Financial News

QTS Reports Second Quarter 2019 Operating Results

Jul 29, 2019

OVERLAND PARK, Kan., July 29, 2019 /PRNewswire/ -- QTS Realty Trust, Inc. ("QTS" or the "Company") (NYSE: QTS) today announced operating results for the second quarter ended June 30, 2019.

Second Quarter GAAP Highlights




  Three Months Ended





Six Months Ended






June 30,





June 30,






2019


2018


% Change


2019


2018


% Change

Total revenue


$

119,167


$

112,277


6.1

%


$

231,856


$

225,974


2.6

%

Net income (loss)


$

7,535


$

(6,433)


217.1

%


$

28,683


$

(6,685)


529.1

%

Net income (loss) attributable to common stockholders


$

438


$

(7,679)


105.7

%


$

12,951


$

(8,230)


257.4

%

Fully diluted weighted average shares outstanding



63,094



58,080


8.6

%



61,388



58,013


5.8

%

Net income (loss) per share attributable to basic common shares


$

(0.03)


$

(0.16)


83.2

%


$

0.17


$

(0.17)


200.8

%

Net income (loss) per share attributable to diluted common shares


$

(0.03)


$

(0.16)


83.3

%


$

0.17


$

(0.17)


200.0

%

FFO available to common stockholders & OP unit holders


$

39,779

(1)

$

25,162


58.1

%


$

76,716

(1)

$

56,639


35.4

%







(1)

Includes QTS's pro rata share of results from the unconsolidated entity.

Additional Second Quarter Highlights

  • Recognized total consolidated revenues of $119.2 million for the quarter ended June 30, 2019, an increase of 6.1% compared to total consolidated revenue of $112.3 million for the same period in 2018. The Company recognized total consolidated revenues of $119.2 million for the quarter ended June 30, 2019 compared to total consolidated Core revenue of $102.5 million for the same period in 2018, an increase of 16.2%. This does not include QTS' pro rata share of revenue attributable to the unconsolidated joint venture of $1.3 million for the quarter ended June 30, 2019.
  • Reported Adjusted EBITDA of $62.2 million for the quarter ended June 30, 2019, an increase of 16.0% compared to Core Adjusted EBITDA for the same period in 2018.
  • Reported Operating FFO available to common stockholders and OP unit holders for the quarter ended June 30, 2019 of $40.8 million, an increase of 10.6% compared to Core Operating FFO available to common stockholders and OP unit holders of $36.9 million for the same period in 2018.
  • Reported Operating FFO per fully diluted share of $0.65 for the quarter ended June 30, 2019, compared to Core Operating FFO per fully diluted share of $0.64 in the same period of 2018.
  • Signed new and modified renewal leases during the second quarter of 2019 aggregating to $19.6 million of incremental annualized rent, net of downgrades.
  • Reported annualized booked-not-billed monthly recurring revenue ("MRR") of $68.1 million as of June 30, 2019 compared to $54.8 million as of March 31, 2019.
  • Completed the acquisition of two data centers in the Netherlands for approximately $44 million in cash consideration, including closing costs on April 23, 2019. The two facilities, in Groningen and Eemshaven, currently have approximately 160,000 square feet of raised floor capacity and 30 megawatts of combined gross power capacity built out and fully available.

"QTS continued to capitalize on our strategic differentiators in the market during the second quarter, resulting in one of our strongest leasing quarters as a public company at attractive returns on invested capital," said Chad Williams, Chairman and CEO of QTS.

Williams added, "Strong execution combined with a go-to-market approach that balances the steady performance of a diversified hybrid colocation business, and select growth acceleration opportunities with strategic hyperscale customers, continues to support consistent growth and financial performance."

Financial Results

Net income recognized in the second quarter of 2019 was $7.5 million ($0.03 net loss per basic and diluted common share), compared to net loss of $6.4 million ($0.16 net loss per basic and diluted common share) recognized in the second quarter of 2018. The increase in net income was primarily driven by a reduction in restructuring expenses of approximately $11.4 million related to costs incurred in the prior year associated with the Company's strategic growth plan.

QTS generated total revenues of $119.2 million in the second quarter of 2019, an increase of 16.2% compared to total Core revenue of $102.5 million in the second quarter of 2018. MRR as of June 30, 2019 was $32.8 million compared to Core MRR as of June 30, 2018 of $29.5 million.

QTS generated $62.2 million of Adjusted EBITDA in the second quarter of 2019, an increase of 16.0% compared to Core Adjusted EBITDA of $53.6 million for the second quarter of 2018.

Additionally, QTS generated Operating FFO available to common stockholders and OP unit holders of $40.8 million in the second quarter of 2019, an increase of 10.6% compared to Core Operating FFO available to common stockholders and OP unit holders of $36.9 million in the second quarter of 2018. Excluding the effects of the Company's primarily non-cash deferred tax benefit/(expense), Operating FFO available to common stockholders and OP unit holders was $41.0 million in the second quarter of 2019, an increase of 10.6% compared to Core Operating FFO available to common stockholders and OP unit holders of $37.1 million in the second quarter of 2018.

Operating FFO per fully diluted share was $0.65 in the second quarter of 2019, compared to Core Operating FFO per fully diluted share of $0.64 in the second quarter of 2018. Excluding the effects of the Company's primarily non-cash deferred tax benefit/(expense), Operating FFO per fully diluted share was $0.65 in the second quarter of 2019, an increase of 1.8% compared to Core Operating FFO per fully diluted share of $0.64 in the second quarter of 2018.

