QTS Realty Trust, Inc. (QTS - $46.99)

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1 Equity Research Data Center REITs March 31, 2016 QTS Realty Trust, Inc. (QTS - $46.99) QTS: Riding the Digital Demand Wave offering the 3 Cs; Raise PT to $53 Outperform PT: $53.00 raise Trading Data: Last Price (03/30/2016) $ Week High (03/11/2016) $ Week Low (05/14/2015) $34.91 Market Cap. $2.6(B) Shares Out. 55,500(M) 3 Month Avg. Daily Vol. 367,574 AFFO Estimates: ($ per share) (Dec) Q1 Q2 Q3 Q4 FY FY-17E FY-16E FY-15A FY-14A Valuation: Multiple Curr. FY Next FY PT P/AFFO EV/EDITDA PEG Source: estimates We are raising our price target on QTS Realty Trust to $53 because of steadily improving leasing demand stemming from the digital data needs of hyper-scale cloud and social media providers. 90% of all data has been created in just the last two years. Data could grow fivefold over the next few years. Outsourced offerings demand has been blossoming allowing market share gains. QTS Realty has succeeded in critical aspects of building shareholder value including retrofitting well located buildings for data center service, making an accretive acquisition and issuing stock to protect the balance sheet. Future acquisitions may utilize a balance of equity and debt to keep QTS debt/ebitda between 4x to 5x. QTS Realty is experiencing consistent double-digit internal growth thanks to its multiple service and security offerings. Half of its customers utilize more than one service pricing renewals could range between 2%-4% on average with no major customers priced above market. Cloud development and security compliance are two major drivers as the stack gets more complicated. It fuels accelerating demand for data center services. QTS has FedRAMP certification which has appeal beyond government customers. QTS s available capacity and power shell could allow a cost effective doubling of capacity revenue grew 43% to $311 million leading to 40% EBITDA growth to $140 million, FFO of $2.29 and AFFO of $2.19 per share, up 18% y/y. Our 2016 estimates are 29% revenue growth to $400 million leading to 31% EBITDA growth to $183 million. AFFO could reach $1.30 million or $2.40 per share, up 10% y/y, reflecting the recent share issuance. QTS recently raised its quarterly dividend from $0.32 per share to $0.36 per share, a 13% hike, representing a 3% yield. SVP/Senior Analyst (561) See required disclosures at the end of report. The Data Center REIT stocks trade at 20x 2016E AFFO and 17x 2016E EBITDA. QTS Realty trades in-line with peers despite to superior market positioning and growth potential. Using 22x 2016E AFFO and 20x EBITDA, our per share price target for QTS Realty rises from $51 to $53. Our rating on QTS Realty remains Outperform. Trading (800) / Member FINRA/SIPC

2 Investment Thesis We recommend purchase of QTS Realty (QTS) with an Outperform rating for the following reasons: 1) 1 billion websites exist today. Harnessing the power and reach of the Internet has become a competitive necessity. Digital data storage could grow fivefold over the next few years Data Centers capture less than 25% of data storage 2) Data centers capture 25% of all data storage. As companies have experienced the superior reliability, speed and pricing of outsourced offerings demand has been blossoming allowing market share gains. 3) Outsourcing and leasing demand has accelerated, pricing is improving and facilities investments are scalable allowing margin expansion as existing customers demand more storage space. Typically more than half of new leasing stems from existing customers needing more space. Excess building shell space to double capacity CEO Chad Williams Dividend is yielding 3% One of the sector s highest growth rates 4) QTS Realty has excess building shell space and land that could allow cost effective, high return expansion. Existing facilities are currently only half built-out leaving room to construct 1.1 million square feet of additional colocation raised floor space doubling capacity. 5) QTS Realty s management team led by CEO Chad Williams has a long history in real estate. He seems focused on maximizing shareholder value through high return on investment internal growth through refurbishing well located buildings into data centers, acquisitions, direct sales and catering to existing customers with a diverse array of service offerings. Mr. Williams owns 6.8 million shares or 12% of the total. 6) QTS Realty s REIT structure shields it from most corporate income tax. The dividend is yielding 3% annually and will likely grow with free cash generation. QTS pays out 100% of income or 60% of FFO. 7) QTS Realty trades in-line with peers despite to having one of the data centers sector s most diverse service offerings, substantial excess building shell and one of highest growth rates. 8) We believe that as QTS Realty evidences ongoing, strong growth and its ability to sustain/grow its AFFO and dividend its stock will prove rewarding and outperform. QTS Realty Trust, Inc. Page 2 of 17

