Form 8-K QTS Realty Trust, Inc. For: Oct 27

 

 

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 27, 2015

 

 

QTS Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland		001-36109		46-2809094
(State or other jurisdiction of incorporation)		(Commission File No.)		(I.R.S. Employer Identification No.)

 

12851 Foster Street Overland Park, KS 66213		66213
(Address of principal executive offices)		(Zip Code)

 

(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:

 

¨

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

Item 2.02 Results of Operations and Financial Condition.

 

On October 27, 2015, QTS Realty Trust, Inc. (the “Company”) announced its financial results for the third quarter ended September 30, 2015. A copy of the Company’s press release is attached hereto as Exhibit 99.1 and a copy of the Company’s Third Quarter 2015 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

 

Exhibit Number		Exhibit Description
99.1		Press Release dated October 27, 2015
99.2		Third Quarter 2015 Supplemental Information

 

 

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.

 

	QTS Realty Trust, Inc.
	By:	/s/ Shirley E. Goza
		Shirley E. Goza
		Secretary and General Counsel

 

October 27, 2015

 

 

EXHIBIT INDEX

 

Exhibit Number		Exhibit Description
99.1		Press Release dated October 27, 2015
99.2		Third Quarter 2015 Supplemental Information

 

 

 

Exhibit 99.1

 

 

 

QTS REPORTS THIRD QUARTER
2015 OPERATING RESULTS

 

 

OVERLAND PARK, Kan. – October 27, 2015 – QTS Realty Trust, Inc. (“QTS” or the “Company”) (NYSE: QTS) today announced operating results for the third quarter ended September 30, 2015.

 

Third Quarter Highlights

 

·

Reported Operating FFO of $29.5 million in the third quarter of 2015, an increase of 63.2% compared to the third quarter of 2014. Operating FFO for the third quarter of 2015 on a fully diluted per share basis was $0.61 per share, an increase of 24.7% compared to the third quarter of 2014. Adjusted Operating FFO was $29.7 million in the third quarter of 2015, an increase of 130.4% compared to the third quarter of 2014.

 

·

Reported Adjusted EBITDA of $39.1 million in the third quarter of 2015, an increase of 50.0% compared to the third quarter of 2014.

 

·

Reported NOI of $56.5 million in the third quarter of 2015, an increase of 56.1% compared to the third quarter of 2014.

 

·

Total revenues of $88.9 million recognized in the third quarter of 2015, an increase of 53.4% compared to the third quarter of 2014. Monthly Recurring Revenue (“MRR”) as of September 30, 2015 increased by 58.7% to $26.2 million compared to MRR as of September 30, 2014.

 

 

 

 

“We are pleased to be reporting another strong quarter, with performance that demonstrates the strength of our model. Our continued leasing activity, stable pricing, low churn and strong booked-not-billed backlog reflect the fact that we are meeting the increasingly diverse needs of our sophisticated enterprise customer base with our fully integrated solutions,” said Chad Williams, Chairman and CEO of QTS.

 

Williams added, “We are also pleased with the progress of the Carpathia integration. Our teams are working well together, and we remain confident in our ability to achieve our synergy and performance targets.”

 

Financial Results

 

Net income recognized in the third quarter of 2015 was $8.2 million ($0.17 per basic and diluted share), which included approximately $1.5 million of transaction and integration costs and $2.6 million of income tax benefit, compared to net income of $4.0 million recognized in the third quarter of 2014.

 

QTS generated Operating FFO of $29.5 million, or $0.61 per fully diluted share, in the third quarter of 2015, which includes a tax benefit of approximately $1.4 million. The $29.5 million of Operating FFO represents an increase of approximately 63.2% compared to $18.1 million for the third quarter of 2014. Adjusted Operating FFO was $29.7 million in the third quarter of 2015, an increase of 130.4% compared to $12.9 million in the third quarter of 2014.

 

Additionally, QTS generated $39.1 million of Adjusted EBITDA in the third quarter of 2015, an increase of 50.0% compared to $26.1 million for the third quarter of 2014. MRR as of September 30, 2015 was $26.2 million, an increase of 58.7% compared to MRR as of September 30, 2014 of $16.5 million, with total revenues increasing by 53.4% to $88.9 million for the third quarter 2015 compared to $57.9 million for the third quarter 2014.

 

Leasing Activity

 

During the third quarter of 2015, QTS entered into customer leases representing approximately $5.6 million of incremental annualized rent, net of downgrades. In general, pricing was above the prior four quarter average. For C1, this increase was due to increased power utilization with only minor changes to space requirements. The increase in C2/C3 pricing was driven by an increased mix of C3 deals which has a higher revenue per square foot. Additionally, the Company benefitted from higher density deployments and a larger mix of smaller C2 deals which tend to have a higher price per square foot.

During the third quarter of 2015, QTS renewed leases with a total annualized rent of $9.2 million at an average rent per square foot of $742, which was 0.9% higher than the annualized rent prior to their respective renewals. In C1, QTS had a significant increase of 18%, which was due to a customer increasing power requirements within their existing space. In C2/C3, there was a minor decrease in pricing which was primarily driven by a few customers reducing their service levels without changing their space requirements. Thus, in aggregate, the renewal rate change in the third quarter of 2015 is in line with the Company’s expectation of low to mid-single digit increases. The Company defines renewals as leases for which the customer retains the same amount of space before and after renewal, which facilitates rate comparability. As summarized in more detail in our supplemental information, there is variability in our renewal rates based on the mix of product types renewed, and renewal rates are expected to increase in the low single digits. Rental churn (which is the MRR impact from a customer completely departing the platform in a given period compared to the total MRR at the beginning of the period) was 0.8% for the third quarter of 2015 and 2.0% for the nine months ended September 30, 2015.

 

During the third quarter of 2015, QTS commenced customer leases (which includes new customers and also existing customers that renewed their lease term) at an average rent of $490 per square foot compared to a trailing four quarter average of $523 per square foot. This decrease in rent per square foot was primarily driven by significant volume increase and the commencement of larger deals during the quarter that typically price at a lower rate per square foot. When adjusting for the increased volume and square footage brought online during the quarter, QTS’ pricing was in line with expectations.

 

As of September 30, 2015, 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, 2015) was approximately $5.1 million, or $61.3 million of annualized rent, and compares to $68.7 million at June 30, 2015. The booked-not-billed balance is expected to contribute an incremental $4.1 million to revenue in 2015 (representing $22.5 million in annualized revenues), an incremental $15.4 million in 2016 (representing $21.3 million in annualized revenues), and an incremental $17.5 million in annualized revenues thereafter.

 

 

 

 

Development, Redevelopment, and Acquisitions

 

During the third quarter of 2015, the Company brought online approximately 3.5 megawatts of gross power and approximately 22,000 net rentable square feet (“NRSF”) of raised floor and various portions of customer specific capital at an aggregate cost of approximately $36 million. In addition, during the third quarter of 2015, the Company continued redevelopment of the Dallas-Fort Worth, Atlanta-Metro, Richmond and Chicago facilities to have space ready for customers later in 2015, 2016 and forward. The Company expects to bring an additional 45,000 raised floor NRSF into service in the remaining quarter of 2015 at an aggregate cost of approximately $72 million. The majority of the capital spend that is not placed into service in 2015 will be for ongoing expansion and development of the Company’s facilities, including the Chicago facility, and to facilitate the booked-not-billed backlog.

 

Balance Sheet and Liquidity

 

As of September 30, 2015, QTS’ total debt balance was $820.9 million, resulting in a debt to annualized Adjusted EBITDA of 5.2x. This ratio continues to be impacted by various portions of QTS’ portfolio that were placed into service in the third quarter of 2015 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 2015 and 2016 associated with the Company’s booked-not-billed backlog of $61.3 million in annualized rent. As the revenues associated with this backlog commence, the Company expects its long term debt to Adjusted EBITDA ratio to continue to improve.

 

In October 2015, the Company amended its unsecured credit facility, increasing the total capacity by $250 million and extending the term. At the same time, the Company terminated its $120 million secured credit facility relating to the Richmond asset. The amended unsecured credit facility has a total capacity of $900 million and includes a $150 million term loan which matures in approximately 5 years, another $150 million term loan which matures in 5.5 years, and a $600 million revolving credit facility which matures in approximately 4 years, with a one year extension option. It also provides for lower borrowing rates of approximately 15 basis points. The unsecured credit facility also includes a $200 million accordion feature. Taking into account the amended unsecured credit facility, the Company’s pro forma total liquidity as of September 30, 2015 was approximately $441 million including cash and cash equivalents and availability under the amended unsecured credit facility.

 

2015 Guidance

 

The Company is revising its 2015 guidance. The Company is raising the bottom end of the range for Adjusted EBITDA and now expects a range of $136.0 million to $142.0 million. The Company is raising its guidance for Operating FFO and now expects a range of $100.0 million to $103.0 million and an Operating FFO per share range of $2.20 to $2.26. The Company is maintaining its 2015 guidance on Capital Expenditures, excluding acquisitions, of approximately $300 million to $350 million.

 

This guidance is calculated based on core revenue growth, excluding acquisitions, in the mid to high teens (which ramp during the year), annual rental churn of 3-5%, and does not contemplate any acquisitions, dispositions or capital markets activity other than those which have already been disclosed.

 

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 28, 2015, 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 0169276# 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 and fully managed services, and the owner of Carpathia Hosting, Inc., a provider of colocation, hybrid cloud services and managed hosting. 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 Facility Management (CFM) provides increased efficiency and greater performance for third-party data center owners and operators. QTS owns, operates or manages 25 data centers and supports more than 1,000 customers in the United States, Canada, Europe and the Asia Pacific region.

