QTS REPORTS THIRD QUARTER 2018 OPERATING RESULTS

OVERLAND PARK, Kan. – October 29, 2018 – QTS Realty Trust, Inc. (“QTS” or the “Company”) (NYSE: QTS) today announced operating results for the third quarter ended September 30, 2018.  In conjunction with its strategic growth plan announced in the first quarter of 2018, QTS is realigning its product offerings around Hyperscale and Hybrid Colocation, while exiting certain of its Cloud and Managed Services offerings, as well as colocation revenue attached to certain customers in the Cloud and Managed Services business that we expect will not remain with QTS post transition (collectively “Non-Core” operations). QTS has realigned information included in this release to focus its guidance and key performance metrics around its core business, which primarily consists of its Hyperscale and Hybrid Colocation businesses, along with technology and services from its Cloud and Managed Services business that support Hyperscale and Hybrid Colocation customers (collectively, the “Core” business), which together will be the Company’s primary business following the completion of the strategic growth plan expected to be completed by the end of 2018. For informational purposes, QTS has excluded its estimated Non-Core business from certain financial and operating statistics below. 

Third Quarter Highlights

“Earlier this year, we laid out multiple strategic initiatives that we had high confidence would drive an acceleration in our business performance. As you can see in our third quarter results, QTS has delivered on those initiatives with strong execution,” said Chad Williams, Chairman and CEO - QTS. “Through a balanced focus on our hyperscale and hybrid colocation growth engines, QTS is well-positioned with a strong foundation to deliver consistent long-term value.” 

Financial Results

Net loss recognized in the third quarter of 2018 was $6.9 million  ($0.25 per basic and diluted share), compared to net income of $7.4 million  ($0.13 per basic and diluted share) recognized in the third quarter of 2017.  The Company incurred $13.7 million of restructuring expenses in the third quarter of 2018 associated with the exit of certain of its Cloud and Managed Services offerings, of which $1.5 million related to severance expenses, $0.7 million related to equity-based compensation and professional fees, and $11.5 million related to product and other expenses (primarily related to impairment write-downs of depreciated property as well as losses incurred on the sale of equipment). The Company also incurred $0.9 million of transaction, integration and impairment costs in the third quarter of 2018, compared to transaction, integration, and impairment costs of $1.1 million in the third quarter of 2017. During the third quarter of 2018, the Company recognized $1.0 million of income tax benefit compared to $2.5 million of income tax benefit recognized in the third quarter of 2017.  

QTS generated total consolidated revenues of $112.2 million in the third quarter of 2018, a decrease of 1.4% compared to $113.8 million in the third quarter of 2017. Consolidated MRR as of September 30, 2018 was $30.7 million compared to consolidated MRR as of September 30, 2017 of $31.6 million. QTS generated total Core revenues of $107.5 million in the third quarter of 2018, an increase of 14.1% compared to $94.2 million in the third quarter of 2017. Core MRR as of September 30, 2018 was $30.1 million compared to Core MRR as of September 30, 2017 of $26.6 million.

QTS generated Core Operating FFO of $35.5 million in the third quarter of 2018  (which includes tax benefit of approximately $0.4 million) a decrease of approximately 0.6% compared to Core Operating FFO of $35.3 million in the third quarter of 2017 (which included tax benefit of approximately $2.5 million). Core Operating FFO per fully diluted share was $0.61 in the third quarter of 2018, a decrease of 1.6% compared to Core Operating FFO per fully diluted share of $0.62 in the third quarter of 2017. Excluding the effects of the Company’s non-cash deferred tax benefit, Core Operating FFO was $0.60 per fully diluted share in the third quarter of 2018, an increase of 3.4% compared to $0.58 per fully diluted share in the third quarter of 2017.  

Additionally, QTS generated $55.0 million of Core Adjusted EBITDA in the third quarter of 2018, an increase of 19.8% compared to $45.9 million for the third quarter of 2017.  

