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Rating Action:

Moody's Upgrades QTS Realty to B1; Outlook Stable

05 Dec 2016

Approximately $300 Million of Debt Securities Affected.

New York, December 05, 2016 -- Moody's Investors Service ("Moody's") upgraded QTS Realty Trust, Inc. ("QTS") corporate family rating to B1 from B2 and its operating subsidiary, QualityTech, L.P.'s, senior unsecured debt rating to B1 from B2. The rating outlook is stable.

The ratings upgrade reflects QTS's consistently sound operating performance, progress in growing the size of its data center portfolio on a leverage-neutral basis, as well as improvements in geographic and asset diversification through a combination of acquisitions and organic growth over the past two years. Furthermore, the upgrade incorporates Moody's expectations for ongoing and steady improvements in the REIT's utilization on the newly acquired Piscataway and the recently launched Chicago data centers, which should lead to improved profitability over time.

QTS has made significant progress in growing the size and quality of its portfolio. The REIT doubled its adjusted gross assets to $2.2 billion as of 3Q16 from $1.1 billion as of 1Q14. During this timeframe the REIT expanded its footprint to include four data centers internationally (Canada, Netherlands, Hong Kong and the UK) and twenty data centers across the U.S. as of September 30, 2016 from a portfolio of 10 domestic data centers at 1Q14.

Management has exhibited good operating and fiscal discipline by maintaining sound liquidity and steady credit metrics as it managed its growth. The REIT's effective leverage (debt plus preferred stock as a % of gross assets) improved to a modest 43% at 3Q16, down from 51% at the end of 2014, supported by significant common equity issuances over the past two years ($276 million for the first nine months of 2016 and $369 million in 2015). The REIT's 3Q16 net debt to EBITDA was moderate at 5.1x. Moody's expects that leverage will be maintained around 5.5x even as QTS continues to invest in redevelopment projects in the next 12-18 months. All the metrics include Moody's operating lease adjustments.

The following ratings were upgraded:

- QTS Realty Trust, Inc. -- corporate family rating to B1 from B2

- QualityTech, L.P. -- senior unsecured rating to B1 from B2

RATING RATIIONALE

QTS Realty's B1 rating reflects the REIT's fully integrated platform that offers wholesale colocation (C1), retail colocation (C2) services, as well as cloud and managed services (C3). The REIT's rating is further supported by its diversified tenant base, large unencumbered asset pool that represents nearly 98% of adjusted gross assets and manageable near-term debt maturities.

These strengths are counterbalanced by the REIT's modest scale, and still meaningful asset concentration. QTS's two largest properties, Atlanta-Metro and Atlanta-Suwanee, GA data centers contributed 32% and 18% of the first nine months of FY2016 NOI, respectively. Asset concentration as measured by annualized base rent is somewhat lower but still significant, with Atlanta-Metro and Atlanta-Suwanee data centers contributing 26% and 16% of 3Q16 annualized rent, respectively. The REIT's asset concentration has improved as a result of the acquisitions and expansion of its recently developed data centers in Dallas and Richmond over the last two years and will continue to improve as QTS achieves higher utilization at the recently acquired Piscataway data center and a new facility in Chicago that was launched in July 2016. However, asset concentration is still significant and remains a key credit concern, and the REIT's modest size will continue to be a disadvantage. QTS's upcoming lease maturities also present a credit challenge. Approximately 40% of the REIT's portfolio (as defined by 3Q16 annualized rental revenue) will roll through 2017 and nearly 66% - by the end of 2018. Due to the shorter lease terms (up to three years) for the C2 and C3 clients, which represent 60% of QTS's annualized rental revenues as of 3Q16, these business segments have the potential to create cash flow volatility versus the traditional C1 product which has lease terms of five to ten years.

The rating outlook is stable reflecting Moody's expectation that QTS will continue to capitalize on strong demand for outsourced server and storage device capacity. The stable rating outlook also incorporates our expectation that QTS will continue to prudently grow and diversify while maintaining steady to improving leverage, adequate liquidity and improving profitability margins over time.

To achieve an upgrade, QTS will need to demonstrate its ability to profitably grow its asset base while significantly improving asset diversity. To the extent asset concentration and scale concerns are effectively mitigated, upward ratings momentum could develop if QTS improves and sustains its EBITDA margin at 50%, maintains fixed charge coverage above 4.5x and sustain net debt/EBITDA under 5x (including Moody's operating lease adjustment).

The rating would be lowered if QTS's financial performance were to deteriorate such that net debt to EBITDA rose above 6.5 times (including Moody's operating lease adjustment) or EBITDA margin declined to 40%. QTS ratings could be downgraded if the REIT experiences higher than expected churn and customer defections, or if industry oversupply results in competitive pricing pressures and deterioration in profitability or strained liquidity. Large debt financed acquisitions could also result in a ratings downgrade.

Moody's last rating action with respect to QTS was on July 10, 2014 when the rating agency assigned a B2 CFR to QTS Realty Trust, Inc. and B2 rating to QualityTech, L.P.'s senior unsecured bond, with stable outlook.

The principal methodology used in this rating was Global Rating Methodology for REITs and Other Commercial Property Firms published in July 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

QTS Realty Trust, Inc. [NYSE: QTS], headquartered in Overland Park, Kansas, USA, is a data center REIT with a fully integrated platform that offers wholesale colocation services, retail colocation services to its customers, as well as cloud and managed services. QTS owns, operates or manages 24 data centers in North America, Europe and Asia Pacific as of September 30, 2016.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ranjini Venkatesan
Asst Vice President - Analyst
Commercial Real Estate Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nick Levidy
MD - Structured Finance
Commercial Real Estate Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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