3 Company Description 25 Data Centers QTS Realty owns 25 Data Centers in 8 markets across America. It serves over 1,000 customers comprised of companies of all sizes. QTS offers custom data centers, colocation (cabinet, cage and suite), and cloud & managed services. Its facilities aggregate 4.9 million gross square feet of building shell of which 2.2 million colocation square feet could be converted into raised floor data center space. Currently, 1.1 million colocation raised floor square feet is operational. The utilization rate is 91%. The company headquarters is located Overland Park, Kansas. QTS Realty Data Centers Market Colocation Space Utilization 1 Richmond, VA 151,623 89% 2 Atlanta, GA 432,986 96% 3 Dallas, TX 54,014 90% 4 Princeton, NJ 58, % 5 Suwanee, GA 185,422 84% 6 Chicago, IL 7 Santa Clara, CA 55,494 98% 8 Jersey City, NJ 31,503 97% 9 Sacramento, CA 54,595 46% 10 Miami, FL 19,887 68% 11 Carpathia 72,332 95% 12 Other 2,493 62% Total 1,118,506 91% Source: Company reports. QTS Realty Trust, Inc. Page 3 of 17

4 The Top Performing REITs 2015 QTS Realty which has been among our top stock picks performed as the seventh best REITs in 2015 posting stock price appreciation of 33% versus the S&P 500 Index down 1% and our Data Centers universe up 20%. Our Outperform rated stocks CoreSite (COR), CyrusOne (CONE) and Equinix (EQIX) appreciated 45%, 36% and 33% ranking second, fourth and sixth, respectively. YTD QTS is up 4% versus the S&P 500 up 1% and data center REIT peers up 17%. General Atlantic and Largest Shareholders General Atlantic owns 1.7 million shares Cohen & Steers and Waddell & Reed General Atlantic Partners is a large shareholder with roughly 1.7 million shares or 3% ownership. It increased its position during the 2013 IPO. General Atlantic sold 5.75 million shares in the March secondary stock offering, 2.3 million in the June offering, 2.76 million in the August offering and million in a November offering. We believe General Atlantic may look to divest the balance of its holdings in The other largest shareholders include Cohen & Steers with 6.8 million shares (12%), Vanguard with 5.6 million (10%), Waddell & Reed with 3.2 million (6%) and the management team with 7.9 million (16%). Both Cohen & Steers and Waddell & Reed have been long-term shareholders via the public markets and likely will remain such. Managerial ownership is dominated by CEO Chad Williams who owns 6.9 million shares (12%). Carpathia Hosting Carpathia for $326 million QTS Realty acquired Virginia-based colocation, cloud and managed services provider, Carpathia Hosting, Inc. for approximately $326 million mid last year. The price translated into less than 11x LQA EBITDA. Proforma for synergies management pegged the valuation at 9.6x second half 2015E annualized EBITDA. Carpathia is a leading hybrid cloud services and Infrastructure-as-a-Service (IaaS) provider offering a high level of security and compliance solutions to sophisticated enterprise customers and federal agencies. The Carpathia acquisition enhances QTS s scale and product mix; exposure to federal agencies and government customers; its customer base by 230; its geographic footprint; among other benefits. On an annualized basis, Carpathia adds approximately $90 million in revenue and approximately $32 million in Adjusted EBITDA. QTS anticipates an additional $2 million in synergies to begin to ramp in QTS Realty Trust, Inc. Page 4 of 17

5 The Data Center Industry Data centers are buildings that house servers and related hardware Data centers are buildings that house servers and related hardware. Data centers require four things: power, space, bandwidth (fiber) and cooling. They are typically located in large metropolitan markets where these resources are readily available. The major US data center markets are Silicon Valley, New York, Northern Virginia, Dallas, Miami, Chicago and Los Angeles. The primary European markets are London, Frankfurt, Amsterdam and Paris. The top locations in Asia are Hong Kong, Tokyo, Singapore and Sydney. Different markets are driven by different customers, and the differences are predictable. Silicon Valley has many Internet content and software-as-a-service companies. New York has a sizable financial contingent complementing generally smaller Internet companies and European telecommunications companies. Northern Virginia is primarily telecoms, Internet companies and government. Miami hosts many Latin American companies. Data Center demand is growing annually at a midteens pace The global data center demand is growing annually at a double-digit pace while supply rises mid-single digits. Data center construction typically takes about one year. Over the past year demand have accelerated. Pricing has held steady. Pricing typically starts to move up once 70% of capacity is reached in any one center. At 70%, space is still available but not easily accessible for expansion by an existing customer. 45% of the world s population has access to the Internet. It has surpassed 3.3 billion users. 1 billion websites exist today. Businesses across Internet commerce, advertising and content, data center demand remain robust with sustained revenue growth. Internet traffic should grow over 20% per year through 2018 according to Cisco. Harnessing the power and reach of the Internet has become a competitive necessity for companies around the globe. Capacity, connectivity, power and uptime The biggest concerns of data center customers are capacity, connectivity, power and uptime. Other concerns include cooling, computing power, tech support, security and speed of expansion, which are equally important but somewhat easier to duplicate. Customers are typically charged rental space, power utilization fees and service costs. The main reasons for purchasing new servers are normal demand driven needs for increases in capacity, upgrades to old servers and new server purchases for new applications. All three of these drivers should increase demand for either data center capacity and/or power utilization. Addressable Market Worldwide IT spending of $3.5 trillion in 2015E Worldwide IT spending is on pace to total $3.5 trillion in 2015, a 5.5 percent decline from 2014, according to the latest forecast by Gartner, Inc. The decline can be attributed to the impact of the rising U.S. dollar. In constant-currency terms, the market is projected to grow 2.5 percent. IT will not be outsourced completely. However, a significant amount of IT infrastructure could be outsourced to data center providers over time. Another indicator of the addressable market for IT infrastructure is total IT hardware expenditures. IT infrastructure providers replace internal data centers, which represent a significant portion of IT hardware costs. IT infrastructure is becoming an increasingly larger portion of hardware costs as applications are delivered over QTS Realty Trust, Inc. Page 5 of 17

