QTS Reports Second Quarter 2021 Operating Results

  Three Months Ended

Six Months Ended

June 30,

June 30,

($ in thousands except per share data)

2021

2020

2021

2020

Total revenue

$

155,220

$

131,640

$

303,952

$

257,932

Net income

$

4,199

$

10,209

$

12,117

$

18,329

Net income (loss) attributable to common stockholders

$

(2,595)

$

2,847

$

(1,801)

$

3,812

Net loss per share attributable to basic common shares (1)

$

(0.08)

$

(0.05)

$

(0.15)

$

(0.06)

Net loss per share attributable to diluted common shares (1)

$

(0.08)

$

(0.05)

$

(0.15)

$

(0.06)

FFO available to common stockholders & OP unit holders (2)

$

53,377

$

48,349

$

107,895

$

92,079

_________________________

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

(2)     Includes QTS' pro rata share of results from its unconsolidated entity.

Consolidated Balance Sheets

(unaudited and in thousands except share data)

June 30, 2021 (1)

December 31, 2020 (1)

ASSETS

Real Estate Assets

Land

$

175,348

$

165,109

Buildings, improvements and equipment

3,138,583

2,839,261

Less: Accumulated depreciation

(789,192)

(702,944)

2,524,739

2,301,426

Construction in progress (2)

1,214,794

1,028,765

Real Estate Assets, net

3,739,533

3,330,191

Investments in unconsolidated entity

12,430

22,608

Operating lease right-of-use assets, net

48,342

51,342

Cash and cash equivalents

28,068

22,775

Rents and other receivables, net

134,870

107,563

Acquired intangibles, net

62,093

68,090

Deferred costs, net (3)

69,133

63,689

Prepaid expenses

12,310

10,253

Goodwill

173,843

173,843

Other assets, net (4)

53,967

48,218

TOTAL ASSETS

$

4,334,589

$

3,898,572

LIABILITIES

Unsecured term loans and revolver, net (5)

$

1,038,833

$

1,335,241

Senior notes, net of debt issuance costs (5)

493,016

492,534

Finance leases

42,395

41,718

Operating lease liabilities

54,629

58,005

Accounts payable and accrued liabilities

240,738

187,270

Dividends and distributions payable

45,248

39,373

Advance rents, security deposits and other liabilities

19,818

19,850

Derivative liabilities

35,173

53,722

Deferred income taxes

948

810

Deferred income

114,978

85,351

TOTAL LIABILITIES

2,085,776

2,313,874

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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, respectively (7)

304,223

304,223

Common stock: $0.01 par value, 450,133,000 shares authorized, 77,030,269 and 64,580,118 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

770

646

Additional paid-in capital

2,305,032

1,622,857

Accumulated other comprehensive loss

(31,638)

(50,451)

Accumulated dividends in excess of earnings

(574,756)

(504,313)

Total stockholders' equity

2,106,843

1,476,174

Noncontrolling interests

141,970

108,524

TOTAL EQUITY

2,248,813

1,584,698

TOTAL LIABILITIES AND EQUITY

$

4,334,589

$

3,898,572

_________________________

(1)

The balance sheets at June 30, 2021 and December 31, 2020, have 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, 2021, construction in progress included $229.5 million related to land holdings for which the initiation of development activities has begun to prepare the property for its intended use.

(3)

As of June 30, 2021 and December 31, 2020, deferred costs, net included $5.0 million and $6.0 million of deferred financing costs net of amortization, respectively, and $64.1 million and $57.7 million of deferred leasing costs net of amortization, respectively.

(4)

As of June 30, 2021 and December 31, 2020, other assets, net included $47.4 million and $44.8 million of corporate fixed assets, respectively, primarily relating to corporate offices, leasehold improvements and product related assets.

(5)

Debt issuance costs, net related to the senior notes and term loans aggregating to $13.3 million and $14.6 million at June 30, 2021 and December 31, 2020, respectively, have been netted against the related debt liability line items for both periods presented.

(6)

As of June 30, 2021, 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, 2021, 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,

2021

2021

2020

2021

2020

Revenues:

Rental (1)

$

150,807

$

144,308

$

125,996

$

295,115

$

246,077

Other (2)

4,413

4,424

5,644

8,837

11,855

Total revenues

155,220

148,732

131,640

303,952

257,932

Operating expenses:

Property operating costs

45,704

46,284

40,349

91,988

81,130

Real estate taxes and insurance

5,788

5,022

4,106

10,810

8,017

Depreciation and amortization

58,255

55,506

47,554

113,761

92,624

General and administrative

24,476

23,641

21,391

48,117

42,074

Transaction and integration costs

8,391

1,516

381

9,907

597

Total operating expenses

142,614

131,969

113,781

274,583

224,442

Operating income

12,606

16,763

17,859

29,369

33,490

Other income and expense:

Interest income

1

—

2

1

2

Interest expense

(7,452)

(8,148)

(6,924)

(15,600)

(14,086)

Other income

—

—

—

—

159

Equity in net loss of unconsolidated entity

(705)

(559)

(590)

(1,264)

(1,267)

Income before taxes

4,450

8,056

10,347

12,506

18,298

Tax benefit (expense)

(251)

(138)

(138)

(389)

31

Net income

4,199

7,918

10,209

12,117

18,329

Net (income) loss attributable to noncontrolling interests (3)

251

(79)

(317)

172

(427)

Net income attributable to QTS Realty Trust, Inc.

