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	7
Reconciliations of Return on Invested Capital (ROIC)	9
Implied Enterprise Value and Weighted Average Shares	10
Operating Portfolio
Data Center Properties	11
Redevelopment Costs Summary	12
Redevelopment Summary	13
NOI by Facility and Capital Expenditure Summary	14
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	24
Appendix	25

 

 

 

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 or lines of business, including data centers acquired in the Company’s acquisition of Carpathia Hosting, Inc.; significant increases in construction and development costs; the increasingly competitive environment in which the Company operates; defaults on, or termination or non-renewal of, leases by customers; increased interest rates and operating costs, including increased energy costs; financing risks, including the Company’s failure to obtain necessary outside financing; decreased rental rates or increased vacancy rates; dependence on third parties to provide Internet, telecommunications and network connectivity to the Company’s data centers; the Company’s failure to qualify and maintain its qualification as a real estate investment trust; environmental uncertainties and risks related to natural disasters; financial market fluctuations; and changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates.

 

While forward-looking statements reflect the Company’s good faith beliefs, they are not guarantees of future performance. The Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the Company’s future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 and other periodic reports the Company files with the Securities and Exchange Commission.

 

 

 

Company Profile

 

 

 

 

Combined Consolidated Balance Sheets

(in thousands)  

 

		June 30,				December 31,
		2016				2015
		(unaudited)
ASSETS
Real Estate Assets
Land		$	64,568			$	57,112
Buildings, improvements and equipment			1,393,920				1,180,386
Less: Accumulated depreciation			(274,145	)			(239,936	)
			1,184,343				997,562
Construction in progress			316,797				345,655
Real Estate Assets, net			1,501,140				1,343,217
Cash and cash equivalents			12,776				8,804
Rents and other receivables, net			35,226				28,233
Acquired intangibles, net (1)			142,848				115,702
Deferred costs, net (2) (3)			34,921				30,042
Prepaid expenses			8,947				6,502
Goodwill (1)			173,843				181,738
Other assets, net (4)			36,984				33,101
TOTAL ASSETS		$	1,946,685			$	1,747,339
LIABILITIES
Unsecured credit facility, net (3)		$	493,255			$	520,956
Senior notes, net of discount and debt issuance costs (3)			291,521				290,852
Capital lease and lease financing obligations			43,440				49,761
Accounts payable and accrued liabilities			63,963				95,924
Dividends and distributions payable			19,692				15,378
Advance rents, security deposits and other liabilities			20,923				18,798
Deferred income taxes (1)			19,742				18,813
Deferred income			18,306				16,991
TOTAL LIABILITIES			970,842				1,027,473
EQUITY
Common stock, $0.01 par value, 450,133,000 shares authorized, 47,864,968 and 41,225,784 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively			478				412
Additional paid-in capital			928,313				670,275
Accumulated dividends in excess of earnings			(73,883	)			(52,732	)
Total stockholders’ equity			854,908				617,955
Noncontrolling interests			120,935				101,911
TOTAL EQUITY			975,843				719,866
TOTAL LIABILITIES AND EQUITY		$	1,946,685			$	1,747,339

 

(1)

During the second quarter of 2016, the purchase price allocation associated with the acquisition of Carpathia Hosting, Inc. (“Carpathia”) was finalized. The primary adjustments to the purchase price allocation made during the first and second quarters of 2016 consisted of a $14.7 million increase in intangible assets, a $6.0 million increase in deferred tax liability and a reduction in goodwill of $7.9 million.

(2)

As of June 30, 2016 and December 31, 2015, deferred costs, net, included $5.5 million and $6.3 million of deferred financing costs net of amortization, respectively, $26.8 million and $21.0 million of deferred leasing costs net of amortization, respectively, and $2.6 million and $2.8 million, net of amortization, related to a leasing arrangement at the Company’s Princeton facility, respectively.

(3)

Debt issuance costs, net, related to the Senior Notes and term loan portion of the Company’s unsecured credit facility aggregating $9.3 million and $10.2 million at June 30, 2016 and December 31, 2015, respectively, have been netted against the related debt liability line items for both periods presented, as required by recently issued accounting guidance.

(4)

As of June 30, 2016 and December 31, 2015, other assets, net, primarily included $29.2 million and $25.9 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 except share and per share data)

 

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

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
Revenues:
Rental		$	71,670			$	68,426			$	52,193			$	140,096			$	101,526
Recoveries from customers			6,168				5,435				5,582				11,603				11,246
Cloud and managed services			17,015				18,890				8,220				35,905				14,015
Other (1)			3,834				2,017				2,122				5,851				2,716
Total revenues			98,687				94,768				68,117				193,455				129,503
Operating expenses:
Property operating costs			32,646				31,781				22,031				64,427				41,367
Real estate taxes and insurance			2,020				1,740				1,474				3,760				2,959
Depreciation and amortization			30,355				28,639				18,062				58,994				34,305
General and administrative (2)			21,608				20,286				14,615				41,894				28,453
Transaction and integration costs (3)			3,833				2,087				4,669				5,920				4,774
Total operating expenses			90,462				84,533				60,851				174,995				111,858
Operating income			8,225				10,235				7,266				18,460				17,645
Other income and expense:
Interest income			2				-				1				2				1
Interest expense			(4,874	)			(5,981	)			(4,799	)			(10,855	)			(10,141	)
Other expense, net (4)			-				-				(83	)			-				(83	)
Income before taxes			3,353				4,254				2,385				7,607				7,422
Tax benefit of taxable REIT subsidiaries (5)			2,454				2,605				3,135				5,059				3,135
Net income			5,807				6,859				5,520				12,666				10,557
Net income attributable to noncontrolling interests (6)			(707	)			(970	)			(888	)			(1,677	)			(1,843	)
Net income attributable to QTS Realty Trust, Inc.		$	5,100			$	5,889			$	4,632			$	10,989			$	8,714
Net income per share attributable to common shares:
Basic		$	0.11			$	0.14			$	0.13			$	0.25			$	0.26
Diluted			0.10				0.14				0.12				0.24				0.25
Weighted average common shares outstanding:
Basic			47,783,093				41,292,445				36,668,755				44,537,769				33,996,467
Diluted			55,574,545				48,973,851				44,444,104				52,274,198				41,867,944

