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QTS Realty Trust Inc (NYSE:QTS)
Q1 2021 Earnings Call
Apr 28, 2021, 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 First Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to Stephen Douglas, Head of Investor Relations at QTS. Please go ahead, sir.

Stephen Douglas -- Executive Vice President of Finance

Thank you, operator. Hello, everyone, and welcome to QTS' First Quarter 2021 Earnings Conference Call. I'm Stephen Douglas, Head of Investor Relations at QTS, and I'm joined 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. 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, including those related to the effects of the ongoing COVID-19 pandemic 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, EBITDAre 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 and Chief Executive Officer

Thanks, Stephen. Hello, and welcome to QTS' First Quarter 2021 Earnings Call. Turning to Slide three. QTS delivered a strong performance during the first quarter to kick off what we expect will be another year of consistent robust growth in 2021. Our momentum coming out of 2020 has continued into 2021. And as Jeff will discuss, we are increasing our financial outlook for the year to reflect continued execution and strong demand environment. During the first quarter, QTS delivered total revenue and adjusted EBITDA of approximately $149 million and $82 million, respectively, representing an 18% and 22% growth year-over-year. We believe this level of growth is industry-leading and reflects the power of our differentiated platform, delivered across a diversified set of target customer verticals.

Adjusted EBITDA margin for the quarter was 55%, representing year-over-year margin expansion of more than 200 basis points, reflecting continued operating leverage in our platform as our business scales and reflecting the ongoing benefit of digitizing initiatives leveraging SDP. In 2020, we recognized approximately $3 million of net cost benefit associated with reduced travel utility rates as a result of the pandemic. During the first quarter of 2021, we saw travel expenses begin to ramp up and utility rates approaching more normalized levels, consistent with the expectations built into our initial 2021 financial outlook. As we sell into our existing built-out infrastructure and scale of our platform, we continue to expect our adjusted margin to expand over time. For the first quarter, we generated OFFO per share of $0.76, which represents approximately 15% year-over-year growth, reflecting our strong adjusted EBITDA performance in the quarter.

While investing back in our business at a robust level to deliver on our significant book backlog and support strong future growth, we have continued to deliver near and medium-term value creation through our consistent OFFO per share growth. As we've discussed in prior quarters, we continue to view our approach to capital allocation as directly tied to our goal of achieving consistent growth in our OFFO per share of between 5% to 9% annually. We believe this range of growth, combined with a three-plus percent dividend yield, provides investors with a consistent potential return opportunity while providing QTS the opportunity to continue to invest in long-term future growth opportunities.

Moving to Slide four. During the first quarter, QTS signed new and modified leases representing approximately $20.6 million of incremental annualized revenue, which compares favorably to our average quarterly leasing expectation of between $17 million to $20 million that we discussed last quarter. The results represent a very strong start to the year following our record leasing performance last quarter, which further derisked our financial growth expectations in 2021. We ended the quarter with backlog of signed but not yet commenced annualized GAAP rent of approximately $81 million, adjusting for the effects of revenue, which we began recognizing via straight-line rent. This is up nearly 50% year-over-year, which is down approximately 7% quarter-over-quarter as a result of strong quarter of leasing commencements and associated in-servicing of more than $112 million of development capital.

On a cash basis, our backlog of signed but not yet commenced annualized rent at the end of the quarter stood at approximately $152 million, up approximately 51% year-over-year. This level of backlog informs and materially de-risk our development activity for the year, more than 80% of which we are directly tied to signed leases. During the first quarter, underlying trends within our installed base remained healthy. We reported same space renewal rates up 2.2% in Q1 versus the prerenewal rates, consistent with our historical average of price increases in the low to mid single-digit price range.

Churn during the quarter also remained consistent with expectations at 0.7% relative to our full year guidance of 3% to 6%. Next on Slide five. Approximately 50% of our signed leases performance during the quarter was contributed by our Hyperscale vertical. Since implementing a strategic plan approximately three years ago to be more intentionally targeting Hyperscale growth opportunities, we've experienced significant growth in our Hyperscale deal funnel and signed leasing activity. We have been pleased with our progress in developing strategic relationships within our target Hyperscale customer vertical and establishing QTS as an incumbent with many of the largest and fastest-growing technology companies in the world.

Incumbency is a powerful differentiator in the Hyperscale vertical, and we continue to leverage our past performance and strategic differentiation of our platform to drive new growth opportunities. As we noted last quarter, we have increased our annual Hyperscale leasing volume target from 2021 to two to four larger five-plus megawatt leases, up from one to three previously. We are tracking well against this objective and remain encouraged by the opportunities in our pipeline. In addition to a number of smaller expansions with existing Hyperscale customers across our platform during the first quarter, we signed an eight-megawatt lease with a Hyperscale cloud provider that will anchor our new 42-megawatt Ashburn DC-2 development.

We officially opened our existing 32-megawatt Ashburn DC-1 site a little over two years ago and are pleased to announce last quarter that we largely sold out of the entire facility. The new 42-megawatt development, which is expected to come online in the middle of this year, will extend our strong momentum in the Ashburn market and support the breadth of our target customer verticals. Including the eight-megawatt anchor tenant lease signed during Q1, we have currently preleased approximately 10 megawatts of capacity in the new Ashburn development, representing nearly 25% of the stabilized capacity of the site. Now moving to Slide six. Our enterprise Hybrid Colocation vertical contributed the remaining approximately 50% of leasing performance during the first quarter.