6 networks instead of individual desktops. IDC says the top priority of Chief Information Officers is reducing costs. Sharing infrastructure via outsourcing is the most compelling way to reduce this capital and operating expense. Growth Drivers Data Center revenue growth has been about 15% per year Data Center revenue growth has been about 15% annually. Growth is maintained as companies recognize the efficiency inherent in sharing infrastructure. Cost savings of as much as 50%, coupled with more flexibility, drive corporations to outsource. Faster broadband speeds and improving technology also contribute to IT outsourcing growth. Roughly 85% of servers are on the premises of the company utilizing them. Blossoming Internet communications is a primary contributor to data center growth. The evolution of Internet communications as the primary means of communication for both companies and individuals is a core driver of IP and data center growth. This is evident in the consumption of Internet media, content and information, represented by Google, Facebook, Netflix and YouTube. Ecommerce is another contributor, best exemplified by the market share gains of online commerce companies like Amazon. Ecommerce spending sustains 20% growth while retail grows at a mid-single digits pace. Internet consumption continues to increase rapidly Consumer Internet consumption continues to increase rapidly. According to emarketer, 75% of online users watch digital videos. However, Nielsen believes the average online user watches less than four hours of online video per month. We believe as broadband speed increases, the consumption of online video will grow rapidly. The list goes on gaming, peer-2-peer, rich media advertising all should contribute to an explosion in usage that requires greater server capacity and drives data center demand and revenue. Beyond consumer-driven IP growth, corporations are relying increasingly on IP for communicating. , instant messaging, and voice are currently delivered via the Internet. In addition, software and applications such as customer relationship management are utilized via the Internet and housed remotely at data centers. Increasing real-time business requirements and storage needs add to demand. Electronic trading is also growing rapidly and adding to network and server demands. Internet data traffic grew increased more than fivefold over the last 5 years Internet data traffic has increased more than fivefold over the last 5 years and could increase threefold over the next 5 years according to Cisco Systems. Cisco Systems, which is the largest manufacturer of IP equipment, believes IP traffic will grow at a compound annual growth rate of over 20% through While IP traffic is growing rapidly, IT continues to be complex and everchanging. Coupling this with recent technology improvements such as virtualization and faster broadband speed creates an attractive environment for outsourcing IT to data centers. Given as much as 80% 90% of computing capacity on dedicated servers goes unused at any given time, virtualization enables unused capacity to be utilized. QTS Realty Trust, Inc. Page 6 of 17

7 Principal Customer Industry QTS Realty's Top Customers Number of Locations Annualized Rent Percentage of Portfolio Annualized Rent Weighted Average Remaining Lease Term in Months 1 Internet 2 $34,504, % 55 2 Technology 5 $12,549, % 15 3 Government 2 $10,183, % 13 4 Information Technology 3 $9,995, % Internet 1 $9,644, % 34 6 Information Technology 2 $9,186, % 99 7 Technology 5 $6,487, % 12 8 Technology 2 $6,472, % 7 9 Information Technology 6 $6,076, % Retail 2 $5,907, % 28 $111,007, % 44 Source: Company reports. REITS REITS are Real Estate Investment Trusts REITS are Real Estate Investment Trusts. Companies with this tax structure can be of higher relative value than non-reit companies because profits are largely shielded from corporate income tax. That savings can be passed along to the shareholders in the form of dividend. Often REITs have fairly high dividend. The publicly traded data center REITs have dividends ranging from 2% to 5% annually. Most of the publicly traded Data Centers are REITs QTS Realty Trust, Inc. Page 7 of 17 To qualify as a REIT a company must have at least 75% of its assets in real estate, 75% of income must come from real estate, 90% of pre-tax income must be distributed to shareholders, no more than 50% of the stock can be owned by five or fewer individuals, and the company cannot own more than 10% of a tenant. Today, most of the publicly traded Data Centers have a REIT structure. All would likely qualify because data centers are physical buildings that rent space to clients housing servers to store and transmit data.