Leasing Activity

During the quarter ended September 30, 2018, QTS entered into new and modified Core leases aggregating to $24.3 million of annualized rent which includes revenue from new leases plus revenue from modified renewals. Removing non-incremental annualized MRR from modified renewals and deducting downgrades during the period resulted in $18.1 million in Core incremental annualized rent for the quarter ended September 30, 2018, which is higher than the prior four quarter average and representative of the expanding pipeline of opportunity in the market. The Company’s Core incremental annualized rent for the third quarter reflects a mix of customers and locations across different markets and strength in the Hyperscale product offering. Pricing on new and modified leases signed during the third quarter was higher than the prior four quarter average, primarily driven by additional power sales to existing Hyperscale tenants as well as favorable pricing on Hybrid Colocation deals. 

During the quarter ended September 30, 2018,  QTS renewed Core leases with total annualized rent of $11.3 million at an average rent per square foot of $717, which was 2.1% higher than the annualized Core rent prior to their respective renewals. There is variability in the Company’s renewal rates based on the mix of product types renewed, and renewal rates are generally expected to increase in the low to mid-single digits as compared to pre-renewal pricing. Core  Rental Churn (which the Company defines as Core MRR lost in the period to a customer intending to fully exit the QTS platform in the near term compared to total Core MRR at the beginning of the period) was 1.1% for the three months ended September 30, 2018, and 3.0% for the nine months ended September 30, 2018.

During the quarter ended September 30, 2018, QTS commenced Core customer leases (which includes new Core customers and also existing Core customers that renewed their lease term) representing approximately $28.8 million of annualized rent at $512 per square foot.

As of September 30, 2018, the Core booked-not-billed MRR balance (which represents Core customer leases that have been executed, but for which lease payments have not commenced as of September 30, 2018) was approximately $4.9 million, or $59.0 million of annualized Core rent, an increase of approximately 15% compared to $4.3 million, or $51.3 million of annualized Core rent at June 30, 2018. The Core booked-not-billed balance is expected to contribute an incremental $1.7 million to revenue in 2018 (representing $10.3 million in annualized Core revenues), an incremental $21.9 million in 2019 (representing $31.6 million in annualized Core revenues), and an incremental $17.0 million in annualized Core revenues thereafter.

Development, Redevelopment, and Acquisitions

During the third quarter of 2018, the Company brought online approximately four megawatts of gross power and approximately 26,000 net rentable square feet (“NRSF”) of raised floor and customer specific capital at its Atlanta-Metro, Chicago and Piscataway facilities at an aggregate cost of approximately $31 million. In addition, during the third quarter of 2018, the Company’s significant development activity continued at the Irving, Ashburn, Piscataway and Fort Worth facilities to have space ready for customers in 2018 and forward. The Company expects to bring an additional 27,000 raised floor NRSF into service in 2018 at an aggregate cost of approximately $59 million.

In October 2018, the Company completed an acquisition of 55 acres of land in Atlanta,  Georgia adjacent to its existing Atlanta-Metro mega data center. The strategic site provides QTS the opportunity to extend its leadership position in Atlanta by expanding its Atlanta-Metro campus by at least an additional 150 megawatts. 

GDT Transition Update 

Following its strategic growth plan announced in first quarter of 2018, QTS has realigned its product offerings around Hyperscale and Hybrid Colocation, while exiting certain of its Cloud and Managed Services offerings, as well as colocation revenue attached to certain customers in the Cloud and Managed Services business that we expect will not remain with QTS post transition (collectively “Non-Core” operations). The Company has worked to transition its Non-Core operations to its strategic partner, General Datatech, L.P. (“GDT”). The Company began the migration process in the first quarter of 2018 with approximately 180 customers identified whose services and support would be transitioned to GDT. As of September 30, 2018, the Company has substantially completed the migration of Non-Core services and customer contracts to GDT with strong success and ahead of schedule. QTS successfully migrated more than 85% of the approximately 180 customers. While the financial impact to QTS’ core business in 2018 is limited, due to better than expected customer retention, QTS now expects a potential core revenue contribution in 2019 from the migration of non-core services and customers of approximately $10+ million, which represents an increase from QTS’ expectation as of June 30, 2018 of $8+ million and QTS’ original stated assumption of $5+ million.