Hybrid Colocation remains a core source of growth for our platform as enterprise customers continue to look to outsourced models to solve their growing IT infrastructure requirements. While leveraging the enhanced visibility and remote orchestration capability enabled by QTS' software-defined data center platform, coming out of a slower year of new enterprise logo growth in 2020 as a result of the pandemic last quarter, we discussed a recent increase in enterprise activity in our funnel. This resurgence in activity includes opportunities that temporarily stalled in 2020 as well as new requirements largely concentrated in the financial services, healthcare and technology verticals.

Typically, approximately 30% to 50% of our incremental growth is sourced from new logos. However, during 2020, this percentage came in at approximately 20%. And as we've discussed last quarter, we expect the new logo activity to return to more normalized levels in 2021. In fact, during the first quarter, new logos contributed approximately 37% of our total Hybrid Colocation leasing. During the first quarter, we were successful in signing 34 new enterprise logos. This is nearly 50% higher than the average quarterly new logos signed during the height of the pandemic in Q2 and Q3 of 2020 of approximately 23. We've also experienced increase in the average size of our enterprise deployments.

During the full year 2020, we signed 14 enterprise leases of 250 KW or greater, with an average deal size of approximately 650 KW. Year-to-date, we have already signed seven enterprise leases of 250 KW or greater, with an average deal size of nearly one megawatt, including two one-megawatt leases signed subsequent to the end of the first quarter, which positions us well for continued strong enterprise leasing in the second quarter. The list of larger enterprise leases signed year-to-date includes a two-megawatt requirement from one of the largest commercial banks in the country, a 1.8-megawatt deployment for a Fortune 500 diversified financial services company and a one-megawatt lease with a large independent advertising firm.

The enterprise Hybrid Colocation business continues to support consistency and diversification in our quarterly performance while driving enhanced return on invested capital. two of our mega data center sites have largely been leased and grown through Hybrid Colocation deployments are Piscataway and Chicago. These sites generated year-over-year growth in annualized rent of approximately 21% and 36%, respectively, as of the end of the first quarter of 2021. As these sites continue to ramp, NOI as of the first quarter has grown approximately 43% and 25% year-over-year, respectively, demonstrating the operating leverage embedded in our mega scale infrastructure.

Overall, we are pleased with the acceleration we have seen in our signed leasing activity and funnel within the enterprise Hybrid Colocation vertical, combined with a strong mix of attractive growth acceleration opportunities in our pipeline in Hyperscale and Federal. We continue to believe that a balanced business approach across our target customer verticals provides the opportunity to maximize our risk-adjusted return on invested capital while delivering consistent financial and operating results. With that,

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

Jeff Berson -- Chief Financial Officer

Thanks, Chad, and good morning. Turning to Slide eight. I'd like to begin by reviewing our current balance sheet and liquidity position. As of our Q4 2020 earnings release on February 16, QTS had access to approximately $582 million of net proceeds through forward stock issuances. During the first quarter of 2021, QTS settled 3.9 million shares of forward equity, representing net proceeds of approximately $216 million to support our ongoing development activity. In addition, subsequent to our fourth quarter 2020 earnings call, through our ATM program, additional equity representing approximately $127 million of net proceeds was sold on a forward basis, continuing our strategy of prefunding our development capital needs three to four quarters in advance.

This resulted in net proceeds through forward stock issuances available to QTS of approximately $493 million as of yesterday's earnings release. We currently expect to draw down our 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 in the mid to high 5 times range. We ended the quarter with leverage of approximately 4.3 times net debt to annualized adjusted EBITDA, including available forward equity proceeds. Excluding forward equity proceeds, our leverage at the end of the first quarter was approximately 5.8 times. Including available forward equity proceeds, we had total available liquidity of over $1.1 billion as of the end of the first quarter.

We currently have no significant debt maturities until 2023 and beyond, and approximately 70% of our indebtedness is subject to a fix rate, including a series of interest rate swap agreements. In April, we're pleased to see S&P upgrade QTS' issue level credit rating by one notch to BB+ in recognition of our consistent performance, conservative balance sheet and strength of our business model. This now positions QTS as one notch below investment-grade with S&P. In a capital-intensive industry, reducing our cost of capital will remain a core initiative. We expect that through continued consistent performance, increasing scale and profitability and the eventual refinancing of our outstanding preferred equity, we are well positioned to achieve an investment-grade rating.

Overall, we remain pleased with the health and flexibility of our current balance sheet. But as always, we'll continue to evaluate opportunities to extend our debt maturities and reduce our overall cost of capital. Now on to our financial outlook on Slide nine. We are revising our 2021 financial guidance to reflect year-to-date outperformance, our updated capital expenditure outlook and our expectation of performance for the balance of 2021. For the full year 2021, we're increasing our revenue guidance by $3 million at the midpoint to a range of $602 million to $616 million, representing a 13% growth year-over-year at the midpoint. Our higher revenue outlook is a function of outperformance in Q1, strength in the Hybrid Colocation leasing and associated commencement timing and an updated expectation of performance for the balance of the year.

As a result of our higher revenue outlook and continued effective cost controls, we're raising the midpoint of our 2021 adjusted EBITDA guidance by $1.5 million at the midpoint to a range of $332 million to $341 million, implying an adjusted EBITDA margin of 55.3% at the midpoint. Moving to OFFO per share. We now expect operating FFO per share in 2021 to be between $2.94 and $3.04, representing 5.3% growth year-over-year at the midpoint. Our outlook incorporates total cash capital expenditures, excluding M&A, of between $875 million and $975 million, up $75 million at the midpoint relative to our initial guidance range, reflecting continued strength in leasing as well as accelerating supply chain inventory planning to derisk future infrastructure deliveries.

Our updated capex outlook remains largely preleased, with more than 80% of capital development tied directly to customer leases. Overall, we're pleased to start the year with strong financial performance in Q1 with leasing momentum and a largely preleased and prefunded development plan that materially derisks our performance for the balance of the year. We look forward to continuing to accelerate our market share while balancing near and long-term financial growth objectives.

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

Chad Williams -- Chairman and Chief Executive Officer

Thanks, Jeff. We're pleased with our performance during the first quarter and our momentum already in the second quarter, and we look forward to continuing to execute against our strategic initiatives. The demand environment for data centers remains very healthy, and we're well positioned to expand our market share, leveraging our core differentiators across our target customer verticals. In closing, I'd like to thank our QTSers across our footprint for their hard work and service to our customers, communities and each other. I'd also like to continue to recognize our critical operation employees who have remained working in our sites supporting our customers throughout the pandemic. Our Powered By People culture continues to differentiate QTS with our customers, which is backed up by our industry-leading customer satisfaction scores and retention. I'd also like to thank our customers, shareholders for their continued trust and confidence in QTS.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Thank you, and goodmorning. I wanted to just touch base on the eight-megawatt lease side with the Hyperscale CSP in Ashburn. Could you provide any incremental insight there? Was this a new logo? It's first sort of large lease we've seen certainly this quarter in the biggest market in the country. Just any characterization around pricing and sort of just the nature of the lease itself.

Chad Williams -- Chairman and Chief Executive Officer

Yes. Thanks, Jordan. This is Chad. I mean, I'd just call it down the fairway. It was an existing customer. We have a strong relationship based on operational maturity and trust, and it was just down the fairway. So great to see get done in a competitive market and ready to move to the next one.

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Okay. And then maybe on guidance, Jeff, $0.76 in the quarter, a great quarter. Just obviously, it annualizes to $3.04, which is the high end of your range, any insight you could add regarding sort of trajectory of FFO? I know last quarter, and historically, you've spoken about 1Q being a lower -- typically lower margin quarter. And we see sort of a step-back before sort of reramping back up. So any insight into what the headwinds will be in 2Q, 3Q and 4Q?

Jeff Berson -- Chief Financial Officer

Yes, sure, Jordan. I mean, we're not expecting headwinds. And what you should read into that is that the business is continuing to grow and drive strength. I think part of the FFO sequencing was given that we had a very strong EBITDA quarter in Q4. In maintaining our leverage, we were able to go through Q4 without additional equity and funding the business. And so you saw some benefit to that flow through into Q1. Over the course of the remainder of this year, through the forward proceeds, we've already got in place, we'll continue to be funding the business. So you'll see some more equity come out, which moderates a little bit that FFO growth. But overall, very excited that while increasing capital, investing in the future in a very healthy way, we're continuing to put up near-term growth and value for shareholders and continue to increase it over time.

Operator

Thank you. Our next question today comes from Colby Synesael with Cowen. Please go ahead.

Colby Synesael -- Cowen -- Analyst

Great. I'm wondering if you could just talk about the pacing of ramp. And so obviously, when you win a lease and it commences, we see the straight-line benefit to GAAP results. But obviously, there's some interest in what's happening on the cash side and things like AFFO. I'm curious if you could just talk about what you're expecting from a ramp in over the remainder of this year and how we might be able to close the gap between OFFO and AFFO as a result? And then secondly, you guys made a land purchase in San Antonio in late 2020. Just curious if you could just talk about what you're seeing in that market and the opportunity to get an, I guess, an anchor deal to actually start to build on that land?

Chad Williams -- Chairman and Chief Executive Officer

Hey, Colby, I'll take the San Antonio, and Jeff can talk a little bit about OFFO. On the San Antonio, we just think Texas is a great market. We currently reside in a couple of spots in Texas, and we think San Antonio is another strategic dot for time, and we'll see how momentum builds. But I wouldn't look for us to get real active in San Antonio until we can feel a little better about like an anchor tenant type of deal. But it's great. There's not a ton of land left in certain areas of San Antonio, and we felt like it was strategic.

Jeff Berson -- Chief Financial Officer

Yes. Colby, in terms of the gap between OFFO and AFFO, what really drove that over the last two years was the significant acceleration in our business of the larger deals, and in particular, obviously, Hyperscale but also Federal, which are much longer time frame deals with escalators. And so there's a lot of straight line associated with that as well as ramps associated. So over time, I think you'll see that gap between OFFO and AFFO start to come back into more of a balance. Now I'm hoping there continues to be a gap because I expect we'll continue to accelerate those larger deals going forward. And as long as we do, you'll still see some of that straight line. But the kind of acceleration we saw over the last two years off of, frankly, a much lower base, is much more likely to moderate going forward. And so you will see that gap come closer together.

Colby Synesael -- Cowen -- Analyst

Okay. Thank you.

Jeff Berson -- Chief Financial Officer

Thank you.

Operator

And our next question today comes from Erik Rasmussen with Stifel. Please go ahead.

Erik Rasmussen -- Stifel -- Analyst

Yes. Thanks for taking the questions. The Federal business appeared to slow in the quarter. But is there any notable events that you can highlight? And maybe you can address with that, what your expectations are for the remainder of the year based on the deals that the team is tracking?

Chad Williams -- Chairman and Chief Executive Officer

Yes, Erik, I wouldn't characterize it as slowing. Federal is going to be like Hyperscale. You're going to have some quarters and not others. This is a process. It's a long game. It's complex customers and deployments. And I think we're well positioned in '21 and beyond. But this is something that you're going to see come in from time to time. When you do, it will be meaningful, and you'll see probably price pickup in the numbers. And when you don't have Federal show up just because of timing and complexity, we built the business on the diversification of Hyperscale, hybrid enterprise and Federal. I don't expect all three to show up each quarter, but when it does, it could be special.

Erik Rasmussen -- Stifel -- Analyst

Great. And then maybe just switching to Europe. No updates there. But can you just give us some insights on the deal pipeline and maybe Eemshaven and any desire to expand further into Europe?

Chad Williams -- Chairman and Chief Executive Officer

I think right now with 30 megawatts in Amsterdam, we couldn't be more excited. We're more excited about the ability for it to impact the financials in a positive way. Groningen has outperformed everything we had on a piece of paper, which is always great to see customers retained and grew. And without even having Eemshaven open, it's been a very positive impact to our financials. Eemshaven is open and repositioned for Hyperscale. And I expect our Hyperscale team in '21 and '22 to have some fun wins over there that are going to be significant on bottom line performance. So I couldn't be more excited about it. Not wrapped around the wheel right now on trying to go big or go home in Europe. But we're always patient and thoughtful about where to deploy capital and couldn't be more excited about Amsterdam and the scale that we have there in Groningen and Eemshaven to have a positive impact on the business and our customers.

Operator

Thank you. Our next question today comes from Mike Funk with Bank of America. Please go ahead.

Mike Funk -- Bank of America -- Analyst

Yes. [Indecipherable] So good morning everyone. A couple if I could. Just back to Ashburn. Can you discuss the returns underwritten on the Ashburn deal this quarter?

Chad Williams -- Chairman and Chief Executive Officer

Yes. I mean, we talk about our Hyperscale returns of 9% to 11%. I'd say they were right in that lower part of that range, but well within the strike price.

Mike Funk -- Bank of America -- Analyst

Great. Thank you. And then on the enterprise side as well, you mentioned you've seen acceleration there in larger deals as well. Maybe some commentary on the share of deals that you're winning and then what is driving the larger size of the deals? And is there durability to that?

Chad Williams -- Chairman and Chief Executive Officer

Yes. I'm going to have Clint take that.

Clint Heiden -- Chief Revenue Officer

Yes. So we're seeing a good pickup. I think some of it's coming out of the pandemic and the pause that we had. That's probably impacting or benefiting everybody. But I think we're feeling very comfortable on the percentage that we're winning, really relates to the investments we've made going back years into SDP and innovation. A big trend we're seeing and an interest from our customers and prospects is really how do they get visibility and control into the data center. So that that's been a nice position for us to have. And we're seeing, like you said, the deals are getting bigger, they're accelerating. And frankly, they're spread across our entire footprint.

Operator

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

Eric Luebchow -- Wells Fargo -- Analyst

Thanks for taking the question. So kind of related to that enterprise hybrid colo question. Just wondering -- I know you obviously have a 9% to 11% target for Hyperscale. Wondering how these yields compare for some of these hybrid colo deals, particularly the larger enterprise deals and how competitive they are market -- in the market? Or do you think you're winning more than your fair share because of your SDP platform?

Chad Williams -- Chairman and Chief Executive Officer

Clint -- I'll have Clint weigh in, but the differentiation does matter, I'll have Clint.

Clint Heiden -- Chief Revenue Officer

Yes, absolutely. I mean we're in the 9% to 10% up to the mid-teens, is what you're going to see from a competitive hybrid deal. We like to think we're going to be on the upper end of what the market would get just due to some of the things we bring to the situation, like the innovation. So we think that counts for something gets us a little bit of a premium to the competition. We do think we're seeing most of the deals out there. And then we think because of the way we're positioned, where we have the right infrastructure in the right market that we're positioned to win that deal.

Eric Luebchow -- Wells Fargo -- Analyst

Great. And then just a follow-up to that. Obviously, I think you've targeted $6 million to $8 million of hybrid colo bookings per quarter. It seems like you overachieved that this quarter, about $10 million. Given what you've seen in the pipeline, some of the larger enterprise deals, do you think you can overachieve that going forward this year? And is there a new range we should think about in terms of your quarterly performance?

Jeff Berson -- Chief Financial Officer

Yes, Eric, I mean, I'll jump in on that. We absolutely have a strong pipeline on enterprise, continue to be pretty excited. We already mentioned a good start into Q2 with a couple of larger deals kicking off. So we've got some good enthusiasm. At the same time, we still have a lot of work to do, and we're not looking to raise the hurdle beyond where we've been, but we come into it with good confidence.

Operator

Thank you. And our next question today comes from Jonathan Atkin with RBC Capital Markets. Please go ahead.

Jonathan Atkin -- RBC Capital Markets -- Analyst

So I was interested in Slide six. I think you showed Chicago NOI growth -- growing slower than revenue growth. And I just was wondering the reason for that. Then as it pertains to maybe upsizing your presence in, say, Northern California or establishing a new presence in a place like Phoenix where you've got land, I wondered what your thoughts are and what it would take to underwrite those sorts of investments? Thanks.

Chad Williams -- Chairman and Chief Executive Officer

Thanks, Jon. On the expansion, I mean, we couldn't be more excited. I was just in Hillsboro last week and that's a new market for us and the momentum that we're seeing there. We're excited about the opportunity for Hyperscale and enterprise, taking advantage of some connectivity options that Clint and the team have rolled into our new Hillsboro site, couldn't be more excited about having that new location. I think with anything, we need to see good pipeline or kind of build-to-suit opportunities to kind of jump-start a facility. I will tell you that someday, we will be in Phoenix. We have 90 acres.