$

4,450

$

7,839

$

9,892

$

12,289

$

17,902

Preferred stock dividends

(7,045)

(7,045)

(7,045)

(14,090)

(14,090)

Net income (loss) attributable to common stockholders

$

(2,595)

$

794

$

2,847

$

(1,801)

$

3,812

Net loss per share attributable to common shares

Basic (4)

$

(0.08)

$

(0.07)

$

(0.05)

$

(0.15)

$

(0.06)

Diluted (4)

$

(0.08)

$

(0.07)

$

(0.05)

$

(0.15)

$

(0.06)

________________________

(1)

Represents lease revenue, inclusive of recoveries from customers as well as straight-line rent. Recoveries from customers was $17.7 million, $16.1 million, and $12.5 million for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively, and $33.8 million and $24.8 million for the six months ended June 30, 2021 and 2020, respectively. Straight-line rent was $7.7 million, $7.4 million and $5.8 million for the three months ended June 30, 2021, March 31, 2021 and June 30, 2020, respectively, and $15.1 million and $9.6 million for the six months ended June 30, 2021 and 2020, respectively.

(2)

Includes revenue from managed services, sales of scrap metals and other unused materials, management fees, service fees, development fees and various other non-rental revenue items.

(3)

The weighted average noncontrolling ownership interest of QualityTech, LP was 8.4%, 9.0% and 9.9% for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively, and 8.7% and 10.1% for the six months ended June 30, 2021 and 2020, respectively.

(4)

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

Consolidated Statements of Comprehensive Income (Loss)

(unaudited and in thousands)

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2021

2021

2020

2021

2020

Net income

$

4,199

$

7,918

$

10,209

$

12,117

$

18,329

Other comprehensive income (loss):

Foreign currency translation adjustment gain (loss)

54

(158)

64

(104)

(159)

Increase (decrease) in fair value of derivative contracts

4,145

17,253

(3,641)

21,398

(40,356)

Reclassification of other comprehensive income to utilities expense

160

(66)

410

94

764

Reclassification of other comprehensive income to interest expense

3,414

3,375

2,703

6,789

3,461

Comprehensive income (loss)

11,972

28,322

9,745

40,294

(17,961)

Comprehensive (income) loss attributable to noncontrolling interests

(956)

(2,558)

(1,022)

(3,514)

1,809

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

$

11,016

$

25,764

$

8,723

$

36,780

$

(16,152)

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 related to its primary business, impairment write-downs of depreciable real estate 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 operating performance measure because, in excluding real estate-related depreciation and amortization, impairment write-downs of depreciable real estate 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, equity-based 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.

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

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2021

2021

2020

2021

2020

FFO

Net income

$

4,199

$

7,918

$

10,209

$

12,117

$

18,329

Equity in net loss of unconsolidated entity

705

559

590

1,264

1,267

Real estate depreciation and amortization

55,044

52,629

44,196

107,673

85,896

Pro rata share of FFO from unconsolidated entity

474

457

399

931

677

FFO (1)

60,422

61,563

55,394

121,985

106,169

Preferred stock dividends

(7,045)

(7,045)

(7,045)

(14,090)

(14,090)

FFO available to common stockholders & OP unit holders

53,377

54,518

48,349

107,895

92,079

Transaction and integration costs

8,391

1,516

381

9,907

597

Operating FFO available to common stockholders & OP unit holders (2)

61,768

56,034

48,730

117,802

92,676

Maintenance capital expenditures

(2,337)

(1,704)

(4,220)

(4,041)

(5,882)

Leasing commissions paid

(11,491)

(9,460)

(6,805)

(20,951)

(15,803)

Amortization of deferred financing costs

1,129

1,130

991

2,259

1,978

Non real estate depreciation and amortization

3,212

2,876

3,358

6,088

6,728

Straight-line rent revenue and expense and other

(7,916)

(7,609)

(5,702)

(15,525)

(9,457)

Tax expense (benefit) from operating results

251

138

138

389

(31)

Equity-based compensation expense

7,311

6,856

6,082

14,167

10,957

Adjustments for unconsolidated entity

51

46

(88)

97

(22)

Adjusted Operating FFO available to common stockholders & OP unit holders (2)

$

51,978

$

48,307

$

42,484

$

100,285

$

81,144

_________________________

(1)

No gains, losses or impairment write-downs associated with assets incidental to our primary business were incurred during the three and six months ended June 30, 2021 and 2020.

