QTS REALTY TRUST, INC. The following discussion and analysis covers the financial condition and results of operations ofQTS Realty Trust, Inc. , for the three and six months endedJune 30, 2021 and 2020. You should read the following discussion and analysis in conjunction with QTS' accompanying consolidated financial statements and related notes and "Risk Factors" contained elsewhere in this Form 10-Q.
Forward-Looking Statements
Some of the statements contained in this Form 10-Q 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 COVID-19 pandemic, its impact on us and our response thereto, the pending
acquisition of the Company and our strategy, plans, intentions, capital
resources, liquidity, 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.
The forward-looking statements contained in this Form 10-Q reflect our current
views about future events and are subject to numerous known and unknown risks,
uncertainties, assumptions and changes in circumstances that may cause our
actual results to differ significantly from those expressed in any
forward-looking statement. We do 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:
•the ability of the Company to obtain stockholder approval required to
consummate the proposed acquisition of the Company (the "transaction"), the
satisfaction or waiver of other conditions to closing in the definitive
agreement for the proposed transaction, unanticipated difficulties or
expenditures relating to the proposed transaction, the response of customers and
business partners to the announcement of the proposed transaction, potential
difficulties in employee retention as a result of the proposed transaction, the
occurrence of any event, change or other circumstances that could give rise to
the termination of the proposed transaction and the outcome of legal proceedings
instituted against the Company, its directors and others related to the proposed
transaction
•adverse economic or real estate developments in our markets or the technology
industry;
•obsolescence or reduction in marketability of our infrastructure due to
changing industry demands;
•global, national and local economic conditions;
•risks related to the COVID-19 pandemic, including, but not limited to, the risk
of business and/or operational disruptions, disruption of our customers'
businesses that could affect their ability to make rental payments to us, supply
chain disruptions and delays in the construction or development of our data
centers;
•risks related to our international operations;
•difficulties in identifying properties to acquire and completing acquisitions;
•our 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 we operate;
•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 our failure to obtain necessary outside financing;
•dependence on third parties to provide Internet, telecommunications and network
connectivity to our data centers;
•our failure to qualify and maintain QTS' qualification as a real estate
investment trust ("REIT");
•environmental uncertainties and risks related to natural disasters;
•financial market fluctuations;
•changes in real estate and zoning laws, revaluations for tax purposes and
increases in real property tax rates; and;
•limitations inherent in our current and any future joint venture investments,
such as lack of sole-decision making authority and reliance on our partners'
financial condition
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While forward-looking statements reflect our 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. We disclaim 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 our future results to differ materially from any forward-looking
statements, see the section entitled "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2020 , and Item 1A. "Risk Factors" of this
Form 10-Q, as well as other periodic reports that we file with the Securities
and Exchange Commission , many of which should be interpreted as being heightened
as a result of the ongoing COVID-19 pandemic and the actions taken to contain
the pandemic or mitigate its impact.
Overview
QTS is a leading provider of data center solutions to the world's largest and
most sophisticated hyperscale technology companies, enterprises and government
agencies. Through our technology-enabled platform, delivered across mega scale
data center infrastructure, we offer a comprehensive portfolio of secure and
compliant IT solutions. Our data centers are facilities that power and support
our customers' IT infrastructure equipment and provide seamless access and
connectivity to a range of communications and IT services providers. Across our
broad footprint of strategically located data centers, we provide flexible,
scalable and secure IT solutions, including data center space, power and
cooling, connectivity and value-add managed services for more than 1,200
customers in the financial services, healthcare, retail, government, technology
and various other industries. We build out our data center facilities depending
on the needs of our customers to accommodate both multi-tenant environments
(hybrid colocation) and customers that require significant amounts of space and
power (hyperscale), including federal customers. We believe that we own and
operate one of the largest portfolios of multi-tenant data centers in the United
States , as measured by gross square footage, and have the capacity to
significantly expand our sellable data center raised floor space without
constructing or acquiring any new buildings. In addition, we own approximately
864 acres of land that is available at our data center properties that provides
us with the opportunity to significantly expand our capacity to further support
future demand from current and new potential customers.
As of June 30, 2021 , we operated a portfolio of 28 data center properties
located throughout the United States , Canada and Europe . Within the United
States , our data centers are concentrated in the markets which we believe offer
the highest growth opportunities. Our data centers are highly specialized,
mission-critical facilities utilized by our customers to store, power and cool
the server, storage, and networking equipment that support their most critical
business systems and processes. We believe that our data centers are
best-in-class and engineered to adhere to the highest specifications
commercially available to customers, providing fully redundant, high-density
power and cooling sufficient to meet the needs of the largest companies and
organizations in the world. We have demonstrated a strong operating track record
of "five-nines" (99.999%) reliability since QTS' inception.
Pending Acquisition by Blackstone
As previously announced, on June 7, 2021 , the Company and the Operating
Partnership entered into an agreement and plan of merger ("Merger Agreement")
with Volt Upper Holdings LLC , a Delaware limited liability company ("Parent"),
Volt Lower Holdings LLC , a Delaware limited liability company ("Merger Sub I"),
and Volt Acquisition LP , a Delaware limited partnership ("Merger Sub II").
Parent, Merger Sub I and Merger Sub II are affiliates of The Blackstone Group
Inc. Pursuant to the Merger Agreement (i) Merger Sub II shall merge with and
into the Operating Partnership (the "partnership merger"), with the Operating
Partnership being the surviving entity, and immediately following the
consummation of the partnership merger, (ii) the Company shall merge with and
into Merger Sub I (the "Company merger"), with Merger Sub I being the surviving
entity. Pursuant to the Merger Agreement the outstanding shares of common stock
of the Company will be acquired for $78 per share in an all-cash transaction. In
addition, (i) the outstanding shares of Series A Preferred Stock (other than
shares owned by Parent, Merger Sub I or any subsidiary of Parent, the Company or
Merger Sub I (such shares, "Excluded Shares")) shall be automatically converted
into the right to receive an amount in cash equal to $25.00 plus any accrued and
unpaid dividends, without interest and (ii) the outstanding shares of Series B
Preferred Stock (other than Excluded Shares) shall be automatically converted
into one Series A preferred unit of Merger Sub I, which shall have terms
materially the same as the Series B Preferred Stock.
The Company merger, partnership merger and the other transactions contemplated
by the Merger Agreement (the "Merger Transactions") are subject to customary
closing conditions, including approval by the Company's common stockholders at a
special meeting to be held on August 26, 2021 . The Merger Transactions are
expected to close on the third business day after the conditions to closing are
satisfied or waived, including approval of the Company's stockholders of the
merger and other transactions contemplated by the Merger Agreement. The Company
can provide no assurances regarding whether the Merger Transactions will close
as expected during the third quarter of 2021, or at all. The board of directors
of the Company has
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unanimously approved the Merger Agreement, and has recommended approval of the
merger, and the other transactions contemplated by the Merger Agreement, by the
Company's stockholders.
