Form 8-K QTS Realty Trust, Inc. For: Oct 25

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

Date of Report (Date of Earliest Event Reported): October 25, 2016

 

 

QTS Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

(913) 814-9988

Registrant’s telephone number, including area code:

 

Not Applicable

(Former name or former address, if changed since last report.)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

 

 

 

Item 2.02 Results of Operations and Financial Condition.

 

On October 25, 2016, QTS Realty Trust, Inc. (the “Company”) announced its financial results for the third quarter ended September 30, 2016. A copy of the Company’s press release is attached hereto as Exhibit 99.1 and a copy of the Company’s Third Quarter 2016 Supplemental Information is attached hereto as Exhibit 99.2.

 

The information included in this Current Report on Form 8-K (including Exhibits 99.1 and 99.2 hereto) shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing made by the Company under the Exchange Act or the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing.

 

Item 9.01 Financial Statements and Exhibits.

 

(d) Exhibits

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

EXHIBIT INDEX

 

 

QTS REPORTS THIRD QUARTER 2016 OPERATING RESULTS

 

OVERLAND PARK, Kan. – October 25, 2016 – QTS Realty Trust, Inc. (“QTS” or the “Company”) (NYSE: QTS) today announced operating results for the third quarter ended September 30, 2016.

 

Third Quarter Highlights

 

 

 

 

 

 

“We are pleased that our integrated technology services platform continues to differentiate QTS in the market and drive our success, as our mega-scale facilities enable our customers flexibility and scalability supporting attractive returns on capital,” said Chad Williams, Chairman and CEO of QTS.

 

Williams added, “We are also excited about the expansion of our footprint, with our first full quarter of our newest Chicago and Piscataway facilities already contributing to our strong leasing results.”

 

 

 

Financial Results

 

Net income recognized in the third quarter of 2016 was $6.5 million ($0.12 per basic and diluted share), which included approximately $3.5 million of transaction and integration costs and $4.2 million of income tax benefit, compared to net income of $8.2 million ($0.17 per basic and diluted share) recognized in the third quarter of 2015, which also included approximately $1.5 million of transaction and integration costs and $2.6 million of income tax benefit.

 

QTS generated Operating FFO of $37.4 million, or $0.67 per fully diluted share, in the third quarter of 2016, which includes a tax benefit of approximately $3.1 million, and compares to Operating FFO of $29.5 million, or $0.61 per share, for the third quarter of 2015, which included a tax benefit of approximately $1.4 million. The current quarter’s Operating FFO represents an increase of approximately 26.5% compared to the prior year, and a 10.0% increase on a per share basis.  

 

Additionally, QTS generated $47.3 million of Adjusted EBITDA in the third quarter of 2016, an increase of 20.9% compared to $39.1 million for the third quarter of 2015.

 

QTS generated total revenues of $103.5 million in the third quarter of 2016, an increase of 16.4% compared to $88.9 million in the third quarter of 2015. MRR as of September 30, 2016 was $29.8 million, an increase of 13.6% compared to MRR as of September 30, 2015 of $26.2 million.

 

Leasing Activity

 

During the third quarter of 2016, QTS entered into customer leases representing approximately $14.5 million of incremental annualized rent, net of downgrades, which is a 55% increase over the prior four quarter average net leasing activity. This growth was driven by the C1 and C2/C3 aspects of the QTS platform. Pricing of deals signed during the quarter was slightly above the prior four quarter average primarily due to higher C1 pricing and a larger mix of C2/C3 deals during the quarter.

 

During the third quarter of 2016, QTS renewed leases with a total annualized rent of $10.7 million at an average rent per square foot of $1,204, which was 0.8% higher than the annualized rent prior to their respective renewals. The Company defines renewals as leases for which the customer retains the same amount of space before and after renewal. There is variability in the Company’s renewal rates based on the mix of product types renewed, and renewal rates are expected to increase in the low to mid-single digits. Rental churn (which the Company defines as MRR lost to a customer intending to fully exit the platform compared to total MRR at the beginning of the period) was 1.1% for the third quarter of 2016 and 4.8% for the nine months ended September 30, 2016.

 

During the third quarter of 2016, average pricing on QTS commenced customer leases (which includes new customers and also existing customers that renewed their lease term) increased to $746 per square foot compared to the prior four quarter average of $611 per square foot due. The increase was attributable to a mix of slightly smaller C1 customers and more cloud and managed services being attached to C2/C3 commencements.

 

As of September 30, 2016, the booked-not-billed MRR balance (which represents customer leases that have been executed, but for which lease payments have not commenced as of September 30, 2016) was approximately $4.2 million, or $50.8 million of annualized rent, and compares to $49.1 million at June 30, 2016. The booked-not-billed balance is expected to contribute an incremental $2.5 million to revenue in 2016 (representing $14.1 million in annualized revenues), an incremental $12.1 million in 2017 (representing $20.3 million in annualized revenues), and an incremental $16.5 million in annualized revenues thereafter.