 

QTS Investor Relations Contact

 

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 our international operations; difficulties in identifying properties to acquire and completing acquisitions; the Company’s failure to successfully develop, redevelop and operate acquired properties, including data centers acquired in our 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 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, 2014 and periodic reports the Company files with the Securities and Exchange Commission.

 

 

 

 

Combined Consolidated Balance Sheets

 

 (in thousands)

 

		September 30,				December 31,
		2015				2014
		(unaudited)
ASSETS
Real Estate Assets
Land		$	52,430			$	48,577
Buildings and improvements			1,108,758				914,286
Less: Accumulated depreciation			(222,373	)			(180,167	)
			938,815				782,696
Construction in progress			353,782				214,719
Real Estate Assets, net			1,292,597				997,415
Cash and cash equivalents			10,730				10,788
Rents and other receivables, net			31,024				15,579
Acquired intangibles, net			119,402				18,000
Deferred costs, net (1)			38,522				37,058
Prepaid expenses			9,074				3,079
Goodwill			174,697				-
Other assets, net (2)			29,445				24,640
TOTAL ASSETS		$	1,705,491			$	1,106,559
LIABILITIES
Mortgage notes payable		$	70,000			$	86,600
Unsecured credit facility			400,000				239,838
Senior notes, net of discount			297,914				297,729
Capital lease and lease financing obligations			53,023				13,062
Accounts payable and accrued liabilities			80,893				64,607
Dividends and distributions payable			15,349				10,705
Advance rents, security deposits and other liabilities			19,079				3,302
Deferred income taxes			15,634				-
Deferred income			25,046				10,531
TOTAL LIABILITIES			976,938				726,374
EQUITY
Common stock, $0.01 par value, 450,133,000 shares authorized, 41,101,507 and 29,408,138 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively			412				294
Additional paid-in capital			668,246				324,917
Accumulated dividends in excess of earnings			(44,142	)			(22,503	)
Total stockholders’ equity			624,516				302,708
Noncontrolling interests			104,037				77,477
TOTAL EQUITY			728,553				380,185
TOTAL LIABILITIES AND EQUITY		$	1,705,491			$	1,106,559

 

(1)

As of September 30, 2015 and December 31, 2014, deferred costs, net, included $14.5 million and $16.5 million of deferred financing costs net of amortization, respectively, $21.1 million and $17.4 million of deferred leasing costs net of amortization, respectively, and $2.9 million and $3.2 million, net of amortization, related to a leasing arrangement at the Company’s Princeton facility, respectively.

(2)

As of September 30, 2015 and December 31, 2014, other assets, net, primarily included $26.5 million and $21.4 million of corporate fixed assets, respectively, primarily relating to construction of corporate offices, leasehold improvements and product related assets.

 

 

 

Combined Consolidated Statements of Operations and

Comprehensive Income

 

(unaudited and in thousands)

 

The following financial data for the nine months ended September 30, 2015 includes the operating results of Carpathia Hosting, Inc. (“Carpathia”) for the period June 16, 2015 (the date the Company acquired Carpathia) through September 30, 2015.

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
Revenues:		2015				2015				2014				2015				2014
Rental		$	62,744			$	52,193			$	45,448			$	164,270			$	127,993
Recoveries from customers			6,158				5,582				6,131				17,404				13,674
Cloud and managed services			18,573				8,220				5,242				32,588				14,443
Other (1)			1,415				2,122				1,124				4,131				2,116
Total revenues			88,890				68,117				57,945				218,393				158,226
Operating expenses:
Property operating costs			30,925				22,031				20,369				72,292				53,121
Real estate taxes and insurance			1,462				1,474				1,377				4,421				3,713
Depreciation and amortization			24,486				18,062				15,210				58,791				42,274
General and administrative (2)			19,440				14,615				11,045				47,893				33,296
Restructuring (3)			-				-				226				-				1,272
Transaction and integration costs (4)			1,482				4,669				(195	)			6,256				958
Total operating expenses			77,795				60,851				48,032				189,653				134,634
Operating income			11,095				7,266				9,913				28,740				23,592
Other income and expense:
Interest income			1				1				-				2				8
Interest expense			(5,418	)			(4,799	)			(5,410	)			(15,559	)			(9,683	)
Other expense, net (5)			-				(83	)			(470	)			(83	)			(580	)
Income before taxes			5,678				2,385				4,033				13,100				13,337
Tax benefit (expense) of taxable REIT subsidiaries (6)			2,560				3,135				(27	)			5,695				(82	)
Net income			8,238				5,520				4,006				18,795				13,255
Net income attributable to noncontrolling interests (7)			(1,229	)			(888	)			(849	)			(3,072	)			(2,810	)
Net income attributable to QTS Realty Trust, Inc.			7,009				4,632				3,157				15,723				10,445

 

(1)

Other revenue – Includes straight line rent, sales of scrap metals and other unused materials and various other income items. Straight line rent was $1.5 million, $1.4 million and $1.0 million for the three months ended September 30, 2015, June 30, 2015 and September 30, 2014, respectively. Straight line rent was $3.3 million and $1.3 million for the nine months ended September 30, 2015 and 2014, respectively.

(2)

General and administrative expenses – Includes personnel costs, sales and marketing costs, professional fees, travel costs, product investment costs and other corporate general and administrative expenses. General and administrative expenses were 21.9%, 21.5%, and 19.1% of total revenues for the three month periods ended September 30, 2015, June 30, 2015 and September 30, 2014, respectively. General and administrative expenses were 21.9% and 21.0% of total revenues for the nine month periods ended September 30, 2015 and 2014, respectively.

(3)

Restructuring costs – For the three and nine months ended September 30, 2014, the Company incurred $0.2 million and $1.3 million in restructuring costs related to severance costs associated with various remote employees.

(4)

Transaction and integration costs – For the three months ended September 30, 2015, June 30, 2015 and September 30, 2014, the Company recognized $0.1 million, $4.3 million and $(0.2) million, respectively, in transaction costs related to the examination of actual and potential acquisitions. Transaction costs were $4.5 million and $1.0 million for the nine months ended September 30, 2015 and 2014, respectively. The Company also recognized $1.4 million and $1.8 million in integration costs for the three month and nine month periods ended September 30, 2015, which include various costs to integrate QTS and Carpathia, including consulting fees, costs to consolidate office space and costs which are currently duplicated but will be eliminated when QTS and Carpathia are fully integrated.

(5)

Other expense, net – Generally includes write offs of unamortized deferred financing costs associated with the early extinguishment of certain debt instruments.

(6)

Tax benefit (expense) of taxable REIT subsidiaries – For the three months ended June 30, 2015, the Company recorded an approximate $3.1 million non-cash tax benefit related to the reversal of valuation allowances of deferred tax assets which was a result of the purchase of Carpathia. For the three months ended September 30, 2015, the Company recorded an additional $2.6 million non-cash tax benefit, aggregating to $5.7 million in non-cash deferred income tax benefit for the nine months ended September 30, 2015.

(7)

Noncontrolling interest –As of September 30, 2015, the noncontrolling ownership interest of QualityTech, LP was 14.3%, which is related to approximately 6.8 million Operating Partnership units outstanding at September 30, 2015 which are convertible into common shares on a one-for-one basis.

 

 

 

Reconciliations of Net Income to FFO, Operating FFO & Adjusted

Operating FFO

 

(unaudited and in thousands)

 

The Company calculates FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO represents net income (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 and primarily non-cash 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 and liquidity 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, non-real estate depreciation, straight line rent adjustments, non-cash deferred taxes and non-cash compensation.

 

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

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
FFO
Net income		$	8,238			$	5,520			$	4,006			$	18,795			$	13,255
Real estate depreciation and amortization			21,022				16,325				13,596				51,649				37,663
FFO			29,260				21,845				17,602				70,444				50,918
Write off of unamortized deferred finance costs			-				83				470				83				580
Restructuring costs			-				-				226				-				1,272
Integration costs			1,360				422				-				1,783				-
Transaction costs			122				4,247				(195	)			4,473				958
Non-cash deferred tax benefit associated with transaction and integration costs			(1,206	)			-				-				(1,206	)			-
Non-cash reversal of deferred tax asset valuation allowance			-				(3,175	)			-				(3,175	)			-
Operating FFO  *			29,536				23,422				18,103				72,402				53,728
Maintenance Capex			(1,408	)			(609	)			(1,877	)			(2,034	)			(1,972	)
Leasing commissions paid			(3,005	)			(3,782	)			(5,516	)			(9,871	)			(10,604	)
Amortization of deferred financing costs and bond discount			849				854				522				2,552				1,725
Non real estate depreciation and amortization			3,463				1,682				1,612				7,086				4,610
Straight line rent revenue			(1,463	)			(1,371	)			(961	)			(3,270	)			(1,283	)
Straight line rent expense			984				211				72				1,266				221
Non-cash deferred tax benefit from operating results			(1,354	)			-				-				(1,354	)			-
Equity-based compensation expense			2,068				1,831				925				5,206				2,901
Adjusted Operating FFO *		$	29,670			$	22,238			$	12,880			$	71,983			$	49,326

 

*

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

 

 

 

 

Reconciliations of Net Income to EBITDA and Adjusted EBITDA

 

(unaudited and in thousands)

 

The Company calculates EBITDA as net income excluding interest expense and interest income, provision 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 and also, in part, to assess the value of the Company’s operating portfolio. 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 on extinguishment of debt, transaction costs, equity-based compensation expense, restructuring charge, gain on legal settlement and gain on sale of real estate. The Company believes that Adjusted EBITDA provides investors with another financial measure that can facilitate comparisons of operating performance between periods and between REITs.