Leasing Activity

During the quarter ended June 30, 2019, QTS entered into new and modified renewal leases aggregating to $19.6 million of incremental annualized rent. The Company's second quarter leasing performance was driven by continued strong performance in its hybrid colocation product offering and continued expansions by strategic hyperscale customers including the signing of a 5+ megawatt, multi-site lease with a hyperscale customer supporting a large federal program.

During the quarter ended June 30, 2019, QTS renewed leases with total annualized rent of $13.9 million at an average rent per square foot of $732, which was 1.2% higher than the annualized rent prior to their respective renewals. There is variability in the Company's renewal rates based on the mix of product types renewed, and renewal rates are generally expected to increase in the low to mid-single digits as compared to pre-renewal pricing. Rental Churn (which the Company defines as MRR lost in the period to a customer intending to fully exit the QTS platform in the near term compared to total MRR at the beginning of the period) was 1.0% for the three months ended June 30, 2019. Rental Churn was 2.3% for the six months ended June 30, 2019.

As of June 30, 2019, the booked-not-billed MRR balance (which represents customer leases that have been executed, but for which lease payments have not commenced as of June 30, 2019) was approximately $5.7 million, or $68.1 million of annualized rent, and compares to $4.6 million, or $54.8 million of annualized rent at March 31, 2019. The booked-not-billed balance is expected to contribute an incremental $6.7 million to revenue in 2019 (representing $22.0 million in annualized revenues), an incremental $10.3 million in 2020 (representing $16.9 million in annualized revenues), and an incremental $29.2 million in annualized revenues thereafter.

Development

During the quarter ended June 30, 2019, the Company brought online approximately three megawatts of gross power and approximately 19,000 net rentable square feet ("NRSF") of raised floor and customer specific capital at its Fort Worth facility at an aggregate cost of approximately $25 million. In addition, during the second quarter of 2019, the Company's significant development activity continued at the Fort Worth, Ashburn, Irving, Chicago, Atlanta-Metro, Santa Clara and Piscataway facilities to have space ready for customers in 2019 and forward. The Company expects to bring an additional 101,000 raised floor NRSF into service in 2019 at an aggregate cost of approximately $148 million, of which $125 million has already been spent as of June 30, 2019.

Additionally, the joint venture brought online the second phase at the Manassas facility in the second quarter of 2019, representing approximately four megawatts of gross power and approximately 11,000 NRSF of raised floor at an aggregate cost of approximately $23 million at the joint venture's 100% share, of which the Company's pro rata share was approximately $11 million. The joint venture intends to bring additional space and power into service as incremental development at the Manassas facility takes place and future phases are delivered to the customer.  

Acquisitions

During the second quarter of 2019, QTS completed the acquisition of two data centers in the Netherlands for approximately $44 million in cash, including closing costs. The data centers represent QTS' first mega scale expansion outside the U.S. and were opportunistically acquired from TCN SIG Telehousing B.V. The two facilities, in Groningen and Eemshaven currently have approximately 160,000 square feet of raised floor capacity and 30 megawatts of combined gross power capacity built out and fully available. QTS currently anticipates approximately $15 million of additional capital investments required for recommissioning of the two facilities. This investment, in addition to the initial purchase price, represents an upfront cost per megawatt of approximately $2 million, which is materially below the average cost to build in the Netherlands market.

The Groningen facility currently has built-out capacity representing approximately 10 gross megawatts of power and 45,000 square feet of raised floor data center space. The Groningen data center is more than 50% leased to approximately 20 colocation tenants and a weighted average remaining lease term of approximately 3.5 years.

The Eemshaven facility, which is currently vacant, was originally constructed to support a single hyperscale tenant and has built-out capacity representing approximately 20 gross megawatts of power and 113,000 square feet of raised floor data center space. The facility is strategically located adjacent to multiple hyperscale customer-owned data center deployments, including a 500+ megawatt data center campus operated by one of the largest hyperscale cloud providers in the world. In addition, the facility is located in close proximity to multiple transatlantic fiber cable landings providing access to multiple markets within Europe and North America. QTS anticipates investing incremental capital over the next several quarters to recommission the facility.  

Balance Sheet and Liquidity

As of June 30, 2019, the Company's total indebtedness, inclusive of its pro rata share of joint venture debt, was approximately $1.4 billion, resulting in a net debt to annualized Adjusted EBITDA of 5.7x. The Company's leverage ratio pro forma for the effects of cash expected to be received at or before March 1, 2020 upon the full physical settlement of, and issuance of, 3,762,500 shares of common stock pursuant to the forward equity sale agreement entered into during the first quarter of 2019, assuming such proceeds were used to repay a portion of the Company's outstanding debt, is approximately 5.1x.

In February 2019, QTS conducted an underwritten offering of 7,762,500 shares of its Class A common stock, consisting of 4,000,000 shares issued by the Company during the first quarter of 2019 and 3,762,500 shares which will be issued on a forward basis, in each case at a price of $41.50 per share. The Company received net proceeds of approximately $159 million from the issuance of 4,000,000 shares during the first quarter, which it used to repay amounts outstanding under its unsecured revolving credit facility. The Company expects to physically settle the forward sale (by the delivery of shares of common stock) and receive proceeds of approximately $147 million from the sale of the 3,762,500 shares of common stock by March 1, 2020, although the Company has the right to elect settlement prior to that time.

As of June 30, 2019, the Company had total available liquidity of approximately $718 million which was comprised of $560 million of available capacity under the Company's unsecured revolving credit facility, approximately $147 million available proceeds at the Company's election to physically settle the aforementioned forward equity sale, and approximately $11 million of cash and cash equivalents.

