QTS Reports Second Quarter 2017 Operating Results

Consolidated Balance Sheets

(in thousands except share data)

June 30,

December 31,

2017

2016 ⁽¹⁾

(unaudited)

ASSETS

Real Estate Assets

Land

$

86,192

$

74,130

Buildings, improvements and equipment

1,625,254

1,524,767

Less: Accumulated depreciation

(354,522)

(317,834)

1,356,924

1,281,063

Construction in progress

363,449

365,960

Real Estate Assets, net

1,720,373

1,647,023

Cash and cash equivalents

42,604

9,580

Rents and other receivables, net

44,033

41,540

Acquired intangibles, net

119,384

129,754

Deferred costs, net (2) (3)

38,152

38,507

Prepaid expenses

8,875

6,918

Goodwill

173,843

173,843

Other assets, net (4)

59,119

39,305

TOTAL ASSETS

$

2,206,383

$

2,086,470

LIABILITIES

Unsecured credit facility, net (3)

$

744,307

$

634,939

Senior notes, net of discount and debt issuance costs (3)

292,858

292,179

Capital lease, lease financing obligations and mortgage notes payable

34,059

38,708

Accounts payable and accrued liabilities

84,052

86,129

Dividends and distributions payable

21,606

19,634

Advance rents, security deposits and other liabilities

31,505

24,893

Deferred income taxes

12,207

15,185

Deferred income

23,433

21,993

TOTAL LIABILITIES

1,244,027

1,133,660

EQUITY

Common stock, $0.01 par value, 450,133,000 shares authorized, 48,812,009 and 47,831,250 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively

488

478

Additional paid-in capital

970,811

931,783

Accumulated dividends in excess of earnings

(126,331)

(97,793)

Total stockholders' equity

844,968

834,468

Noncontrolling interests

117,388

118,342

TOTAL EQUITY

962,356

952,810

TOTAL LIABILITIES AND EQUITY

$

2,206,383

$

2,086,470

(1)

The balance sheet at December 31, 2016, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements.

(2)

As of June 30, 2017 and December 31, 2016, deferred costs, net included $6.1 million and $7.0 million of net deferred financing costs related to the revolving portion of the Company's unsecured credit facility, respectively, and $32.0 million and $31.5 million of deferred leasing costs net of amortization, respectively.

(3)

Debt issuance costs, net related to the Senior Notes and term loan portion of the Company's unsecured credit facility aggregating $9.2 million and $10.1 million at June 30, 2017 and December 31, 2016, respectively, have been netted against the related debt liability line items for both periods presented.

(4)

As of June 30, 2017 and December 31, 2016, other assets, net included $50.9 million and $31.7 million of corporate fixed assets, respectively, primarily relating to construction of corporate offices, leasehold improvements and product related assets. During the quarter ended June 30, 2017, fixed assets and the associated accumulated depreciation related to the Duluth, GA facility aggregating to $10.6 million were moved from Real Estate Assets, net to Other assets, net as the facility was transitioned to corporate office space.

Consolidated Statements of Operations

(unaudited and in thousands except share and per share data)

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2017

2017

2016

2017

2016

Revenues:

Rental

$

80,793

$

79,117

$

71,670

$

159,910

$

140,096

Recoveries from customers

8,774

8,361

6,168

17,135

11,603

Cloud and managed services

16,856

16,965

17,015

33,821

35,905

Other (1)

1,445

1,521

3,834

2,966

5,851

Total revenues

107,868

105,964

98,687

213,832

193,455

Operating expenses:

Property operating costs

36,846

35,421

32,646

72,267

64,427

Real estate taxes and insurance

2,946

3,147

2,020

6,093

3,760

Depreciation and amortization

34,527

33,948

30,355

68,475

58,994

General and administrative (2)

22,562

22,197

21,608

44,759

41,894

Transaction and integration costs (3)

161

336

3,833

497

5,920

Total operating expenses

97,042

95,049

90,462

192,091

174,995

Operating income

10,826

10,915

8,225

21,741

18,460

Other income and expense:

Interest income

-

1

2

1

2

Interest expense

(7,647)

(6,869)

(4,874)

(14,516)

(10,855)

Income before taxes

3,179

4,047

3,353

7,226

7,607

Tax benefit of taxable REIT subsidiaries (4)

1,429

1,521

2,454

2,950

5,059

Net income

4,608

5,568

5,807

10,176

12,666

Net income attributable to noncontrolling interests (5)

(568)

(691)

(707)

(1,259)

(1,677)

Net income attributable to QTS Realty Trust, Inc.