Novel Coronavirus (COVID-19)
We continue to actively monitor developments with respect to COVID-19 and have
taken numerous actions based on corporate policies specifically focusing on the
safety and wellness of our customers, partners, and employees, as well as
providing continuous and resilient services. Although the COVID-19 pandemic has
caused significant disruptions to the United States and global economy and has
contributed to significant volatility in financial markets, as of the date of
this report, these developments have not had a known material adverse effect on
our business. As of the date of this report, each of our data centers in North
America and Europe are fully operational and operating in accordance with our
business continuity plans. Across each of the respective jurisdictions in which
we operate, our business has been deemed an essential operation, which has
allowed us to remain fully staffed with critical personnel in place to continue
to provide service and support for our customers.
The extent to which COVID-19 may impact our and our customers' operations will
depend on future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the pandemic, new
information that may emerge concerning the severity, variants or mutations of
COVID-19, vaccine efficacy and rollout and other actions taken to contain
COVID-19 or treat its impact, among others. The COVID-19 pandemic presents
material uncertainty and risk with respect to our business, financial
performance, and results of operations and may exacerbate many of the risks
identified under the section entitled "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2020 .
Our Customer Base
Our data center facilities are designed with the flexibility to support a
diverse set of solutions and customers. Our customer base is comprised of more
than 1,200 different companies of all sizes representing an array of industries,
each with unique and varied business models and needs. We serve Fortune 1000
companies as well as small and medium-sized businesses, or SMBs, including
financial institutions, healthcare companies, retail companies, government
agencies, communications service providers, software companies and global
Internet companies.
We have customers that range from large enterprise and technology companies with
significant IT expertise and data center requirements, including financial
institutions, "Big Four" accounting firms, government agencies and the world's
largest global Internet and cloud companies, to major healthcare,
telecommunications and software and web-based companies.
As a result of our diverse customer base, customer concentration in our
portfolio is limited. As of June 30, 2021 , only six of our more than 1,200
customers individually accounted for more than 3% of our monthly recurring
revenue ("MRR") (as defined below), with the largest customer accounting for
approximately 14.6% of our MRR and the next largest customer accounting for 5.2%
of our MRR.
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Our Portfolio
As of June 30, 2021 , our portfolio consisted of 28 owned and leased properties,
including a property owned by an unconsolidated entity, with data centers
located throughout the United States , Canada and Europe . The following table
presents an overview of our portfolio of operating properties, based on
information as of June 30, 2021 :
Net Rentable Square Feet (Operating NRSF) (1)
Available Basis of Current
Gross Utility Design Raised
Year Square Raised Office & Supporting % Annualized Power ("BOD") Floor as a
Properties Acquired (2) Feet (3) Floor (4) Other (5) Infrastructure (6) Total Occupied (7) Rent (8) (MW) (9) NRSF (10) % of BOD
Richmond, VA 2010 1,318,353 140,398 51,093 153,449 344,940 83.5 % $ 32,562,651 110 557,309 25 %
Atlanta, GA (DC - 1) 2006 968,695 527,186 36,953 364,815 928,954 98.1 % 123,084,878 72 527,186 100 %
Irving, TX 2013 698,000 224,605 15,300 252,733 492,638 95.7 % 57,374,515 140 275,701 81 %
Princeton, NJ 2014 553,930 58,157 2,229 111,405 171,791 100.0 % 10,558,271 22 158,157 37 %
Atlanta, GA (DC - 2) 2020 495,000 99,118 9,250 90,870 199,238 98.2 % 27,076,030 100 240,000 41 %
Chicago, IL 2014 474,979 127,222 4,931 125,595 257,748 91.1 % 27,632,743 56 215,855 59 %
Ashburn, VA (DC - 1) (11) 2018 445,000 163,125 13,199 169,319 345,643 99.6 % 24,842,959 50 178,000 92 %
Suwanee, GA 2005 369,822 212,975 8,697 107,128 328,800 88.1 % 59,776,332 36 212,975 100 %
Piscataway, NJ 2016 360,000 118,263 19,243 116,289 253,795 95.0 % 25,443,454 111 176,000 67 %
Netherlands facilities (12) 2019 312,114 38,632 - 47,367 85,999 81.7 % 8,295,561 92 158,000 24 %
Ashburn, VA (DC - 2) (13) 2021 310,000 39,204 1,192 27,443 67,839 100.0 % - 50 169,664 23 %
Fort Worth, TX 2016 261,836 71,147 17,232 125,794 214,173 67.0 % 10,107,749 50 80,000 89 %
Hillsboro, OR 2020 158,000 23,563 1,000 20,240 44,803 81.3 % 4,380,684 30 85,000 28 %
Santa Clara, CA (14) 2007 135,322 62,046 1,238 45,094 108,378 91.4 % 25,944,154 11 80,940 77 %
Sacramento, CA 2012 92,644 54,595 2,794 23,916 81,305 59.1 % 11,671,128 8 54,595 100 %
Dulles, VA (15) 2017 66,751 26,625 - 22,206 48,831 86.2 % 13,267,724 13 44,545 60 %
Leased facilities (16) 2006 & 2015 187,706 59,065 18,650 41,901 119,616 84.0 % 22,277,731 10 79,717 74 %
Other (17) Misc. 147,435 22,380 98,674 30,074 151,128 79.8 % 10,001,496 5 22,380 100 %
7,355,587 2,068,306 301,675 1,875,638 4,245,619 92.6 % $ 494,298,060 966 3,316,024 62 %
New Property Development
Manassas, VA (DC - 2) (18) 2021 340,000 - - - - - % - - 160,000 - %
Unconsolidated Properties - at the Entity's 100% Share (19)
Manassas, VA (DC - 1) 2018 118,031 33,600 12,663 39,044 85,307 100.0 % 11,164,640 135 66,324 51 %
Total Properties 7,813,618 2,101,906 314,338 1,914,682 4,330,926 92.8 %$ 505,462,700 1,101 3,542,348 59 %
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(1)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 our own office space. (2)With respect to acquisitions, represents the year a property was acquired. With respect to properties under lease, represents the year our initial lease commenced for the property. With respect to new data center construction, represents the year the facility was opened or expected to be opened. (3)With respect to our 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. Gross square feet includes 424,246 square feet of our office and support space, which is not included in operating NRSF. (4)Represents management's estimate of the portion of NRSF of the facility with available power and cooling capacity that is currently leased or readily available to be leased to customers as data center space based on engineering drawings. (5)Represents the operating NRSF of the facility other than data center space (typically office and storage space) that is currently leased or available to be leased. (6)Represents required data center support space, including mechanical, telecommunications and utility rooms, as well as building common areas. (7)Calculated as data center raised floor that is subject to a signed lease for which billing has commenced divided by leasable raised floor based on the current configuration of the properties, expressed as a percentage. (8)We define annualized rent as MRR multiplied by 12. We calculate MRR as monthly contractual revenue under executed contracts as of a particular date, which includes revenue from our rental and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR does not include the impact from backlog contracts (as defined below) as of a particular date, unless otherwise specifically noted, nor does it reflect the accounting associated with any free rent, rent abatements or future scheduled rent increases. (9)Represents installed utility power and transformation capacity that is available for use by the facility as ofJune 30, 2021 . (10)Represents the total sellable data center raised floor potential of the existing data center facility. (11)This property was formerly known as "Ashburn,VA " but has been renamed "Ashburn, VA (DC - 1)" to distinguish between the existing data center and the recently developed data center shown as "Ashburn, VA (DC - 2)." (12)Consists of two data centers located in Eemshaven,Netherlands and Groningen,Netherlands . (13)Represents the recently developed data center in ourAshburn, VA market. (14)Subject to long-term ground lease. (15)Consists of one data center inDulles, Virginia . TheDulles campus previously consisted of two data center buildings, however as ofDecember 31, 2020 , the Company relocated customers from the smaller and older facility to the new facility in order to optimize its operating cost structure. (16)Includes 6 facilities. All facilities are leased, including one subject to a finance lease. (17)Consists ofMiami, FL ;Lenexa, KS ; andOverland Park, KS facilities. (18)Represents the development of a new data center building at ourManassas, VA campus. TheManassas, VA (DC - 2) data center is 100% owned and consolidated by QTS and is separate from theManassas, VA (DC - 1) data center that is owned by the unconsolidated entity. (19)Represents our unconsolidated entity at 100% share. Our equity ownership of the unconsolidated entity is 50%. 33