2019 Guidance




2019 Guidance

($ in millions except per share amounts)


Low


High

Revenue


$

461


$

475

Adjusted EBITDA


$

243.5


$

253.5

Operating FFO per fully diluted share


$

2.61


$

2.71

The Company is reaffirming its Revenue guidance range for 2019 of $461 million to $475 million which assumes annual rental churn as previously announced of between 3% and 6%. The Company is also reaffirming its Adjusted EBITDA guidance range for 2019 of $243.5 million to $253.5 million and reaffirming its Operating FFO per fully diluted share guidance range for 2019 of $2.61 per share to $2.71 per share.

The Company's 2019 guidance includes the effects of the joint venture, which is reflected as an unconsolidated joint venture on QTS' reported financial statements. Consistent with GAAP accounting standards, revenue from the unconsolidated joint venture is removed from QTS' reported GAAP financial statements. Also consistent with GAAP accounting and NAREIT-defined standards, QTS includes its proportionate ownership of EBITDAre and Funds from Operations from the joint venture in its reported EBITDAre and Funds from Operations results, respectively.

QTS does not provide reconciliations for the non-GAAP financial measures included in its guidance provided above due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliations, including net income (loss) and adjustments that could be made for restructuring costs, transaction costs, lease exit costs, asset impairments and loss on disposals and other charges as those amounts are subject to significant variability based on future transactions that are not yet known, the amount of which, based on historical experience, could be significant.

Non-GAAP Financial Measures

This release includes certain non-GAAP financial measures that management believes are helpful in understanding the Company's business, as further described below. The Company does not, nor does it suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. The Company believes that the presentation of non-GAAP financial measures provide meaningful supplemental information to both management and investors that is indicative of the Company's operations. The Company has included a reconciliation of this additional information to the most comparable GAAP measure in the selected financial information below.

Definitions

Core. The Core business consists primarily of the Company's hyperscale and hybrid colocation business, along with technology and services revenue from the Company's cloud and managed services business that supports hyperscale and hybrid colocation customers. Core financial measures and operating statistics represent the financial results or operating statistics, as applicable, of the Company's Core business. The Company transitioned its "Non-Core" business (i.e., business other than the Core business) over the course of 2018, ending in the fourth quarter of 2018, following the Company's announcement of its strategic growth plan in the first quarter of 2018.

Non-Core. Non-Core represents the portion of the Company's business that the Company exited in accordance with its strategic growth plan announced in the first quarter of 2018 and completed in the fourth quarter of 2018. The Non-Core business consisted of certain products and services within the Company's cloud and managed services business, primarily managed hosting, as well as colocation revenue attached to certain customers in the managed services business. Non-Core financial measures and operating statistics represent the financial results or operating statistics, as applicable, of the Company's Non-Core business for the applicable period.

Conference Call Details

The Company will host a conference call and webcast on July 30, 2019, at 8:30 a.m. Eastern time (7:30 a.m. Central time) to discuss its financial results, current business trends and market conditions.

The dial-in number for the conference call is (877) 883-0383 (U.S.) or (412) 902-6506 (International). The participant entry number is 6511151# and callers are asked to dial in ten minutes prior to start time. A link to the live broadcast and the replay will be available on the Company's website (www.qtsdatacenters.com) under the Investors tab.

About QTS

QTS Realty Trust, Inc. (NYSE: QTS) is a leading provider of data center solutions across a diverse footprint spanning more than 6 million square feet of owned mega scale data center space throughout primarily North America and Europe. Through its software-defined technology platform, QTS is able to deliver secure, compliant infrastructure solutions, robust connectivity and premium customer service to leading hyperscale technology companies, enterprises, and government entities. QTS owns, operates or manages 26 data centers and supports more than 1,100 customers primarily in North America and Europe.

QTS Investor Relations Contact

Stephen Douglas – EVP – Finance
ir@qtsdatacenters.com  

Forward Looking Statements

Some of the statements contained in this release constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In particular, statements pertaining to the Company's capital resources, portfolio performance, results of operations, anticipated growth in our funds from operations and anticipated market conditions contain forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You also can identify forward-looking statements by discussions of strategy, plans or intentions.

The forward-looking statements contained in this release reflect the Company's current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause actual results to differ significantly from those expressed in any forward-looking statement. The Company does not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: adverse economic or real estate developments in the Company's markets or the technology industry; obsolescence or reduction in marketability of our infrastructure due to changing industry demands; global, national and local economic conditions; risks related to the Company's international operations; difficulties in identifying properties to acquire and completing acquisitions; the Company's failure to successfully develop, redevelop and operate acquired properties or lines of business; significant increases in construction and development costs; the increasingly competitive environment in which the Company operates; defaults on, or termination or non-renewal of leases by customers; decreased rental rates or increased vacancy rates; increased interest rates and operating costs, including increased energy costs; financing risks, including the Company's failure to obtain necessary outside financing; dependence on third parties to provide Internet, telecommunications and network connectivity to the Company's data centers; the Company's failure to qualify and maintain its qualification as a real estate investment trust; environmental uncertainties and risks related to natural disasters; financial market fluctuations; changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates; and limitations inherent in our current and any future joint venture investments, such as lack of sole decision-making authority and reliance on our partners' financial condition.

While forward-looking statements reflect the Company's good faith beliefs, they are not guarantees of future performance. Any forward-looking statement speaks only as of the date on which it was made. The Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the Company's future results to differ materially from any forward-looking statements, see the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 and other periodic reports the Company files with the Securities and Exchange Commission.