$

4,040

$

4,877

$

5,100

$

8,917

$

10,989

Net income per share attributable to common shares:

     Basic

$

0.08

$

0.10

$

0.11

$

0.18

$

0.25

     Diluted

0.08

0.10

0.10

0.17

0.24

Weighted average common shares outstanding:

     Basic

47,666,086

47,908,709

47,783,093

47,561,507

44,537,769

     Diluted

55,458,429

55,620,260

55,574,545

55,336,062

52,274,198

(1)

Other revenue – Includes straight line rent, sales of scrap metals and other unused materials and various other revenue items. Straight line rent was $0.9 million, $1.5 million and $3.5 million for the three months ended June 30, 2017, March 31, 2017 and June 30, 2016, respectively. Straight line rent was $2.4 million and $5.4 million for the six months ended June 30, 2017 and 2016, respectively. 

(2)

General and administrative expenses – Includes personnel costs, sales and marketing costs, professional fees, travel costs, product investment costs and other corporate general and administrative expenses. General and administrative expenses were 20.9%, 20.9%, and 21.9% of total revenues for the three month periods ended June 30, 2017, March 31, 2017 and June 30, 2016, respectively. General and administrative expenses were 20.9% and 21.7% of total revenues for the six months ended June 30, 2017 and 2016, respectively.

(3)

Transaction and integration costs – For the three month periods ended June 30, 2017, March 31, 2017 and June 30, 2016, the Company recognized $0.1 million, $0.1 million and $0.8 million, respectively, in transaction costs related to the examination of actual and potential acquisitions. Transaction costs were $0.2 million and $0.8 million for the six months ended June 30, 2017 and 2016, respectively. The Company also recognized less than $0.1 million, $0.3 million and $3.0 million in integration costs for the three month periods ended June 30, 2017, March 31, 2017 and June 30, 2016, respectively. Integration costs include various costs to integrate QTS and acquired businesses (including consulting fees, costs to consolidate office space and costs which were previously duplicated) as well as accelerated depreciation of certain software following acquisition. Integration costs were $0.3 million and $5.1 million for the six months ended June 30, 2017 and 2016, respectively.

(4)

Tax benefit of taxable REIT subsidiaries – For the three months ended June 30, 2017, March 31, 2017 and June 30, 2016, the Company recorded an approximate $1.4 million, $1.5 million and $2.5 million non-cash deferred tax benefit, respectively, related to operating losses which include certain transaction and integration costs. The Company recorded $3.0 million and $5.1 million in non-cash deferred tax benefits for the six months ended June 30, 2017 and 2016, respectively.

(5)

Noncontrolling interest – The noncontrolling ownership interest of QualityTech, LP was 12.2% and 12.4% as of June 30, 2017 and 2016, respectively.

Reconciliations of Net Income to FFO, Operating FFO & Adjusted Operating FFO

(unaudited and in thousands except per share data)

The Company calculates FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO represents net income (loss) (computed in accordance with GAAP), adjusted to exclude gains (or losses) from sales of property, real estate-related depreciation and amortization and similar adjustments for unconsolidated partnerships and joint ventures. Management uses FFO as a supplemental performance measure because, in excluding real estate-related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. The Company generally calculates Operating FFO as FFO excluding certain non-routine charges and gains and losses that management believes are not indicative of the results of the Company's operating real estate portfolio. The Company believes that Operating FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and, to the extent other REITs calculate Operating FFO on a comparable basis, between the Company and these other REITs. The Company calculates Adjusted Operating FFO by adding or subtracting from Operating FFO items such as: maintenance capital investment, paid leasing commissions, amortization of deferred financing costs and bond discount, non-real estate depreciation, straight line rent adjustments, deferred taxes and non-cash compensation. Operating FFO and Adjusted Operating FFO are non-GAAP measures that are used as supplemental operating measures and to provide additional information to users of the financial statements.