 

 

 

(1)

Other revenue - Includes straight line rent, sales of scrap metals and other unused materials and various other income items. Straight line rent was $3.5 million, $1.9 million and $1.4 million for the three months ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively. Straight line rent was $5.4 million and $1.8 million for the six months ended June 30, 2016 and 2015, 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%, 21.4%, and 21.5% of total revenues for the three month periods ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively. General and administrative expenses were 21.7% and 22.0% of total revenues for the six month periods ended June 30, 2016 and 2015, respectively.

(3)

Transaction and integration costs - For the three month periods ended June 30, 2016 and June 30, 2015, the Company recognized $0.8 million, and $4.3 million, respectively, related to the examination of actual and potential acquisitions. Transaction costs were $0.8 million and $4.4 million for the six months ended June 30, 2016 and 2015, respectively. The Company also recognized $3.0 million, $2.1 million and $0.4 million in integration costs for the three month periods ended June 30, 2016, March 31, 2016 and June 30, 2015. These costs 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 in the near future. Integration costs were $5.1 million and $0.4 million for the six months ended June 30, 2016 and 2015, respectively.

(4)

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

(5)

Tax benefit of taxable REIT subsidiaries – For the three months ended June 30, 2016, March 31, 2016 and June 30, 2015, the Company recorded an approximate $2.5 million, $2.6 million and $3.1 million deferred tax benefit, respectively. The current year amounts related to recorded operating losses which include certain transaction and integration costs. The prior year amount related to the reversal of valuation allowances of deferred tax assets which was a result of the purchase of Carpathia. The Company recorded $5.1 million and $3.1 million in deferred tax benefits for the six months ended June 30, 2016 and 2015, respectively.

(6)

Noncontrolling interest – The noncontrolling ownership interest of QualityTech, LP was 12.4% and 14.6% as of June 30, 2016 and 2015, respectively, with the decrease primarily attributable to the equity issuance in April 2016.

 

 

Summary of Financial Data

(in thousands, except operating portfolio statistics data and per share data)

 

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

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
Summary of Results
Total revenue		$	98,687			$	94,768			$	68,117			$	193,455			$	129,503
Net income		$	5,807			$	6,859			$	5,520				12,666				10,557
Fully diluted weighted average shares			55,575				48,974				44,444			$	52,274			$	41,868
Net income per basic share		$	0.11			$	0.14			$	0.13			$	0.25			$	0.26
Net income per diluted share		$	0.10			$	0.14			$	0.12			$	0.24			$	0.25
Other Data
FFO		$	32,216			$	31,728			$	21,845			$	63,944			$	41,184
Operating FFO		$	34,866			$	33,067			$	23,422			$	67,933			$	42,866
Operating FFO per share		$	0.63			$	0.68			$	0.53			$	1.30			$	1.02
Recognized MRR in the period		$	84,506			$	83,162			$	57,953			$	167,668			$	110,417
MRR (at period end)		$	28,872			$	27,480			$	25,473			$	28,872			$	25,473
EBITDA		$	38,580			$	38,874			$	25,245			$	77,454			$	51,867
Adjusted EBITDA		$	45,613			$	43,011			$	31,828			$	88,624			$	59,862
NOI		$	64,021			$	61,247			$	44,612			$	125,268			$	85,177
NOI as a % of revenue			64.9	%			64.6	%			65.5	%			64.8	%			65.8	%
Adjusted EBITDA as a % of revenue			46.2	%			45.4	%			46.7	%			45.8	%			46.2	%
General and administrative expenses as a % of revenue			21.9	%			21.4	%			21.5	%			21.7	%			22.0	%
Annualized ROIC			15.1	%			15.6	%			15.8	%			15.3	%			15.3	%

 

		June 30,				December 31,
Balance Sheet Data		2016				2015
Real estate at cost		$	1,775,285			$	1,583,153
Net investment in real estate			1,501,140				1,343,217
Total assets			1,946,685				1,747,339
Total debt			839,440	(1)			873,763	(1)
Debt to last quarter annualized Adjusted EBITDA			4.6	x			5.3	x
Debt to undepreciated real estate assets			47.3	%(1)			55.2	%(1)
Debt to Implied Enterprise Value			21.2	%(1)			28.4	%(1)

 

(1)

In accordance with recent accounting changes, as noted on page 4, certain debt issuance costs have been reclassified from assets to liabilities in the prior period presented above. In addition, the Company has excluded the Senior Note discount and associated debt issuance costs from the Total Debt line item for both periods presented. As a result, the amounts referenced above represent the full amount of debt that will be repaid.

 

 

 

		June 30,				December 31,
		2016				2015
Operating Portfolio Statistics
Built out square footage:
Raised floor			1,283,941				1,118,506
Leasable raised floor (1)			1,012,203				839,356
Leased raised floor			890,477				761,166
Total Raw Shell:
Total			5,250,927				4,878,342
Basis-of-design raised floor space (1)			2,360,605				2,184,631
Data center properties			25				24
Basis of design raised floor % developed			54.4	%			51.2	%
Data center % occupied			88.0	%			90.7	%
Data center raised floor % wholly-owned			87.4	%(2)			85.5	%(2)

 

(1)

See definition in Appendix.

(2)

Amounts assume the Santa Clara facility is not wholly-owned, as it is subject to a long-term ground lease. Had the Santa Clara facility been included as wholly-owned, the percentage of data center raised floor that is wholly-owned by the Company would be 91.8% and 90.5% at June 30, 2016 and December 31, 2015, respectively.

 

 

 

Reconciliations of Return on Invested Capital (ROIC)

(unaudited and in thousands)

 

Return on Invested Capital (“ROIC”) is a non-GAAP measure that provides additional information to users of the financial statements. Management believes ROIC is a helpful metric for users of the financial statements to gauge the Company's performance against the capital it has invested.

 

Return on Invested Capital (ROIC)		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
NOI (1)		$	64,021			$	61,247			$	49,112			$	125,268			$	89,677
Annualized NOI			256,084				244,988				196,448				250,536				179,354
Average undepreciated real estate assets and other net fixed assets placed in service (2)			1,692,551				1,568,645				1,243,782				1,640,984				1,170,135
Annualized ROIC			15.1	%			15.6	%			15.8	%			15.3	%			15.3	%

 

(1)

Includes facility level G&A allocation charges of 4% of cash revenue for all facilities, with the exception of the leased facilities acquired in 2015, which include G&A expense allocation charges of 10% of cash revenue. These allocated charges aggregated to $5.1 million, $5.0 million and $2.7 million for the three month periods ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively.

(2)

Calculated by using average quarterly balance of each account.

 

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		June 30,				March 31,				June 30,				June 30,				June 30,
Net Fixed Assets Placed in Service		2016				2016				2015				2016				2015
Real Estate Assets, net		$	1,501,140			$	1,384,180			$	1,241,151			$	1,501,140			$	1,241,151
Less: Construction in progress			(316,797	)			(340,511	)			(320,885	)			(316,797	)			(320,885	)
Plus: Accumulated depreciation			274,145				255,344				205,284				274,145				205,284
Plus: Goodwill			173,843				171,679				173,237				173,843				173,237
Plus: Other fixed assets, net			15,698				13,185				11,400				15,698				11,400
Plus: Acquired intangibles, net (1)			108,194				90,070				90,173				108,194				90,173
Plus: Leasing Commissions, net			29,438				25,494				22,735				29,438				22,735
Total as of period end		$	1,785,661			$	1,599,441			$	1,423,095			$	1,785,661			$	1,423,095
Average undepreciated real estate assets and other net fixed assets as of reporting period (2)		$	1,692,551			$	1,568,645			$	1,243,782			$	1,640,984			$	1,170,135

 

(1)

Net of acquired intangible liabilities and deferred tax liabilities. In addition, for the period ended March 31, 2016, there was a reclassification between goodwill and acquired intangibles.

(2)

Calculated by using average quarterly balance of each account.

 

 

 

Implied Enterprise Value and Weighted Average Shares

 

Implied Enterprise Value as of June 30, 2016:
Total Shares Outstanding:
Class A Common Stock			47,731,968
Class B Common Stock			133,000
Total Shares Outstanding			47,864,968
Units of Limited Partnership (1)			7,423,473
Options to purchase Class A Common Stock (2)			454,082
Fully Diluted Total Shares and Units of Limited Partnership outstanding as of June 30, 2016			55,742,523
Share price as of June 30, 2016		$	55.98
Market equity capitalization (in thousands)		$	3,120,466
Debt  (in thousands)			839,440	(3)
Implied Enterprise Value (in thousands)		$	3,959,906

 

(1)

Includes 652,529 of operating partnership units representing the “in the money” value of Class O LTIP units on an “as if” converted basis as of June 30, 2016.

(2)

Represents options to purchase 454,082 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 as of June 30, 2016.

(3)

Excludes the Senior Note discount and all debt issuance costs reflected as liabilities at June 30, 2016.

 

The following table presents the weighted average fully diluted shares for the three and six months ended June 30, 2016:

 

		Three Months Ended				Six Months Ended
		June 30, 2016				June 30, 2016
Weighted average shares outstanding - basic			47,783,093				44,537,769
Effect of Class A and Class RS partnership units (1)			6,794,021				6,797,482
Effect of Class O units on as "as if" converted basis (1)			598,342				579,900
Effect of options to purchase Class A common stock on an "as if" converted basis (2)			399,089				359,047
Weighted average shares outstanding - diluted			55,574,545				52,274,198

 

(1)

The Class A units, Class RS units and Class O units represent limited partnership interests in the Operating Partnership.