 

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

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
EBITDA and Adjusted EBITDA
Net income		$	8,238			$	5,520			$	4,006			$	18,795			$	13,255
Interest expense			5,418				4,799				5,410				15,559				9,683
Interest income			(1	)			(1	)			-				(2	)			(8	)
Tax (benefit) expense of taxable REIT subsidiaries			(2,560	)			(3,135	)			27				(5,695	)			82
Depreciation and amortization			24,486				18,062				15,210				58,791				42,274
EBITDA			35,581				25,245				24,653				87,448				65,286
Write off of unamortized deferred finance costs			-				83				470				83				580
Equity-based compensation expense			2,068				1,831				925				5,206				2,901
Restructuring costs			-				-				226				-				1,272
Integration costs			1,360				422				-				1,783				-
Transaction costs			122				4,247				(195	)			4,473				958
Adjusted EBITDA		$	39,131			$	31,828			$	26,079			$	98,993			$	70,997

 

 

 

 

Reconciliations of Net Income to Net Operating Income (NOI)

 

(unaudited and in thousands)

 

The Company calculates net operating income (“NOI”) as net income, excluding: interest expense, interest income, tax expense of taxable REIT subsidiaries, depreciation and amortization, write off of unamortized deferred financing costs, gain on extinguishment of debt, transaction costs, gain on legal settlement, gain on sale of real estate, restructuring charge 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:

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
Net Operating Income (NOI)
Net income		$	8,238			$	5,520			$	4,006			$	18,795			$	13,255
Interest expense			5,418				4,799				5,410				15,559				9,683
Interest income			(1	)			(1	)			-				(2	)			(8	)
Depreciation and amortization			24,486				18,062				15,210				58,791				42,274
Write off of unamortized deferred finance costs			-				83				470				83				580
Tax (benefit) expense of taxable REIT subsidiaries			(2,560	)			(3,135	)			27				(5,695	)			82
Restructuring costs			-				-				226				-				1,272
Integration costs			1,360				422				-				1,783				-
Transaction costs			122				4,247				(195	)			4,473				958
General and administrative expenses			19,440				14,615				11,045				47,893				33,296
NOI (1)		$	56,503			$	44,612			$	36,199			$	141,680			$	101,392
Breakdown of NOI by facility:
Atlanta-Metro data center		$	17,964			$	16,875			$	14,752			$	51,605			$	44,348
Atlanta-Suwanee data center			10,376				10,094				9,046				30,600				25,798
Santa Clara data center			3,615				3,574				3,301				10,566				9,349
Richmond data center			5,340				4,933				3,772				14,528				10,158
Sacramento data center			1,870				1,900				1,938				5,641				6,601
Princeton data center			2,331				2,310				2,066				6,990				2,089
Dallas-Fort Worth data center			1,532				1,462				420				3,743				420
Carpathia data centers			12,460				2,250				-				14,710				-
Other facilities			1,015				1,214				904				3,297				2,629
NOI (1)		$	56,503			$	44,612			$	36,199			$	141,680			$	101,392

 

(1)

Includes facility level general and administrative expense allocation charges of 4% of revenue for QTS entities and 10% of revenue for Carpathia entities which aggregated to $4.9 million, $2.7 million and $2.3 million for the three month periods ended September 30, 2015, June 30, 2015 and September 30, 2014, respectively, and $10.1 million and $6.3 million for the nine month periods ended September 30, 2015 and 2014, respectively.

 

 

 

 

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:

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
Recognized MRR in the period
Total period revenues (GAAP basis)		$	88,890			$	68,117			$	57,945			$	218,393			$	158,226
Less: Total  period recoveries			(6,158	)			(5,582	)			(6,131	)			(17,404	)			(13,674	)
Total period deferred setup fees			(1,477	)			(1,412	)			(1,125	)			(4,135	)			(3,508	)
Total period straight line rent and other			(2,959	)			(3,170	)			(1,726	)			(8,221	)			(3,711	)
Recognized MRR in the period			78,296				57,953				48,963				188,633				137,333
MRR at period end
Total period revenues (GAAP basis)		$	88,890			$	68,117			$	57,945			$	218,393			$	158,226
Less: Total revenues excluding last month			(59,455	)			(41,871	)			(38,439	)			(188,958	)			(138,720	)
Total revenues for last month of period			29,435				26,246				19,506				29,435				19,506
Less: Last month recoveries			(1,661	)			(2,185	)			(1,771	)			(1,661	)			(1,771	)
Last month deferred setup fees			(269	)			(513	)			(391	)			(269	)			(391	)
Last month straight line rent and other			(1,291	)			1,925				(823	)			(1,291	)			(823	)
MRR at period end		$	26,214			$	25,473			$	16,521			$	26,214			$	16,521

 

 

 

Exhibit 99.2

 

 

 

 

Table of Contents

 

 

Overview
Company Profile		3
Financial Statements
Combined Consolidated Balance Sheets		4
Combined Consolidated Statements of Operations and Comprehensive Income (Loss)		5
Summary of Financial Data		6
Reconciliations of Return on Invested Capital (ROIC)		8
Implied Enterprise Value		9
Operating Portfolio
Data Center Properties		10
Redevelopment Costs Summary		11
Redevelopment Summary		12
NOI by Facility and Capital Expenditure Summary		13
Leasing Statistics – Signed Leases		15
Leasing Statistics – Renewed Leases and Rental Churn		17
Leasing Statistics – Commenced Leases		18
Lease Expirations		19
Largest Customers		20
Industry Segmentation		21
Product Diversification		22
Capital Structure
Debt Summary and Debt Maturities		23
Interest Summary		25
Appendix		26

 

 

 

Forward Looking Statements

 

Some of the statements contained in this document 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 document 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 our international operations; difficulties in identifying properties to acquire and completing acquisitions; the Company’s failure to successfully develop, redevelop and operate acquired properties, including data centers acquired in our 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 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, 2014 and other periodic reports the Company files with the Securities and Exchange Commission.

 

 

 

Company Profile

 

 

 

 

Combined Consolidated Balance Sheets  

 

 

(in thousands)  

		September 30,				December 31,
		2015				2014
		(unaudited)
ASSETS
Real Estate Assets
Land		$	52,430			$	48,577
Buildings and improvements			1,108,758				914,286
Less: Accumulated depreciation			(222,373	)			(180,167	)
			938,815				782,696
Construction in progress			353,782				214,719
Real Estate Assets, net			1,292,597				997,415
Cash and cash equivalents			10,730				10,788
Rents and other receivables, net			31,024				15,579
Acquired intangibles, net			119,402				18,000
Deferred costs, net (1)			38,522				37,058
Prepaid expenses			9,074				3,079
Goodwill			174,697				-
Other assets, net (2)			29,445				24,640
TOTAL ASSETS		$	1,705,491			$	1,106,559
LIABILITIES
Mortgage notes payable		$	70,000			$	86,600
Unsecured credit facility			400,000				239,838
Senior notes, net of discount			297,914				297,729
Capital lease and lease financing obligations			53,023				13,062
Accounts payable and accrued liabilities			80,893				64,607
Dividends and distributions payable			15,349				10,705
Advance rents, security deposits and other liabilities			19,079				3,302
Deferred income taxes			15,634				-
Deferred income			25,046				10,531
TOTAL LIABILITIES			976,938				726,374
EQUITY
Common stock, $0.01 par value, 450,133,000 shares authorized, 41,101,507 and 29,408,138 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively			412				294
Additional paid-in capital			668,246				324,917
Accumulated dividends in excess of earnings			(44,142	)			(22,503	)
Total stockholders’ equity			624,516				302,708
Noncontrolling interests			104,037				77,477
TOTAL EQUITY			728,553				380,185
TOTAL LIABILITIES AND EQUITY		$	1,705,491			$	1,106,559

 

(1)

As of September 30, 2015 and December 31, 2014, deferred costs, net, included $14.5 million and $16.5 million of deferred financing costs net of amortization, respectively, $21.1 million and $17.4 million of deferred leasing costs net of amortization, respectively, and $2.9 million and $3.2 million, net of amortization, related to a leasing arrangement at the Company’s Princeton facility, respectively.

(2)

As of September 30, 2015 and December 31, 2014, other assets, net, primarily included $26.5 million and $21.4 million of corporate fixed assets, respectively, primarily relating to construction of corporate offices, leasehold improvements and product related assets.

 

 

 

Combined Consolidated Statements of Operations and

Comprehensive Income

(unaudited and in thousands)

 

The following financial data for the three month period ended June 30, 2015 and the nine month period ended September 30, 2015 includes the operating results of Carpathia Hosting, Inc. (“Carpathia”) starting June 16, 2015 (the date the Company acquired Carpathia) through the end of the respective period.