By the end of 2018, QTS expects both non-core revenue and expense will be fully removed from financial results. Execution on cost reduction has tracked in line with expectations and QTS expects to complete the elimination of all non-core expenses by the end of 2018. In addition, QTS anticipates any remaining restructuring expenses related to the strategic growth plan will be recognized during the fourth quarter of 2018.

Balance Sheet and Liquidity

As of September 30, 2018, the Company’s total debt balance net of cash and cash equivalents was approximately $1.2 billion, resulting in a net debt to annualized Consolidated Adjusted EBITDA of 5.3x. This ratio compares to the 4.7x net debt to annualized Consolidated Adjusted EBITDA reported in the second quarter of 2018, with the increase primarily a result of additional capital development spending in the third quarter of 2018 funded through the Company’s unsecured revolving credit facility.

As of September 30, 2018, the Company had total available liquidity of approximately $749 million which was comprised of $735 million of available capacity under the Company’s unsecured revolving credit facility and approximately $14 million of cash and cash equivalents.

2018 Core Guidance 

References to QTS’ “Core” business refers to the Company’s business expected to be retained following the completion of the previously announced strategic growth plan, as described above. The Company is reaffirming its 2018 guidance, as outlined below.

The Company is reaffirming its Core Adjusted EBITDA guidance range for 2018 of $218 million to $228 million and its Core OFFO per share guidance range for 2018 of $2.55 per share to $2.65 per share. The Company expects Core Revenue to be at the high end of the provided range due primarily to higher than anticipated utility recovery revenue which passes through directly to higher operating costs. As the visibility and confidence in lease expirations through the end of the year remains strong, the Company is reaffirming its previously announced annual rental churn guidance for the Core business of 3% to 5%. The Company is also reaffirming its previously announced cash capital expenditure guidance range for 2018 of $425 million to $475 million, excluding capital expenditures for acquisitions.

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

Non-GAAP Financial Measures

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

Conference Call Details

The Company will host a conference call and webcast on October 30, 2018, at 8:30 a.m. Eastern time (7:30 a.m. Central time) to discuss its financial results, current business trends and market conditions. 

The dial-in number for the conference call is (877) 883-0383 (U.S.) or (412) 902-6506 (International). The participant entry number is 7471397# and callers are asked to dial in ten minutes prior to start time. A link to the live broadcast and the replay will be available on the Company’s website  (www.qtsdatacenters.com) under the Investors tab.

About QTS

QTS Realty Trust, Inc. (NYSE: QTS) is a leading provider of secure, compliant data center solutions, hybrid cloud and fully managed services. QTS’ integrated technology service platform of hyperscale and hybrid colocation provides flexible, scalable, secure IT solutions for web and IT applications. QTS’ Critical Facilities Management (CFM) provides increased efficiency and greater performance for third-party data center owners and operators. QTS owns, operates or manages 26 data centers and supports more than 1,000 Core customers primarily in North America.