A reconciliation of net income to FFO, Operating FFO and Adjusted Operating FFO is presented below:

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2017

2017

2016

2017

2016

FFO

Net income

$

4,608

$

5,568

$

5,807

$

10,176

$

12,666

Real estate depreciation and amortization

30,275

29,504

26,409

59,779

51,278

FFO

34,883

35,072

32,216

69,955

63,944

Integration costs

18

272

3,026

291

5,079

Transaction costs

143

64

807

206

841

Tax benefit associated with transaction and integration costs

-

-

(1,183)

-

(1,931)

Operating FFO  *

35,044

35,408

34,866

70,452

67,933

Maintenance Capex

(1,172)

(796)

(380)

(1,968)

(715)

Leasing commissions paid

(4,055)

(4,169)

(3,388)

(8,224)

(9,195)

Amortization of deferred financing costs and bond discount

971

980

877

1,951

1,754

Non real estate depreciation and amortization

4,254

4,443

3,946

8,697

7,716

Straight line rent revenue and expense and other

(637)

(1,127)

(3,243)

(1,764)

(4,853)

Tax benefit from operating results

(1,429)

(1,521)

(1,271)

(2,950)

(3,128)

Equity-based compensation expense

3,732

3,082

3,200

6,814

5,250

Adjusted Operating FFO *

$

36,708

$

36,300

$

34,607

$

73,008

$

64,762

Fully diluted weighted average shares

55,458

55,620

55,575

55,336

52,274

Operating FFO per diluted share

$

0.63

$

0.64

$

0.63

$

1.27

$

1.30

The Company's calculations of Operating FFO and Adjusted Operating FFO may not be comparable to Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use the same definition.

Reconciliations of Net Income to EBITDA and Adjusted EBITDA

(unaudited and in thousands)

The Company calculates EBITDA as net income (loss) (computed in accordance with GAAP) adjusted to exclude interest expense and interest income, provision (benefit) for income taxes (including income taxes applicable to sale of assets) and depreciation and amortization. The Company believes that EBITDA is another metric that is often utilized to evaluate and compare the Company's ongoing operating performance between periods and between REITs. In addition to EBITDA, the Company calculates an adjusted measure of EBITDA, which the Company refers to as Adjusted EBITDA, as EBITDA excluding write off of unamortized deferred financing costs, gains (losses) on extinguishment of debt, transaction and integration costs, equity-based compensation expense, restructuring costs and gain (loss) on sale of real estate. The Company believes that Adjusted EBITDA provides investors with another financial measure that can facilitate comparisons of operating performance between periods and between REITs.

A reconciliation of net income to EBITDA and Adjusted EBITDA is presented below:

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2017

2017

2016

2017

2016

EBITDA and Adjusted EBITDA

Net income

$

4,608

$

5,568

$

5,807

$

10,176

$

12,666

Interest expense

7,647

6,869

4,874

14,516

10,855

Interest income

-

(1)

(2)

(1)

(2)

Tax benefit of taxable REIT subsidiaries

(1,429)

(1,521)

(2,454)

(2,950)

(5,059)

Depreciation and amortization

34,527

33,948

30,355

68,475

58,994

EBITDA

45,353

44,863

38,580

90,216

77,454

Equity-based compensation expense

3,732

3,082

3,200

6,814

5,250

Integration costs

18

272

3,026

291

5,079

Transaction costs

143

64

807

206

841

Adjusted EBITDA

$

49,246

$

48,281

$

45,613

$

97,527

$

88,624

Reconciliations of Net Income to Net Operating Income (NOI)

(unaudited and in thousands)

The Company calculates net operating income ("NOI") as net income (loss) (computed in accordance with GAAP), excluding: interest expense, interest income, tax expense (benefit) of taxable REIT subsidiaries, depreciation and amortization, write off of unamortized deferred financing costs, gain (loss) on extinguishment of debt, transaction and integration costs, gain (loss) on sale of real estate, restructuring costs and general and administrative expenses. Management uses NOI as a supplemental performance measure because it provides a useful measure of the operating results from its customer leases. In addition, management believes it is useful to investors in evaluating and comparing the operating performance of its properties and to compute the fair value of its properties. The Company's NOI may not be comparable to other REITs' NOI as other REITs may not calculate NOI in the same manner. NOI should be considered only as a supplement to net income as a measure of the Company's performance and should not be used as a measure of results of operations or liquidity or as an indication of funds available to meet cash needs, including the ability to make distributions to stockholders. NOI is a measure of the operating performance of the Company's properties and not of the Company's performance as a whole. NOI is therefore not a substitute for net income as computed in accordance with GAAP. A reconciliation of net income to NOI is presented below:

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2017

2017

2016

2017

2016

Net Operating Income (NOI)

Net income

$

4,608

$

5,568

$

5,807

$

10,176

$

12,666

Interest expense

7,647

6,869

4,874

14,516

10,855

Interest income

-

(1)

(2)

(1)

(2)