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
Revenues:		2015				2015				2014				2015				2014
Rental		$	62,744			$	52,193			$	45,448			$	164,270			$	127,993
Recoveries from customers			6,158				5,582				6,131				17,404				13,674
Cloud and managed services			18,573				8,220				5,242				32,588				14,443
Other (1)			1,415				2,122				1,124				4,131				2,116
Total revenues			88,890				68,117				57,945				218,393				158,226
Operating expenses:
Property operating costs			30,925				22,031				20,369				72,292				53,121
Real estate taxes and insurance			1,462				1,474				1,377				4,421				3,713
Depreciation and amortization			24,486				18,062				15,210				58,791				42,274
General and administrative (2)			19,440				14,615				11,045				47,893				33,296
Restructuring (3)			-				-				226				-				1,272
Transaction and integration costs (4)			1,482				4,669				(195	)			6,256				958
Total operating expenses			77,795				60,851				48,032				189,653				134,634
Operating income			11,095				7,266				9,913				28,740				23,592
Other income and expense:
Interest income			1				1				-				2				8
Interest expense			(5,418	)			(4,799	)			(5,410	)			(15,559	)			(9,683	)
Other expense, net (5)			-				(83	)			(470	)			(83	)			(580	)
Income before taxes			5,678				2,385				4,033				13,100				13,337
Tax benefit (expense) of taxable REIT subsidiaries (6)			2,560				3,135				(27	)			5,695				(82	)
Net income			8,238				5,520				4,006				18,795				13,255
Net income attributable to noncontrolling interests (7)			(1,229	)			(888	)			(849	)			(3,072	)			(2,810	)
Net income attributable to QTS Realty Trust, Inc.			7,009				4,632				3,157				15,723				10,445

 

(1)

Other revenue - Includes straight line rent, sales of scrap metals and other unused materials and various other income items. Straight line rent was $1.5 million, $1.4 million and $1.0 million for the three month periods ended September 30, 2015, June 30, 2015 and September 30, 2014, respectively. Straight line rent was $3.3 million and $1.3 million for the nine month periods ended September 30, 2015 and 2014, respectively.

(2)

General and administrative expenses - Includes personnel costs, sales and marketing costs, professional fees, travel costs, product investment costs and other corporate general and administrative expenses. General and administrative expenses were 21.9%, 21.5%, and 19.1% of total revenues for the three month periods ended September 30, 2015, June 30, 2015 and September 30, 2014, respectively. General and administrative expenses were 21.9% and 21.0% of total revenues for the nine month periods ended September 30, 2015 and 2014, respectively.

(3)

Restructuring costs – For the three and nine months ended September 30, 2014, the Company incurred $0.2 million and $1.3 million in restructuring costs related to severance costs associated with various remote employees.

(4)

Transaction and integration costs - For the three month periods ended September 30, 2015, June 30, 2015 and September 30, 2014, the Company recognized $0.1 million, $4.3 million and $(0.2) million, respectively, in transaction costs related to the examination of actual and potential acquisitions. Transaction costs were $4.5 million and $1.0 million for the nine month periods ended September 30, 2015 and 2014, respectively. The Company also recognized $1.4 million and $1.8 million in integration costs for the three month and nine month periods ended September 30, 2015, which include various costs to integrate QTS and Carpathia, including consulting fees, costs to consolidate office space and costs which are currently duplicated, but will be eliminated when QTS and Carpathia are fully integrated.

(5)

Other expense, net - Generally includes write offs of unamortized deferred financing costs associated with the early extinguishment of certain debt instruments.

(6)

Tax benefit (expense) of taxable REIT subsidiaries – For the three months ended June 30, 2015, the Company recorded an approximate $3.1 million non-cash tax benefit related to the reversal of valuation allowances of deferred tax assets which was a result of the purchase of Carpathia. For the three months ended September 30, 2015, the Company recorded an additional $2.6 million non-cash tax benefit, aggregating to $5.7 million in non-cash deferred income tax benefit for the nine months ended September 30, 2015.

(7)

Noncontrolling interest - As of September 30, 2015, the noncontrolling ownership interest of QualityTech, LP was 14.3%, which is related to approximately 6.8 million Operating Partnership units outstanding at September 30, 2015 which are convertible into common shares on a one-for-one basis.

 

 

 

Summary of Financial Data

 

(in thousands, except operating portfolio statistics data)

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
Summary of Results		2015				2015				2014				2015				2014
Total revenue		$	88,890			$	68,117			$	57,945			$	218,393			$	158,226
Net income			8,238				5,520				4,006				18,795				13,255
Other Data
FFO		$	29,260			$	21,845			$	17,602			$	70,444			$	50,918
Operating FFO			29,536				23,422				18,103				72,402				53,728
Operating FFO per share			0.61				0.53				0.49				1.64				1.45
Adjusted Operating FFO			29,670				22,238				12,880				71,983				49,326
Recognized MRR in the period			78,296				57,953				48,963				188,633				137,333
MRR (at period end)			26,214				25,473				16,521				26,214				16,521
EBITDA			35,581				25,245				24,653				87,448				65,286
Adjusted EBITDA			39,131				31,828				26,079				98,993				70,997
NOI			56,503				44,612				36,199				141,680				101,392
NOI as a % of revenue			63.6	%			65.5	%			62.5	%			64.9	%			64.1	%
Adjusted EBITDA as a % of revenue			44.0	%			46.7	%			45.0	%			45.3	%			44.9	%
General and administrative expenses as a % of revenue			21.9	%			21.5	%			19.1	%			21.9	%			21.0	%
Annualized ROIC			15.7	%			15.8	%			15.0	%			15.7	%			15.3	%

 

		September 30,				December 31,
Balance Sheet Data		2015				2014
Real estate at cost		$	1,514,970			$	1,177,582
Net investment in real estate			1,292,597				997,415
Total assets			1,705,491				1,106,559
Total debt			820,937				637,229
Debt to last quarter annualized Adjusted EBITDA			5.2	x			5.5	x
Debt to undepreciated real estate assets			54.2	%			54.1	%
Debt to Implied Enterprise Value			27.8	%			33.4	%

 

 

 

		September 30,				December 31,
Operating Portfolio Statistics		2015				2014
Built out square footage:
Raised floor			1,076,142				927,075
Leasable raised floor (1)			844,410				698,232
Leased raised floor			735,574				593,610
Total Raw Shell:
Total			4,842,857				4,688,164
Basis-of-design raised floor space (1)			2,187,267				2,090,959
Data center properties			25				12
Basis of design raised floor % developed			49.2	%			44.3	%
Data center % occupied			87.1	%			85.0	%

 

(1)

See definition in Appendix.

 

 

 

 

Reconciliations of Return on Invested Capital (ROIC)

 

(unaudited and in thousands)

 

Return on Invested Capital (ROIC)		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
NOI (1)		$	56,503			$	49,112			$	36,199			$	146,180			$	101,392
Annualized NOI			226,012				196,448				144,796				194,907				135,189
Average undepreciated real estate assets and other net fixed assets placed in service			1,441,297				1,243,782				966,924				1,242,476				882,894
Annualized ROIC			15.7	%			15.8	%			15.0	%			15.7	%			15.3	%

 

(1)

Includes facility level G&A allocation charges of 4% of revenue for QTS entities and 10% of revenue for Carpathia entities which aggregated to $4.9 million, $2.7 million and $2.3 million for the three month periods ended September 30, 2015, June 30, 2015, and September 30, 2014, respectively, and $10.1 million and $6.3 million for the nine month periods ended September 30, 2015 and 2014, respectively.

 

Calculation of Average Undepreciated Real Estate Assets and other Net Fixed Assets Placed in Service		As of												As of
Undepreciated Real Estate Assets and other		September 30,				June 30,				September 30,				September 30,				September 30,
Net Fixed Assets Placed in Service		2015				2015				2014				2015				2014
Real Estate Assets, net		$	1,292,597			$	1,241,151			$	948,850			$	1,292,597			$	948,850
Less: Construction in progress			(353,782	)			(320,885	)			(174,470	)			(353,782	)			(174,470	)
Plus: Accumulated depreciation			222,373				205,284				168,210				222,373				168,210
Plus: Goodwill			174,697				173,237				-				174,697				-
Plus: Other fixed assets, net			11,007				11,400				23,268				11,007				23,268
Plus: Acquired intangibles, net			88,642	*			90,173	*			18,745				88,642	*			18,745
Plus: Leasing Commissions, net			23,966				22,735				19,221				23,966				19,221
Total as of period end		$	1,459,500			$	1,423,095			$	1,003,824			$	1,459,500			$	1,003,824
Average undepreciated real estate assets and other net fixed assets as of reporting period (2)		$	1,441,297			$	1,243,782			$	966,924			$	1,242,476			$	882,894

 

(2)

Calculated by using average quarterly balance of each account.

 

*

Net of acquired intangible liabilities and deferred tax liabilities.

 

 

 

 

Implied Enterprise Value

 

 

Implied Enterprise Value as of September 30, 2015:
Total Shares Outstanding:
Class A Common Stock			40,968,507
Class B Common Stock			133,000
Total Shares Outstanding			41,101,507
Units of Limited Partnership (1)			7,378,184
Options to purchase Class A Common Stock (2)			317,813
Fully Diluted Total Shares and Units of Limited Partnership outstanding as of September 30, 2015 (3)			48,797,504
Share price as of September 30, 2015		$	43.69
Market equity capitalization (in thousands)		$	2,131,963
Debt  (in thousands)			820,937
Implied Enterprise Value (in thousands)		$	2,952,900

 

(1)

Includes 531,184 of operating partnership units representing the “in the money” value of Class O LTIP units on an “as if” converted basis.

(2)

Represents options to purchase 317,813 shares of Class A Common Stock of QTS Realty Trust Inc. representing the “in the money” value of options on an “as if” converted basis.

(3)

Weighted average fully diluted shares and units for the three and nine month periods ended September 30, 2015 were 48,733,417 and 44,181,583, respectively.

 

 

 

Data Center Properties

 

(in thousands, except NRSF data)

 

The following table presents an overview of the portfolio of data center properties that the Company owns or leases, referred to herein as our data center properties, based on information as of September 30, 2015:

 

								Operating Net Rentable Square Feet (Operating NRSF) (3)
Property		Year Acquired (1)		Gross Square Feet (2)				Raised Floor (4)				Office & Other (5)				Supporting Infrastructure (6)				Total				% Occupied and Billing (7)				Annualized Rent (8)				Available Utility Power (MW) (9)				Basis of Design NRSF				% Raised Floor
Richmond, VA		2010			1,318,353				121,623				51,093				131,324				304,040				86.2	%		$	26,249,863				110				556,623				21.9	%
Atlanta, GA (Metro)		2006			968,695				417,986				36,953				315,676				770,615				93.1	%		$	79,308,328				72				527,186				79.3	%
Dallas-Fort Worth, TX		2013			698,000				54,014				2,321				35,825				92,160				90.2	%		$	8,441,882				140				292,000				18.5	%
Princeton, NJ		2014			553,930				58,157				2,229				111,405				171,791				100.0	%		$	9,665,340				22				158,157				36.8	%
Suwanee, GA		2005			369,822				185,422				8,697				108,266				302,385				81.8	%		$	52,778,916				36				208,008				89.1	%
Chicago, IL		2014			317,000				-				-				-				-				-	%		$	-				8				133,000				-	%
Santa Clara, CA**		2007			135,322				55,494				944				45,687				102,125				97.2	%		$	24,986,083				11				80,347				69.1	%
Jersey City, NJ*		2006			122,448				31,503				14,208				41,901				87,612				97.9	%		$	12,228,150				7				52,744				59.7	%
Sacramento, CA		2012			92,644				54,595				2,794				23,916				81,305				46.0	%		$	11,523,173				8				57,906				94.3	%
Miami, FL		2008			30,029				19,887				-				6,592				26,479				68.2	%		$	5,111,352				4				19,887				100.0	%
Carpathia facilitiies ***		2015			154,693				72,332				5,242				14,169				91,743				74.0	%		$	83,389,172				20				96,280				75.1	%
Other		Misc			81,921				5,129				37,854				38,723				81,706				20.4	%		$	891,338				1				5,129				100.0	%
Total					4,842,857				1,076,142				162,335				873,484				2,111,961				87.1	%		$	314,573,597				439				2,187,267				49.2	%

 

(1)

Represents the year a property was acquired or, in the case of a property under lease, the year the Company’s initial lease commenced for the property.

(2)

With respect to the Company’s owned properties, gross square feet represents the entire building area. With respect to leased properties, gross square feet represents that portion of the gross square feet subject to our lease. This includes 218,926 square feet of QTS office and support space, which is not included in operating NRSF.

(3)

Represents the total square feet of a building that is currently leased or available for lease plus developed supporting infrastructure, based on engineering drawings and estimates, but does not include space held for redevelopment or space used for the Company’s own office space.

(4)

Represents management’s estimate of the portion of NRSF of the facility with available power and cooling capacity that is currently leased or readily available to be leased to customers as data center space based on engineering drawings.

(5)

Represents the operating NRSF of the facility other than data center space (typically office and storage space) that is currently leased or available to be leased.

(6)

Represents required data center support space, including mechanical, telecommunications and utility rooms, as well as building common areas.

(7)

Calculated as data center raised floor that is subject to a signed lease for which billing has commenced (735,574 square feet as of September 30, 2015), divided by leasable raised floor based on the current configuration of the properties (844,410 square feet as of September 30, 2015), expressed as a percentage.

(8)

The Company defines annualized rent as MRR multiplied by 12. The Company calculates MRR as monthly contractual revenue under executed contracts as of a particular date, which includes revenue from the Company’s C1, C2 and C3 rental activities and cloud and managed services, but excludes customer recoveries, deferred set up fees and other one-time and variable revenues. MRR does not include the impact from booked-not-billed contracts as of a particular date, unless otherwise specifically noted.

(9)

Represents installed utility power and transformation capacity that is available for use by the facility as of September 30, 2015.

 

*

Represents facilities that we lease.

**

Subject to long-term ground lease.

***

Includes 13 facilities. All facilities are leased, including those subject to capital leases.

 

 

 

Redevelopment Costs Summary

 

(in millions, except NRSF data)

 

During the third quarter of 2015, the Company brought online approximately 3.5 megawatts of gross power and approximately 22,000 NRSF of raised floor and customer specific capital at our Atlanta-Metro, Dallas-Fort Worth and Carpathia vault data centers at an aggregate cost of approximately $36 million. The under construction table below summarizes the Company’s outlook for development projects which it expects to complete by December 31, 2015 (in millions).

 

		Under Construction Costs (1)
Property		Actual (2)				Estimated Cost to Completion (3)				Total				Expected Completion date
Richmond		$	36			$	18			$	54			Q4 2015
Atlanta-Metro			10				8				18			Q4 2015
Totals		$	46			$	26			$	72

 

(1)

In addition to projects currently under construction, the Company’s near-term redevelopment projects are expected to be delivered in a modular manner, and the Company currently expects to invest additional capital to complete these near term projects. The ultimate timing and completion of, and the commitment of capital to, the Company’s future redevelopment projects are within the Company’s discretion and will depend upon a variety of factors, including the actual contracts executed, availability of financing and the Company’s estimation of the future market for data center space in each particular market.

(2)

Actual costs under construction through September 30, 2015. In addition to the $46 million of construction costs incurred through September 30, 2015 for redevelopment expected to be completed by December 31, 2015, as of September 30, 2015 the Company had incurred $308 million of additional costs (including acquisition costs and other capitalized costs) for other redevelopment projects that are expected to be completed after December 31, 2015.

(3)

Represents management’s estimate of the additional costs required to complete the current NRSF under development. There may be an increase in costs if customers’ requirements exceed the Company’s current basis of design.

 

 

 

Redevelopment Summary

 

(in millions, except NRSF data)

 

The following redevelopment table presents an overview of the Company’s redevelopment pipeline, based on information as of September 30, 2015. This table shows the Company’s ability to increase its raised floor of 1,076,142 square feet by approximately 2.0 times to 2.2 million square feet as of September 30, 2015.

 

Raised Floor NRSF
Overview as of September 30, 2015
Property		Current NRSF in Service				Under Construction (1)				Future Available (2)				Basis of Design NRSF				Approximate Adjacent Acreage of Land (3)
Richmond			121,623				30,000				405,000				556,623				111.1
Atlanta-Metro			417,986				15,000				94,200				527,186				6.0
Dallas-Fort Worth			54,014				-				237,986				292,000				15.0
Princeton			58,157				-				100,000				158,157				65.0
Atlanta-Suwanee			185,422				-				22,586				208,008				15.4
Santa Clara			55,494				-				24,853				80,347				-
Sacramento			54,595				-				3,311				57,906				-
Jersey City			31,503				-				21,241				52,744				-
Chicago			-				-				133,000				133,000				23.0
Miami			19,887				-				-				19,887				-
Carpathia facilities			72,332				-				23,948				96,280				-
Other			5,129				-				-				5,129				-
Totals as of September 30, 2015			1,076,142				45,000				1,066,125				2,187,267				235.5

 

(1)

Reflects NRSF at a facility for which the initiation of substantial activities has begun to prepare the property for its intended use on or before December 31, 2015.

(2)

Reflects NRSF at a facility for which the initiation of substantial activities has begun to prepare the property for its intended use after December 31, 2015.

(3)

The total cost basis of adjacent land, which is land available for the future development, is approximately $20 million. This is included in land on the Combined Consolidated Balance Sheets. The Basis of Design NRSF does not include any build-out on the adjacent land.

 

 

 

NOI by Facility and Capital Expenditure Summary

 

(unaudited and in thousands)

 

The Company calculates net operating income, or NOI, as net income (loss), excluding: interest expense, interest income, depreciation and amortization, write-off of unamortized deferred financing costs, tax expense of taxable REIT subsidiaries, gain on extinguishment of debt, transaction and integration costs, gain on legal settlement, gain on sale of real estate, restructuring charge 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. The breakdown of NOI by facility is shown below:

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
Breakdown of NOI by facility:
Atlanta-Metro data center		$	17,964			$	16,875			$	14,752			$	51,605			$	44,348
Atlanta-Suwanee data center			10,376				10,094				9,046				30,600				25,798
Santa Clara data center			3,615				3,574				3,301				10,566				9,349
Richmond data center			5,340				4,933				3,772				14,528				10,158
Sacramento data center			1,870				1,900				1,938				5,641				6,601
Princeton data center			2,331				2,310				2,066				6,990				2,089
Dallas-Fort Worth data center			1,532				1,462				420				3,743				420
Carpathia data centers			12,460				2,250				-				14,710				-
Other facilities			1,015				1,214				904				3,297				2,629
NOI (1)		$	56,503			$	44,612			$	36,199			$	141,680			$	101,392

 

(1)

Includes facility level G&A allocation charges of 4% of revenue for QTS entities and 10% of revenue for Carpathia entities which aggregated to $4.9 million, $2.7 million and $2.3 million, for the three month periods ended September 30, 2015, June 30, 2015, and September 30, 2014, respectively, and $10.1 million and $6.3 million for the nine month periods ended September 30, 2015 and 2014, respectively.

 

 

 

Capital expenditures incurred are summarized as follows:

 

		Capital Expenditures (1)
		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
Redevelopment		$	61,345			$	32,136			$	225,828			$	124,655
Acquisitions (2)			-				17,764				332,697				91,064
Maintenance capital expenditures			1,408				1,877				2,034				1,972
Other capitalized costs			6,255				4,134				18,100				13,383
Total capital expenditures		$	69,008			$	55,911			$	578,659			$	231,074

 

(1)

Does not include capitalized leasing commissions included in deferred costs or other management-related fixed assets included in other assets.