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Factors That May Influence Future Results of Operations and Cash Flows Revenue. Our revenue growth will depend on our ability to maintain the historical occupancy rates of leasable raised floor, lease currently available space, lease new capacity that becomes available as a result of our development and redevelopment activities, attract new customers and continue to meet the ongoing technological requirements of our customers. As ofJune 30, 2021 , we had in place customer leases generating revenue for approximately 93% of our leasable raised floor. Our ability to grow revenue also will be affected by our ability to maintain or increase rental and managed services rates at our properties. In addition, we also at times may elect to reclaim space from customers in a negotiated transaction where we believe that we can redevelop and/or re-lease that space at higher rates, which may cause a decrease in revenue until the space is re-leased. Leasing Arrangements. As ofJune 30, 2021 , approximately 54% of our MRR was attributable to the metered power model. Under the metered power model, the customer pays us a fixed monthly rent amount, plus reimbursement of certain other operating costs, including actual costs of sub-metered electricity used to power its data center equipment and an estimate of costs for electricity used to power supporting infrastructure for the data center, expressed as a factor of the customer's actual electricity usage. Fluctuations in our customers' utilization of power and the supplier pricing of power do not significantly impact our results of operations or cash flows under the metered power model. These leases generally have a minimum term of five years. As ofJune 30, 2021 , the remaining approximately 46% of our MRR was attributable to the gross lease or managed service model. Under this model, the customer pays us a fixed amount on a monthly basis, and does not separately reimburse us for operating costs, including utilities, maintenance, repair, property taxes and insurance, as reimbursement for these costs is factored into MRR. However, if customers incur more utility costs than their leases permit, we are able to charge these customers for overages. For leases under the gross lease or managed service model, fluctuations in our customers' utilization of power and the prices our utility providers charge us will impact our results of operations and cash flows. Our gross leases and managed services contracts generally have a term of three years or less. Scheduled Lease Expirations. Our ability to minimize rental churn (which we define as MRR lost in the period from a customer intending to fully exit our platform in the near-term compared to the total MRR at the beginning of the period) and customer downgrades at renewal, combined with our ability to renew, lease and re-lease expiring space, will impact our results of operations and cash flows. Leases which have commenced billing representing approximately 15% and 24% of our total leased raised floor are scheduled to expire during the years endingDecember 31, 2021 (including all month-to-month leases) and 2022, respectively. These leases also represented approximately 19% and 28%, respectively, of our annualized rent as ofJune 30, 2021 . Given that our average rent for larger contracts tend to be at or below market rent at expiration, as a general matter, based on current market conditions, we expect that expiring rents will generally be at or below the then-current market rents. Acquisitions, Development, and Financing. Our revenue growth also will depend on our ability to acquire and redevelop and/or construct and subsequently lease data center space at favorable rates. We generally fund the cost of data center acquisition, construction and/or redevelopment from our net cash provided by operations, revolving credit facility, other unsecured and secured borrowings, joint ventures and/or the issuance of additional equity. We believe that we have sufficient access to capital to fund our development. Unconsolidated Entity. OnFebruary 22, 2019 , we entered into an agreement with Alinda, an infrastructure investment firm, with respect to ourManassas data center. At closing, we contributed cash and ourManassas data center (a hyperscale data center under development inManassas, Virginia ), and Alinda contributed cash, in each case in exchange for a 50% interest in the unconsolidated entity. TheManassas data center, which is currently leased to a global cloud-based software company pursuant to a 10-year lease agreement, was contributed at an expected stabilized value upon completion of approximately$240 million . Under the agreement, we will receive additional distributions in the future as and when we complete development of each phase of theManassas data center and place it into service, which allows us to receive distributions for Alinda's share of the unconsolidated entity based on the expected full stabilization of the asset. These distributions will be based on a 6.75% capitalization rate for each phase delivered during the first three years of the agreement. Under the agreement, we serve as the unconsolidated entity's operating member, subject to authority and oversight of a board appointed by Alinda and us, and separately we serve as manager and developer of the facility in exchange for management and development fees. The agreement includes various transfer restrictions and rights of first offer that will allow us to repurchase Alinda's interest should Alinda wish to exit in the future. In addition, we have agreed to provide Alinda an opportunity to invest in future similar entities based on similar terms and at a comparable capitalization rate. This agreement has been reflected as an unconsolidated entity on our reported financial statements beginning in the first quarter of 2019. 34 -------------------------------------------------------------------------------- Table of Contents Operating Expenses. Our operating expenses generally consist of direct personnel costs, utilities, property and ad valorem taxes, insurance and site maintenance costs and rental expenses on our ground and building leases. In particular, our buildings require significant power to support the data center operations conducted in them. Although a significant portion of our long-term leases - leases with a term greater than three years - contain reimbursements for certain operating expenses, we will not in all instances be reimbursed for all of the property operating expenses we incur. Increases or decreases in our operating expenses will impact our results of operations and cash flows and we expect to incur additional operating expenses as we continue to expand. General Leasing Activity Information is provided in the tables below for both our leasing activity as well as backlog balances. For new/modified leases signed, "Incremental Annualized Rent, Net of Downgrades" reflect net incremental MRR signed during the period for purposes of tracking incremental revenue contribution. The amounts include renewals when there was a change in square footage rented, but exclude renewals where square footage remained consistent before and after renewal. (See "Renewed Leases" table below for such renewals.) Annualized rent per leased square foot is computed using the total MRR associated with all new and modified leases for the respective periods. Regarding renewed leases signed, consistent with our strategy and business model, the renewal rates below reflect total MRR per square foot including all subscribed services. For comparability, we include only those leases where the square footage remained consistent before and after renewal. All customers with space changes are incorporated into new/modified leasing statistics and rates. The following leasing and backlog statistics include results of the consolidated business as well as QTS' 50% share of revenue from the unconsolidated entity, if any. Annualized Incremental rent per Annualized Rent leased sq ft (1), Net of Period Number of Leases (1) Downgrades Three Months Ended New/Modified Leases Signed June 30, 2021 468$ 277 $ 26,730,104 Six Months Ended June 30, 2021 987 304 47,335,497 Annualized rent (1) Number of Renewed per leased sq Period Leases ft Annualized Rent (2) Rent Change Renewed Leases (2) Three Months Ended June 30, 2021 113$ 946 $ 14,586,804 7.4% Six Months Ended June 30, 2021 241 619 37,579,716 4.2%
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(1)We define annualized rent as MRR as ofJune 30, 2021 , multiplied by 12. (2)We define renewals as leases where the customer retains the same amount of space before and after renewals, which facilitates rate comparability. The following tables outline the Company's backlog (which represents MRR, excluding cost recoveries, for customer leases that have been signed but have not yet commenced as of period end) as ofJune 30, 2021 , both on a GAAP rent and cash rent basis: Backlog - GAAP rent (1) 2021 2022 Thereafter Total MRR$ 2,995,732 $ 2,260,957 $ 2,200,005 $ 7,456,694 Incremental revenue (2) 10,766,155 20,174,110 26,400,060 Annualized revenue (3)$ 35,948,784 $ 27,131,484 $ 26,400,060 $ 89,480,328 Backlog - Cash rent (1) 2021 2022 Thereafter Total MRR$ 5,007,779 $ 3,661,320 $ 4,514,350 $ 13,183,449 Incremental revenue (2) 17,093,259 29,716,610 54,172,200 Annualized revenue (3)$ 60,093,348 $ 43,935,840 $ 54,172,200 $ 158,201,388
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(1)Includes our consolidated backlog balance in addition to backlog associated
with the unconsolidated entity at QTS' pro rata share of the backlog revenue. Of
the $89.5 million backlog of annualized GAAP rent, approximately $3.1 million
related to QTS' pro rata share of backlog revenue associated with the
unconsolidated entity. Of the $158.2 million backlog of annualized cash rent,
approximately $3.6 million related to QTS' pro rata share of backlog revenue
associated with the unconsolidated entity.