(2)

The weighted average share price for the three and six months ended June 30, 2016 was $51.24 and $47.89, 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 June 30, 2016:

 

								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 (7)				Annualized Rent (8)				Available Utility Power (MW) (9)				Basis of Design ("BOD") NRSF				Current Raised Floor as a % of BOD
Richmond, VA		2010			1,318,353				167,309				51,093				178,854				397,256				88.1	%		$	35,510,868				110				557,309				30.0	%
Atlanta, GA (Metro)		2006			968,695				452,986				36,953				331,426				821,365				94.1	%		$	90,118,528				72				527,186				85.9	%
Dallas-Fort Worth, TX		2013			698,000				95,614				6,981				77,425				180,020				95.3	%		$	19,956,036				140				292,000				32.7	%
Princeton, NJ		2014			553,930				58,157				2,229				111,405				171,791				100.0	%		$	9,702,840				22				158,157				36.8	%
Suwanee, GA		2005			369,822				185,422				8,697				107,128				301,247				81.3	%		$	56,471,954				36				208,008				89.1	%
Chicago, IL		2014			317,000				-				-				-				-				-	%		$	-				8				133,000				-	%
Santa Clara, CA*		2007			135,322				55,905				944				45,094				101,943				77.9	%		$	22,072,713				11				80,940				69.1	%
Jersey City, NJ**		2006			122,448				31,503				14,208				41,901				87,612				97.1	%		$	11,680,023				7				52,744				59.7	%
Sacramento, CA		2012			92,644				54,595				2,794				23,916				81,305				46.1	%		$	11,998,463				8				57,906				94.3	%
Piscataway		2016			360,000				88,820				14,311				91,851				194,982				76.2	%		$	8,914,718				111				176,000				50.5	%
Miami, FL		2008			30,029				19,887				-				6,592				26,479				67.2	%		$	5,295,855				4				19,887				100.0	%
Leased facilities acquired in 2015 ***		2015			167,278				71,250				5,418				32,992				109,660				86.6	%		$	73,887,964				20				94,975				75.0	%
Other		Misc			117,406				2,493				49,337				23,482				75,312				60.7	%		$	857,268				1				2,493				100.0	%
Total					5,250,927				1,283,941				192,965				1,072,066				2,548,972				88.0	%		$	346,467,230				550				2,360,605				54.4	%

 

(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 292,086 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 space is occupied (890,477 square feet as of June 30, 2016), divided by leasable raised floor based on the current configuration of the properties (1,012,203 square feet as of June 30, 2016), 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 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 contracts 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.

(9)

Represents installed utility power and transformation capacity that is available for use by the facility as of June 30, 2016.

 

*

Subject to long-term ground lease.

**

Represents facilities that we lease.

***

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

 

 

Redevelopment Costs Summary

(in millions, except NRSF data)

 

During the second quarter of 2016, the Company brought online approximately 10.8 megawatts of gross power and approximately 43,000 NRSF of raised floor and customer specific capital at its Richmond, Atlanta-Metro and Dallas-Fort Worth data centers at an aggregate cost of approximately $68 million, which excludes the recently acquired Piscataway facility. The under construction table below summarizes the Company’s outlook for development projects which it expects to complete by December 31, 2016 (in millions).

 

		Under Construction Costs (1)
Property		Actual (2)				Estimated Cost to Completion (3)				Total				Expected Completion date
Atlanta-Metro		$	8			$	7			$	15			Q4 2016
Atlanta-Suwanee			13				2				15			Q3 2016
Chicago			25				20				45			Q3 2016
Dallas-Fort Worth			9				19				28			Q4 2016
Totals		$	55			$	48			$	103

 

(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 June 30, 2016. In addition to the $55 million of construction costs incurred through June 30, 2016 for redevelopment expected to be completed by December 31, 2016, as of June 30, 2016 the Company had incurred $262 million of additional costs (including acquisition costs and other capitalized costs) for other redevelopment projects that are expected to be completed after December 31, 2016.

(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 June 30, 2016. This table shows the Company’s ability to increase its raised floor of 1,283,941 square feet as of June 30, 2016 by approximately 1.8 times to 2.4 million square feet.

 

		Raised Floor NRSF
		Overview as of June 30, 2016
Property		Current NRSF in Service				Under Construction (1)				Future Available (2)				Basis of Design NRSF				Approximate Adjacent Acreage of Land (3)
Richmond			167,309				-				390,000				557,309				111.1
Atlanta-Metro			452,986				-				74,200				527,186				6.0
Dallas-Fort Worth			95,614				12,500				183,886				292,000				29.4
Princeton			58,157				-				100,000				158,157				65.0
Atlanta-Suwanee			185,422				19,000				3,586				208,008				15.4
Santa Clara			55,905				-				25,035				80,940				-
Sacramento			54,595				-				3,311				57,906				-
Jersey City			31,503				-				21,241				52,744				-
Chicago			-				14,000				119,000				133,000				23.0
Miami			19,887				-				-				19,887				-
Leased facilities acquired in 2015			71,250				-				23,725				94,975				-
Piscataway			88,820				-				87,180				176,000				-
Other			2,493				-				-				2,493				-
Totals as of June 30, 2016			1,283,941				45,500				1,031,164				2,360,605				249.9

 

(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, 2016.

(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, 2016.

(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 (benefit) of taxable REIT subsidiaries, gain (loss) on extinguishment of debt, transaction and integration costs, gain (loss) on sale of real estate, restructuring costs and general and administrative expenses. The Company believes that NOI is another metric that is often utilized to evaluate returns on operating real estate from period to period and also, in part, to assess the value of the operating real estate. The breakdown of NOI by facility is shown below:

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
Breakdown of NOI by facility:
Atlanta-Metro data center		$	20,885			$	19,972			$	16,875			$	40,857			$	33,641
Atlanta-Suwanee data center			11,272				11,500				10,094				22,772				20,224
Santa Clara data center			3,653				3,764				3,574				7,417				6,951
Richmond data center			7,976				6,602				4,933				14,578				9,188
Sacramento data center			2,140				1,922				1,900				4,062				3,771
Princeton data center			2,356				2,356				2,310				4,712				4,659
Dallas-Fort Worth data center			3,914				2,624				1,462				6,538				2,211
Leased data centers acquired in 2015			10,035				11,415				2,250				21,450				2,250
Piscataway data center (2)			670				-				-				670				-
Other facilities			1,120				1,092				1,214				2,212				2,282
NOI (1)		$	64,021			$	61,247			$	44,612			$	125,268			$	85,177

 

(1)

Includes facility level G&A allocation charges of 4% of cash revenue for all facilities, with the exception of the leased facilities acquired in 2015, which include G&A expense allocation charges of 10% of cash revenue. These allocated charges aggregated to $5.1 million, $5.0 million and $2.7 million for the three month periods ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively.