We've prepositioned, pre permitted and struck a renewable power deal with one of the most favorable power companies in the area. And we couldn't be more excited. And it's just going to be the right customer and right match to go to Phoenix. But again, we can't allocate capital everywhere all the time. We have to continue to be disciplined around that. So we'll wait until we see the right pipeline, the right entry point and go, but great to have Hillsboro open and excited about the future in Phoenix. Jeff?

Jeff Berson -- Chief Financial Officer

Yes, Jon. And then in terms of that slide, I mean, what we love is you see the great growth in both, Piscataway and in Chicago, which is really for us predominantly enterprise facilities. And so you're seeing the strength of our hybrid team driving both at the top end. You've seen great operating leverage on the Piscataway side. And frankly, we have seen and you'll continue to see great operating leverage in the Chicago side. What you saw from the quarter is that in that quarter, we did have a customer churn event. It's certainly not at the top ten customer. And then the scope of the business within that 0.7% churn was not really material. But when you isolate it down just to Chicago, you did see an impact in the NOI in the quarter. We need the space, frankly, and we've already got a good pipeline on refilling it. So no concerns there.

Jonathan Atkin -- RBC Capital Markets -- Analyst

Thank you.

Operator

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

Nate Crossett -- Berenberg -- Analyst

Hey, good morning. I wanted to get your thoughts on inflation as it relates to increased build costs, curious what are you guys seeing right now in terms of costs? Are there any issues in sourcing materials or labor? And do you think you'll be able to pass on a lot of these higher costs to your tenants in the form of higher pricing?

Chad Williams -- Chairman and Chief Executive Officer

Hey Nate, this is Chad. I mean, we do expect to see it. We haven't seen dramatic increases in inflation to date on build costs, but we think inflation is coming, like most of the rest of the people. I think one of the things that our development team, Dave Robey and the team have done is we've standardized almost our entire product offering now. So our ability to kind of pre buy and get ahead of some of that on the supply chain risk, both for production and pricing, has really changed the game for us on the ability to take risk out. So you think about '21 and '22, we're already materially derisking that, both from a supply chain and cost standpoint. And yes, I think customers will be reasonable. When you have a value prop to sell customers, customers understand costs are going up. And I think we'll be able to kind of see that flow through into our numbers.

Nate Crossett -- Berenberg -- Analyst

Okay. And then just one, we keep hearing about chip shortages. I'm just wondering what you're hearing from your customers and how that could affect deployments this year?

Chad Williams -- Chairman and Chief Executive Officer

Nate, I'm going to have Brent take that because he's a chip expert.

Brent Bensten -- Chief Technology Officer

Hey Nate, how are you? The reality is -- we're certainly hearing it from the markets, but the reality is it has not impacted our pipeline at this point. And obviously, we deploy a lot of our own infrastructure that's chip dependent, and we have seen absolutely no impact to us. So as anyone would do, we're watching it closely, but no impact to date.

Operator

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

Frank Louthan -- Raymond James -- Analyst

Great. Thank you. Can you talk to us a little bit about the new logos that you're attracting? What industries are you seeing now? And can you characterize the type of workloads that are seeking now your product right now?

Chad Williams -- Chairman and Chief Executive Officer

Thanks, Frank. I'm going to have Clint answer that.

Clint Heiden -- Chief Revenue Officer

Yes. We're strong in financial and healthcare and the technology vertical in general. I think, also, you get into SLED activity in accounts that are looking for compliant data centers and infrastructure. In terms of the workloads, I might shift that question a little bit over to Brent on what he thinks.

Brent Bensten -- Chief Technology Officer

Sure. I mean the workloads are pretty typical to what we've seen in the past across the enterprise. So this is mostly transformative kind of digitization programs, some small scale, some large scale, moving out of corporate-owned facilities into larger colocation facilities like QTS. Again, I wouldn't say there's any dramatic shift there other than that stall that Clint talked about earlier, picking up. So we're just seeing kind of that period now accelerate.

Clint Heiden -- Chief Revenue Officer

And when I -- I'm going to come back real quick, when I say SLED, I'm talking about state, local and education, which is a strong market for us. I just wanted to clarify that.

Frank Louthan -- Raymond James -- Analyst

Got it. That's helpful. And then, Chad, you mentioned the 9% for the deal up in Northern Virginia, sort of the lower end of that range, that 9% to 11%. Where is that trending? Is that upper end of the range still realistic?

Clint Heiden -- Chief Revenue Officer

Yes, I think it is. I mean when we have customers that expand, 50-plus percent of our business continues to expand with existing customers. I think we see a different conversation with customers. So customers are willing to stay and be part of a value change and operational experience and scale, yes, you can see that. When you're trying to acquire new logos, I think Tag and the team will tell you that it's a more competitive environment. We're probably going to be more toward the bottom of the range. And here's the fact. I've said more -- no more deals this year than we had even all of last year. So we're not going to try to win every deal, and that's fine.

Operator

Thank you. And our next question today comes from Richard Choe with JPMorgan. Please go ahead.

Richard Choe -- JP Morgan -- Analyst

Hi. I just wanted to clarify something with the enterprise colo part. With the new logos kind of coming on, are you seeing kind of that balancing out maybe a little bit of a pullback from the existing logo customer base, given that maybe some stuff was pulled forward last year? Or do you think both will kind of grow well this year?

Chad Williams -- Chairman and Chief Executive Officer

Yes. Thanks for the question. No, we're seeing actually that both are growing. We have a very strong new logo funnel. And our existing client base is also growing at a very attractive rate.

Richard Choe -- JP Morgan -- Analyst

And then with churn, I guess, started off pretty well outside of maybe the Chicago issue, but it seems like it's trending similar to last year, pretty low. Are you seeing anything in terms of what might impact churn this year? Maybe that's different from last year? Is churn coming from different sources? Or is everything kind of typical so far?