 

Development, Redevelopment, and Acquisitions

 

During the third quarter of 2016, the Company brought online approximately 3 megawatts of gross power and approximately 14,000 net rentable square feet (“NRSF”) of raised floor and various portions of customer specific capital at an aggregate cost of approximately $56 million which was largely driven by early investment in our newest Chicago facility. In addition, during the third quarter of 2016, the Company continued redevelopment of the Dallas-Fort Worth, Atlanta-Metro, Richmond and Chicago facilities to have space ready for customers later in 2016 and forward.  The

Company expects to bring approximately 32,000 raised floor NRSF into service in the fourth quarter of 2016 at an aggregate cost of approximately $58 million.

 

 

Balance Sheet and Liquidity

 

As of September 30, 2016, the Company’s total debt balance net of cash and cash equivalents was $862.1 million, resulting in a debt to annualized Adjusted EBITDA of 4.6x. This ratio continues to be impacted by various portions of the Company’s portfolio that were placed into service in the third quarter of 2016 which have not yet produced a stabilized Adjusted EBITDA. In addition, the Company incurred costs included in construction in progress related to revenue which will begin to ramp in the remainder of 2016 and into 2017 associated with the Company’s booked-not-billed backlog of $50.8 million in annualized rent.

 

As of September 30, 2016, the Company had total available liquidity of approximately $380 million which was comprised of $368 million of available capacity under the Company’s unsecured revolving credit facility and approximately $12 million of cash and cash equivalents.

 

 

2016 Guidance

 

The Company is raising its 2016 guidance for Adjusted EBITDA, Operating FFO and Operating FFO per share. The Company now expects Adjusted EBITDA of $181 million to $187 million, Operating FFO of $139 million to $143 million, and Operating FFO per share of $2.57 to $2.65. The Company now expects Capital Expenditures, excluding acquisitions, of approximately $300 million for 2016 and continues to anticipate Adjusted EBITDA margin to approach 47.0% over the next few years. The Company is also lowering its churn guidance from 5-8% to 5-7% for 2016.

 

This guidance does not contemplate any acquisitions or dispositions, other than those which have already been disclosed.  The guidance also incorporates approximately $7 million of estimated Operating FFO affecting tax benefit recognized in 2016.

 

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.

 

Conference Call Details

 

The Company will host a conference call and webcast on October 26, 2016, at 10:00 a.m. Eastern time (9:00 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 6876189# 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 secure, compliant data center solutions, hybrid cloud and fully managed services. QTS’ integrated technology service platform of custom data center (C1), colocation (C2) and cloud and managed services (C3) provides flexible, scalable, secure IT solutions for web and IT applications. QTS’ Critical Facilities Management (CFM) provides increased efficiency and greater performance for third-party data center owners and operators. QTS owns, operates or manages 24 data centers and supports more than 1,000 customers in North America, Europe and Asia Pacific.

 

 

 

 

 

QTS Investor Relations Contact

 

Stephen Douglas – Vice President – Investor Relations and Strategic Planning

Jeff Berson – Chief Investment Officer

William Schafer – Chief Financial Officer

[email protected]

 

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 and results of operations contain forward-looking statements. Likewise, all of the statements regarding anticipated growth in funds from operations and anticipated market conditions are 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 can also 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; 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, including data centers acquired in the Company’s acquisition of Carpathia Hosting, Inc.; 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; increased interest rates and operating costs, including increased energy costs; financing risks, including the Company’s failure to obtain necessary outside financing; decreased rental rates or increased vacancy rates; 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; and changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates.

 

While forward-looking statements reflect the Company’s good faith beliefs, they are not guarantees of future performance. 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, 2015 and other periodic reports the Company files with the Securities and Exchange Commission.

 

 

 

 

Combined Consolidated Balance Sheets

 

(in thousands)

 

 

 

Combined Consolidated Statements of Operations and Comprehensive Income

 

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

 

The following financial data for the three and nine months ended September 30, 2016 includes the operating results of the Piscataway facility for the period June 6, 2016 (the date the Company acquired the facility) through September 30, 2016.

 

 

 

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. 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, taxes and non-cash compensation. Adjusted Operating FFO is a non-GAAP measure that is used as a supplemental performance measure 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:

 

Reconciliations of Net Income to EBITDA and Adjusted EBITDA

 

(unaudited and in thousands)

 

The Company calculates EBITDA as net income (loss) 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 results 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, gain (loss) 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:

 

 

Reconciliations of Net Income to Net Operating Income (NOI)

 

(unaudited and in thousands)

 

The Company calculates net operating income (“NOI”) as net income (loss), 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. The Company believes that NOI is another metric that is often utilized to evaluate returns on operating real estate from period to period and also, in part, to assess the value of the operating real estate. A reconciliation of net income to NOI is presented below:

 

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 revenues to recognized MRR in the period and MRR at period-end is presented below: