do you feel like you're passing uncertain Hyperscale deals that have lower return prospects?

Chad Williams -- Chairman & Chief Executive Officer

Jordan, it's a great comment. I mean, we do not chase every Hyperscale deal, that's a fact. I think the thing that's probably giving us better depth on Hyperscale, is we're not trying to go land 25-megawatt deals out of the gate. We're very happy with kind of those incremental 5-plus megawatt deals, BECAUSE we historically see them grow. And I would much rather do a higher-return, lower-megawatt deal that I know has got growth capacity built into it, that spreads our capital intensity out over periods of quarters.

So, we just think it's a sweet spot for us for Hyperscale customers. And I would say maybe the other comment that's giving tag and the team some depth is that we're getting more and more incumbents and more and more logos. So, it's a very lumpy business in Hyperscale. We've all talked about that for years. It's why I'm so confident in the spread of our business both Federal, Hybrid Colocation and Hyperscale because it's very hard to predict the lumpiness of Hyperscale. But the more incumbent logos that you have to talk to and work with, it takes the concentration of building a business based on one or two names.

Now, one or two names can drive huge growth. We've seen that play out in the industry. That's a great thing. But diversity around that Hyperscale logos is a big priority for us, because I think it provides for more opportunities on a more predictable basis. But -- we will have more opportunities then we will be able to say yes to in 2020. I'm fairly confident of that.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

And you raised another, sort of, point, I was interested in, which is: The nature of the workloads that are being deployed. So, you mentioned also in your remarks the social media company that you've done business with, multisite deal in the quarter 1.5-meg expansion. It sounds like this is a customer with huge buying potential, great to have the logo in the portfolio. But what's the nature of a 1.5-megawatt total net expansion multisite versus the potential 15 to 20 meg type workloads that a customer like this could be taking from other folks in the industry?

Chad Williams -- Chairman & Chief Executive Officer

Yes, it's a great question. So, I would consider the smaller kind of 1.5 to 2-megawatt deployments very intense network connectivity that they're trying to distribute around in a geographical area. So, think about that as high density, lots of connectivity on-ramps, those type of things. And they also have a lot of, what you would call, edge deployments, which really kind of plays into that connectivity type of play.

So, we love doing those type of opportunities because it just brings a lot of concentration of traffic to our facilities and usually offers a good value prop to other customers. When you get into the larger deals, these guys have large operations that run. So, everybody thinks about their production facilities in these 20 and 30 and 40-megawatt chunks. They actually are fairly proficient at providing and predicting that type of stuff for themselves, but there's a lot of ancillary services that they're building and deploying that connect to those type of production facilities. It's kind of fun that we just happen to kind of lay out a portfolio whether it's in Richmond or in Texas where we're very close proximity to some very large data center production facilities.

So, I love being back in the house or corporate or product development, or ancillary type of services for them, because -- for customers like that, because it just gives us great opportunity to fill gaps where we can add tremendous value. So, it's a little bit of everything, but there's a lot of demand coming in lots of different areas.

Operator

And our next question today comes from Simon Flannery of Morgan Stanley. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thanks very much. Good morning. So, on Hillsboro, now that you have your anchor tenant, how are you thinking about the ability to lease up the rest of that space? Is there a pipeline of people that have been kind of soft circle that you would expect you could start signing up fairly soon? Or is it going to be more elongated?

And then, if you could just give us an update on Richmond as well. I think you mentioned that briefly earlier, but what's the expectation in 2020 and beyond for Richmond?

Chad Williams -- Chairman & Chief Executive Officer

Yes. So, thank you, Simon. In Hillsboro, yes, we feel confident about our pipeline building, both in the Hyperscale business and in the Hybrid business. So we think, we're going to have great opportunities in that market. It's a great regulatory, great power cost. It's just a market where I think with the West Coast interconnection opportunities and the cables that are in Hillsboro, I think it's just a great market. I think you'll see that pick some significant opportunities up that maybe would have previously landed in Northern California.