(2)

Includes results of the Piscataway facility for the period June 6, 2016 through June 30, 2016.

 

Capital expenditures incurred are summarized as follows:

 

		Capital Expenditures (1)
		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Redevelopment		$	29,026			$	78,416			$	82,508			$	164,483
Acquisitions (2)			125,000				335,150				125,000				335,150
Maintenance capital expenditures			380				609				715				626
Other capitalized costs			9,135				5,786				15,831				11,845
Total capital expenditures		$	163,541			$	419,961			$	224,054			$	512,104

 

(1)

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

(2)

The three and six months ended June 30, 2016 reflects the total consideration transferred for the purchase of the Piscataway facility on June 6, 2016. The three and six months ended June 30, 2015 reflects the total consideration transferred for the Carpathia acquisition on June 16, 2015 (excluding the assumption of $19.8 million in deferred tax liabilities assumed).

 

 

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, and renewals where C3 dedicated server cloud customers had shifts in their MRR related to their use of fully depreciated equipment. The amounts below exclude renewals where square footage remained consistent before and after renewal. (See renewal table on page 17 for such renewals).

 

During the second quarter of 2016, the Company signed 410 new and modified leases aggregating to $25.8 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 $13.3 million in incremental annualized rent for the quarter, which is a 54% increase over the prior four quarter average. This growth was driven by both the C1 and C2/C3 aspects of the QTS platform. Pricing of the C1 deals signed during the quarter was down slightly over the prior four quarter average primarily due to contracting additional space with existing C1 customers whereby the scale allows QTS to provide lower pricing. Pricing of the Company’s C2/C3 deals exceeded the prior four quarter average primarily attributable to customers contracting additional services with those leases.

 

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		Q2 2016		410			41,251			$	625			$	25,787,118			$	13,310,055
		P4QA*		384			22,611				745				16,844,647				8,646,107
		Q1 2016		367			47,262				434				20,503,532				8,566,303
		Q4 2015		357			21,801				801				17,471,080				9,849,694
		Q3 2015		448			7,513				1,686				12,669,407				5,582,511
		Q2 2015		365			13,867				1,207				16,734,571				10,585,921
New/modified leases signed - C1		Q2 2016		23			28,018			$	265			$	7,429,308
		P4QA*		20			12,552				285				3,579,439
		Q1 2016		16			38,960				240				9,361,740
		Q4 2015		20			10,476				373				3,910,932
		Q3 2015		20			128				3,983				509,776
		Q2 2015		22			644				831				535,306
New/modified leases signed - C2/C3		Q2 2016		387			13,233			$	1,387			$	18,357,810
		P4QA*		365			10,059				1,319				13,265,209
		Q1 2016		351			8,302				1,342				11,141,792
		Q4 2015		337			11,325				1,197				13,560,148
		Q3 2015		428			7,385				1,647				12,159,631
		Q2 2015		343			13,223				1,225				16,199,265

 

*

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 June 30, 2016 and how that will affect revenue in 2016 and subsequent years:

 

Booked-not-billed ("BNB")		2016				2017				Thereafter				Total
MRR		$	1,597,343			$	1,330,716			$	1,162,655			$	4,090,714
Incremental revenue (1)			8,223,055				9,304,366				13,951,854
Annualized revenue (2)			19,168,121				15,968,589				13,951,854				49,088,564

 

(1)

Incremental revenue represents the expected amount of recognized MRR in the period based on when the booked-not-billed leases commence throughout the period.

(2)

Annualized revenue represents the booked-not-billed MRR multiplied by 12, demonstrating how much recognized MRR might have been recognized if the booked-not-billed leases commencing in the period were in place for an entire year.

 

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 June 30, 2016 to be approximately $50 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 second quarter of 2016 was 2.0% higher than the rates for those customers immediately prior to renewal. The Company believes that renewal rates will generally increase in the low to mid-single digits.

 

Rental Churn (which the Company defines as MRR lost to a customer intending to fully exit the platform compared to total MRR at the beginning of the period) was 1.3% for the second quarter of 2016 and 3.6% for the six months ended June 30, 2016.