(2)Incremental revenue represents the expected amount of recognized MRR for the
business in the period based on when the backlog leases commence throughout the
period.
(3)Annualized revenue represents the backlog MRR multiplied by 12, demonstrating
how much recognized MRR would have been recognized if the backlog leases
commencing in the period were in place for an entire year.
We estimate the remaining cost to provide the space, power, connectivity and
other services to the customer contracts which had not billed as of June 30,
2021 to be approximately $391 million . This estimate generally includes
customers with newly contracted space of more than 3,300 square feet of raised
floor space. The space, power, connectivity and other services provided to
customers that contract for smaller amounts of space is generally provided by
utilizing existing space which was previously developed.
Results of Operations
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Changes in revenues and expenses for the three months ended June 30, 2021
compared to the three months ended June 30, 2020 are summarized below (unaudited
and in thousands):
Three Months Ended June 30,
2021 2020 $ Change % Change
Revenues:
Rental $ 150,807 $ 125,996 $ 24,811 20 %
Other 4,413 5,644 (1,231) (22) %
Total revenues 155,220 131,640 23,580 18 %
Operating expenses:
Property operating costs 45,704 40,349 5,355 13 %
Real estate taxes and insurance 5,788 4,106 1,682 41 %
Depreciation and amortization 58,255 47,554 10,701 23 %
General and administrative 24,476 21,391 3,085 14 %
Transaction and integration costs 8,391 381 8,010 2,102 %
Total operating expenses 142,614 113,781 28,833 25 %
Operating income 12,606 17,859 (5,253) (29) %
Other income and expense:
Interest income 1 2 (1) (50) %
Interest expense (7,452) (6,924) 528 8 %
Equity in net loss of unconsolidated (705) (590) 115 19 %
entity
Income before taxes 4,450 10,347 (5,897) (57) %
Tax expense (251) (138) 113 82 %
Net income $ 4,199 $ 10,209 $ (6,010) (59) %
Revenues. Total revenues for the three months ended June 30, 2021 were
$155.2 million compared to $131.6 million for the three months ended June 30,
2020 . The increase of $23.6 million , or 18%, was largely attributable to growth
in our hyperscale and hybrid colocation offerings primarily through increases in
revenues at our Ashburn (DC - 1), Atlanta (DC - 1) and Chicago facilities, as
well as the opening of our Atlanta (DC - 2) facility.
Property Operating Costs. Property operating costs for the three months ended
June 30, 2021 were $45.7 million compared to property operating costs of
$40.3 million for the three months ended June 30, 2020 , an increase of
$5.4 million , or 13%.
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The breakdown of our property operating costs is summarized in the table below
(unaudited and in thousands):
Three Months Ended June 30,
2021 2020 $ Change % Change
Property operating costs:
Direct payroll $ 6,774 $ 6,939 $ (165) (2) %
Rent 2,436 2,717 (281) (10) %
Repairs and maintenance 4,285 3,360 925 28 %
Utilities 21,601 16,307 5,294 32 %
Management fee allocation 5,701 4,828 873 18 %
Other 4,907 6,198 (1,291) (21) %
Total property operating costs $ 45,704 $ 40,349 $ 5,355 13 %
The increase in total property operating costs was primarily due to increased
utilities expense, repairs and maintenance expense and management fee allocation
resulting from ongoing company growth. The increase in utility costs was
primarily driven by increased power utility expenses primarily at the Atlanta
(DC - 1) and Suwanee facilities, as well as the opening of our Atlanta (DC - 2)
facility. Offsetting these increases was a reduction in general bad debt
reserves attributable to a higher level of bad debt expense in the prior year
associated with the risk of a loss across our portfolio of lease receivables
primarily related to customers that experienced business disruptions due to
COVID-19 in the second quarter of 2020, which is included in the "Other" line
item of the property operating costs table, as well as a reduction in rent
expense primarily related to the exit of portions of leased facilities as
customers churned, downgraded or migrated to our owned facilities.
Real Estate Taxes and Insurance. Real estate taxes and insurance for the three
months ended June 30, 2021 were $5.8 million compared to $4.1 million for the
three months ended June 30, 2020 . The increase of $1.7 million , or 41%, was
primarily attributable to an increase in real estate taxes associated with the
in servicing of certain data center facilities and increased assessed property
values at our Atlanta (DC - 1) and Fort Worth facilities.
Depreciation and Amortization. Depreciation and amortization for the three
months ended June 30, 2021 was $58.3 million compared to $47.6 million for the
three months ended June 30, 2020 . The increase of $10.7 million , or 23%, was
primarily due to additional depreciation expense relating to an increase in
assets placed in service at our Ashburn (DC - 1), Chicago and Irving facilities,
as well as the opening of our Atlanta (DC - 2) facility.
General and Administrative Expenses. General and administrative expenses were
$24.5 million for the three months ended June 30, 2021 compared to $21.4 million
for the three months ended June 30, 2020 , an increase of $3.1 million , or 14%.
The increase was primarily attributable to an increase in total compensation
expense, the majority of which related to increased equity-based compensation
expense associated with the growth of the Company and anticipated achievement of
certain performance metrics of outstanding equity awards, as well as an increase
in expenses related to travel and corporate events following limited activity in
the prior year due to COVID-19.
Transaction and Integration Costs. Transaction and integration costs were
$8.4 million for the three months ended June 30, 2021 , compared to $0.4 million
for the three months ended June 30, 2020 . The increase of $8.0 million was
primarily attributable to transaction costs recognized during the three months
ended June 30, 2021 associated with the potential pending merger. See the
"Pending Acquisition by Blackstone " section above for further details.
Interest Expense. Interest expense for the three months ended June 30, 2021 was
$7.5 million compared to $6.9 million for the three months ended June 30, 2020 .