Consolidated Balance Sheets

(unaudited and in thousands except shares data)




June 30,


December 31,



2019 (1)


2018 (1)

ASSETS







Real Estate Assets







Land


$

107,307


$

105,541

Buildings, improvements and equipment



2,087,374



1,917,251

Less: Accumulated depreciation



(523,040)



(467,644)




1,671,641



1,555,148

Construction in progress  (2)



856,005



790,064

Real Estate Assets, net



2,527,646



2,345,212

Investments in unconsolidated entity



32,797



Operating lease right-of-use assets, net



59,946



Cash and cash equivalents



10,638



11,759

Rents and other receivables, net



60,754



55,093

Acquired intangibles, net



89,226



95,451

Deferred costs, net  (3) (4)



46,662



45,096

Prepaid expenses



8,224



6,822

Goodwill



173,843



173,843

Assets held for sale





71,800

Other assets, net (5)



57,217



56,893

TOTAL ASSETS


$

3,066,953


$

2,861,969








LIABILITIES







Unsecured credit facility, net  (4)


$

949,816


$

945,657

Senior notes, net of debt issuance costs  (4)



395,167



394,786

Finance leases and mortgage notes payable



48,211



4,674

Operating lease liabilities



67,457



Accounts payable and accrued liabilities



90,211



99,166

Dividends and distributions payable



33,247



29,633

Advance rents, security deposits and other liabilities



47,987



32,679

Liabilities held for sale





24,349

Deferred income taxes



1,294



1,097

Deferred income



40,033



33,241

TOTAL LIABILITIES



1,673,423



1,565,282








EQUITY







7.125% Series A cumulative redeemable perpetual preferred stock: $0.01 par value (liquidation preference $25.00 per share), 4,600,000 shares authorized, 4,280,000 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively (6)



103,212



103,212

6.50% Series B cumulative convertible perpetual preferred stock: $0.01 par value (liquidation preference $100.00 per share), 3,162,500 shares authorized, issued and outstanding as of June 30, 2019 and December 31, 2018, respectively (7)



304,223



304,265

Common stock: $0.01 par value, 450,133,000 shares authorized, 55,390,521 and 51,123,417 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively



554



511

Additional paid-in capital



1,219,048



1,062,473

Accumulated other comprehensive income (loss)



(23,310)



2,073

Accumulated dividends in excess of earnings



(316,158)



(278,548)

Total stockholders' equity



1,287,569



1,193,986

Noncontrolling interests



105,961



102,701

TOTAL EQUITY



1,393,530



1,296,687

TOTAL LIABILITIES AND EQUITY


$

3,066,953


$

2,861,969







(1)

The balance sheet at June 30, 2019 and December 31, 2018, has been derived from the 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, 2019, construction in progress included $200.3 million related to land acquisitions whereby the initiation of development activities has begun to prepare the property for its intended use.

(3)

As of June 30, 2019 and December 31, 2018, deferred costs, net included $6.7 million and $7.7 million of deferred financing costs net of amortization, respectively, and $40.0 million and $37.4 million of deferred leasing costs net of amortization, respectively.

(4)

Debt issuance costs, net related to the Senior Notes and term loan portion of the Company's unsecured credit facility aggregating $10.7 million and $11.6 million at June 30, 2019 and December 31, 2018, respectively, have been netted against the related debt liability line items for both periods presented.

(5)

As of June 30, 2019 and December 31, 2018, other assets, net included $54.0 million and $48.8 million of corporate fixed assets, respectively, primarily relating to construction of corporate offices, leasehold improvements and product related assets.

(6)

As of June 30, 2019, the total liquidation preference of the Series A Preferred Stock was $107.0 million, calculated as $25.00 liquidation preference per share times 4,280,000 shares outstanding.

(7)

As of June 30, 2019, the total liquidation preference of the Series B Preferred Stock was $316.3 million, calculated as $100.00 liquidation preference per share times 3,162,500 shares outstanding.

 

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,



2019


2019 (1)


2018 (1)


2019


2018 (1)

Revenues:
















Rental (2)


$

114,977


$

109,389


$

101,086


$

224,366


$

201,014

Other  (3)



4,190



3,300



11,191



7,490



24,960

Total revenues



119,167



112,689



112,277



231,856



225,974

Operating expenses:
















Property operating costs



38,570



34,103



36,558



72,673



74,298

Real estate taxes and insurance



3,355



3,367



2,903



6,722



5,808

Depreciation and amortization



41,481



38,788



37,820



80,269



73,733

General and administrative (4)



20,124



19,891



21,031



40,015



43,265

Transaction and integration costs



1,039



1,214



653



2,253



1,573

Restructuring







11,430





19,960

Total operating expenses



104,569



97,363



110,395



201,932



218,637

Gain on sale of real estate, net





13,408





13,408



Operating income



14,598



28,734



1,882



43,332



7,337

Other income and expense:
















Interest income



36



45



25



81



26

Interest expense



(6,459)



(7,146)



(8,203)



(13,605)



(16,313)

Other income (expense)



(40)







(40)



Equity in earnings (loss) of unconsolidated entity



(401)



(274)





(675)



Income (loss) before taxes



7,734



21,359



(6,296)



29,093



(8,950)

Tax benefit (expense) of taxable REIT subsidiaries



(199)



(211)



(137)



(410)



2,265

Net income (loss)



7,535



21,148



(6,433)



28,683



(6,685)

Net (income) loss attributable to noncontrolling interests  (5)



(52)



(1,590)



1,002



(1,642)



1,031

Net income (loss) attributable to QTS Realty Trust, Inc.