8 Management CEO Chad Williams QTS Realty is led by CEO Chad Williams QTS Realty is led by Chad Williams who has served as Chairman and CEO since founding QTS in Chad has more than 24 years of experience in the management and development of various private companies and more than 14 years of experience in the ownership, management and development of commercial real estate, the last eight of which have been focused on data center properties. In 2003, Chad leveraged his experience developing, owning and managing mission-critical facilities and began acquiring data centers with the strategy of building a national presence to provide this type of facility. Under Chad s leadership and through a series of acquisitions, the business grew from operating a single facility to a national and fully integrated data center platform. CEO Chad Williams owns 6.9 million shares CEO Chad Williams is the largest shareholder of QTS Realty owning 6.9 million shares and OP units representing 14% of total shares and units outstanding. Chad is on the board of directors for the US Dream Academy and is involved in numerous other charities in the Kansas City area. Chad lives in Lenexa, KS with his wife and three children CFO Bill Schafer Bill Schafer serves as CFO Bill Schafer serves as the Chief Financial Officer for QTS and is a member of the executive management team. Bill is responsible for all aspects of QTS financial operations, accounting systems, and financing activities. Bill has more than 20 years of experience in the REIT industry, serving as executive Vice President and Chief Financial Officer with Developers Diversified Realty (NYSE:DDR) from 2005 to Bill was the Senior Vice President and Chief Financial Officer from 1999 to 2005, Vice President and Chief Financial Officer of the Company from its organization as a public company in 1993, and the Chief Financial Officer of its predecessor entities from Bill joined the Cleveland, Ohio, office of the Price Waterhouse LLP accounting firm in 1983 and served as a Senior Manager from 1990 until Bill graduated from the University of Michigan with a Bachelor of Arts degree in business administration. Bill lives in Overland Park, KS with his wife and three children. CIO Jeff Berson Jeff Berson heads investment strategy Jeff Berson joined QTS in 2013 to head the company s investment strategy, including business development, strategic projects and investor relations, as well as supporting the office of the CFO on capital markets activities. Jeff has more than 20 years of investment banking experience, much of it with the technology sector s emerging infrastructure companies including data centers, managed services, enabling communications technologies and fiber providers. Prior to joining QTS, Jeff served as a managing director in UBS Media and Communications Group, focused primarily on the communications infrastructure and the telecommunications services sectors. He s also previously served as head of the Communications Services Investment Banking Group at Oppenheimer & QTS Realty Trust, Inc. Page 8 of 17

9 Co., managing director in the Telecom Group at Barclays Capital and held various positions within the investment banking department at CIBC World Markets. The Wharton School Jeff earned a M.B.A. from the University of Chicago, a Bachelor of Arts degree from the University of Pennsylvania and a Bachelor of Science degree from the Wharton School at the University of Pennsylvania. Jeff is based out of QTS headquarters in Overland Park, KS, but lives in Scarsdale, NY with his wife and three daughters. Risks Macro-Economic and Interest Rates Rising interest rates can hurt data centers Data center demand can fluctuate depending on economic conditions. Rising interest rates can hurt data center stocks in a number of different ways. First, rising interest rates make the dividend yield of REITs less attractive because alternatives including risk free treasuries become a more viable alternative. Second, the cost of borrowings of both existing variable loans and future loans can impair bottomline profits including AFFO. Third, rising interest rates lessen the present value of future cash flow. Competition and Pricing Communications real-estate and hosting services are highly fragmented and competitive sectors. Pricing may be pressured Recently contracts have spanned 3-10 years Pricing may be pressured over time as data centers compete with large companies that have greater resources, such as Microsoft, IBM, EDS, AT&T and Amazon. These companies have the ability to invest materially more capital in their businesses. They also could lower pricing given they have greater scale. Historically data center industry colocations contracts have averaged 2-3 years, but more recently contracts have spanned 3-10 years. While pricing pressure and potential margin erosion is a threat to the business opportunity, the outstripping of demand versus supply allowed stable pricing in 2014 and Virtualization enables colocation clients to occupy less space QTS Realty Trust, Inc. Page 9 of 17 Virtualization and Potential Pricing Power Deterioration Virtualization is a broad IT term referring to the abstraction of computing resources to perform multiple tasks. As much as 80% 90% of computing capacity on dedicated servers goes unused at any given time. Cloud computing is a hot area within virtualization. Cloud computing refers to computing resources made accessible as scalable, on-demand services over a network. Cloud computing combines virtualization, service-orientation, elasticity, multi-tenancy and pay-asyou-go billing. Adopters of cloud computing seek to capture improved cost efficiencies, accelerated innovation cycles, faster time-to-market deployment, and scalability on-demand. Virtualization enables colocation clients to occupy less space because server efficiency improves. Customers can now run multiple applications or projects on a single or group of shared servers, as opposed to dedicating individual servers