The increase in interest expense was primarily attributable to an increase in
our average total debt balance from the prior period, partially offset by a
decrease in our average interest rates from the prior period.
Equity in net loss of unconsolidated entity. This represents equity in earnings
(loss) of our unconsolidated entity formed during the first quarter of 2019 that
owns our Manassas (DC - 1) data center. Equity in net loss was $0.7 million for
the three months ended June 30, 2021 , which remained consistent with a net loss
of $0.6 million for the three months ended June 30, 2020 .
Tax Expense. Tax expense for the three months ended June 30, 2021 was
$0.3 million which remained consistent when compared to $0.1 million of tax
expense for the three months ended June 30, 2020 .
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Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Changes in revenues and expenses for the six months ended June 30, 2021 compared
to the six months ended June 30, 2020 are summarized below (unaudited and in
thousands):
Six Months Ended June 30,
2021 2020 $ Change % Change
Revenues:
Rental $ 295,115 $ 246,077 $ 49,038 20 %
Other 8,837 11,855 (3,018) (25) %
Total revenues 303,952 257,932 46,020 18 %
Operating expenses:
Property operating costs 91,988 81,130 10,858 13 %
Real estate taxes and insurance 10,810 8,017 2,793 35 %
Depreciation and amortization 113,761 92,624 21,137 23 %
General and administrative 48,117 42,074 6,043 14 %
Transaction and integration costs 9,907 597 9,310 1,559 %
Total operating expenses 274,583 224,442 50,141 22 %
Operating income 29,369 33,490 (4,121) (12) %
Other income and expense:
Interest income 1 2 (1) (63) %
Interest expense (15,600) (14,086) 1,514 11 %
Other income - 159 (159) (100) %
Equity in net loss of unconsolidated (1,264) (1,267) (3) 0 %
entity
Income before taxes 12,506 18,298 (5,792) (32) %
Tax benefit (expense) (389) 31 420 (1,355) %
Net income $ 12,117 $ 18,329 $ (6,212) (34) %
Revenues. Total revenues for the six months ended June 30, 2021 were
$304.0 million compared to $257.9 million for the six months ended June 30,
2020 . The increase of $46.0 million , or 18%, was largely attributable to growth
in our hyperscale and hybrid colocation offerings primarily through increases in
revenues at our Ashburn (DC - 1), Atlanta (DC - 1) and Chicago facilities, as
well as the opening of our Atlanta (DC - 2) facility.
Property Operating Costs. Property operating costs for the six months ended
June 30, 2021 were $92.0 million compared to property operating costs of
$81.1 million for the six months ended June 30, 2020 , an increase of
$10.9 million , or 13%.
The breakdown of our property operating costs is summarized in the table below
(unaudited and in thousands):
Six Months Ended June 30,
2021 2020 $ Change % Change
Property operating costs:
Direct payroll $ 13,764 $ 13,467 $ 297 2 %
Rent 4,835 5,466 (631) (12) %
Repairs and maintenance 8,697 6,699 1,998 30 %
Utilities 42,581 31,295 11,286 36 %
Management fee allocation 11,178 9,505 1,673 18 %
Other 10,933 14,698 (3,765) (26) %
Total property operating costs $ 91,988 $ 81,130 $ 10,858 13 %
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The increase in total property operating costs was primarily due to increased
utilities expense, repairs and maintenance expense, management fee allocation
and direct payroll costs resulting from ongoing company growth. The increase in
utility costs was primarily driven by increased power utility expenses primarily
at the Atlanta (DC - 1), Suwanee and Chicago facilities, as well as the opening
of our Atlanta (DC - 2) facility. Offsetting these increases was a reduction in
general bad debt reserves attributable to a higher level of bad debt expense in
the prior year associated with the risk of a loss across our portfolio of lease
receivables primarily related to customers that experienced business disruptions
due to COVID-19 in the first and second quarters of 2020, which is included in
the "Other" line item of the property operating costs table, as well as a
reduction in rent expense primarily related to the exit of portions of leased
facilities as customers churned, downgraded or migrated to our owned facilities.
Real Estate Taxes and Insurance. Real estate taxes and insurance for the six
months ended June 30, 2021 were $10.8 million compared to $8.0 million for the
six months ended June 30, 2020 . The increase of $2.8 million , or 35%, was
primarily attributable to an increase in real estate taxes associated with the
in servicing of certain data center facilities and increased assessed property
values at our Atlanta (DC - 1), Ashburn (DC - 1) and Fort Worth facilities.
Depreciation and Amortization. Depreciation and amortization for the six months
ended June 30, 2021 was $113.8 million compared to $92.6 million for the six
months ended June 30, 2020 . The increase of $21.1 million , or 23%, was primarily
due to additional depreciation expense relating to an increase in assets placed
in service at our Ashburn (DC - 1), Chicago , Irving and Atlanta (DC - 1)
facilities, as well as the opening of our Atlanta (DC - 2) facility.
General and Administrative Expenses. General and administrative expenses were
$48.1 million for the six months ended June 30, 2021 compared to $42.1 million
for the six months ended June 30, 2020 , an increase of $6.0 million , or 14%. The
increase was primarily attributable to an increase in total compensation
expense, the majority of which related to increased equity-based compensation
expense associated with the growth of the Company and anticipated achievement of
certain performance metrics of outstanding equity awards, as well as increases
in charitable contributions and software licenses.
Transaction and Integration Costs. Transaction and integration costs were
$9.9 million for the six months ended June 30, 2021 , compared to $0.6 million
for the six months ended June 30, 2020 . The increase of $9.3 million was
primarily attributable to transaction costs recognized during the six months
ended June 30, 2021 associated with the potential pending merger. See the
"Pending Acquisition by Blackstone " section above for further details.
Interest Expense. Interest expense for the six months ended June 30, 2021 was
$15.6 million compared to $14.1 million for the six months ended June 30, 2020 .
The increase in interest expense was primarily attributable to an increase in
our average total debt balance from the prior period as well as a lower level of
capitalized interest during the current period, which was driven by a reduction
in interest rates.
Other Income. Other income represents the impact of foreign currency exchange
rate fluctuations on the value of our net investments in foreign subsidiaries
whose functional currencies are other than the U.S. Dollar. We recognized no
foreign currency gain (loss) related to our investment in the Netherlands
facilities during the six months ended June 30, 2021 . Prior to February 2020 ,
gains or losses from foreign currency transactions related to our investment in
the Netherlands facilities were included in determining net income (loss). In
February 2020 , we entered into a net investment hedge which resulted in gains or
losses subsequently being recognized in Other Comprehensive Income (Loss).
Equity in net loss of unconsolidated entity. This represents equity in earnings
(loss) of our unconsolidated entity formed during the first quarter of 2019 that
owns our Manassas (DC - 1) data center. Equity in net loss was $1.3 million for
the six months ended June 30, 2021 , which remained consistent with a net loss of
$1.3 million for the six months ended June 30, 2020 .
Tax Benefit (Expense). Tax expense for the six months ended June 30, 2021 was
$0.4 million which remained consistent when compared to less than $0.1 million
of tax benefit for the six months ended June 30, 2020 .