So, we're excited about that being a West Coast jump off and feel good about the momentum we see both in Hybrid and Hyperscale. Richmond continues to be an opportunity. We took back some space in Richmond at the end of last year. It just so happened that coordinated with the time where the Hybrid business with almost 30 new logos in Richmond in 2019 needed additional Hybrid Colocation space. And we'll take some of that back and put it into all three product sets, but we're excited about the Hybrid and Hyperscale opportunities.

Of course, May 5, a little plug for Clint Heiden in the Richmond Network Access Point Summit, which is our second summit that's really highlighting the transatlantic new cables coming into Virginia Beach that are coming through the Richmond Virginia site force. It was great to create a network access point. We think that's got tremendous opportunity over the next few years to be a real aggregator of opportunities.

And as I said earlier, Northern Virginia continues to fill up. And I think that's a good thing for sites like Manassas and Richmond as we continue to build that.

Simon Flannery -- Morgan Stanley -- Analyst

And are you looking at any other sites beyond your current footprint? I mean, you obviously closed out a couple of European -- international markets, but do you think this is the footprint we have for the year?

Chad Williams -- Chairman & Chief Executive Officer

We're very satisfied with our footprint today.

Simon Flannery -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

And our next question today comes from Brett Feldman of Goldman Sachs. Please go ahead.

Brett Feldman -- Goldman Sachs -- Analyst

Thanks for taking the question. So, the last three quarters of the year, your quarterly net leasing activity exceeded the average you were targeting for last year. And I know this can be lumpy, but it certainly feels like you're entering 2020 with a lot of sales momentum.

So, the thing I'd like to maybe better understand, are the success-based cost associated with continued sales execution? So, for example, have your recent quarters seeing upward pressure on selling cost? Is that something that's embedded in the guidance that you have provided for this year?

And then I saw the lease commission expenses that were coming out of the AFFO, were stepping up. I haven't spent a lot of time on that. So, if you could help us understand the relationship there between that and sales execution and how to model those out? I think that will be very helpful. Thank you.

Jeff Berson -- Chief Financial Officer

Sure, Brett. This is Jeff. So, as it relates to the capex, if you look at 2019, success-based capex did drive the growth that we've seen in the past and that we're excited we'll continue to see within the $350 million to $400 million range. And then when we talked about going into 2020, it's with the new build in Atlanta that could add $100 million to $150 million of capex. And then in talking about Hillsboro, our total capex went up by probably another $50 million or so.

So, I think you can think about the business at least on our current state as continued strong growth success based in existing facilities at a $350 million to $400 million. And then as you do some of these larger deals in terms of new markets, that could be anywhere from an additional $50 million to $150 million per facility or per market, just depending on how much you're delivering upfront. So, again, to Chad's point, continuing to balance capex and growth with putting up returns both near-term, midterm and short term.

As it relates to the commissions on AFFO, one of the reasons that we focus on OFFO is because you have some circumstances like you saw in the quarter, where unbelievably successful quarters you wind up paying more commission.

The reality is we love paying high commissions because it means we're selling a lot and driving the business in the right way. And we think salespeople love being in QTS, not just for that, but because we're giving them the right products and the right opportunities to grow the business.

So, you'll continue to see lumpiness around AFFO as it relates to commissions, particularly in a business where we're looking to do one to three Hyperscale deals a year. And when those hit, those tend to come with a higher commission payment.

Brett Feldman -- Goldman Sachs -- Analyst

Got it. And just a quick follow-up. Those expenses, are those now going to be amortized through your selling expense and therefore into EBITDA over the next few quarters? Is that how that works?

Jeff Berson -- Chief Financial Officer

Yes. On the commission side, they basically get amortized over the length of the contract. So, that gets amortized over a much longer period than just a couple of quarters or year, but yes.

Brett Feldman -- Goldman Sachs -- Analyst

All right. Thank you.

Operator

Our next question today comes from Michael Funk of Bank of America. Please go ahead.