(2)

The nine months ended September 30, 2015 reflects the total consideration transferred for the Carpathia acquisition on June 16, 2015 (excluding the assumption of $21.7 million in deferred tax liabilities assumed). The 2014 periods reflect the total consideration transferred for the acquisition of the Princeton facility on June 30, 2014 and the acquisition of the Chicago facility on July 8, 2014, in their respective periods.

 

 

 

Leasing Statistics – Signed Leases

 

 

The mix of leasing activity has a significant impact on quarterly rates, both within major product segments and for overall blended leasing rates. The Company’s rate performance will vary quarter to quarter based on the mix of deals leased – C1 Custom Data Center, C2 Colocation (Cabinet, Cage and Suite), and C3 Cloud and Managed Services categories all vary on a rate per square foot basis. The amounts below include renewals when there was a change in square footage rented, but not renewals where square footage remained consistent before and after renewal (See renewal table on page 17 for such renewals).

 

During the third quarter of 2015, the Company signed 448 new and modified leases aggregating to $12.7 million of annualized rent which includes new leased revenue plus revenue from modified renewals. Removing annualized modified renewal MRR and deducting period downgrades results in $5.6 million in incremental annualized rent for the quarter. The large increase in C1 rent per square foot was attributable to several C1 customers purchasing additional power, but no additional space. While the Company did not sign any significant C1 leases during the third quarter of 2015, it did continue to see solid leasing activity in its C2/C3 categories, with increased pricing on a per square foot basis attributable to customers utilizing additional services with those leases. This C2/C3 leasing activity continues to support the Company’s belief in its investment in its 3C platform.

 

Annualized Rent of New and Modified Leases represents total MRR associated with all new and modified leases for the respective periods for the purposes of computing annualized rent rates per square foot during the period. Incremental Annualized Rent, Net of Downgrades reflects net incremental MRR signed during the period for purposes of tracking incremental revenue contribution.

 

		Period		Number of Leases		Total Leased sq ft				Annualized Rent per Leased sq ft				Annualized Rent of New and Modified Leases				Incremental Annualized Rent, Net of Downgrades
New/modified leases signed - Total		Q3 2015		448			7,513			$	1,686			$	12,669,407			$	5,582,511
		P4QA*		353			50,533				434				21,912,014				13,487,611
		Q2 2015		365			13,867				1,207				16,734,571				10,585,921
		Q1 2015		340			47,052				590				27,778,291				13,618,400
		Q4 2014		347			10,596				1,011				10,717,456				4,116,717
		Q3 2014		361			130,617				248				32,417,738				25,629,407
New/modified leases signed - C1		Q3 2015		20			128			$	3,983			$	509,776
		P4QA*		19			38,251				224				8,554,275
		Q2 2015		22			644				831				535,306
		Q1 2015		18			30,386				340				10,333,301
		Q4 2014		21			315				580				182,772
		Q3 2014		15			121,658				190				23,165,719
New/modified leases signed - C2/C3		Q3 2015		428			7,385			$	1,647			$	12,159,631
		P4QA*		334			12,282				1,088				13,357,739
		Q2 2015		343			13,223				1,225				16,199,265
		Q1 2015		322			16,666				1,047				17,444,990
		Q4 2014		326			10,281				1,025				10,534,684
		Q3 2014		346			8,959				1,033				9,252,019

 

*

Average of prior 4 quarters

 

NOTE: Figures above do not include cost recoveries. In general, C1 customers reimburse the Company for certain operating costs whereas C2/C3 customers are on a gross lease basis. As a result, pricing and resulting per square foot rates for C2/C3 customers includes the recovery of such operating costs.

 

 

 

The following table outlines the booked-not-billed (“BNB”) balance as of September 30, 2015 and how that will affect revenue in 2015 and subsequent years:

 

Booked-not-billed ("BNB")		2015				2016				Thereafter				Total
MRR		$	1,876,807			$	1,777,842			$	1,455,723			$	5,110,372
Incremental revenue			4,146,438				15,373,238				17,468,675
Annualized revenue			22,521,683				21,334,110				17,468,675				61,324,468

 

The Company estimates the remaining cost to provide the space, power, connectivity and other services to the customer contracts which had not billed as of September 30, 2015 to be approximately $40 million. This estimate generally includes C1 customers with newly contracted space of more than 3,300 square feet. The space, power, connectivity and other services provided to customers that contract for smaller amounts of space is generally provided by existing space which was previously developed.

 

 

 

Leasing Statistics – Renewed Leases and
Rental Churn

 

 

The mix of leasing activity has a significant impact on quarterly rates, both within major product segments and for overall blended renewal rates. The Company’s rate performance will vary quarter to quarter based on the mix of deals leased – C1 Custom Data Center, C2 Colocation, and C3 Cloud and Managed Services categories all vary on a rate per square foot basis.

 

Consistent with the Company’s 3C strategy and business model, the renewal rates below reflect total MRR per square foot including all subscribed services. For comparability, the Company includes only those customers that have maintained consistent space footprints in the computations below. All customers with space changes are incorporated into new/modified leasing statistics and rates.

 

The overall blended rate for renewals signed in the third quarter of 2015 was 0.9% higher than the rates for those customers immediately prior to renewal. In C1, QTS had a significant increase of 18%, which was due to a customer increasing power requirements within their existing space. In C2/C3, there was a minor decrease in pricing which was primarily driven by a few customers reducing their service levels without changing their space requirements. Thus, in aggregate, the renewal rate change in the third quarter of 2015 is in line with the Company’s expectation of low to mid-single digit increases.

 

Rental Churn (which the Company defines as MRR lost to complete termination of customer services in a given period compared to total MRR at the beginning of the period) was 0.8% for the third quarter of 2015 and 2.0% for the nine months ended September 30, 2015. The Company expects churn for the full year 2015 to be 3-5%.

 

		Period		Number of renewed leases		Total Leased sq ft				Annualized rent per leased sq ft				Annualized Rent				Rent Change(1)
Renewed Leases - Total		Q3 2015		89			12,338			$	742			$	9,157,450				0.9	%
		P4QA*		66			7,472				804				6,010,456				0.6	%
		Q2 2015		76			9,540				785				7,492,287				5.1	%
		Q1 2015		65			6,291				863				5,427,185				1.2	%
		Q4 2014		64			6,317				940				5,941,125				3.4	%
		Q3 2014		59			7,740				669				5,181,226				-2.9	%
Renewed Leases - C1		Q3 2015		3			3,200			$	297			$	951,180				17.9	%
		P4QA*		-			-				-				-				0.0	%
		Q2 2015		-			-				-				-				0.0	%
		Q1 2015		-			-				-				-				0.0	%
		Q4 2014		-			-				-				-				0.0	%
		Q3 2014		-			-				-				-				0.0	%
Renewed Leases - C2/C3		Q3 2015		86			9,138			$	898			$	8,206,270				-0.7	%
		P4QA*		66			7,472				804				6,010,456				0.6	%
		Q2 2015		76			9,540				785				7,492,287				5.1	%
		Q1 2015		65			6,291				863				5,427,185				1.2	%
		Q4 2014		64			6,317				940				5,941,125				3.4	%
		Q3 2014		59			7,740				669				5,181,226				-2.9	%

 

*

Average of prior 4 quarters

(1)

Calculated as the percentage change of the rent per square foot immediately before renewal when compared to the rent per square foot immediately after renewal.

 

 

 

Leasing Statistics – Commenced Leases

 

 

The mix of leasing activity across C1, C2 and C3 has significant impact on quarterly rates, both within major product segments and for overall blended commencement rates. The Company’s rate performance will vary quarter to quarter based on the mix of deals leased. C1 Custom Data Center, C2 Colocation, and C3 Cloud and Managed Services categories all vary on a rate per square foot basis.

 

During the third quarter of 2015, the Company commenced customer leases (which includes both new customers and existing customers that modified their lease terms) representing approximately $37.9 million of annualized rent at $490 per square foot. This compares to customer leases representing an aggregate trailing four quarter average of approximately $20.6 million of annualized rent at $523 per square foot. $13.8 million in annualized rent of commenced leases was contributed by Carpathia in the third quarter.

 

The annualized rent per leased square foot for C1 was due to the impact of a large C1 customer which continued to ramp in the third quarter of 2015. The C2/C3 average commencement rate for the third quarter of 2015 was $882 per square foot with rates impacted by larger C2 customers and a lower level of service related to those customers.