QTS Investor Relations Contact

Stephen Douglas – Vice President – Investor Relations and Strategic Planning

Jeff Berson – Chief Financial Officer

William Schafer – Executive Vice President – Finance and Accounting

ir@qtsdatacenters.com

Forward Looking Statements

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

The forward-looking statements contained in this release reflect the Company’s current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause actual results to differ significantly from those expressed in any forward-looking statement. The Company does not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: adverse economic or real estate developments in the Company’s markets or the technology industry; obsolescence or reduction in marketability of our infrastructure due to changing industry demands; global, national and local economic conditions; the Company’s ability to successfully execute its strategic growth plan and realize its expected benefits; risks related to the Company’s international operations; difficulties in identifying properties to acquire and completing acquisitions; the Company’s failure to successfully develop, redevelop and operate acquired properties or lines of business; significant increases in construction and development costs; the increasingly competitive environment in which the Company operates; defaults on, or termination or non-renewal of leases by customers; decreased rental rates or increased vacancy rates; increased interest rates and operating costs, including increased energy costs; financing risks, including the Company’s failure to obtain necessary outside financing; dependence on third parties to provide Internet, telecommunications and network connectivity to the Company’s data centers; the Company’s failure to qualify and maintain its qualification as a real estate investment trust; environmental uncertainties and risks related to natural disasters; financial market fluctuations; 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. Any forward-looking statement speaks only as of the date on which it was made. The Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the Company’s future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 and other periodic reports the Company files with the Securities and Exchange Commission.

Consolidated Balance Sheets

(unaudited and in thousands except shares data)

Consolidated Statements of Operations

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

Consolidated Statements of Comprehensive Income

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Reconciliations of Net Income to FFO, Operating FFO, Adjusted Operating FFO, Core FFO, Core Operating FFO and Adjusted Core 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 other REITs calculate Operating FFO on a comparable basis, between REITs.

Operating FFO and Adjusted Operating Funds From Operations (“Adjusted Operating FFO”) are non-GAAP measures that are used as supplemental operating measures 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 who do not use the NAREIT definition of FFO or do not calculate FFO in accordance with NAREIT guidance. In addition, the Company’s calculations of FFO, Operating FFO and Adjusted Operating FFO are not necessarily comparable to FFO, Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. FFO, Operating FFO and Adjusted Operating FFO are non-GAAP measures and should not be considered a measure of the Company’s results of operations or liquidity or as a substitute for, or an alternative to, net income (loss), cash provided by operating activities or any other performance measure determined in accordance with GAAP, nor is it indicative of funds available to fund its cash needs, including its ability to make distributions to its stockholders.

Core Operating FFO and Adjusted Core Operating FFO represent Operating FFO and Adjusted Operating FFO of the Company’s Core business, respectively, and are used as supplemental performance measures because they reflect results of the portion of the business the Company expects to retain following completion of the strategic growth plan. 

A reconciliation of net income (loss) to FFO, Operating FFO and Adjusted Operating FFO on a Core and Non-Core basis is presented below (unaudited and in thousands):  

Reconciliations of Net Income to EBITDAre and Adjusted EBITDA

The Company considers earnings before interest, taxes, depreciation and amortization for real estate (“EBITDAre”), 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 EBITDAre in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”). EBITDAre represents net income (loss) (computed in accordance with GAAP), adjusted to exclude gains (or losses) from sales of depreciated property, income tax expense (or benefit), interest expense, depreciation and amortization, impairments of depreciated property and unconsolidated partnerships and joint ventures, and similar adjustments for unconsolidated partnerships and joint ventures. The Company’s management uses EBITDAre as a supplemental performance measure because it provides a performance measure that, when compared year over year, captures the performance of the Company’s operations by removing the impact of capital structure (primarily interest expense) and asset base charges (primarily depreciation and amortization) from its operating results.

Due to the volatility and nature of certain significant charges and gains recorded in the Company’s operating results that management believes are not reflective of its operating performance, management computes an adjusted measure of EBITDAre, which the Company refers to as Adjusted EBITDA. The Company generally calculates Adjusted EBITDA excluding certain non-routine charges, write off of unamortized deferred financing costs, gains (losses) on extinguishment of debt, and transaction and integration costs, in addition to non-cash recurring costs such as equity-based compensation. The Company believes that Adjusted EBITDA provides investors with another financial measure that may facilitate comparisons of operating performance between periods and, to the extent other REITs calculate Adjusted EBITDA on a comparable basis, between REITs.

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

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