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Rating Action:

Moody's assigns a B2 rating to QTS Realty Trust; outlook stable

10 Jul 2014

New York, July 10, 2014 -- Moody's Investors Service assigned a B2 corporate family rating to QTS Realty Trust, Inc (NYSE: QTS) and a B2 senior unsecured rating to QualityTech, L.P.'s proposed bond issuance. The rating outlook is stable. This is the first time Moody's has assigned a rating to QTS.

QTS will issue up to $250 million of senior unsecured notes with an eight year maturity. The notes will be guaranteed by most of the subsidiaries of the Operating Partnership with the exception of the subsidiaries that own the Richmond, VA, Dallas, TX and East Windsor, NJ facilities. Collectively, these assets represented less than 10% of annualized rental revenue as of March 2014, however could represent a much larger percentage going forward as both the Texas and New Jersey assets are new and currently non-income producing. The notes will be pari passu to other existing and future unsecured debt QualityTech, L.P. The proceeds of which will be used to pay down existing balances on the company's unsecured term loan and revolving credit facility.

RATINGS RATIONALE

The B2 corporate family and senior unsecured ratings incorporate QTS' fully integrated platform that offers both wholesale (C1) and retail/colocation (C2) services to its customers, as well as cloud and managed services (C3). The company has improved its portfolio occupancy over the past two years to 93% at 1Q14 from 88% at 1Q12, mainly through organic growth while maintaining good tenant diversification. The ratings are further supported by the company's large, high-quality unencumbered asset pool and manageable near-term debt maturities.

These strengths are counterbalanced by the REIT's small size and asset concentration. As of March 31, 2014 the company owned and operateed ten assets throughout the U.S., with the Atlanta, GA (Metro) asset representing 38% of annualized rental revenues and the Suwanee, GA asset representing 25%. Upcoming lease maturities are also of concern, as over 40% of the portfolio (as defined by 1Q14 annualized rental revenue) will roll through 2016. A large portion of these maturities are colocation contracts with shorter lead times for renewals (typically three to six months prior to expiration). Due to the shorter lease terms (up to three years) for QTS' C2 and C3 clients, which represent 59% of annualized rental revenues as of March 2014, 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.

QTS has a modest leverage profile with Debt + Preferred % Gross Assets at 43% and Net Debt/EBITDA at 5.1x as of 1Q14 however is expected to operate closer to 50% effective leverage and 6.0x Net Debt/EBITDA over the next two years. Secured debt levels are low at 8.2% of gross assets as of 1Q14. The company has a strong fixed charge coverage ratio of 5.4x at 1Q14, however following the unsecured debt issuance QTS is expected to operate in the mid-4x range going forward.

The stable rating outlook reflects our expectation that QTS will continue to capitalize on strong demand for outsourced server and storage device capacity from large enterprises. It also incorporates our expectation that QTS will prudently grow and diversify geographically its portfolio of assets while maintaining adequate liquidity to cover near and medium term needs.

QTS' rating is constrained as a result of its small scale in a growing and competitive landscape as well as the company's substantial asset concentrations and therefore a ratings upgrade is unlikely in the next 12-18 months. However, an upgrade could be considered if QTS substantially diversifies its asset base such that no single asset represents greater than 20% of annualized revenue as well as gains greater scale. To the extent asset concentration and scale concerns are effectively mitigated, upward ratings pressure could develop if QTS improves and sustains its EBITDA margin at 50% and maintains its fixed charge while keeping its Debt to EBITDA under 4.0x. QTS ratings could be downgraded if the REIT experiences higher than expected churn and customer defections, moves toward a more aggressive financial policy (including sizeable leveraged acquisitions, or reduced liquidity), or if industry oversupply results in competitive pricing pressures and deterioration in profitability. The rating could also experience a downward pressure should negative shifts in the supply/demand or competitive dynamics in the data center space resulting in strained liquidity and total net debt to EBITDA sustained above 6.0x.

The following ratings were assigned with a stable outlook:

QTS Realty Trust, Inc. -- corporate family rating at B2

QualityTech, L.P. -- senior unsecured rating at B2

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 Credit Policy page on www.moodys.com for a copy of this methodology.

QTS Realty Trust, Inc. [NYSE: QTS], headquartered in Overland Park, Kansas, USA, is an owner, developer and operator of multi-tenant data centers in the U.S. QTS has a fully integrated platform that offers both wholesale and retail/colocation services to its customers, as well as cloud and managed services. As of March 31, 2014 the company owned ten datacenters representing 3.8 million square feet of space throughout the U.S. As of March 31, 2014 the company reported total assets of approximately $877 million and shareholders' equity of approximately $395 million.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

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

Nicholas Levidy
MD - Structured Finance
Commercial Real Estate Finance
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

Moody's assigns a B2 rating to QTS Realty Trust; outlook stable
No Related Data.
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