S&P: QTS Realty Trust Inc. Rating Raised To 'BB-' And Removed From CreditWatch; Outlook Stable
At the same time, we raised our issue-level rating on the company's unsecured credit facility and senior unsecured notes to 'BB' from 'BB-'. The recovery rating remains '2', indicating our expectation for substantial (70%-90%; upper half of the range) recovery for lenders in the event of a payment default.
We removed all ratings from CreditWatch, where we had placed them with positive implications on July 25, 2016.
"The ratings upgrade reflects our increased confidence in the cash flow stability of the business, supported by the company's low revenue churn, multi-year contracts, and strong demand for data center services," said S&P Global Ratings credit analyst Rose Askinazi.
QTS's custom data center platform (its "C1" segment) has contracts that are more akin to wholesale leases, with contract lengths of five to 10 years and annual price escalators of around 3%. C1 customers tend to have sizable space requirements, where the median customer occupies approximately 3,900 square feet, supporting high utilization rates for the company, between 87%-91% in recent quarters. This segment represents 39% of monthly recurring revenue and helps drive the company's relatively low churn rate, at 1.3% in the second quarter of 2016.
The stable outlook reflects our expectation that the company will have adequate liquidity to fund growth initiatives and negative discretionary cash flow through at least the end of 2017, as it continues to invest in additional data center capacity.
While unlikely over the next 12 months, we could lower the rating if operating performance weakens due to competitive pressure or overexpansion, causing pricing pressure or a decline in utilization that results in margin compression and FFO to debt declining below 10%.
While unlikely over the next 12 months, we could raise the rating if FFO to debt increases to the high-teens percent area or if leverage improves below 5x on a sustained basis. Any upgrade would require our confidence that the company would fund future expansion, both organic and inorganic, in a leverage neutral manner. Alternatively, we could raise the rating over the longer term if the company continues to successfully increase its scale and improve geographic and customer diversity while managing churn and utilization near current levels.