$

7,483


$

19,558


$

(5,431)


$

27,041


$

(5,654)

Preferred stock dividends



(7,045)



(7,045)



(2,248)



(14,090)



(2,576)

Net income (loss) attributable to common stockholders


$

438


$

12,513


$

(7,679)


$

12,951


$

(8,230)

















Net income (loss) per share attributable to common shares:
















     Basic  (6)


$

(0.03)


$

0.20


$

(0.16)


$

0.17


$

(0.17)

     Diluted  (6)



(0.03)



0.20



(0.16)



0.17



(0.17)







(1)

Pursuant to the Company's adoption of ASC 842 "Leases" on January 1, 2019 and to remain consistent with revenue presentation across the industry, historical revenue categories have been reclassified to conform to current presentation of two categories. The new categories incorporate a reclassification of straight line rent from the "Other" line item into the "Rental" line item, a reclassification of "Recoveries from Customers" from its own line item into the "Rental" line item and a combination of the "Cloud and managed services" and "Other" line items into a single "Other" line item.

(2)

Represents lease revenue, inclusive of recoveries from customers as well as straight line rent. Recoveries from customers was $12.7 million, $10.8 million, and $10.4 million for the three months ended June 30, 2019, March 31, 2019, and June 30, 2018, respectively, and $23.5 million and $22.0 million for the six months ended June 30, 2019 and 2018, respectively. Straight line rent was $1.0 million, $1.5 million and $1.4 million for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively, and $2.5 million and $4.1 million for the six months ended June 30, 2019 and 2018, respectively.

(3)

Includes revenue from managed services, sales of scrap metals and other unused materials and various other revenue items.

(4)

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 16.9%, 17.7%, and 18.7% of total revenues for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively, and 17.3% million and 19.1% million for the six months ended June 30, 2019 and 2018, respectively.

(5)

The weighted average noncontrolling ownership interest of QualityTech, LP was 10.7%, 11.3% and 11.5% for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively, and 11.0% and 11.5% for the six months ended June 30, 2019 and 2018 months ended 2019 and 2018, respectively.

(6)

Basic and diluted net income (loss) per share were calculated using the two-class method.

 

Consolidated Statements of Comprehensive Income

(unaudited and in thousands)




Three Months Ended


Six Months Ended



June 30,


March 31,


June 30,


June 30,



2019


2019


2018


2019


2018

Net income (loss)


$

7,535


$

21,148


$

(6,433)


$

28,683


$

(6,685)

Other comprehensive income (loss):
















Foreign currency translation adjustment gain



66







66



Increase (decrease) in fair value of derivative contracts



(18,606)



(9,853)



2,563



(28,459)



8,545

Reclassification of other comprehensive income to interest expense (income)



(471)



(494)



91



(965)



493

Comprehensive income (loss)



(11,476)



10,801



(3,779)



(675)



2,353

Comprehensive (income) loss attributable to noncontrolling interests



1,291



(1,217)



431



74



(271)

Comprehensive income (loss) attributable to QTS Realty Trust, Inc.


$

(10,185)


$

9,584


$

(3,348)


$

(601)


$

2,082

FFO, Operating FFO, and Adjusted Operating FFO

The Company considers funds from operations ("FFO"), to be a supplemental measure of its performance which should be considered along with, but not as an alternative to, net income (loss) and cash provided by operating activities as a measure of operating performance. 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 depreciable real estate and land related to its primary business, impairment write-downs of depreciable real estate and land related to its primary business, real estate-related depreciation and amortization and similar adjustments for unconsolidated entities. To the extent the Company incurs gains or losses from the sale of assets that are incidental to its primary business, or incurs impairment write-downs associated with assets that are incidental to its primary business, it includes such charges in its calculation of FFO. The Company's 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.

Due to the volatility and nature of certain significant charges and gains recorded in the Company's operating results that management believes are not reflective of its operating performance, management computes an adjusted measure of FFO, which the Company refers to as Operating funds from operations ("Operating FFO"). Operating FFO is a non-GAAP measure that is used as a supplemental operating measure and to provide additional information to users of the financial statements. 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 they calculate Operating FFO on a comparable basis, between REITs.

Adjusted Operating Funds From Operations ("Adjusted Operating FFO") is a non-GAAP measure that is used as a supplemental operating measure and to provide additional information to users of the financial statements. 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, non-real estate depreciation and amortization, straight line rent adjustments, income taxes, non-cash compensation and similar adjustments for unconsolidated entities.

The Company offers these measures because it recognizes that FFO, Operating FFO and Adjusted Operating FFO will be used by investors as a basis to compare its operating performance with that of other REITs. However, because FFO, Operating FFO and Adjusted Operating FFO exclude real estate depreciation and amortization and capture neither the changes in the value of the Company's properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of its properties, all of which have real economic effect and could materially impact its financial condition, cash flows and results of operations, the utility of FFO, Operating FFO and Adjusted Operating FFO as measures of its operating performance is limited. The Company's calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO in accordance with NAREIT guidance. In addition, the Company's calculations of FFO, Operating FFO and Adjusted Operating FFO are not necessarily comparable to FFO, Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. FFO, Operating FFO and Adjusted Operating FFO are non-GAAP measures and should not be considered a measure of the Company's results of operations or liquidity or as a substitute for, or an alternative to, net income (loss), cash provided by operating activities or any other performance measure determined in accordance with GAAP, nor is it indicative of funds available to fund its cash needs, including its ability to make distributions to its stockholders.