 

		Period		Number of renewed leases		Total Leased sq ft				Annualized rent per leased sq ft				Annualized Rent				Rent Change (1)
Renewed Leases - Total		Q2 2016		82			9,719			$	739			$	7,183,415				2.0	%
		P4QA*		74			11,972				874				10,462,725				0.1	%
		Q1 2016		59			16,705				950				15,871,969				-3.7	%**
		Q4 2015		71			9,306				1,002				9,329,194				2.3	%
		Q3 2015		89			12,338				742				9,157,450				0.9	%
		Q2 2015		76			9,540				785				7,492,287				5.1	%
Renewed Leases - C1		Q2 2016		-			-			$	-			$	-				0.0	%
		P4QA*		1			1,850				266				491,258				9.7	%
		Q1 2016		-			-				-				-				0.0	%
		Q4 2015		1			4,200				241				1,013,852				3.0	%
		Q3 2015		3			3,200				297				951,180				17.9	%
		Q2 2015		-			-				-				-				0.0	%
Renewed Leases - C2/C3		Q2 2016		82			9,719			$	739			$	7,183,415				2.0	%
		P4QA*		73			10,122				985				9,971,467				-0.3	%
		Q1 2016		59			16,705				950				15,871,969				-3.7	%**
		Q4 2015		70			5,106				1,629				8,315,343				2.2	%
		Q3 2015		86			9,138				898				8,206,270				-0.7	%
		Q2 2015		76			9,540				785				7,492,287				5.1	%

 

*

Average of prior 4 quarters

**

The decline in the renewal rate of 3.7% was due to changes in product mix by two customers that renewed. If the renewals related to those customers were excluded from the renewal base, rates would have been consistent with pre-renewal rates.

(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 second quarter of 2016, the Company commenced customer leases (which includes both new customers and existing customers that modified their lease terms) representing approximately $27.4 million of annualized rent. This compares to customer leases representing an aggregate trailing four quarter average of approximately $35.5 million of annualized rent. Average pricing on QTS commenced leases during the second quarter of 2016 decreased compared to the prior four quarter average due to the change in C1 versus C2/C3 mix.

 

The C1 average commencement rate of $232 per square foot represents an increase of 16% over the prior four quarter average of $200 per square foot, which was due to customers commencing with additional redundancy in the current period. The C2/C3 average commencement rate of $1,255 per square foot represents an increase of 8% over the prior four quarter average of $1,157 per square foot, which was due to additional services being attached to C2/C3 customer commencements.

 

		Period		Number of leases		Total Leased sq ft				Annualized rent per leased sq ft				Annualized Rent
Leases commenced - Total		Q2 2016		409			53,503			$	513			$	27,449,191
		P4QA*		492			57,791				615				35,527,044
		Q1 2016		411			49,858				776				38,666,890
		Q4 2015		446			52,783				733				38,669,556
		Q3 2015		651			77,273				490				37,887,304
		Q2 2015		459			51,248				525				26,884,427
Leases commenced - C1		Q2 2016		21			38,818			$	232			$	9,020,640
		P4QA*		28			32,745				200				6,545,714
		Q1 2016		21			17,540				225				3,941,117
		Q4 2015		21			40,618				233				9,457,608
		Q3 2015		33			43,199				181				7,822,312
		Q2 2015		37			29,622				168				4,961,821
Leases commenced - C2/C3		Q2 2016		388			14,685			$	1,255			$	18,428,551
		P4QA*		464			25,046				1,157				28,981,330
		Q1 2016		390			32,318				1,075				34,725,773
		Q4 2015		425			12,165				2,401				29,211,948
		Q3 2015		618			34,074				882				30,064,992
		Q2 2015		422			21,626				1,014				21,922,606

 

*

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, with the majority of C2/C3 lease expirations occurring in 2017 and 2018. The following table sets forth a summary schedule of the lease expirations as of June 30, 2016 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)			383				13,999				2	%		$	17,111,657				5	%			0	%			3	%			2	%
2016			1,024				43,395				5	%			47,504,525				14	%			2	%			6	%			6	%
2017			1,224				144,038				16	%			87,916,834				25	%			6	%			16	%			3	%
2018			933				270,976				31	%			89,875,217				26	%			11	%			9	%			6	%
2019			312				34,186				4	%			24,130,898				7	%			1	%			5	%			1	%
2020			123				44,564				5	%			18,622,507				5	%			2	%			3	%			0	%
After 2020			89				318,819				37	%			61,305,592				18	%			17	%			1	%			0	%
Portfolio Total			4,088				869,977				100	%		$	346,467,230				100	%			39	%			43	%			18	%

 

(1)

Represents each agreement with a customer signed as of June 30, 2016 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 June 30, 2016. 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 June 30, 2016 and have continued on a month-to-month basis.

 

 

 

Largest Customers

 

 

As of June 30, 2016, 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 June 30, 2016 (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		$	40,057,416				11.6	%		53
Information Technology		C1		2			12,131,594				3.5	%		95
Information Technology		C1, C3		3			11,328,674				3.3	%		95
Technology		C2, C3		4			9,654,378				2.8	%		11
Internet		C1		1			9,644,400				2.8	%		28
Government		C2		2			9,405,960				2.7	%		7
Technology		C2, C3		5			7,286,112				2.1	%		9
Retail		C3		2			6,409,400				1.8	%		23
Information Technology		C2, C3		6			5,991,937				1.7	%		11
Information Technology		C1		1			5,935,800				1.7	%		69
Total / Weighted Average						$	117,845,671				34.0	%		46

 

(1)

Annualized rent is presented for leases commenced as of June 30, 2016. 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 June 30, 2016.

 

 

 

Industry Segmentation

 

The following table sets forth information relating to the industry segmentation as of June 30, 2016:

 

 

 

The following table sets forth information relating to the industry segmentation as of December 31, 2015:

 

 

 

(1)

Subsequent to December 31, 2015, industries of certain customers have been refined and reclassified. As such, the industry segmentation table as of December 31, 2015 has been conformed to these new classifications.