Chad Williams -- Chairman and Chief Executive Officer

I'd say it's right on track. No big indication or change.

Operator

Thank you. Our next question today comes from Tim Long at Barclays. Please go ahead.

Tim Long -- Barclays -- Analyst

Thank you. Two, if I could as well. First on the pricing front. It seems like it was down for new leases and up for renewals. Just kind of walk us through your pricing assumptions as we look through the year? Any changes expected there? And then second, on STP, it sounds like it had a pretty good benefit to margins in the quarter. How much more room is there for internal benefits? And then maybe just update us on what you're hearing as far as deal wins and pricing because of STP.

Chad Williams -- Chairman and Chief Executive Officer

Thanks Tim. On pricing, it's a competitive market, but we don't see any big changes. I think this quarter is just a reflection that you didn't have Federal in the numbers this quarter. So I don't think there's any big indication of direction or change, but -- we're competitive. But we feel good about it. I might have Brent take on the SDP question a little bit and talk about the trending and the wins there.

Brent Bensten -- Chief Technology Officer

Yes. So absolutely. We are still seeing a premium for customers coming in and wanting the technology that we deploy with SDP. The reality is we used to see it kind of on the tail side of a sales cycle. And now we're seeing customers coming in and requesting that on the front side of the sales cycle. So it's a nice motivator to get folks in through that funnel efficiently for us. As it relates to kind of margin expansion, we're hopeful that as we continue to deploy additional features, which we do every six weeks on the platform that will continue to drive additional incremental value in the platform. I think you'll see that across -- about our crossConnect and some of the other new things that are coming in the next couple of months. But the reality is, yes, we're definitely seeing that help drive additional margins.

Tim Long -- Barclays -- Analyst

Thank you.

Operator

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

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thank you very much. Good morning. When you talk about hyperscalers and your pipeline, how many companies are we talking about at the moment? Have we expanded beyond a small group to a larger group in the 10, 12 or any color around that would be great. And then what are you seeing in terms of their appetite to in-source versus outsource? Has there been any changes around in a post-COVID world? Thanks.

Chad Williams -- Chairman and Chief Executive Officer

Thanks, Simon. I might have Tag answer that question.

Tag Greason -- Chief Hyperscale Officer

Hey, Simon, thanks a lot. Appreciate the question. When we think about the Hyperscale universe, we have kind of our eyes on about 30 names of well-defined targets in the Hyperscale market. We actively are working on deals anywhere from eight to 12 of those names at any given time. And so that kind of gives you a flavor of what that universe looks like. As it relates to the second part of your question, ultimately, we see the Hyperscale market continuing to lean forward in their capacity planning, and we are encouraged by what that means for us and our pipeline.

Simon Flannery -- Morgan Stanley -- Analyst

Okay. And what are the decisions that make them decide to do it with you rather than to build it themselves?

Tag Greason -- Chief Hyperscale Officer

Yes. It differs by each one of the hyperscalers. They each have kind of a threshold of how many percent of their compute needs they're going to build internally. It fluctuates based on the region and their ability to build on their own and their comfort with partners like QTS. And so we see a wide range of percentages of build versus lease. What I have seen in the past couple of years working with our team is as our incumbency grows and the trust in the partnership that we have, those percentages start to shift in our direction and generally toward the leasing side of that equation.

Chad Williams -- Chairman and Chief Executive Officer

And Simon, one thing I might add to that is I do think maybe people underestimate the value of 700 acres of strategic ground across the country that's tied to power and infrastructure because sometimes it gets down to Tag being differentiated because he has something that a partner needs, which is infrastructure, renewable power access, those type of things. So I think when you have the kind of land bank that we have over the last four or five years, it's a very strategic advantage and starts a lot of conversations.

Operator

Thank you. Our next question today comes from David Guarino with Green Street. Please go ahead.

David Guarino -- Green Street -- Analyst

Hey guys. Chad, I know you're a real estate guy at heart. It feels like the transaction market for data centers is really favoring sellers right now. So are there any non core data centers in the portfolio that might be worth monetizing as a source of funds to keep funding the development pipeline?

Chad Williams -- Chairman and Chief Executive Officer

David, Jeff has been very disciplined about constantly challenging us around every aspect of capital. I would say that everything is on the table as we think about things. But our customer engagement and our operation of those facilities still remain a key differentiation for us. So capital is a driver of our business, but also customer engagement relationship and continuity of operation is too. So I don't think you'll see us exit a facility or market and hand off customers to somebody. But if there was some strategic JV, Jeff is always looking for those type of creative ways to capitalize or optimize capital.

David Guarino -- Green Street -- Analyst

Okay. And then would you be able to provide some color also about the occupancy and rent decline at the Richmond data center this quarter?

Chad Williams -- Chairman and Chief Executive Officer

Yes. I think in Richmond, we had a customer contract that came up and they consolidated to their internal data center. We knew that some time ahead of time, and we had another customer that Clint had, in fact, another financial institution that gobbled up the space, and you've just seen kind of moving out and the ramping up of that space, but it's already been repurposed to a new customer.

Operator

Thank you. Our next question today comes from Aryeh Klein with BMO Capital Markets. Please go ahead.

Aryeh Klein -- BMO Capital Markets -- Analyst

Thanks and good morning. Just on the capex increase, can you talk about what specifically drove that? It doesn't seem like leasing was necessarily materially higher than expected. So is it just reflective of what you're seeing in the pipeline?