10 for each project or task. This can result in lower colocation revenue per customer for the group but might aid cloud revenue. Virtualization is an example of how technological advancement might impact the colocation business negatively. In general, as server hardware advances, the amount of physical space required to power the same computing capacity could lessen. If technological advancements overwhelm the trend of growing IP traffic, then colocation demand and pricing could decline. Availability of and Access to Credit Availability of capital is critical Data Center development requires meaningful, substantial upfront spending to construct and build facilities. Availability of capital is critical to future growth. Should lending markets tighten, facility development could suffer. Dependence on Clients Liquidity crises and customer bankruptcies add to churn. Recent signs point to steady improvement in the economy, the consumer, credit and the economy, but demand can be sensitive to any change in these variables. Financials QTS Realty now has almost 1 million of operational colocation square feet of data center space developed across 12 facilities. It serves over 850 customers. Utilization is 83%. For the full year 2014, QTS Realty reported revenue up 22% to $218 million yielding EBITDA of $100 million, up 33%. AFFO reached $1.86 per share revenue grew 43% to $311 million leading to 40% EBITDA growth to $140 million, FFO of $2.29 and AFFO of $2.19 per share, up 18% y/y. Our 2016 estimates are 29% revenue growth to $400 million leading to 31% EBITDA growth to $183 million. AFFO could reach $1.30 million or $2.40 per share, up 10% y/y, reflecting the recent share issuance. Post the recent stock issuance, QTS net debt to EBITDA falls from over 5x to roughly 4x. This could allow QTS to avoid raising higher cost long-term debt to fund their development of more data center capacity to keep up with demand. QTS Realty pays a $0.36 per share quarterly dividend which represents a 60% payout ratio and yields 3% annually. QTS Realty Trust, Inc. Page 10 of 17

11 QTS Realty - Consensus Estimates ($ in thousands, except per share data) Burke & Quick 1Q16E Guidance 1Q16E Consensus Revenue $94,500 $94,687 EBITDA $42,398 $41,147 FFO $0.61 $0.62 AFFO $0.59 $ E 2016E Revenue $400,000 $400,189 EBITDA $183,000 $181,000 $180,772 FFO $2.48 $2.59 $2.61 AFFO $2.40 $ E 2017E Revenue $460,000 $465,180 EBITDA $212,891 $214,197 FFO $2.87 $2.97 AFFO $2.80 $2.96 Source: Factset and Burke & Quick Partners Estimates. Valuation Price Target $53 The Data Center REIT sector trades at 20x 2016E AFFO and 17x 2016E EBITDA. With a recurring business model and infrastructure that has strategic value, we believe the multiple can go higher. QTS Realty trades in-line with peers. But, we believe QTS Realty has one of the data centers sector s most diverse service offerings, substantial excess building shell and one of highest growth rates positioning it to sustain above average growth. Using 22x 2016E AFFO and 20x EBITDA, our per share price target for QTS Realty is $53. QTS Realty Trust, Inc. Page 11 of 17

12 QTS Realty - Annual Income Statement ($ in thousands, except per share data) Fiscal Year Ending December 31, E 2017E 2018E Rental Revenues $175,649 $230,510 $284,000 $330,100 $376,314 Recoveries 19,194 22,581 24,000 25,000 26,918 Cloud & Managed 20,231 51,994 86,000 98, ,768 Other 2,715 5,998 6,000 6,000 6,000 Revenues 217,789 $311,083 $400,000 $460,000 $520,000 Yr.-Yr. Pct. Change 22.4% 42.8% 28.6% 15.0% 13.0% Property Operating Costs (71,518) (104,355) (137,382) (156,609) (175,997) Pct. of Revenue 32.8% 33.5% 34.3% 34.0% 33.8% Gross Profit 146, , , , ,003 Yr.-Yr. Pct. Change 24.9% 41.3% 27.0% 15.5% 13.4% Margin 67.2% 66.5% 65.7% 66.0% 66.2% Real Estate Taxes and Insurance (5,116) (5,869) (6,000) (6,500) (6,800) Pct. of Revenue 2.3% 1.9% 1.5% 1.4% 1.3% General & Administrative (45,283) (67,783) (81,618) (92,000) (101,400) Pct. of Revenue 20.8% 21.8% 20.4% 20.0% 19.5% Restructuring and Transaction (2,316) (11,282) Total Operating Costs (52,715) (84,934) (87,618) (98,500) (108,200) Pct. of Revenue 24.2% 27.3% 21.9% 21.4% 20.8% Add Back Stock Comp 4,153 6,964 8,000 8,000 8,000 EBITDA 100, , , , ,803 Yr.-Yr. Pct. Change 32.6% 40.0% 30.7% 16.3% 14.5% EBITDA Margin 45.9% 45.0% 45.8% 46.3% 46.9% Depreciation & Amortization (58,282) (85,811) (109,880) (111,180) (112,180) Stock Comp & Non-Recurring (4,153) (6,964) (8,000) (8,000) (8,000) Operating Income 35,274 35,983 65,120 93, ,623 Interest Income (Expense) (15,300) (21,287) (30,000) (32,000) (34,000) Other Income (Expense) (871) (468) Pretax Income (Loss) 19,103 14,228 35,120 61,711 89,623 Income Tax 9, Net income (Loss) 19,103 24,129 35,120 61,711 89,623 Noncontrolling Interest (4,031) (3,803) (4,917) (8,639) (12,547) Net Income (Loss) to Common 15,072 20,326 30,203 53,071 77,076 EPS - Diluted $0.40 $0.52 $0.76 $1.36 $1.98 Diluted Shares 37,412 45,353 54,063 56,000 57,000 FFO 74, , , , ,303 FFO Per Share $2.00 $2.29 $2.48 $2.87 $3.27 AFFO 69,236 99, , , ,303 AFFO Per Share $1.86 $2.19 $2.40 $2.80 $3.20 Yr.-Yr. Pct. Change 66.1% 17.8% 9.7% 16.6% 14.2% Free Cash Flow (FCF) EBITDA 100, , , , ,803 Interest & Cash Taxes (15,300) (11,386) (30,000) (32,000) (34,000) Maintanence CapEx (2,684) (4,745) (4,000) (4,000) (4,000) Recurring Free Cash Flow 82, , , , ,803 Recurring FCF Per Diluted Share $2.19 $2.73 $2.76 $3.16 $3.61 Expansion CapEx (197,848) (306,990) (320,000) (300,000) (300,000) Free Cash Flow (115,807) (183,081) (171,000) (123,109) (94,197) FCF Per Diluted Share ($3.10) ($4.04) ($3.16) ($2.20) ($1.65) Source: Company reports and Burke & Quick Partners Estimates. QTS Realty Trust, Inc. Page 12 of 17