Michael Funk -- Bank of America Merrill Lynch -- Analyst

Yes. Thank you for taking the question. First, one for you Jeff, if I could. So, you gave us some of the piece parts, I think, but can you tell us what you're guiding for expecting for same-store NOI growth in 2020?

Jeff Berson -- Chief Financial Officer

Sure, Mike. So -- I mean, one of the things that we try to do to help people get their arms around same-store is we put out our renewal status, which you've now seen consecutively for, I don't know, last 24, 25 quarters at QTS, which is when customers do renew with us, what's happening in our pricing per square foot basis. And we have consistently seen those renewals in a normalized level in the, call it, 1% to 4% positive. Part of that we think is just customers liking to stay with QTS, validating what we're doing, sticking with us and driving better pricing per square foot.

What you saw in Q4, just to be very transparent, that number was negative 2.2%. There was one customer in that renewal that renewed, but took some lower power densities and got a different price point as a result. Excluding that, we would have been up 2.7% and have been positive over the course of the last year. So, I think that's generally the consistency that we see in the business and would expect that to continue going forward.

Michael Funk -- Bank of America Merrill Lynch -- Analyst

Great. Thank you, Jeff. Maybe one for Chad here as well too. So, you mentioned the demand in Hillsboro were very strong maybe some shift from California. So, are we seeing a shift in demand geographically? Or is the demand in place like Hillsboro, is that incremental to other more traditional high-demand markets?

Chad Williams -- Chairman & Chief Executive Officer

It's a little bit of both. I do think you'll see some opportunities that maybe previously would have head into other markets looking at Hillsboro because of the strong connectivity, the power cost, the regulatory environment. And so, the other reason I'm encouraged about Hillsboro is because it's a very developed data center market. So, it's not something that we're trying to create new, but it also doesn't have abundant capacity.

So, it's just a great opportunity. We think it's going to be a great new market and we needed a market for the Hyperscale team that was West Coast centric that they could really build. I think, our facility there will support over 200 megawatts of a campus. So, we're encouraged about the size, the scale and the opportunity.

Michael Funk -- Bank of America Merrill Lynch -- Analyst

Great. Thank you, Cha. Maybe one more for Jeff, if I could? So, Jeff, are you thinking about asset recycling here as well with -- as far as kind of the capital need for 2020 and beyond? Are there assets in the portfolio maybe that are sub-return, maybe not attractive markets? How are you thinking about that?

Jeff Berson -- Chief Financial Officer

Yes. Sure, Mike. We're always open to and very focused on driving multiple levers to fund the business. You saw that in the JV that we announced last year. And we have a great partner in Alinda and we've got a number of additional capital partners that would love to work with us. So, we're always looking at that. What we like as we think about different JV opportunities and we know that Alinda does have capital set aside and would expect it will find additional things to do with them. What we like a lot from those and makes a lot of sense would be new build-to-suit opportunities with hyperscalers where you know you've got a facility that's fully stabilized, enables us to drive incremental business and revenue from those new assets by putting in less capital and driving higher returns, which is what you saw from us again in the deal we did last year.

And so, looking at that, as well as different ways to manage the portfolio and recycle capital, I mean the other thing you saw a little bit in the quarter was also just looking at our existing portfolio like some of the smaller lease facilities and just exiting out of some of those to continue to drive operating efficiency and success in the business.

Operator

Our next question today comes from Nate Crossett of Berenberg. Please go ahead.

Nate Crossett -- Berenberg -- Analyst

Hi. Good morning. Just wanted to get your comment on development yield, the markets you operate in. Where do we stand on pricing for Hyperscale? Are we nearing a bottom? And there was a comment in the presentation that the wind came at the higher end of the 9% to 11% target range.

Chad Williams -- Chairman & Chief Executive Officer

Yes, Nate. We're seeing stability in pricing. Obviously, with us chasing one to three deals as a target each year, we can be a little more selective on the ones that we do. We have, in Atlanta, in some of those kind of markets a definite cost advantage, not just in build, but also operational cost with our 20% less power cost in that market because of the size and scale of our facility.