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Non-GAAP Financial Measures
We consider the following non-GAAP financial measures to be useful to investors
as key supplemental measures of our performance: (1) FFO; (2) Operating FFO; (3)
Adjusted Operating FFO; (4) MRR and Recognized MRR; (5) NOI; (6) EBITDAre; 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 our operating performance. FFO, Operating
FFO, Adjusted Operating FFO, MRR, NOI, EBITDAre and Adjusted EBITDA, as
calculated by us, may not be comparable to similarly titled measures as reported
by other companies that do not use the same definition or implementation
guidelines or interpret the standards differently from us.
We do not, nor do we suggest investors should, consider such non-GAAP financial
measures in isolation from, or as a substitute for, GAAP financial information.
We believe the presentation of non-GAAP financial measures provide meaningful
supplemental information to both management and investors that is indicative of
our operations. We have included a reconciliation of this additional information
to the most comparable GAAP measure below.
FFO, Operating FFO and Adjusted Operating FFO
We consider funds from operations ("FFO") to be a supplemental measure of our
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. We calculate FFO in accordance with the standards
established by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO represents net income (loss) (computed in accordance with GAAP),
adjusted to exclude gains (or losses) from sales of depreciable real estate
related to our primary business, impairment write-downs of depreciable real
estate related to our primary business, real estate-related depreciation and
amortization, and similar adjustments for unconsolidated entities. To the extent
we incur gains or losses from the sale of assets that are incidental to our
primary business, or incur impairment write-downs associated with assets that
are incidental to our primary business, we include such amounts in our
calculation of FFO. Our management uses FFO as a supplemental operating
performance measure because, in excluding real estate-related depreciation and
amortization, impairment write-downs of depreciable real estate and gains and
losses from property dispositions related to our primary business, 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 our operating results that management believes are not reflective of
our operating performance, management computes an adjusted measure of FFO, which
we refer to as Operating funds from operations ("Operating FFO"). Operating FFO
is a non-GAAP measure that is used as a supplemental operating measure and to
provide additional information to users of the financial statements. We
generally calculate Operating FFO as FFO excluding certain non-routine charges
and gains and losses that management believes are not indicative of the results
of our operating real estate portfolio. We believe that Operating FFO provides
investors with another financial measure that may facilitate comparisons of
operating performance between periods and, to the extent they calculate
Operating FFO on a comparable basis, between REITs.
Adjusted Operating Funds From Operations ("Adjusted Operating FFO") is a
non-GAAP measure that is used as a supplemental operating measure and to provide
additional information to users of the financial statements. We calculate
Adjusted Operating FFO by adding or subtracting from Operating FFO items such
as: maintenance capital investment, paid leasing commissions, amortization of
deferred financing costs, non-real estate depreciation and amortization,
straight-line rent adjustments, income taxes, equity-based compensation and
similar adjustments for unconsolidated entities.
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We offer these measures because we recognize that FFO, Operating FFO and
Adjusted Operating FFO will be used by investors as a basis to compare our
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 our 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 our
properties, all of which have real economic effect and could materially impact
our financial condition, cash flows and results of operations, the utility of
FFO, Operating FFO and Adjusted Operating FFO as measures of our operating
performance is limited. Our 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, our
calculations of FFO, Operating FFO and Adjusted Operating FFO are not
necessarily comparable to similarly titled measures 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 our 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 our cash needs, including our ability to make distributions to our
stockholders.
A reconciliation of net income to FFO, Operating FFO and Adjusted Operating FFO
is presented below (unaudited and in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
FFO
Net income $ 4,199 $ 10,209 12,117 $ 18,329
Equity in net loss of unconsolidated entity 705 590 1,264 1,267
Real estate depreciation and amortization 55,044 44,196 107,673 85,896
Pro rata share of FFO from unconsolidated entity 474 399 931 677
FFO (1) 60,422 55,394 121,985 106,169
Preferred stock dividends (7,045) (7,045) (14,090) (14,090)
FFO available to common stockholders & OP unit
holders 53,377 48,349 107,895 92,079
Transaction and integration costs 8,391 381 9,907 597
Operating FFO available to common stockholders &
OP unit holders (2) 61,768 48,730 117,802 92,676
Maintenance capital expenditures (2,337) (4,220) (4,041) (5,882)
Leasing commissions paid (11,491) (6,805) (20,951) (15,803)
Amortization of deferred financing costs 1,129 991 2,259 1,978
Non real estate depreciation and amortization 3,212 3,358 6,088 6,728
Straight-line rent revenue and expense and other (7,916) (5,702) (15,525) (9,457)
Tax expense (benefit) from operating results 251 138 389 (31)
Equity-based compensation expense 7,311 6,082 14,167 10,957
Adjustments for unconsolidated entity 51 (88) 97 (22)
Adjusted Operating FFO available to common
stockholders & OP unit holders (2) $ 51,978 _______________________
(1)No gains, losses or impairment write-downs associated with assets incidental to our primary business were incurred during the three and six months endedJune 30, 2021 and 2020. (2)Our 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) and Recognized MRR We calculate MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from our rental and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR is also calculated to include our pro rata share of monthly contractual revenue under signed leases as of a particular date associated with unconsolidated entities, which includes revenue from the unconsolidated entity's rental and managed services activities, but excludes the unconsolidated entity's customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR reflects the annualized cash rental payments. It does not include the impact from backlog leases as of a particular date, unless otherwise specifically noted. 41 -------------------------------------------------------------------------------- Table of Contents Separately, we calculate recognized MRR as the recurring revenue recognized during a given period, which includes revenue from our rental and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. Management uses MRR and recognized MRR as supplemental performance measures because they provide useful measures of increases in contractual revenue from our customer leases and customer leases attributable to our business. MRR and recognized MRR should not be viewed by investors as alternatives to actual monthly revenue, as determined in accordance with GAAP. Other companies may not calculate MRR or recognized MRR in the same manner. Accordingly, our 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 our performance. MRR and recognized MRR should not be used as measures of our results of operations or liquidity, nor is it indicative of funds available to meet our cash needs, including our ability to make distributions to our stockholders. A reconciliation of total GAAP revenues to recognized MRR in the period and MRR at period end is presented below (unaudited and in thousands): Three Months Ended Six Months Ended June 30, June 30, 2021 2020 2021 2020 Recognized MRR in the period Total period revenues (GAAP basis)$ 155,220 $ 131,640 $ 303,952 $ 257,932 Less: Total period variable lease revenue from recoveries (17,692) (12,528) (33,820) (24,803) Total period deferred setup fees (7,241) (4,520) (13,677) (8,444) Total period straight-line rent and other (10,456) (9,327) (22,079) (17,359) Recognized MRR in the period$ 119,831 $ 105,265