For periods in 2018, Core Operating FFO and Adjusted Core Operating FFO represent Operating FFO and Adjusted Operating FFO of the Company's Core business, respectively, and are used as supplemental performance measures because they reflect results of the portion of the business the Company retained following completion of the strategic growth plan. 

A reconciliation of net income (loss) to FFO, Operating FFO and Adjusted Operating FFO is presented below (unaudited and in thousands):



















Three Months Ended



June 30, 2019


March 31, 2019


June 30, 2018



Total


Total


Core


Non-Core


Total

FFO
















Net income (loss)


$

7,535


$

21,148


$

5,397


$

(11,830)


$

(6,433)

Equity in net (income) loss of unconsolidated entity



401



274







Real estate depreciation and amortization



38,544



35,927



33,093



750



33,843

Gain on sale of real estate, net





(13,408)







Pro rata share of FFO from unconsolidated entity



344



41







FFO (1)



46,824



43,982



38,490



(11,080)



27,410

Preferred stock dividends



(7,045)



(7,045)



(2,248)





(2,248)

FFO available to common stockholders & OP unit holders



39,779



36,937



36,242



(11,080)



25,162

















Restructuring costs









11,430



11,430

Transaction and integration costs



1,039



1,214



653





653

Tax benefit associated with restructuring, transaction and integration costs









(41)



(41)

Operating FFO available to common stockholders & OP unit holders*



40,818



38,151



36,895



309



37,204

















Maintenance Capex



(2,233)



(709)



(2,612)





(2,612)

Leasing commissions paid



(6,528)



(6,515)



(7,600)



(71)



(7,671)

Amortization of deferred financing costs and bond discount



979



978



961





961

Non real estate depreciation and amortization



2,937



2,861



2,140



1,836



3,976

Straight line rent revenue and expense and other



(979)



(1,422)



(1,300)



67



(1,233)

Tax expense (benefit) from operating results



199



211



178





178

Equity-based compensation expense



4,296



3,300



3,999





3,999

Adjustments for unconsolidated entity



(42)



22







Adjusted Operating FFO available to common stockholders & OP unit holders*


$

39,447


$

36,877


$

32,661


$

2,141


$

34,802







(1)

FFO for the three months ended June 30, 2018 includes $3.1 million of impairment losses related to certain non-real estate product related assets that were considered incidental to our primary business and were included in the "Restructuring" line item of the consolidated statement of operations. No gains, losses or impairment write-downs associated with assets incidental to our primary business were incurred during the three months ended June 30, 2019 and March 31, 2019.



*

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.

 
















Six Months Ended



June 30, 2019


June 30, 2018



Total


Core


Non-Core


Total

FFO













Net income (loss)


$

28,683


$

10,480


$

(17,165)


$

(6,685)

Equity in net (income) loss of unconsolidated entity



675







Real estate depreciation and amortization



74,471



64,285



1,615



65,900

Gain on sale of real estate, net



(13,408)







Pro rata share of FFO from unconsolidated entity



385







FFO (1)



90,806



74,765



(15,550)



59,215

Preferred stock dividends



(14,090)



(2,576)





(2,576)

FFO available to common stockholders & OP unit holders



76,716



72,189



(15,550)



56,639














Restructuring costs







19,960



19,960

Transaction and integration costs



2,253



1,573





1,573

Tax benefit associated with restructuring, transaction and integration costs







(1,676)



(1,676)

Operating FFO available to common stockholders & OP unit holders*



78,969



73,762



2,734



76,496














Maintenance Capex



(2,942)



(3,542)





(3,542)

Leasing commissions paid



(13,043)



(13,439)



(142)



(13,581)

Amortization of deferred financing costs and bond discount



1,957



1,923





1,923

Non real estate depreciation and amortization



5,798



4,288



3,545



7,833

Straight line rent revenue and expense and other



(2,401)



(3,809)



58



(3,751)

Tax expense (benefit) from operating results



410



(589)





(589)

Equity-based compensation expense



7,596



7,480





7,480

Adjustments for unconsolidated entity



(20)







Adjusted Operating FFO available to common stockholders & OP unit holders*


$

76,324


$

66,074


$

6,195


$

72,269







(1)

FFO for the six months ended June 30, 2018 includes $7.1 million of impairment losses related to certain non-real estate product related assets that were considered incidental to our primary business and were included in the "Restructuring" line item of the consolidated statement of operations. No gains, losses or impairment write-downs associated with assets incidental to our primary business were incurred during the six months ended June 30, 2019.



*

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.

Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDA

The Company calculates EBITDAre in accordance with ("NAREIT"). EBITDAre represents net income (loss) (computed in accordance with GAAP), adjusted to exclude gains (or losses) from sales of depreciated property, income tax expense (or benefit), interest expense, depreciation and amortization, impairments of depreciated property and unconsolidated entities, and similar adjustments for unconsolidated entities. The Company's management uses EBITDAre as a supplemental performance measure because it provides performance measures that, when compared year over year, captures the performance of the Company's operations by removing the impact of capital structure (primarily interest expense) and asset base charges (primarily depreciation and amortization) from its operating results.

Due to the volatility and nature of certain significant charges and gains recorded in the Company's operating results that management believes are not reflective of its operating performance, management computes an adjusted measure of EBITDAre, which the Company refers to as Adjusted EBITDA. The Company generally calculates Adjusted EBITDA excluding certain non-routine charges, write off of unamortized deferred financing costs, gains (losses) on extinguishment of debt, restructuring costs, and transaction and integration costs, as well as the Company's pro-rata share of each of those respective expenses associated with the unconsolidated entity aggregated into one line item categorized as "Adjustments for the unconsolidated entity." In addition, the Company calculates Adjusted EBITDA excluding certain non-cash recurring costs such as equity-based compensation. The Company believes that Adjusted EBITDA provides investors with another financial measure that may facilitate comparisons of operating performance between periods and, to the extent other REITs calculate Adjusted EBITDA on a comparable basis, between REITs.