Jeff Berson -- Chief Financial Officer

Yes. I'd say it's two things, but it is absolutely driven by pipeline and enthusiasm that we're going to continue to perform and have the opportunity to meet the needs of those customers and grow into all of that while still putting up near-term results and increasing our guidance near term. But the second aspect is some of that capex increase is what Chad mentioned in terms of leaning in on supply chain and just making sure that we're getting orders in a little bit earlier, frankly, than we had in the past to make sure that we don't have any disruption on that.

Aryeh Klein -- BMO Capital Markets -- Analyst

Got it. And then maybe just looking out to 2022, you do have some significant renewals from large customers. Is there any risk to releasing spreads or churn risk from some of those that you anticipate?

Chad Williams -- Chairman and Chief Executive Officer

Aryeh, I think the benefit with what we're looking at in '22 is they're all established long-term relationships, and we got tremendous confidence they'll be continuing QTS customers.

Aryeh Klein -- BMO Capital Markets -- Analyst

Okay. Thanks.

Operator

And our next question today comes from Omotayo Okusanya Mizuho. Please go ahead.

Omotayo Okusanya -- Mizuho -- Analyst

Yes. Good morning everyone. Congrats on a solid quarter. At the beginning of the year, I mean there was just general concerns about sales cycles elongating and everyone was kind of talking about that. Now that you've had a quarter under your belt, would you kind of talk a little bit about, is that still what the environment feels like? I mean, it doesn't sound that way, given how bullish you sound on your enterprise business in particular. But just kind of curious, thoughts about what the world felt like a quarter ago versus today?

Chad Williams -- Chairman and Chief Executive Officer

Tayo, I'm going to have Clint take that.

Clint Heiden -- Chief Revenue Officer

Yes. Thanks, Tayo. What we're seeing is we feel like deals are accelerating through the RFP or through the proposal process. Customers are getting the decisions much faster. And as Chad noted, we've already got two deals that have come in, in Q2 that struck very quickly. So we're feeling like they're accelerating, they're getting larger, and we feel good about our pipeline and momentum.

Omotayo Okusanya -- Mizuho -- Analyst

Great. And then if you could just -- a quick second. Chad, very early on, you kind of talked about potential margin expansion over time. Could you kind of talk a little bit about, is it economies of scale that's going to create that? Is it FTT that's helping you kind of do that? Just kind of help us think through how that's potentially going to happen? And if possible, kind of quantifying what it could look like?

Chad Williams -- Chairman and Chief Executive Officer

Tayo, it's a great question. I think it's a combination of a lot of things. It's the scale of the operations, our operational scale at the facility level as we continue to take facilities and optimize them. It's also SDP. It's a differentiation around that. It's being on the competitive side of pricing, but still profitable side of pricing, it's a combination of all those things. And I think we'll continue. I mean, we're not going to see the pace of expansion that we've seen over the last two or three years. And certainly, COVID had some impact to expansion last year that we're already seeing normalized as people get out and travel and do things, which we want them to be. And we want to be part of that. But we still have some wood to chop, and we're going to keep working on it. I mean, digitizing the platform has transitioned and transform the way we think about business and the way we deploy. And we're going to continue to optimize around the edges because once you have it done, you can really start optimizing. And that's what we're going to work on.

Operator

Thank you. And our next question today comes from Sami Badri with Credit Suisse. Please go ahead.

Sami Badri -- Credit Suisse -- Analyst

Hi. Thank you. One area I wanted to hit was in the industrial supply chain for components. And we have heard that lead times for those have actually elongated quite a bit. I just want to get kind of a quick take on what you guys are seeing and maybe just some quantitative framework around how long it even gets -- how long it takes to get, say, something like an industrial generator ship to the U.S. from wherever in the world it's coming in from? Just an idea on the components of the data center and the lead times would be helpful.

Chad Williams -- Chairman and Chief Executive Officer

Yes. Mr. Robey, do you want to take that?

David Robey -- Chief Operating Officer

Sure, absolutely. We certainly continue to monitor, obviously, all the components. We've seen some variability. Large components such as generators, to be honest, we have not seen a significant shift in. But there are components that do fluctuate given different supply chain challenges that folks are dealing with. As we stated earlier, we continue to stay ahead of that and are being very proactive, recognizing those trends ahead of time and making sure that we're securing our availability of those components to make sure our deliveries are on time.

Chad Williams -- Chairman and Chief Executive Officer

And Sami, I might add, I think Dave's work around standardization of our product, which has not always been the case at QTS, but the last two, three years with Dave's redesign, a freedom design and standardization of the product, it's really helped our ability to control supply chain and watch it.

Sami Badri -- Credit Suisse -- Analyst

Got it. And then one other question, and this is kind of more thinking about QTS over the next couple of years. But is the plan really to be -- or is the objective 50% of leasing to be Hyperscale? Is that kind of the two, three-year plan? Or is there going to be a situation here where enterprise begins to start overtaking a number of deals that come in and that starts to increase as a percentage of leasing mix over time?

Chad Williams -- Chairman and Chief Executive Officer

Sami, I'd like to think that I get up and control that every day, but I don't. So we're going to get out there and do the deals that work for QTS, both from an enterprise, a Hyperscale and a Federal perspective. The beauty of it is, as we get up and work hard and can find opportunities in a lot of different places, it lets us be a little more selective on what we do. But I'm not losing a lot of sleep on exactly what percentage. We're finding the right deals, and we're doing them.