 

		Period		Number of leases		Total Leased sq ft				Annualized rent per leased sq ft				Annualized Rent
Leases commenced - Total		Q3 2015		651			77,273			$	490			$	37,887,304
		P4QA*		402			39,299				523				20,567,432
		Q2 2015		459			51,248				525				26,884,427
		Q1 2015		369			21,813				817				17,829,577
		Q4 2014		401			48,080				391				18,815,804
		Q3 2014		379			36,054				520				18,739,920
Leases commenced - C1		Q3 2015		33			43,199			$	181			$	7,822,312
		P4QA*		31			24,262				183				4,430,303
		Q2 2015		37			29,622				168				4,961,821
		Q1 2015		21			8,289				215				1,780,368
		Q4 2014		30			34,657				176				6,112,759
		Q3 2014		35			24,480				199				4,866,264
Leases commenced - C2/C3		Q3 2015		618			34,074			$	882			$	30,064,992
		P4QA*		371			15,037				1,090				16,397,147
		Q2 2015		422			21,626				1,014				21,922,606
		Q1 2015		348			13,524				1,264				17,089,279
		Q4 2014		371			13,423				946				12,703,045
		Q3 2014		344			11,574				1,199				13,873,656

 

*

Average of prior 4 quarters

 

 

 

Lease Expirations

 

 

C1 leases are typically 5-10 years with the majority of C1 lease expirations occurring in 2017 and beyond. C2/C3 leases are typically 3 years in duration, thus the majority of C2/C3 lease expirations are in 2016 and 2017. The following table sets forth a summary schedule of the lease expirations as of September 30, 2015 at the properties in the Company’s portfolio. Unless otherwise stated in the footnotes, the information set forth in the table assumes that customers exercise no renewal options and all early termination rights are exercised:

 

Year of Lease Expiration		Number of Leases Expiring (1)				Total Raised Floor of Expiring Leases				% of Portfolio Leased Raised Floor				Annualized Rent (2)				% of Portfolio Annualized Rent				C1 as % of Portfolio Annualized Rent				C2 as % of Portfolio Annualized Rent				C3 as % of Portfolio Annualized Rent
Month-to-Month (3)			352				5,513				1	%		$	10,092,846				3	%			0	%			2	%			1	%
2015			359				17,295				2	%			20,332,611				6	%			0	%			3	%			3	%
2016			1,493				90,110				12	%			83,682,558				27	%			3	%			14	%			10	%
2017			962				111,925				15	%			66,925,448				21	%			5	%			11	%			5	%
2018			605				278,603				38	%			78,617,276				25	%			12	%			10	%			3	%
2019			111				18,839				3	%			8,953,430				3	%			1	%			2	%			0	%
After 2019			141				213,288				29	%			45,969,429				15	%			11	%			3	%			1	%
Portfolio Total			4,023				735,574				100	%		$	314,573,597				100	%			32	%			44	%			23	%

 

(1)

Represents each agreement with a customer signed as of September 30, 2015 for which billing has commenced; a lease agreement could include multiple spaces and a customer could have multiple leases.

(2)

Annualized rent is presented for leases commenced as of September 30, 2015. The Company defines annualized rent as MRR multiplied by 12. The Company calculates MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from our 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 as of a particular date, unless otherwise specifically noted. This amount reflects the annualized cash rental payments. It does not reflect the accounting associated with any free rent, rent abatements or future scheduled rent increases and also excludes operating expense and power reimbursements.

(3)

Consists of customers whose leases expired prior to September 30, 2015 and have continued on a month-to-month basis.

 

 

 

Largest Customers

 

 

As of September 30, 2015, the Company’s portfolio was leased to over 1,000 customers comprised of companies of all sizes representing an array of industries, each with unique and varied business models and needs. The following table sets forth information regarding the ten largest customers in the portfolio based on annualized rent as of September 30, 2015 (does not include rents or maturities associated with booked-not-billed customers or ramps for existing customers which have not yet commenced billing):

 

Principal Customer Industry		Product		Number of Locations		Annualized Rent (1)				% of Portfolio Annualized Rent				Weighted Average Remaining Lease Term (Months) (2)
Internet		C1		2		$	25,714,404				8.2	%			49
Technology		C2, C3		6			12,797,111				4.1	%			16
Government		C2, C3		2			10,552,988				3.4	%			28
Information Technology		C1, C3		3			9,934,445				3.2	%			103
Internet		C1		1			9,644,400				3.1	%			37
Information Technology		C1		2			8,945,964				2.8	%			102
Technology		C2, C3		3			6,472,121				2.1	%			10
Financial Services		C2, C3		1			4,885,524				1.6	%			27
Financial Services		C1		1			4,381,920				1.4	%			16
Information Technology		C2, C3		2			4,151,722				1.3	%			22
Total / Weighted Average						$	97,480,598				31.0	%			45

 

(1)

Annualized rent is presented for leases commenced as of September 30, 2015. We define annualized rent as MRR multiplied by 12. We calculate MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from our 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 as of a particular date. This amount reflects the annualized cash rental payments. It does not reflect any free rent, rent abatements or future scheduled rent increases and also excludes operating expense and power reimbursements.

(2)

Weighted average based on customer’s percentage of total annualized rent expiring and is as of September 30, 2015.

 

 

 

Industry Segmentation

 

 

The following table sets forth information relating to the industry segmentation as of September 30, 2015:

 

 

The following table sets forth information relating to the industry segmentation as of December 31, 2014:

 

 

 

 

Product Diversification

 

 

The following table sets forth information relating to the distribution of leases at the properties, by type of product offering, as of September 30, 2015:

 

 

(1)

As of September 30, 2015, C1 customers renting at least 6,600 square feet represented $53.8 million of annualized C1 MRR, C1 customers renting 3,300 square feet to 6,599 square feet represented $19.2 million of annualized C1 MRR, and C1 customers renting below 3,300 square feet represented $21.3 million of annualized C1 MRR. As of September 30, 2015, C1 customers’ median used square footage was 4,000 square feet.

 

The following table sets forth information relating to the distribution of leases at the properties, by type of product offering, as of December 31, 2014:

 

 

(1)

As of December 31, 2014, C1 customers renting at least 6,600 square feet represented $52.0 million of annualized C1 MRR, C1 customers renting between 3,300 and 6,599 square feet represented $17.9 million of annualized C1 MRR, and C1 customers renting below 3,300 square feet represented $16.1 million of annualized C1 MRR. As of December 31, 2014, C1 customers’ median used square footage was 3,856 square feet.

 

 

 

Debt Summary and Debt Maturities

 

(in thousands)

 

		September 30,				December 31,
		2015				2014
Unsecured Credit Facility		$	400,000			$	239,838
Senior Notes, net of discount			297,914				297,729
Richmond Credit Facility			70,000				70,000
Atlanta-Metro Equipment Loan			-				16,600
Capital Lease and Lease Financing Obligations			53,023				13,062
Total		$	820,937			$	637,229

 

As of September 30, 2015:

 

Debt instruments		2015				2016				2017				2018				2019				Thereafter				Total
Unsecured Credit Facility (1)		$	-			$	-			$	-			$	300,000			$	100,000			$	-			$	400,000
Senior Notes (2)			-				-				-				-				-				300,000				300,000
Richmond Credit Facility			-				-				-				-				70,000				-				70,000
Capital Lease and Lease Financing Obligations			3,262				12,558				12,388				8,804				2,461				13,550				53,023
Total		$	3,262			$	12,558			$	12,388			$	308,804			$	172,461			$	313,550			$	823,023

 

(1)

Pursuant to a credit agreement amendment that the Company entered into on December 17, 2014, the revolving portion of the Unsecured Credit Facility has a stated maturity of December 17, 2018 with an option to extend for one additional year.

(2)

Excludes discount reflected at September 30, 2015.

 

 

 

In October 2015, the Company amended its unsecured credit facility, increasing the total capacity by $250 million and extending the term.  At the same time, the Company terminated its $120 million secured credit facility relating to the Richmond asset. The amended unsecured credit facility has a total capacity of $900 million and includes a $150 million term loan which matures in approximately 5 years, another $150 million term loan which matures in 5.5 years and a $600 million revolving credit facility which matures in approximately 4 years, with a one year extension option. It also provides for lower borrowing rates of approximately 15 basis points. The unsecured credit facility also includes a $200 million accordion feature. Taking into account the amended unsecured credit facility, the Company’s pro forma total liquidity as of September 30, 2015 was approximately $441 million including cash and cash equivalents and availability under the amended unsecured credit facility. If the amendment had closed prior to September 30, 2015, the Company’s debt maturity schedule would appear as follows:

 

Debt instruments		2015				2016				2017				2018				2019				Thereafter				Total
Unsecured Credit Facility (1)		$	-			$	-			$	-			$	-			$	170,000			$	300,000			$	470,000
Senior Notes (2)			-				-				-				-				-				300,000				300,000
Capital Lease and Lease Financing Obligations			3,262				12,558				12,388				8,804				2,461				13,550				53,023
Total		$	3,262			$	12,558			$	12,388			$	8,804			$	172,461			$	613,550			$	823,023

 

(1)

Pursuant to a credit agreement amendment that the Company entered into in October 2015, the revolving portion of the Unsecured Credit Facility has a stated maturity of December 17, 2019 with an option to extend for one additional year.

(2)

Excludes discount reflected at September 30, 2015.

 

 

 

 

Interest Summary

 

(unaudited and in thousands)

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
Interest expense and fees		$	7,279			$	6,367			$	5,892			$	20,117			$	12,050
Swap interest			-				-				158				-				482
Amortization of deferred financing costs and bond discount			849				854				691				2,552				1,894
Capitalized interest (1)			(2,710	)			(2,422	)			(1,331	)			(7,110	)			(4,743	)
Total interest expense		$	5,418			$	4,799			$	5,410			$	15,559			$	9,683

 

(1)

The weighted average interest rate for the three months ended September 30, 2015, June 30, 2015, and September 30, 2014 was 4.04%, 4.60%, and 4.62%, respectively. As of September 30, 2015 and December 31, 2014 our weighted average coupon interest rate was 3.48% and 3.95%, respectively.

 

 

 

Appendix

 

 

Non-GAAP Financial Measures

 

This document includes certain non-GAAP financial measures that management believes are helpful in understanding the Company’s business, as further described below.

 

The Company considers the following non-GAAP financial measures to be useful to investors as key supplemental measures of the Company’s performance: (1) FFO; (2) Operating FFO; (3) Adjusted Operating FFO; (4) MRR; (5) NOI; (6) EBITDA; and (7) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss and cash flows from operating activities as a measure of the Company’s operating performance and liquidity. FFO, Operating FFO, Adjusted Operating FFO, MRR, NOI, EBITDA and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Operating FFO, Adjusted Operating FFO, MRR, NOI, EBITDA and Adjusted EBITDA as reported by other companies that do not use the same definition or implementation guidelines or interpret the standards differently from us.