13 QTS Realty - Income Statement, 2015 ($ in thousands, except per share data) Fiscal Year Ending December 31, 1Q 2Q 3Q 4Q 2015 Rental Revenues $49,333 $52,193 $62,744 $66,240 $230,510 Recoveries 5,664 5,582 6,158 5,177 22,581 Cloud & Managed 5,795 8,220 18,573 19,406 51,994 Other 594 2,122 1,415 1,867 5,998 Revenues $61,386 $68,117 $88,890 $92,690 $311,083 Yr.-Yr. Pct. Change 25.4% 32.7% 53.4% 55.6% 42.8% Property Operating Costs (19,336) (22,031) (30,925) (32,063) (104,355) Pct. of Revenue 31.5% 32.3% 34.8% 34.6% 33.5% Gross Profit 42,050 46,086 57,965 60, ,728 Yr.-Yr. Pct. Change 28.5% 32.4% 54.3% 47.3% 41.3% Margin 68.5% 67.7% 65.2% 65.4% 66.5% Real Estate Taxes and Insurance (1,485) (1,474) (1,462) (1,448) (5,869) Pct. of Revenue 2.4% 2.2% 1.6% 1.6% 1.9% General & Administrative (13,838) (14,615) (19,440) (19,890) (67,783) Pct. of Revenue 22.5% 21.5% 21.9% 21.5% 21.8% Restructuring and Transaction (105) (4,669) (1,482) (5,026) (11,282) Total Operating Costs (15,428) (20,758) (22,384) (26,364) (84,934) Pct. of Revenue 25.1% 30.5% 25.2% 28.4% 27.3% Add Back Stock Comp 1,307 1,831 2,068 1,758 6,964 EBITDA 28,034 31,828 39,131 41, ,040 Yr.-Yr. Pct. Change 29.6% 36.7% 50.0% 41.4% 40.0% EBITDA Margin 45.7% 46.7% 44.0% 44.3% 45.0% Depreciation & Amortization (16,243) (18,062) (24,486) (27,020) (85,811) Stock Comp & Non-Recurring (1,307) (1,831) (2,068) (1,758) (6,964) Operating Income 10,379 7,266 11,095 7,243 35,983 Interest Income (Expense) (5,342) (4,798) (5,417) (5,730) (21,287) Other Income (Expense) 0 (83) 0 (385) (468) Pretax Income (Loss) 5,037 2,385 5,678 1,128 14,228 Income Tax 0 3,135 2,560 4,206 9,901 Net income (Loss) 5,037 5,520 8,238 5,334 24,129 Noncontrolling Interest (955) (888) (1,229) (731) (3,803) Net Income (Loss) to Common 4,082 4,632 7,009 4,603 20,326 EPS - Diluted $0.15 $0.17 $0.26 $0.17 $0.52 Diluted Shares 39,209 44,444 48,733 48,830 45,353 FFO 19,444 23,422 29,536 31, ,916 FFO Per Share $0.50 $0.53 $0.61 $0.65 $2.29 AFFO 20,075 22,238 29,670 27,843 99,826 AFFO Per Share $0.51 $0.50 $0.61 $0.57 $2.19 Yr.-Yr. Pct. Change 6.1% -1.1% 76.4% 8.3% 17.8% Free Cash Flow (FCF) EBITDA 28,034 31,828 39,131 41, ,040 Interest & Cash Taxes (5,342) (1,663) (2,857) (1,524) (11,386) Maintanence CapEx (17) (609) (1,408) (2,711) (4,745) Recurring Free Cash Flow 22,675 29,556 34,866 36, ,909 Recurring FCF Per Diluted Share $0.58 $0.67 $0.72 $0.75 $2.73 Expansion CapEx (92,126) (84,202) (67,600) (63,062) (306,990) Free Cash Flow (69,451) (54,646) (32,734) (26,250) (183,081) FCF Per Diluted Share ($1.77) ($1.23) ($0.67) ($0.54) ($4.04) Source: Company reports and Burke & Quick Partners Estimates. QTS Realty Trust, Inc. Page 13 of 17