Sami Badri -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

And our next question today comes from Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo -- MoffettNathanson -- Analyst

Hey, good morning. Thanks for taking my question. I've got one on hybrid colo and one on the balance sheet. So first, you noted that the average hybrid colo deal size has increased. Why do you think that's been the case? Is it just natural that larger enterprises are the first to come back post pandemic? Or is it mix because smaller enterprises maybe moving more toward cloud or something else? And then on the balance sheet, Jeff, you talked about the long-term goal of getting to investment grade. I think you have the option of calling your preferreds in 2023. So would it be reasonable to think of maybe 2024 as an appropriate time frame for getting to IG? And what do you think the ratings agencies are looking for?

Chad Williams -- Chairman and Chief Executive Officer

I'll have Clint take hybrid, and then Jeff can finish on the balance sheet.

Clint Heiden -- Chief Revenue Officer

Yes. So I'll jump in on the -- why are they growing? I think in general, part of that is just a reaction to where we are in the industry in digitization and enterprises converting more and more to that infrastructure. And then, frankly, we are in a position, we believe, to get a larger share of that shift over with the way we've positioned our infrastructure and innovation. So I think a lot of it's just where we're trending with digitization. I think you'll continue to see that trend moving forward, deals getting bigger and momentum increasing.

Chad Williams -- Chairman and Chief Executive Officer

And the one other thing I'll add to hybrid real quick before Jeff takes on the balance sheet is a little bit of this is where we might not see as many of the caging cabinets, single cabinet deals five, six, seven years ago, what we are seeing is a little tendency for some of the larger enterprises to bring some stuff back out of the cloud. And that dynamic is bringing -- they're not bringing them out of the cloud with two or three cabinets. They're coming back out of the cloud with 500 KW, a megawatt. So I think that's a dynamic that we're seeing play out in the industry, which is not negative, you're still going to see dramatic growth in cloud. There's a great adoption to cloud, but you're also seeing enterprises make some choices on what comes in and what comes back out.

Jeff Berson -- Chief Financial Officer

And Nick, on the balance sheet, we absolutely have a plan to getting to investment grade. And I don't have the patience to wait till 2024. So we're very happy that about six months ago, Moody's upgraded us. And then most recently, we got an upgrade from S&P. They've got us at a BB issuer level. But at the bond level, we're already BB+ at S&P. And frankly, all they're looking for is continued execution, continued scale and then the big trigger, to your point, is the prefs that are callable in early 2023. So that alone, from a rating agency standpoint, would be looked at as a full turn of deleveraging. I think that's really all we got to do is keep executing and then call those in early 2023 and we're effectively only one notch away from getting that.

Nick Del Deo -- MoffettNathanson -- Analyst

Okay. Great. Thank you.

Operator

And our next question is from Matt Niknam from Deutsche Bank. Please go ahead.

Matt Niknam -- Deutsche Bank -- Analyst

Hey guys. Thanks for taking my question. First on enterprise. You talked a little bit about some of the new logo momentum. I'm just wondering if you've seen any improvement in demand from some of the verticals that were a little bit weaker and more heavily impacted by COVID last year? And then just a follow-up on Hyperscale. I guess more broadly, if Tag or anyone on the team can give a little more color around the demand backdrop in 1Q and whether you've seen any sort of capacity digestion taking place among some of the larger hyperscalers you guys track? Thank you.

Chad Williams -- Chairman and Chief Executive Officer

Sounds good. Tag, why don't you take the Hyperscale, then I'll have Clint do the enterprise?

Tag Greason -- Chief Hyperscale Officer

Okay. Great. Yes, it's -- we saw that great digestion period back in '19. We're not seeing that now. There's still good planning cycles involved when you're talking to the incumbents and looking at their capacity planning. We're not seeing that same trend of a digestion or a pullback. And so we feel pretty good about what the market is showing us and what our pipeline looks like going into the year. So feel good about that.

Clint Heiden -- Chief Revenue Officer

Matt, on demand and where we're seeing it from, we're really seeing it from all verticals. So it's not particularly slanted toward those that might have been impacted by the pandemic or not. We've had enterprises in hospitality and travel be part of the pipeline and funnel that we're seeing. So we're not seeing it in a particular vertical or in a particular region, it's really been across all aspects of what we're seeing.

Matt Niknam -- Deutsche Bank -- Analyst

Great. Thank you.

Operator

And ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to Chad Williams for any closing remarks.

Chad Williams -- Chairman and Chief Executive Officer

Well, I just want to thank everybody for participating this morning. And again, thank our QTSers across the country that continue to make QTS who we are and serve our people, our customers, and our communities. So thank you, and talk to you next quarter.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Stephen Douglas -- Executive Vice President of Finance

Chad Williams -- Chairman and Chief Executive Officer

Jeff Berson -- Chief Financial Officer

Clint Heiden -- Chief Revenue Officer

Brent Bensten -- Chief Technology Officer

Tag Greason -- Chief Hyperscale Officer

David Robey -- Chief Operating Officer

Jordan Sadler -- KeyBanc Capital Markets -- Analyst

Colby Synesael -- Cowen -- Analyst

Erik Rasmussen -- Stifel -- Analyst

Mike Funk -- Bank of America -- Analyst

Eric Luebchow -- Wells Fargo -- Analyst

Jonathan Atkin -- RBC Capital Markets -- Analyst

Nate Crossett -- Berenberg -- Analyst

Frank Louthan -- Raymond James -- Analyst

Richard Choe -- JP Morgan -- Analyst

Tim Long -- Barclays -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

David Guarino -- Green Street -- Analyst

Aryeh Klein -- BMO Capital Markets -- Analyst

Omotayo Okusanya -- Mizuho -- Analyst

Sami Badri -- Credit Suisse -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

Matt Niknam -- Deutsche Bank -- Analyst

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