 

Definitions

 

C1 – Custom Data Center. Power costs are passed on to customers (metered power); generally 3,000 square feet or more of raised floor; lease term of 5 to 10 years; customers are large corporations, government agencies, and global Internet businesses.

 

C2 – Colocation. Power overages charged separately; specified kW included in lease; up to 3,000 square feet of raised floor; lease term of up to 3 years; customers are large corporations, small and medium businesses and government agencies.

 

C3 – Cloud and Managed Services. Power bundled with service; small amounts of space; customers rent managed virtual servers; lease term up to 3 years; customers are large corporations, small and medium businesses and government agencies.

 

Booked-not-billed (“BNB”). The Company defines booked-not-billed as customer leases that have been signed, but for which lease payments have not yet commenced.

 

Leasable raised floor. The Company defines leasable raised floor as the amount of raised floor square footage that the Company has leased plus the available capacity of raised floor square footage that is in a leasable format as of a particular date and according to a particular product configuration. The amount of leasable raised floor may change even without completion of new redevelopment projects due to changes in the Company’s configuration of C1, C2 and C3 product space.

 

Basis-of-design floor space. The Company defines basis-of-design floor space as the total data center raised floor potential of its existing data center facilities.

 

Operating NRSF. Represents the total square feet of a building that is currently leased or available for lease plus developed supporting infrastructure, based on engineering drawings and estimates, but does not include space held for redevelopment or space used for the Company’s own office space.

 

The Company. Refers to QTS Realty Trust, Inc., a Maryland corporation, together with its consolidated subsidiaries, including QualityTech, LP.

 

 

 

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 and liquidity. 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’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 core operating performance and liquidity, management computes an adjusted measure of FFO, which the Company refers to as Operating FFO. The Company generally calculates Operating FFO as FFO excluding certain non-routine and often non-cash 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 and liquidity 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 specifically for comparing year over year ability to fund dividend distributions from operating activities. Adjusted Operating FFO is used by the Company as a basis to address cash flow and its ability to fund its dividend payments. 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, straight line rent adjustments, non-cash deferred taxes and non-cash compensation.

 

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 and liquidity 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 and liquidity is limited. The Company’s calculation of FFO may not be comparable to measures calculated by other companies that 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.

 

 

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
FFO
Net income		$	8,238			$	5,520			$	4,006			$	18,795			$	13,255
Real estate depreciation and amortization			21,022				16,325				13,596				51,649				37,663
FFO			29,260				21,845				17,602				70,444				50,918
Write off of unamortized deferred finance costs			-				83				470				83				580
Restructuring costs			-				-				226				-				1,272
Integration costs			1,360				422				-				1,783				-
Transaction costs			122				4,247				(195	)			4,473				958
Non-cash deferred tax benefit associated with transaction and integration costs			(1,206	)			-				-				(1,206	)			-
Non-cash reversal of deferred tax asset valuation allowance			-				(3,175	)			-				(3,175	)			-
Operating FFO  *			29,536				23,422				18,103				72,402				53,728
Maintenance Capex			(1,408	)			(609	)			(1,877	)			(2,034	)			(1,972	)
Leasing commissions paid			(3,005	)			(3,782	)			(5,516	)			(9,871	)			(10,604	)
Amortization of deferred financing costs and bond discount			849				854				522				2,552				1,725
Non real estate depreciation and amortization			3,463				1,682				1,612				7,086				4,610
Straight line rent revenue			(1,463	)			(1,371	)			(961	)			(3,270	)			(1,283	)
Straight line rent expense			984				211				72				1,266				221
Non-cash deferred tax benefit from operating results			(1,354	)			-				-				(1,354	)			-
Equity-based compensation expense			2,068				1,831				925				5,206				2,901
Adjusted Operating FFO *		$	29,670			$	22,238			$	12,880			$	71,983			$	49,326

 

*

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.

 

Monthly Recurring Revenue (MRR)

 

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 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 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 the Company’s customer leases. 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.

 

 

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
Recognized MRR in the period
Total period revenues (GAAP basis)		$	88,890			$	68,117			$	57,945			$	218,393			$	158,226
Less: Total  period recoveries			(6,158	)			(5,582	)			(6,131	)			(17,404	)			(13,674	)
Total period deferred setup fees			(1,477	)			(1,412	)			(1,125	)			(4,135	)			(3,508	)
Total period straight line rent and other			(2,959	)			(3,170	)			(1,726	)			(8,221	)			(3,711	)
Recognized MRR in the period			78,296				57,953				48,963				188,633				137,333
MRR at period end
Total period revenues (GAAP basis)		$	88,890			$	68,117			$	57,945			$	218,393			$	158,226
Less: Total revenues excluding last month			(59,455	)			(41,871	)			(38,439	)			(188,958	)			(138,720	)
Total revenues for last month of period			29,435				26,246				19,506				29,435				19,506
Less: Last month recoveries			(1,661	)			(2,185	)			(1,771	)			(1,661	)			(1,771	)
Last month deferred setup fees			(269	)			(513	)			(391	)			(269	)			(391	)
Last month straight line rent and other			(1,291	)			1,925				(823	)			(1,291	)			(823	)
MRR at period end		$	26,214			$	25,473			$	16,521			$	26,214			$	16,521

 

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and Adjusted EBITDA

 

The Company calculates EBITDA as net income (loss) adjusted to exclude interest expense and interest income, provision for income taxes (including income taxes applicable to sale of assets) and depreciation and amortization. Management believes that EBITDA is useful to investors in evaluating and facilitating comparisons of the Company’s operating performance between periods and between REITs by removing the impact of its capital structure (primarily interest expense) and asset base charges (primarily depreciation and amortization) from its operating results.

 

In addition to EBITDA, the Company calculates an adjusted measure of EBITDA, which it refers to as Adjusted EBITDA, as EBITDA excluding unamortized deferred financing costs, gains on extinguishment of debt, transaction costs, equity-based compensation expense, restructuring charge, gain (loss) on legal settlement and gain 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.

 

Management uses EBITDA and Adjusted EBITDA as supplemental performance measures as they provide useful measures of assessing the Company’s operating results. Other companies may not calculate EBITDA or Adjusted EBITDA in the same manner. Accordingly, the Company’s EBITDA and Adjusted EBITDA may not be comparable to others. EBITDA 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.

 

 

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
EBITDA and Adjusted EBITDA
Net income		$	8,238			$	5,520			$	4,006			$	18,795			$	13,255
Interest expense			5,418				4,799				5,410				15,559				9,683
Interest income			(1	)			(1	)			-				(2	)			(8	)
Tax (benefit) expense of taxable REIT subsidiaries			(2,560	)			(3,135	)			27				(5,695	)			82
Depreciation and amortization			24,486				18,062				15,210				58,791				42,274
EBITDA			35,581				25,245				24,653				87,448				65,286
Write off of unamortized deferred finance costs			-				83				470				83				580
Equity-based compensation expense			2,068				1,831				925				5,206				2,901
Restructuring costs			-				-				226				-				1,272
Integration costs			1,360				422				-				1,783				-
Transaction costs			122				4,247				(195	)			4,473				958
Adjusted EBITDA		$	39,131			$	31,828			$	26,079			$	98,993			$	70,997

 

 

 

Net Operating Income (NOI)

 

The Company calculates net operating income (“NOI”) as net income (loss), excluding: interest expense, interest income, tax expense of taxable REIT subsidiaries, depreciation and amortization, write off of unamortized deferred financing costs, gain on extinguishment of debt, transaction and integration costs, gain on legal settlement, gain on sale of real estate, restructuring charge 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 (loss) to NOI is presented below:

 

 

		Three Months Ended												Nine Months Ended
		September 30,				June 30,				September 30,				September 30,
		2015				2015				2014				2015				2014
Net Operating Income (NOI)
Net income		$	8,238			$	5,520			$	4,006			$	18,795			$	13,255
Interest expense			5,418				4,799				5,410				15,559				9,683
Interest income			(1	)			(1	)			-				(2	)			(8	)
Depreciation and amortization			24,486				18,062				15,210				58,791				42,274
Write off of unamortized deferred finance costs			-				83				470				83				580
Tax (benefit) expense of taxable REIT subsidiaries			(2,560	)			(3,135	)			27				(5,695	)			82
Restructuring costs			-				-				226				-				1,272
Integration costs			1,360				422				-				1,783				-
Transaction costs			122				4,247				(195	)			4,473				958
General and administrative expenses			19,440				14,615				11,045				47,893				33,296
NOI (1)		$	56,503			$	44,612			$	36,199			$	141,680			$	101,392
Breakdown of NOI by facility:
Atlanta-Metro data center		$	17,964			$	16,875			$	14,752			$	51,605			$	44,348
Atlanta-Suwanee data center			10,376				10,094				9,046				30,600				25,798
Santa Clara data center			3,615				3,574				3,301				10,566				9,349
Richmond data center			5,340				4,933				3,772				14,528				10,158
Sacramento data center			1,870				1,900				1,938				5,641				6,601
Princeton data center			2,331				2,310				2,066				6,990				2,089
Dallas-Fort Worth data center			1,532				1,462				420				3,743				420
Carpathia data centers			12,460				2,250				-				14,710				-
Other facilities			1,015				1,214				904				3,297				2,629
NOI (1)		$	56,503			$	44,612			$	36,199			$	141,680			$	101,392

 

(1)

Includes facility level G&A allocation charges of 4% of revenue for QTS entities and 10% of revenue for Carpathia entities which aggregated to $4.9 million, $2.7 million and $2.3 million for the three month periods ended September 30, 2015, June 30, 2015, and September 30, 2014, respectively, and $10.1 million and $6.3 million for the nine month periods ended September 30, 2015 and 2014, respectively.