14 QTS Realty - Income Statement, 2016E ($ in thousands, except per share data) Fiscal Year Ending December 31, 1QE 2QE 3QE 4QE 2016E Rental Revenues $67,000 $70,000 $72,000 $75,000 $284,000 Recoveries 6,000 6,000 6,000 6,000 24,000 Cloud & Managed 20,000 21,000 22,000 23,000 86,000 Other 1,500 1,500 1,500 1,500 6,000 Revenues $94,500 $98,500 $101,500 $105,500 $400,000 Yr.-Yr. Pct. Change 53.9% 44.6% 14.2% 13.8% 28.6% Property Operating Costs (32,603) (33,884) (34,815) (36,081) (137,382) Pct. of Revenue 34.5% 34.4% 34.3% 34.2% 34.3% Gross Profit 61,898 64,616 66,686 69, ,618 Yr.-Yr. Pct. Change 47.2% 40.2% 15.0% 14.5% 27.0% Margin 65.5% 65.6% 65.7% 65.8% 65.7% Real Estate Taxes and Insurance (1,500) (1,500) (1,500) (1,500) (6,000) Pct. of Revenue 1.6% 1.5% 1.5% 1.4% 1.5% General & Administrative (20,000) (20,300) (20,500) (20,818) (81,618) Pct. of Revenue 21.2% 20.6% 20.2% 19.7% 20.4% Restructuring and Transaction Total Operating Costs (21,500) (21,800) (22,000) (22,318) (87,618) Pct. of Revenue 22.8% 22.1% 21.7% 21.2% 21.9% Add Back Stock Comp 2,000 2,000 2,000 2,000 8,000 EBITDA 42,398 44,816 46,686 49, ,000 Yr.-Yr. Pct. Change 51.2% 40.8% 19.3% 19.6% 30.7% EBITDA Margin 44.9% 45.5% 46.0% 46.5% 45.8% Depreciation & Amortization (27,320) (27,420) (27,520) (27,620) (109,880) Stock Comp & Non-Recurring (2,000) (2,000) (2,000) (2,000) (8,000) Operating Income 13,078 15,396 17,166 19,481 65,120 Interest Income (Expense) (7,500) (7,500) (7,500) (7,500) (30,000) Other Income (Expense) Pretax Income (Loss) 5,578 7,896 9,666 11,981 35,120 Income Tax Net income (Loss) 5,578 7,896 9,666 11,981 35,120 Noncontrolling Interest (781) (1,105) (1,353) (1,677) (4,917) Net Income (Loss) to Common 4,797 6,791 8,312 10,304 30,203 EPS - Diluted $0.12 $0.17 $0.21 $0.26 $0.76 Diluted Shares 49,000 55,500 55,750 56,000 54,063 FFO 29,898 32,816 34,686 36, ,000 FFO Per Share $0.61 $0.59 $0.62 $0.65 $2.48 AFFO 28,898 31,816 33,686 35, ,000 AFFO Per Share $0.59 $0.57 $0.60 $0.64 $2.40 Yr.-Yr. Pct. Change 15.6% 14.7% -0.9% 11.5% 9.7% Free Cash Flow (FCF) EBITDA 42,398 44,816 46,686 49, ,000 Interest & Cash Taxes (7,500) (7,500) (7,500) (7,500) (30,000) Maintanence CapEx (1,000) (1,000) (1,000) (1,000) (4,000) Recurring Free Cash Flow 33,898 36,316 38,186 40, ,000 Recurring FCF Per Diluted Share $0.69 $0.65 $0.68 $0.73 $2.76 Expansion CapEx (80,000) (80,000) (80,000) (80,000) (320,000) Free Cash Flow (46,103) (43,684) (41,815) (39,399) (171,000) FCF Per Diluted Share ($0.94) ($0.79) ($0.75) ($0.70) ($3.16) Source: Company reports and Burke & Quick Partners Estimates. QTS Realty Trust, Inc. Page 14 of 17