(2)

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 the standards established by NAREIT. EBITDAre represents net income (loss) (computed in accordance with GAAP), adjusted to exclude gains (or losses) from sales of depreciated property related to its primary business, income tax expense (or benefit), interest expense, depreciation and amortization, impairments of depreciated property related to its primary business, 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-based 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 indication of funds available to meet its cash needs, including its ability to make distributions to its stockholders.

A reconciliation of net income to EBITDAre and Adjusted EBITDA is presented below (unaudited and in thousands):

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2021

2021

2020

2021

2020

EBITDAre and Adjusted EBITDA

Net income

$

4,199

$

7,918

$

10,209

$

12,117

$

18,329

Equity in net loss of unconsolidated entity

705

559

590

1,264

1,267

Interest income

(1)

—

(2)

(1)

(2)

Interest expense

7,452

8,148

6,924

15,600

14,086

Tax expense (benefit)

251

138

138

389

(31)

Depreciation and amortization

58,255

55,506

47,554

113,761

92,624

Pro rata share of EBITDAre from unconsolidated entity

1,100

1,106

924

2,206

1,743

EBITDAre (1)

$

71,961

$

73,375

$

66,337

$

145,336

$

128,016

Equity-based compensation expense

7,311

6,856

6,082

14,167

10,957

Transaction, integration and implementation costs

8,391

1,516

381

9,907

597

Adjusted EBITDA

$

87,663

$

81,747

$

72,800

$

169,410

$

139,570

_________________________

(1)

No gains, losses or impairment write-downs associated with assets incidental to our primary business were incurred during the three and six months ended June 30, 2021 and 2020.

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, debt restructuring costs, transaction, integration and impairment 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 (loss) as computed in accordance with GAAP.

A reconciliation of net income to NOI is presented below (unaudited and in thousands):

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2021

2021

2020

2021

2020

Net Operating Income (NOI)

Net income

$

4,199

$

7,918

$

10,209

$

12,117

$

18,329

Equity in net loss of unconsolidated entity

705

559

590

1,264

1,267

Interest income

(1)

—

(2)

(1)

(2)

Interest expense

7,452

8,148

6,924

15,600

14,086

Depreciation and amortization

58,255

55,506

47,554

113,761

92,624

Other (income) expense

—

—

—

—

(159)

Tax expense (benefit)

251

138

138

389

(31)

Transaction and integration costs

8,391

1,516

381

9,907

597

General and administrative expenses

24,476

23,641

21,391

48,117

42,074

NOI from consolidated operations (1)

$

103,728

$

97,426

$

87,185

$

201,154

$

168,785

Pro rata share of NOI from unconsolidated entity (2)

1,115

1,133

927

2,248

1,771

Total NOI (1)

$

104,843

$

98,559

$

88,112

$

203,402

$

170,556

_________________________

(1)

Includes facility level general and administrative allocation charges of 4% of cash revenue for all facilities. These allocated charges aggregated to $5.7 million, $5.5 million and $4.8 million for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively, and $11.2 million and $9.5 million the six months ended June 30, 2021 and 2020, respectively.

(2)

QTS' pro rata share of the unconsolidated entity is 50%.

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 backlog 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.

A reconciliation of total revenues to recognized MRR in the period and MRR at period-end is presented below (unaudited and in thousands):

Three Months Ended

Six Months Ended

June 30,

March 31,

June 30,

June 30,

2021

2021

2020

2021

2020

Recognized MRR in the period

Total period revenues (GAAP basis)

$

155,220

$

148,732

$

131,640

$

303,952

$

257,932

Less: Total period variable lease revenue from recoveries

(17,692)

(16,128)

(12,528)

(33,820)

(24,803)

Total period deferred setup fees

(7,241)

(6,436)

(4,520)

(13,677)

(8,444)

Total period straight-line rent and other

(10,456)

(11,623)

(9,327)

(22,079)

(17,359)

Recognized MRR in the period

119,831

114,545

105,265

234,376

207,326

MRR at period end

Total period revenues (GAAP basis)

$

155,220

$

148,732

$

131,640

$

303,952

$

257,932

Less: Total revenues excluding last month

(102,328)

(99,683)

(87,538)

(251,060)

(213,830)

Total revenues for last month of period

52,892

49,049

44,102

52,892

44,102

Less: Last month variable lease revenue from recoveries

(6,358)

(5,163)

(4,350)

(6,358)

(4,350)

Last month deferred setup fees

(2,548)

(2,179)

(1,533)

(2,548)

(1,533)

Last month straight-line rent and other

(2,794)

(2,370)

(2,480)

(2,794)

(2,480)

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

465

472

352

465

352

MRR at period end

$

41,657

$

39,809

$

36,091

$

41,657

$

36,091