MRR at period end Total period revenues (GAAP basis)$ 155,220 $ 131,640 $ 303,952 $ 257,932 Less: Total revenues excluding last month (102,328) (87,538) (251,060) (213,830) Total revenues for last month of period 52,892 44,102 52,892 44,102 Less: Last month variable lease revenue from recoveries (6,358) (4,350) (6,358) (4,350) Last month deferred setup fees (2,548) (1,533) (2,548) (1,533) Last month straight-line rent and other (2,794) (2,480) (2,794) (2,480) Add: Pro rata share of MRR at period end of unconsolidated entity 465 352 465 352 MRR at period end (1)$ 41,657 $ 36,091 $ 41,657 $ 36,091 _______________________ (1)Does not include our backlog of cash rent balance, which was$7.5 million and$9.3 million as ofJune 30, 2021 and 2020, respectively. Net Operating Income (NOI) We calculate net operating income ("NOI") as net income (loss) (computed in accordance with GAAP), excluding: interest expense, interest income, tax expense (benefit), depreciation and amortization, write off of unamortized deferred financing costs, other (income) expense, debt restructuring costs, transaction, integration and impairment costs, gain (loss) on sale of real estate, restructuring costs, general and administrative expenses and similar adjustments for unconsolidated entities. We allocate a management fee charge of 4% of cash revenues for all facilities as a property operating cost and a corresponding reduction to general and administrative expense to cover the day-to-day administrative costs to operate our data centers. The management fee charge is reflected as a reduction to net operating income. Management uses NOI as a supplemental performance measure because it provides a useful measure of the operating results from our customer leases. In addition, we believe it is useful to investors in evaluating and comparing the operating performance of our properties and to compute the fair value of our properties. Our NOI may not be comparable to other REITs' NOI as other REITs may not calculate NOI in the same manner. NOI should be considered only as a supplement to net income (loss) as a measure of our performance and should not be used as a measure of our results of operations or liquidity or as an indication of funds available to meet our cash needs, including our ability to make distributions to our stockholders. NOI is a measure of the operating performance of our properties and not of our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP. 42
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A reconciliation of net income to NOI is presented below (unaudited and in
thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net Operating Income (NOI)
Net income $ 4,199 $ 10,209 $ 12,117 $ 18,329
Equity in net loss of unconsolidated
entity 705 590 1,264 1,267
Interest income (1) (2) (1) (2)
Interest expense 7,452 6,924 15,600 14,086
Depreciation and amortization 58,255 47,554 113,761 92,624
Other (income) expense - - - (159)
Tax expense (benefit) 251 138 389 (31)
Transaction and integration costs 8,391 381 9,907 597
General and administrative expenses 24,476 21,391 48,117 42,074
NOI from consolidated operations (1)
$ 201,154 $ 168,785 Pro rata share of NOI from unconsolidated entity 1,115 927 2,248 1,771 Total NOI (1)$ 104,843 $ 88,112 $ 203,402 $ 170,556 _______________________ (1)Includes facility level general and administrative allocation charges of 4% of cash revenue for all facilities. These allocated charges aggregated to$5.7 million and$4.8 million for the three months endedJune 30, 2021 and 2020, respectively, and$11.2 million and$9.5 million for the six months endedJune 30, 2021 and 2020, respectively. Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDA We calculate EBITDAre in accordance with the standards established by NAREIT. EBITDAre represents net income (computed in accordance with GAAP) adjusted to exclude gains (or losses) from sales of depreciated property related to our primary business, income tax expense (or benefit), interest expense, depreciation and amortization, impairments of depreciated property related to our primary business, and similar adjustments for unconsolidated entities. Management uses EBITDAre as a supplemental performance measure because it provides performance measures that, when compared year over year, captures the performance of our operations by removing the impact of our capital structure (primarily interest expense) and asset base charges (primarily depreciation and amortization) from our operating results. Due to the volatility and nature of certain significant charges and gains recorded in our operating results that management believes are not reflective of operating performance, we compute an adjusted measure of EBITDAre, which we refer to as Adjusted EBITDA. We calculate Adjusted EBITDA as EBITDAre excluding certain non-routine charges, write off of unamortized deferred financing costs, gains (losses) on extinguishment of debt, restructuring costs, and transaction and integration costs, as well as our pro-rata share of each of those respective adjustments associated with the unconsolidated entity aggregated into one line item categorized as "Adjustments for the unconsolidated entity." In addition, we calculate Adjusted EBITDA excluding certain non-cash recurring costs such as equity-based compensation. We believe 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 our operating results. Other companies may not calculate EBITDAre or Adjusted EBITDA in the same manner. Accordingly, our 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 our performance and should not be used as substitutes for net income (loss), as measures of our results of operations or liquidity or as indications of funds available to meet our cash needs, including our ability to make distributions to our stockholders. 43
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Table of Contents A reconciliation of net income to EBITDAre and Adjusted EBITDA is presented below (unaudited and in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
EBITDAre and Adjusted EBITDA
Net income $ 4,199 $ 10,209 $ 12,117 $ 18,329
Equity in net loss of unconsolidated entity 705 590 1,264 1,267
Interest income (1) (2) (1) (2)
Interest expense 7,452 6,924 15,600 14,086
Tax expense (benefit) 251 138 389 (31)
Depreciation and amortization 58,255 47,554 113,761 92,624
Pro rata share of EBITDAre from
unconsolidated entity 1,100 924 2,206 1,743
EBITDAre (1) 71,961 66,337 $ 145,336 $ 128,016
Equity-based compensation expense 7,311 6,082 14,167 10,957
Transaction, integration and implementation
costs 8,391 381 9,907 597
Adjusted EBITDA $ 87,663 $ 72,800 $ 169,410 $ 139,570 _______________________
(1)No gains, losses or impairment write-downs associated with assets incidental
to our primary business were incurred during the three and six months ended
Liquidity and Capital Resources
The Merger Agreement contains provisions which restrict or prohibit certain capital expenditures without the consent of the Parent as well as certain capital transactions typically used to fund our short and long-term liquidity requirements. Until the Merger Transactions close, or the Merger Agreement is terminated, our liquidity requirements will primarily be funded by our cash flow from operations and certain other capital activities allowed under the Merger Agreement. In particular, we are subject to various restrictions under the Merger Agreement on raising additional capital, assuming additional debt, issuing additional equity or debt, repurchasing equity, and entering into certain acquisition, disposition and leasing transactions, among other restrictions, subject to the restrictions under the Merger Agreement. Short-Term Liquidity Our short-term liquidity needs include funding capital expenditures for the development of data center space (a significant portion of which is discretionary), meeting debt service and debt maturity obligations, funding payments for finance leases, funding distributions to our common and preferred stockholders and unit holders, utility costs, site maintenance costs, real estate and personal property taxes, insurance, rental expenses, general and administrative expenses and certain recurring and non-recurring capital expenditures. We incurred$453.4 million of capital expenditures during the six months endedJune 30, 2021 . A significant portion of our future capital expenditures are discretionary in nature and we may ultimately determine not to make these expenditures or the timing of expenditures may vary. In addition, the amount and timing of future capital expenditures may vary if the Merger Transactions close as expected. We expect to meet capital expenditures requirements and our other short-term liquidity needs through operating cash flow, cash and cash equivalents and borrowings under our credit facilities. The funding to meet short term liquidity needs may vary if the Merger Transactions close as expected. The Company is subject to restrictions on equity issuances, other capital markets activities and sales of interests in certain projects into unconsolidated entities pursuant to the terms of the Merger Agreement. 44 -------------------------------------------------------------------------------- Table of Contents Our cash paid for capital expenditures for the six months endedJune 30, 2021 and 2020 are summarized in the table below (unaudited and in thousands): Six Months Ended June 30, 2021 2020 Development$ 386,438 $ 321,639 Acquisitions 27,154 1,797 Maintenance capital expenditures 4,041 5,882 Other capital expenditures (1) 62,922 50,134 Total capital expenditures$ 480,555 $ 379,452