15 QTS Realty - Valuation Analysis ($ in thousands, expect per share data) Fiscal Year Ending December 31, 2016E 2017E AFFO Stock Price $46.99 $46.99 AFFO $2.40 $2.80 Multiple 20x 17x Secular Growth Rate 15% 15% PEG Ratio Target Multiple 22x PEG 1.5 Implied Price $52.87 Upside to Target 13% EBITDA Stock Price $46.99 $46.99 Diluted Shares 55,500 55,500 Market Capitalization $2,607,945 $2,607,945 Long-term Debt & Pfd Stock (871,739) (871,739) Working Capital 217, ,113 Enterprise Value 3,262,571 3,262,571 EBITDA 183, ,891 Multiple 18x 15x Target Multiple 20x Implied Price $54.15 Upside to Target 15% Recurring Free Cash Flow Recurring Free Cash Flow $149,000 $176,891 Per Share $2.68 $3.19 Multiple 18x 15x Target Multiple 20x Implied Price $53.69 Price Target $53.00 Upside to Target 13% Source: Company reports and Burke & Quick Partners Estimates. QTS Realty Trust, Inc. Page 15 of 17

16 Burke & Quick Research s Data Centers Universe Data Center REITs Burke & Quick Partners (561) /30/2016 S&P 500 CyrusOne CoreSite DuPont Fab Digital Realty Equinix QTS Realty Amazon Internap SP50 CONE COR DFT DLR EQIX QTS Average AMZN INAP Stock Price $2, $45.24 $69.19 $40.86 $88.33 $ $46.99 $ $ Week High 2, Low 1, % Change YTD 1% 21% 22% 29% 17% 9% 4% 17% -11% -57% Relative 20% 21% 28% 16% 8% 3% 16% -12% -58% Dividend $1.52 $2.12 $1.88 $3.52 $7.00 $1.44 Yield 3.4% 3.1% 4.6% 4.0% 2.1% 3.1% 3.4% Capitalization Fully Diluted Shares 79,700 47,479 81, ,218 70,400 55, ,000 55,895 Market Capitalization $3,605,628 $3,285,072 $3,324,768 $12,562,078 $23,098,944 $2,607,945 $287,969,890 $154,829 Long-Term Debt (996,500) (506,007) (1,549,460) (7,269,241) (5,549,049) (871,739) (18,161,000) (365,693) Working Capital (46,200) (56,694) (13,526) (332,563) 1,602, ,113 2,575,000 (3,714) Enterprise Value $4,648,328 $3,847,773 $4,887,754 $20,163,882 $27,045,067 $3,262,571 $303,555,890 $524,236 AFFO/Share AFFO/Share $2.90 $3.50 $3.05 $4.90 $16.00 $2.80 $8.00 $0.84 Multiple AFFO/Share Multiple AFFO/Share EBITDA EBITDA 2017 $325,000 $228,000 $350,000 $1,260,000 $1,778,548 $212,891 $17,999,539 $88,000 Multiple EBITDA , , ,000 1,176,000 1,622, ,000 13,999,880 83,000 Multiple EBITDA , , ,937 1,024,724 1,271, ,040 10,633,000 79,626 Target Multiple 2016E AFFO Price Target $50.00 $64.00 $46.00 $87.00 $ $53.00 $ $5.00 Upside to Target 11% -8% 13% -2% -6% 13% 17% 81% Rating: Outperform Outperform Outperform Marketperf Outperform Outperform Outperform Outperform Source: Company reports; Burke & Quick Research estimates QTS Realty Trust, Inc. Page 16 of 17

17 DISCLOSURES: ANALYST CERTIFICATION I,, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. DISCLOSURES Additional information available upon request. BQP has performed investment banking services for the subject company in the past 12 months, or does expect to in the next 3 months, and the analyst(s) responsible for covering the securities in this report does not receive any compensation based upon BQP s investment banking revenues. This report was prepared by (BQP) BQP is a Member of FINRA and SIPC. RATINGS INFORMATION Rating and Price Target Change History 3 Year Rating Change History 3 Year Price Change History Source: Burke & Quick Partners Created by: Blue-Compass.net * Previous Close3/29/2016 Burke and Quick Partners LLC Stock Ratings and Definitions Outperform (O) Market Perform (MP) Underperform (U) Covered Not Rated (CNR) % of Companies Under Coverage With This Rating % of Companies for which Burke & Quick Partners LLC has performed services for in the last 12 months Investment Banking Brokerage The stock s total return is expected to outperform the S&P 500 over the next 12 months % 20.00% 0.00% The stock s total return is expected to be in line with the S&P 500 over the next 12 months % 0.00% 0.00% The stock s total return is expected to underperform the S&P 500 over the next 12 months. 0.00% 0.00% 0.00% The stock is covered by the firm but ratings and estimates are not issued. QTS Realty Trust, Inc. Page 17 of 17