Management uses EBITDAre and Adjusted EBITDA as supplemental performance measures as they provide useful measures of assessing the Company's operating results. Other companies may not calculate EBITDAre or Adjusted EBITDA in the same manner. Accordingly, the Company's EBITDAre and Adjusted EBITDA may not be comparable to others. EBITDAre and Adjusted EBITDA should be considered only as supplements to net income (loss) as measures of the Company's performance and should not be used as substitutes for net income (loss), as measures of its results of operations or liquidity or as an indications of funds available to meet its cash needs, including its ability to make distributions to its stockholders.

For periods in 2018, Core EBITDAre and Adjusted EBITDAre are used as supplemental performance measures because they reflect results of the portion of the business of the Company retained following completion of the strategic growth plan.

A reconciliation of net income (loss) to EBITDAre and Adjusted EBITDA on a consolidated, Core and non-Core basis is presented below (unaudited and in thousands):



















Three Months Ended



June 30, 2019


March 31, 2019


June 30, 2018



Total


Total


Core


Non-Core


Total

EBITDAre and Adjusted EBITDA
















Net income (loss)


$

7,535


$

21,148


$

5,397


$

(11,830)


$

(6,433)

Equity in net (income) loss of unconsolidated entity



401



274







Interest income



(36)



(45)



(25)





(25)

Interest expense



6,459



7,146



8,199



4



8,203

Tax expense (benefit) of taxable REIT subsidiaries



199



211



178



(41)



137

Depreciation and amortization



41,481



38,788



35,233



2,586



37,819

(Gain) loss on disposition of depreciated property and impairment write-downs of depreciated property





(13,408)





3,122



3,122

Pro rata share of EBITDAre from unconsolidated entity



863



215







EBITDAre


$

56,902


$

54,329


$

48,982


$

(6,159)


$

42,823

















Equity-based compensation expense



4,296



3,300



3,999





3,999

Restructuring costs









8,308



8,308

Transaction and integration costs



1,039



1,214



653





653

Adjusted EBITDA


$

62,237


$

58,843


$

53,634


$

2,149


$

55,783

 
















Six Months Ended



June 30, 2019


June 30, 2018



Total


Core


Non-Core


Total

EBITDAre and Adjusted EBITDA













Net income (loss)


$

28,683


$

10,480


$

(17,165)


$

(6,685)

Equity in net (income) loss of unconsolidated entity



675







Interest income



(81)



(26)





(26)

Interest expense



13,605



16,302



11



16,313

Tax expense (benefit) of taxable REIT subsidiaries



410



(589)



(1,676)



(2,265)

Depreciation and amortization



80,269



68,573



5,160



73,733

(Gain) loss on disposition of depreciated property and impairment write-downs of depreciated property



(13,408)





7,139



7,139

Pro rata share of EBITDAre from unconsolidated entity



1,078







EBITDAre


$

111,231


$

94,740


$

(6,531)


$

88,209














Equity-based compensation expense



7,596



7,480





7,480

Restructuring costs







12,821



12,821

Transaction and integration costs



2,253



1,573





1,573

Adjusted EBITDA


$

121,080


$

103,793


$

6,290


$

110,083

Net Operating Income (NOI)

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, other (income) expense, gain (loss) on extinguishment of debt, transaction and integration costs, gain (loss) on sale of real estate, restructuring costs, general and administrative expenses and similar adjustments for unconsolidated entities. The Company allocates a management fee charge of 4% of cash revenues for all facilities as a property operating cost and a corresponding reduction to general and administrative expense to cover the day-to-day administrative costs to operate our data centers. The management fee charge is reflected as a reduction to net operating income.

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.

For periods in 2018, Core NOI is used as a supplemental performance measure because it reflects results of the portion of the business the Company retained following completion of the strategic growth plan.

A reconciliation of net income (loss) to NOI on a consolidated, Core and non-Core basis is presented below (unaudited and in thousands):



















Three Months Ended



June 30, 2019


March 31, 2019


June 30, 2018



Total


Total


Core


Non-Core


Total

Net Operating Income (NOI)
















Net income (loss)


$

7,535


$

21,148


$

5,397


$

(11,830)


$

(6,433)

Equity in net (income) loss of unconsolidated entity



401



274







Interest income



(36)



(45)



(25)





(25)

Interest expense



6,459



7,146



8,199



4



8,203

Depreciation and amortization



41,481



38,788



35,233



2,586



37,819

Other (income) expense



40









Tax expense (benefit) of taxable REIT subsidiaries



199



211



178



(41)



137

Transaction and integration costs



1,039



1,214



653





653

General and administrative expenses



20,124



19,891



18,004



3,028



21,032

Gain on sale of real estate, net





(13,408)







Restructuring









11,430



11,430

NOI from consolidated operations (1)


$

77,242


$

75,219


$

67,639


$

5,177


$

72,816

Pro rata share of NOI from unconsolidated entity



842



234







Total NOI (1)


$

78,084


$

75,453


$

67,639


$

5,177


$

72,816







(1)

Includes facility level general and administrative allocation charges of 4% of cash revenue for all facilities. These allocated charges aggregated to $4.6 million, $4.5 million and $4.6 million for the three months ended June 30, 2019, March 31, 2019 and June 30, 2018, respectively.