So, that's letting us enjoy a higher return on invested capital, which is wonderful. So, three of our -- kind of, three of our deals last year were all at the higher end of the 9% to 11% range. And we don't see that trend necessarily changing. I think, overall, it's been stable in the pricing. And I think you're going to see more deal flow, which should help continued stability in the pricing.

Nate Crossett -- Berenberg -- Analyst

Okay. That's helpful. And just on private equity. We've heard that some of these private platforms have taken a step back in certain markets. I'm just curious if you're seeing that in the kind of main markets that you guys operate in?

Chad Williams -- Chairman & Chief Executive Officer

I'm sure private equity will do fine with whatever they want to do. So, I don't have any comment really on that.

Operator

And our next question today comes from Frank Louthan of Raymond James. Please go ahead.

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. Can you comment a little bit on the Federal business? What do you think the outlook is for that this year? Will it be as strong as last year? Then why is it that you think that you all are focused on this and most of your public peers are not? What is it that you see in that market that others don't?

Chad Williams -- Chairman & Chief Executive Officer

Well, one thing is I think it happens a lot in life where people look at success and think it was just like a recent success. I can tell you there are Federal project and focus has been years, not quarters. And I think we've just been very intentional about it. It's been something that we've worked hard on both operationally, security. We made an entry -- a fairly substantial entry or additional entry into the market with an acquisition back in 2015 that allowed us to kind of pick up an additional skill set that we did not have previously. And we've been very intentional about it.

And I think the recent success on it is something that we feel good about. And I think that the government has been talking for a long time maybe to a fact where people kind of feel like it's more words, but they will take action. I think they are going to transform and digitize their platforms. I think they have to. And I think QTS is well positioned to be an opportunist in that area and we're going to continue to see growth in that. So, we're excited about it.

Frank Louthan -- Raymond James -- Analyst

All right. Great. And just a follow-up. You said earlier that the returns will be better on the Federal business. What is it about the Federal business in particular that gets you better returns?

Chad Williams -- Chairman & Chief Executive Officer

Well, I mean, it's hard to win Federal business without Federal business that you've already done. So, it's hard to get into that business. They ask you to do some things operational and security that you have to be very intentional about. You have to set your operation up for them, not them conforming to your operation.

So, it's just a different mindset. And unless you're intentional from every aspect of the way you build, the way you operate, the way you sell, you've got to have a pretty dedicated focus on that. And I think that's where we've been able to -- maybe to some degree just outwork others. We don't mind rolling up our sleeves and doing the hard work if we see value creation opportunities. And that's been a hallmark of our company. So, it's nothing more fancy than that.

Operator

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

Eric Luebchow -- Wells Fargo -- Analyst

Great. Thank you. Can you provide an update on the European market, the Netherlands asset that you acquired last year? And what the pipeline looks like in terms of Hyperscale versus traditional enterprise demand?

Chad Williams -- Chairman & Chief Executive Officer

Yes, Eric. As we said in our comments, Groningen has outperformed kind of our initial -- not substantially, I think $0.5 million. But we renewed a bunch of customers, we've added customers, who are deployed existing. And so that continues to just hum as a Hybrid Colocation facility. And Eemshaven, which is going to be a large multi-megawatt facility for Hyperscale, it's going to be online mid-2020. So, we'll start to build the pipeline and already are starting to have those conversations. I think everyone, holistically, believes that Europe is going to have some opportunity for growth in Hyperscale and so do we. I'm just glad that with our basis and our infrastructure, we're going to go in a very accretive way. And I think we'll continue to focus. We don't have to be heroes in Europe. We just have to go knock down some singles and doubles, and it will materially impact our business in a positive way.

I think the other thing is between the two sites, we'll have almost 30 megawatts in Europe. So, it's something that our Hyperscale and Hybrid teams have a serious footprint now that they can go talk about. So, we're excited.