 

 

Product Diversification

 

 

The following table sets forth information relating to the distribution of leases at the properties, by type of product offering, as of June 30, 2016:

 

 

 

(1)

As of June 30, 2016, C1 customers renting at least 6,600 square feet represented $89.8 million of annualized C1 MRR, C1 customers renting 3,300 square feet to 6,599 square feet represented $22.7 million of annualized C1 MRR, and C1 customers renting below 3,300 square feet represented $22.0 million of annualized C1 MRR. As of June 30, 2016, C1 customers’ median used square footage was 3,892 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, 2015:

 

 

 

(1)

As of December 31, 2015, C1 customers renting at least 6,600 square feet represented $72.5 million of annualized C1 MRR, C1 customers renting between 3,300 and 6,599 square feet represented $17.8 million of annualized C1 MRR, and C1 customers renting below 3,300 square feet represented $21.4 million of annualized C1 MRR. As of December 31, 2015, C1 customers’ median used square footage was 3,876 square feet.

 

 

 

Debt Summary and Debt Maturities

 

(in thousands)

 

		Weighted Average
		Coupon Interest Rate at						June 30,				December 31,
		June 30, 2016				Maturities		2016				2015
Unsecured Credit Facility
Revolving Credit Facility			2.01	%		December 17, 2019		$	196,000			$	224,002
Term Loan I			1.95	%		December 17, 2020			150,000				150,000
Term Loan II			1.95	%		April 27, 2021			150,000				150,000
Senior Notes (1)			5.88	%		August 1, 2022			300,000				300,000
Capital Lease and Lease Financing Obligations			3.45	%		2016 - 2025			43,440				49,761
Total			3.44	%				$	839,440			$	873,763

 

(1)

Excludes the Senior Note discount and debt issuance costs reflected as liabilities at June 30, 2016.

 

As of June 30, 2016:

 

Debt instruments		2016				2017				2018				2019				2020				Thereafter				Total
Unsecured Credit Facility		$	-			$	-			$	-			$	196,000			$	150,000			$	150,000			$	496,000
Senior Notes (1)			-				-				-				-				-				300,000				300,000
Capital Lease and Lease Financing Obligations			6,237				12,388				8,804				2,461				2,190				11,360				43,440
Total		$	6,237			$	12,388			$	8,804			$	198,461			$	152,190			$	461,360			$	839,440

 

(1)

Excludes the Senior Note discount and all debt issuance costs reflected as liabilities at June 30, 2016.

 

 

 

Interest Summary

 (unaudited and in thousands)

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,				June 30,
		2016				2015				2015				2016				2015
Interest expense and fees		$	7,153			$	7,885			$	6,367			$	15,038			$	12,838
Amortization of deferred financing costs and bond discount			877				877				854				1,754				1,703
Capitalized interest (1)			(3,156	)			(2,781	)			(2,422	)			(5,937	)			(4,400	)
Total interest expense		$	4,874			$	5,981			$	4,799			$	10,855			$	10,141

 

(1)

The weighted average interest rate for the three months ended June 30, 2016, March 31, 2016, and June 30, 2015 was 4.27%, 3.77%, and 4.60%, respectively. As of June 30, 2016 and December 31, 2015 our weighted average coupon interest rate was 3.44% and 3.31%, 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. 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. 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, 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 charges and gains and losses that management believes are not indicative of the results of the Company’s operating real estate portfolio. The Company believes that Operating FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and, to the extent they calculate Operating FFO on a comparable basis, between REITs.

 

Adjusted Operating Funds From Operations (“Adjusted Operating FFO”) is a non-GAAP measure that is used as a supplemental performance measure and to provide additional information to users of the financial statements. The Company calculates Adjusted Operating FFO by adding or subtracting from Operating FFO items such as: maintenance capital investment, paid leasing commissions, amortization of deferred financing costs and bond discount, non-real estate depreciation, straight line rent adjustments, 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 with that of other REITs. However, because FFO, Operating FFO and Adjusted Operating FFO exclude real estate depreciation and amortization and capture neither the changes in the value of the Company’s properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of its properties, all of which have real economic effect and could materially impact its financial condition, cash flows and results of operations, the utility of FFO, Operating FFO and Adjusted Operating FFO as measures of its operating performance is limited. The Company’s calculation of FFO may not be comparable to measures calculated by other companies 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												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
FFO
Net income		$	5,807			$	6,859			$	5,520			$	12,666			$	10,557
Real estate depreciation and amortization			26,409				24,869				16,325				51,278				30,627
FFO			32,216				31,728				21,845				63,944				41,184
Write off of unamortized deferred finance costs			-				-				83				-				83
Integration costs			3,026				2,053				422				5,079				422
Transaction costs			807				34				4,247				841				4,352
Deferred tax benefit associated with transaction and integration costs			(1,183	)			(748	)			-				(1,931	)			-
Non-cash reversal of deferred tax asset valuation allowance			-				-				(3,175	)			-				(3,175	)
Operating FFO  *			34,866				33,067				23,422				67,933				42,866
Maintenance Capex			(380	)			(335	)			(609	)			(715	)			(626	)
Leasing commissions paid			(3,388	)			(5,807	)			(3,782	)			(9,195	)			(6,866	)
Amortization of deferred financing costs and bond discount			877				877				854				1,754				1,703
Non real estate depreciation and amortization			3,946				3,770				1,682				7,716				3,623
Straight line rent revenue and expense and other			(3,243	)			(1,610	)			(1,160	)			(4,853	)			(1,525	)
Deferred tax benefit from operating results			(1,271	)			(1,857	)			-				(3,128	)			-
Equity-based compensation expense			3,200				2,050				1,831				5,250				3,138
Adjusted Operating FFO *		$	34,607			$	30,155			$	22,238			$	64,762			$	42,313