 
















Six Months Ended



June 30, 2019


June 30, 2018



Total


Core


Non-Core


Total

Net Operating Income (NOI)













Net income (loss)


$

28,683


$

10,480


$

(17,165)


$

(6,685)

Equity in net (income) loss of unconsolidated entity



675







Interest income



(81)



(26)





(26)

Interest expense



13,605



16,302



11



16,313

Depreciation and amortization



80,269



68,573



5,160



73,733

Other (income) expense



40







Tax expense (benefit) of taxable REIT subsidiaries



410



(589)



(1,676)



(2,265)

Transaction and integration costs



2,253



1,573





1,573

General and administrative expenses



40,015



36,118



7,147



43,265

Gain on sale of real estate, net



(13,408)







Restructuring







19,960



19,960

NOI from consolidated operations (1)


$

152,461


$

132,431


$

13,437


$

145,868

Pro rata share of NOI from unconsolidated entity



1,076







Total NOI (1)


$

153,537


$

132,431


$

13,437


$

145,868







(1)

Includes facility level general and administrative allocation charges of 4% of cash revenue for all facilities. These allocated charges aggregated to $9.0 million and $8.8 million for the six months ended June 30, 2019 and 2018, respectively.

Monthly Recurring Revenue (MRR) and Recognized MRR

The Company calculates MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from its rental and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR is also calculated to include the Company's pro rata share of monthly contractual revenue under signed leases as of a particular date associated with unconsolidated entities, which includes revenue from the unconsolidated entity's rental and managed services activities, but excludes the unconsolidated entity's customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR reflects the annualized cash rental payments. It does not include the impact from booked-not-billed leases as of a particular date, unless otherwise specifically noted.

Separately, the Company calculates recognized MRR as the recurring revenue recognized during a given period, which includes revenue from its rental 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 the Company's customer leases and customer leases attributable to the Company's business. MRR and recognized MRR should not be viewed by investors as alternatives to actual monthly revenue, as determined in accordance with GAAP. Other companies may not calculate MRR or recognized MRR in the same manner. Accordingly, the Company's MRR and recognized MRR may not be comparable to other companies' MRR and recognized MRR. MRR and recognized MRR should be considered only as supplements to total revenues as a measure of its performance. MRR and recognized MRR should not be used as measures of the Company's results of operations or liquidity, nor is it indicative of funds available to meet its cash needs, including its ability to make distributions to its stockholders.

For periods in 2018, Core Recognized MRR and MRR are used as supplemental performance measures because they reflect results of the portion of the business the Company retained following completion of the strategic growth plan.

A reconciliation of total revenues to recognized MRR in the period and MRR at period-end on a consolidated, Core and non-Core basis is presented below (unaudited and in thousands):



















Three Months Ended



June 30, 2019


March 31, 2019


June 30, 2018



Total


Total


Core


Non-Core


Total

Recognized MRR in the period
















Total period revenues (GAAP basis)


$

119,167


$

112,689


$

102,549


$

9,728


$

112,277

Less: Total period variable lease revenue from recoveries



(12,672)



(10,793)



(10,444)





(10,444)

Total period deferred setup fees



(3,822)



(3,232)



(3,073)



(130)



(3,203)

Total period straight line rent and other



(5,485)



(3,942)



(2,022)



(2,304)



(4,326)

Recognized MRR in the period



97,188



94,722



87,010



7,294



94,304

















MRR at period end
















Total period revenues (GAAP basis)


$

119,167


$

112,689


$

102,549


$

9,728


$

112,277

Less: Total revenues excluding last month



(77,863)



(73,809)



(67,701)



(6,861)



(74,562)

Total revenues for last month of period



41,304



38,880



34,848



2,867



37,715

Less: Last month variable lease revenue from recoveries



(4,222)



(3,871)



(3,597)





(3,597)

Last month deferred setup fees



(1,322)



(1,242)



(984)



(99)



(1,083)

Last month straight line rent and other



(3,349)



(2,068)



(745)



(1,139)



(1,884)

Add: Pro rata share of MRR at period end of unconsolidated entity



369



253







MRR at period end


$

32,780


$

31,952


$

29,522


$

1,629


$

31,151

 
















Six Months Ended



June 30, 2019


June 30, 2018



Total


Core


Non-Core


Total

Recognized MRR in the period













Total period revenues (GAAP basis)


$

231,856


$

202,939


$

23,035


$

225,974

Less: Total period variable lease revenue from recoveries



(23,465)



(21,957)





(21,957)

Total period deferred setup fees



(7,053)



(5,961)



(135)



(6,096)

Total period straight line rent and other



(9,428)



(5,921)



(2,856)



(8,777)

Recognized MRR in the period



191,910



169,100



20,044



189,144














MRR at period end













Total period revenues (GAAP basis)


$

231,856


$

202,939


$

23,035


$

225,974

Less: Total revenues excluding last month



(190,552)



(168,091)



(20,168)



(188,259)

Total revenues for last month of period



41,304



34,848



2,867



37,715

Less: Last month variable lease revenue from recoveries



(4,222)



(3,597)





(3,597)

Last month deferred setup fees



(1,322)



(984)



(99)



(1,083)

Last month straight line rent and other



(3,349)



(745)



(1,139)



(1,884)

Add: Pro rata share of MRR at period end of unconsolidated entity



369







MRR at period end


$

32,780


$

29,522


$

1,629


$

31,151

 

SOURCE QTS Realty Trust, Inc.

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