Depreciation and amortization

34,527

33,948

30,355

68,475

58,994

Tax benefit of taxable REIT subsidiaries

(1,429)

(1,521)

(2,454)

(2,950)

(5,059)

Integration costs

18

272

3,026

291

5,079

Transaction costs

143

64

807

206

841

General and administrative expenses

22,562

22,197

21,608

44,759

41,894

NOI ⁽¹⁾

$

68,076

$

67,396

$

64,021

$

135,472

$

125,268

Breakdown of NOI by facility:

Atlanta-Metro data center

$

20,704

$

20,511

$

20,885

$

41,215

$

40,857

Atlanta-Suwanee data center

11,423

11,958

11,272

23,381

22,772

Leased data centers ⁽²⁾

8,408

9,010

10,574

17,418

22,383

Richmond data center

8,389

8,230

7,976

16,619

14,578

Irving data center

8,057

6,440

3,914

14,497

6,538

Santa Clara data center

2,705

3,279

3,653

5,984

7,417

Piscataway data center

2,279

2,403

670

4,682

670

Princeton data center

2,393

2,399

2,356

4,792

4,712

Sacramento data center

1,778

1,837

2,140

3,615

4,062

Chicago data center

1,275

647

-

1,922

-

Fort Worth data center

75

106

181

-

Other facilities ⁽³⁾

590

576

581

1,166

1,279

NOI ⁽¹⁾

$

68,076

$

67,396

$

64,021

$

135,472

$

125,268

(1)

Includes facility level G&A expense allocation charges of 4% of cash revenue for all entities, with the exception of the leased facilities acquired in 2015, which include G&A expense allocation charges of 10% of cash revenue.  These allocated charges aggregated to $5.3 million, $5.2 million and $5.1 million for the three month periods ended June 30, 2017,  March 31, 2017 and June 30, 2016, respectively, and $10.5 million and $10.1 million for the six month periods ended June 30, 2017 and 2016, respectively.

(2)

Includes 13 facilities. All facilities are leased, including those subject to capital leases. During the quarter ended March 31, 2017, the Company moved its Jersey City, NJ facility to the "Leased data centers" line item.

(3)

Consists of Miami, FL; Lenexa, KS; Overland Park, KS; and Duluth, GA facilities. During the quarter ended March 31, 2017, the Company moved its Miami, FL facility to the "Other facilities" line item.

Reconciliations of Total Revenues to Recognized MRR in the period and MRR at period end

(unaudited and in thousands)

The Company calculates MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from its C1, C2 and C3 rental and cloud and managed services activities, but excludes customer recoveries, deferred set up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR does not include the impact from booked-not-billed leases (which represent customer leases that have been executed but for which lease payments have not commenced) as of a particular date, unless otherwise specifically noted. The Company calculates recognized MRR as the recurring revenue recognized during a given period, which includes revenue from its C1, C2 and C3 rental and cloud and managed services activities, but excludes customer recoveries, deferred set up fees, variable related revenues, non-cash revenues and other one-time revenues. Management uses MRR and recognized MRR as supplemental performance measures because they provide useful measures of increases in contractual revenue from customer leases. A reconciliation of total GAAP revenues to recognized MRR in the period and MRR at period-end is presented below:

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2017

2017

2016

2017

2016

Recognized MRR in the period

Total period revenues (GAAP basis)

$

107,868

$

105,964

$

98,687

$

213,832

$

193,455

Less: Total period recoveries

(8,774)

(8,361)

(6,168)

(17,135)

(11,603)

Total period deferred setup fees

(2,436)

(2,616)

(2,256)

(5,052)

(4,159)

Total period straight line rent and other

(3,306)

(3,118)

(5,757)

(6,424)

(10,025)

Recognized MRR in the period

93,352

91,869

84,506

185,221

167,668

MRR at period end

Total period revenues (GAAP basis)

$

107,868

$

105,964

$

98,687

$

213,832

$

193,455

Less: Total revenues excluding last month

(71,262)

(70,939)

(64,520)

(177,226)

(159,288)

Total revenues for last month of period

36,606

35,025

34,167

36,606

34,167

Less: Last month recoveries

(2,872)

(2,760)

(2,805)

(2,872)

(2,805)

Last month deferred setup fees

(822)

(898)

(756)

(822)

(756)

Last month straight line rent and other

(1,221)

(933)

(1,734)

(1,221)

(1,734)

MRR at period end

$

31,691

$

30,434

$

28,872

$

31,691

$

28,872