 

*

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												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
Recognized MRR in the period
Total period revenues (GAAP basis)		$	98,687			$	94,768			$	68,117			$	193,455			$	129,503
Less: Total  period recoveries			(6,168	)			(5,435	)			(5,582	)			(11,603	)			(11,246	)
Total period deferred setup fees			(2,256	)			(1,903	)			(1,412	)			(4,159	)			(2,658	)
Total period straight line rent and other			(5,757	)			(4,268	)			(3,170	)			(10,025	)			(5,182	)
Recognized MRR in the period			84,506				83,162				57,953				167,668				110,417
MRR at period end
Total period revenues (GAAP basis)		$	98,687			$	94,768			$	68,117			$	193,455			$	129,503
Less: Total revenues excluding last month			(64,520	)			(63,020	)			(41,871	)			(159,288	)			(103,257	)
Total revenues for last month of period			34,167				31,748				26,246				34,167				26,246
Less: Last month recoveries			(2,805	)			(1,876	)			(2,185	)			(2,805	)			(2,185	)
Last month deferred setup fees			(756	)			(676	)			(513	)			(756	)			(513	)
Last month straight line rent and other			(1,734	)			(1,716	)			1,925				(1,734	)			1,925
MRR at period end		$	28,872			$	27,480			$	25,473			$	28,872			$	25,473

 

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 (benefit) 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 write off of unamortized deferred financing costs, gains (losses) on extinguishment of debt, transaction and integration costs, equity-based compensation expense, restructuring costs, gain (loss) on legal settlement and gain (loss) on sale of real estate. The Company believes that Adjusted EBITDA provides investors with another financial measure that can facilitate comparisons of operating performance between periods and between REITs.

 

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												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
EBITDA and Adjusted EBITDA
Net income		$	5,807			$	6,859			$	5,520			$	12,666			$	10,557
Interest expense			4,874				5,981				4,799				10,855				10,141
Interest income			(2	)			-				(1	)			(2	)			(1	)
Tax benefit of taxable REIT subsidiaries			(2,454	)			(2,605	)			(3,135	)			(5,059	)			(3,135	)
Depreciation and amortization			30,355				28,639				18,062				58,994				34,305
EBITDA			38,580				38,874				25,245				77,454				51,867
Write off of unamortized deferred finance costs			-				-				83				-				83
Equity-based compensation expense			3,200				2,050				1,831				5,250				3,138
Integration costs			3,026				2,053				422				5,079				422
Transaction costs			807				34				4,247				841				4,352
Adjusted EBITDA		$	45,613			$	43,011			$	31,828			$	88,624			$	59,862

 

 

 

Net Operating Income (NOI)

 

The Company calculates net operating income (“NOI”) as net income (loss), excluding: interest expense, interest income, tax expense (benefit) of taxable REIT subsidiaries, depreciation and amortization, write off of unamortized deferred financing costs, gain (loss) on extinguishment of debt, transaction and integration costs, gain (loss) on sale of real estate, restructuring costs and general and administrative expenses. The Company believes that NOI is another metric that is often utilized to evaluate returns on operating real estate from period to period and also, in part, to assess the value of the operating real estate. A reconciliation of net income (loss) to NOI is presented below:

 

		Three Months Ended												Six Months Ended
		June 30,				March 31,				June 30,				June 30,
		2016				2016				2015				2016				2015
Net Operating Income (NOI)
Net income		$	5,807			$	6,859			$	5,520			$	12,666			$	10,557
Interest expense			4,874				5,981				4,799				10,855				10,141
Interest income			(2	)			-				(1	)			(2	)			(1	)
Depreciation and amortization			30,355				28,639				18,062				58,994				34,305
Write off of unamortized deferred finance costs			-				-				83				-				83
Tax benefit of taxable REIT subsidiaries			(2,454	)			(2,605	)			(3,135	)			(5,059	)			(3,135	)
Integration costs			3,026				2,053				422				5,079				422
Transaction costs			807				34				4,247				841				4,352
General and administrative expenses			21,608				20,286				14,615				41,894				28,453
NOI (1)		$	64,021			$	61,247			$	44,612			$	125,268			$	85,177
Breakdown of NOI by facility:
Atlanta-Metro data center		$	20,885			$	19,972			$	16,875			$	40,857			$	33,641
Atlanta-Suwanee data center			11,272				11,500				10,094				22,772				20,224
Santa Clara data center			3,653				3,764				3,574				7,417				6,951
Richmond data center			7,976				6,602				4,933				14,578				9,188
Sacramento data center			2,140				1,922				1,900				4,062				3,771
Princeton data center			2,356				2,356				2,310				4,712				4,659
Dallas-Fort Worth data center			3,914				2,624				1,462				6,538				2,211
Leased data centers acquired in 2015			10,035				11,415				2,250				21,450				2,250
Piscataway data center (2)			670				-				-				670				-
Other facilities			1,120				1,092				1,214				2,212				2,282
NOI (1)		$	64,021			$	61,247			$	44,612			$	125,268			$	85,177

 

(1)

Includes facility level G&A allocation charges of 4% of cash revenue for all entities, with the exception of the leased facilities acquired in 2015, which include G&A expense allocation charges of 10% of cash revenue. These allocated charges aggregated to $5.1 million, $5.0 million and $2.7 million for the three month periods ended June 30, 2016, March 31, 2016 and June 30, 2015, respectively.

(2)

Includes results of the Piscataway facility for the period June 6, 2016 through June 30, 2016.