Eric Luebchow -- Wells Fargo -- Analyst

Great. And one follow-up on the Hyperscale vertical. You've had a lot of success in the last year with, what I would call, non-traditional Software-as-a-Service social media companies relative to the largest public cloud companies. So, is your pipeline still weighted more toward those companies? And what kind of advantage do you think you have versus some of your peers to win those types of deals versus the really large public cloud deployment?

Chad Williams -- Chairman & Chief Executive Officer

Eric, I'm going to let Tag Greason take that.

Tag Greason -- Chief Hyperscale Officer

Eric, thanks a lot for the question. As it relates to our Hyperscale pipeline, we have a number of opportunities in that 1 to 4-megawatt range that we continue to work on. So, a number of transactions. The answer to your question is, yes, it is heavily weighted to those kind. But there are the 10, 20-megawatt opportunities in the pipeline as well. So, on gross megawatts, it kind of gets skewed back to a 50:50 mix. But, in general, we're excited about the pipeline and the opportunities and we look forward to moving forward with those opportunities.

Operator

And our next question today comes from Aryeh Klein at BMO Capital Markets. Please go ahead.

Aryeh Klein -- BMO Capital Markets -- Analyst

Thanks. Hybrid leasing continues to be a pretty steady performer. Maybe talk a little bit about what rate you expect that business to grow longer term? And then, SDP obviously is helping there. But any sense of how competitors are responding to that?

Chad Williams -- Chairman & Chief Executive Officer

The Hybrid business is a very competitive business. So, we have had our ability. It's been the engine of our business from the very start. I think SDP is helping a lot. And from Clint and the team's ability to walk in to an enterprise and immediately differentiate our platform in a significantly completely different way, is a game changer. So, we're going to continue, even though that area of the business has tremendous pressure, because there's just a lot of people out there that can sell Colocation and focus on space and price.

We're differentiating on a whole different level with the digitized platform, the ability from connectivity and data and analytics, and all those such things that really drive a very seamless ability for them, not just to be with us for Hybrid Colocation, but to also connect in and have visibility with other things that they want to do in "The Hybrid World."

So, we think the opportunity continues to be steady for us, and we're going to continue for Hybrid to be a good engine of our business.

Aryeh Klein -- BMO Capital Markets -- Analyst

Great. Thank you.

Operator

And our next question comes from Sami Badri of Credit Suisse. Please go ahead.

Sami Badri -- Credit Suisse -- Analyst

Hi. Thank you. Maybe we could just get a little bit of an update on the interconnection business, perhaps maybe just revenue growth or mix of total, just so we have a bit more color on how that side of the house is actually performing?

Jeff Berson -- Chief Financial Officer

Hey, Sami, yes. So, from the interconnection business, we're continuing to see success there. A couple of years ago we talked about that business being about 5% of our revenue. At this point, it's closer to 8-plus percent of our revenue and continuing to grow, still growing faster than our overall numbers. Now, off a lower base but continuing to drive value.

And importantly, what we're seeing is real take up as we're focused on where the technology is bringing the interconnection business. And so, a lot of things that we're doing there in terms of driving the future of that, and maybe Jon will give you a quick update on some of the new technologies we're bringing to, to really stay on the front edge of where cross-connection is going.

Jon Greaves -- Chief Technology Officer

Yes, absolutely. Sami, so -- we're also obviously been extending our network with software-defined solutions, products like Switchboard. Those now fully integrate into our main Service Delivery Platform stack, so customers can kind of use those very seamlessly and gain access to those services on demand.

Chad Williams -- Chairman & Chief Executive Officer

And I might add to that. As I mentioned earlier, Clint and the team are going to be in Richmond on May 5 to talk about connectivity at the Richmond Network Access Point Summit, and that's going to be an opportunity to hear a lot about connectivity in general for QTS and the platform and our partners.

Sami Badri -- Credit Suisse -- Analyst

Got it. Thank you for that. And another kind of update maybe on the GDT partnership you have. I know it's been some time since that partnership was put into place. Maybe any kind of quantitative contribution that that partnership is making to the business or maybe another color would be very helpful.

Chad Williams -- Chairman & Chief Executive Officer

GDT continues to be a strategic partner. And we look for them to continue to grow. They have done a wonderful job with the customer base that they took over. And we continue to see incremental opportunities with them for the services we provide to them.

Jeff Berson -- Chief Financial Officer

Yes. Sami, I know we talked about them contributing about $10 million in that partnership, when we spoke about a year ago on the revenue side. And they've stayed consistent there. So, we're very happy with the relationship and we're actually starting to see some interesting situations where they're bringing more customers into the platform and working with us on it.

Operator

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

Nick Del Deo -- MoffettNathanson -- Analyst

Hey, thanks for taking my question. First one for Jeff. Jeff, as we think about the midpoint of the 2020, expected EBITDA margin. Now, if my math is right, the year-over-year increase seems to be a function of mostly from an increased contribution from the JV, and that's why the 2019 margins being a bit depressed because of higher tenant recoveries, is that accurate? And to the extent that the margin on more of an apples-to-apples basis is kind of flat-to-down year-over-year, is that primarily a function of absorbing the cost of the Atlanta and Hillsboro openings?

Jeff Berson -- Chief Financial Officer

Yes. So, Nick, when you're looking at '18 to '19, you're right, we got some margin pickup from the JV. At the same time, we also had a lot of power pass-throughs that are effectively zero margins. So, you got to look at both sides of that. There's always moving pieces in the business, so it's not always just based on one metric. If you zero out both of those aspects, what you'll see is margin improvement year-over-year, that's still around that 50 basis points. If you look at the guidance in 2020, you'll see margin improvement of at least that again.

We're confident that as we scale the business and drive operating efficiencies, that we can continue to put up at least 50 basis points of margin improvement each year. And we're comfortable and confident that we're doing the right things to deliver on it.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay. Got it. And then, one for Chad. Chad, I think, your ownership interest in QTS has been kind of gently trending down over the last several years, as the company has issued shares to support the expansion. I think, it's a little below 11% today. Do you have any sort of ownership threshold that you ultimately don't want to slip below? Or do you not really think about your stake that way?

Chad Williams -- Chairman & Chief Executive Officer

I don't really think about the stake that way. I mean, obviously, as we grow and access capital, that absolute percentage is going to grow. But as a top one or two shareholder, almost any day of the week, there's a lot of focus on the ownership and the value creation, not just from my family, but all shareholders.

So, I think it's got great alignment, substantial ownership and we've seen continued opportunities to grow that shareholder.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay. So, you're most -- you're focused on value, not percentage?

Chad Williams -- Chairman & Chief Executive Officer

Yes.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay, perfect. Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Chad Williams, for any final remarks.

Chad Williams -- Chairman & Chief Executive Officer

Well, I just want to thank all of you for your time this morning. And thank our QTSers around the country that made 2019, an exciting opportunistic year for QTS. Thank you for your continued trust and confidence that you place in us, as stewards of your capital. And we thank you and look forward to talking to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Stephen W Douglas -- VP, Investor Relations & Strategic Planning

Chad Williams -- Chairman & Chief Executive Officer

Jeff Berson -- Chief Financial Officer

Tag Greason -- Chief Hyperscale Officer

Jon Greaves -- Chief Technology Officer

Erik Rasmussen -- Stifel Financial Corp. -- Analyst

Richard Choe -- JPMorgan -- Analyst

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Brett Feldman -- Goldman Sachs -- Analyst

Michael Funk -- Bank of America Merrill Lynch -- Analyst

Nate Crossett -- Berenberg -- Analyst

Frank Louthan -- Raymond James -- Analyst

Eric Luebchow -- Wells Fargo -- Analyst

Aryeh Klein -- BMO Capital Markets -- Analyst

Sami Badri -- Credit Suisse -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

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