_______________________
(1)Represents capital expenditures for capitalized interest, commissions, personal property, overhead costs and corporate fixed assets. Corporate fixed assets primarily relate to construction of corporate offices, leasehold improvements and product related assets. Long-Term Liquidity Our long-term liquidity needs primarily consist of funds for property acquisitions, scheduled debt maturities and interest payments, funding payments for finance leases, recurring and non-recurring capital expenditures, and dividend payments on our common stock, Series A Preferred Stock and Series B Preferred Stock. We may also pursue new developments and additional redevelopment of our data centers and future redevelopment of other space in our portfolio. We may also pursue development on land we own that is available at multiple data center properties in our portfolio. The development and/or redevelopment of this space, including timing, is at our discretion and will depend on a number of factors, including availability of capital and our estimate of the demand for data center space in the applicable market. We expect to meet our long-term liquidity needs with net cash provided by operations, incurrence of additional long-term indebtedness, borrowings under our revolving credit facility, and distributions from our unconsolidated entity, subject to prevailing market conditions, as discussed below. The Company is subject to restrictions on equity issuances, other capital markets activities and sales of interests in certain projects into unconsolidated entities pursuant to the terms of the Merger Agreement. Our long-term liquidity needs will be different if the Merger Transactions close as expected. Equity InJune 2019 , we established an "at-the-market" equity offering program (the "Prior ATM Program") pursuant to which we could issue, from time to time, up to$400 million of our Class A common stock,$0.01 par value per share (the "Class A common stock"), which could include shares to be sold on a forward basis. During the three months endedMarch 31, 2021 , we settled the remaining shares subject to the forward sale agreements under the Prior ATM Program. Because we had utilized substantially all of the offering capacity of the Prior ATM Program, inMay 2020 , we established a new "at-the-market" equity offering program (the "Current ATM Program") pursuant to which we may issue, from time to time, up to$500 million of our Class A common stock, which may include shares to be sold on a forward basis. As under the Prior ATM Program, the use of forward sales under the Current ATM Program generally allows us to lock in a price on the sale of shares of our Class A common stock when sold by the forward sellers, but defer receiving the net proceeds from such sales until the shares of our Class A common stock are issued at settlement on a later date. The Company is subject to restrictions on the issuance of Class A common stock pursuant to the terms of the Merger Agreement without Parent's consent. InJune 2020 , we conducted an underwritten offering of 4,400,000 shares of our common stock on a forward basis. During the three months endedMarch 31, 2021 , we settled a portion of the 4,400,000 shares subject to the forward sales agreements. During the three months endedJune 30, 2021 , we settled 8.2 million shares sold on a forward basis, representing all remaining outstanding forward stock sales from the Current ATM Program and theJune 2020 underwritten offering, generating net proceeds of approximately$490.9 million . 45 -------------------------------------------------------------------------------- Table of Contents Manassas Unconsolidated Entity OnFebruary 22, 2019 , we entered into an agreement with Alinda, an infrastructure investment firm, with respect to ourManassas (DC - 1) data center, as described above under "Factors That May Influence Future Results of Operations and Cash Flows." Under the agreement, we will receive additional proceeds in the future as and when we complete development of each phase of theManassas data center and place it into service, which allows us to receive proceeds for Alinda's share of the unconsolidated entity based on the expected full stabilization of the asset. These proceeds will be based on a 6.75% capitalization rate for each phase delivered during the first three years of the agreement. Cash As ofJune 30, 2021 , our cash and cash equivalents balance was$28.1 million . Dividends and Distributions The following tables present quarterly cash dividends and distributions paid to our common and preferred stockholders for the six months endedJune 30, 2021 and 2020: Six Months Ended June 30, 2021 Aggregate Dividend/Distribution Record Date Payment Date Per Share Rate Amount (in millions) Common Stock March 19, 2021 April 6, 2021 $ 0.50 $ 35.7 December 22, 2020 January 7, 2021 $ 0.47 33.4 $ 69.1 Series A Preferred Stock March 31, 2021 April 15, 2021 $ 0.45 $ 1.9 December 31, 2020 January 15, 2021 $ 0.45 1.9 $ 3.8 Series B Preferred Stock March 31, 2021 April 15, 2021 $ 1.63 $ 5.1 December 31, 2020 January 15, 2021 $ 1.63 5.1 $ 10.2 Six Months Ended June 30, 2020 Aggregate Dividend/Distribution Record Date Payment Date Per Share Rate Amount (in millions) Common Stock March 20, 2020 April 7, 2020 $ 0.47 $ 31.5 December 20, 2019 January 7, 2020 $ 0.44 28.6 $ 60.1 Series A Preferred Stock March 31, 2020 April 15, 2020 $ 0.45 $ 1.9 December 31, 2019 January 15, 2020 $ 0.45 1.9 $ 3.8 Series B Preferred Stock March 31, 2020 April 15, 2020 $ 1.63 $ 5.1 December 31, 2019 January 15, 2020 $ 1.63 5.1 $ 10.2 46
-------------------------------------------------------------------------------- Table of Contents Additionally, subsequent toJune 30, 2021 , we paid the following dividends: •OnJuly 7, 2021 , we paid our regular quarterly cash dividend of$0.50 per common share to stockholders of record as of the close of business onJune 18, 2021 . •OnJuly 15, 2021 , we paid a quarterly cash dividend of approximately$0.45 per share on our Series A Preferred Stock to holders of Series A Preferred Stock of record as of the close of business onJune 30, 2021 . •OnJuly 15, 2021 , we paid a quarterly cash dividend of approximately$1.63 per share on our Series B Preferred Stock to holders of Series B Preferred Stock of record as of the close of business onJune 30, 2021 . Indebtedness Below is a listing of our outstanding debt, including finance leases, as ofJune 30, 2021 andDecember 31, 2020 (in thousands): Weighted Average Effective Interest Rate at June 30, 2021 June 30, December 31, (1) Maturity Date 2021 2020 (unaudited) (unaudited) Unsecured Credit Facility Revolving Credit Facility 1.35% December 17, 2023$ 95,156 $ 392,337 Term Loan A 3.26% December 17, 2024 225,000 225,000 Term Loan B 3.30% April 27, 2025 225,000 225,000 Term Loan C 3.46% October 18, 2026 250,000 250,000 Term Loan D 1.45% January 15, 2026 250,000 250,000 3.875% Senior Notes 3.88% October 1, 2028 500,000 500,000 Finance Leases 4.36% 2031 - 2041 42,395 41,718 3.12% 1,587,551 1,884,055 Less net debt issuance costs (13,307) (14,562) Total outstanding debt, net$ 1,574,244 $ 1,869,493
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(1)The coupon interest rates associated with Term Loan A, Term Loan B, and Term Loan C incorporate the effects of our interest rate swaps in effect as ofJune 30, 2021 . As ofJune 30, 2021 , we had availability under our$1.0 billion revolving credit facility of$901.3 million , excluding$500.0 million of availability through the unsecured credit facility's accordion feature. As ofJune 30, 2021 , we were in compliance with all of our covenants of our debt agreements. Contingencies We are subject to various routine legal proceedings and other matters in the ordinary course of business. While resolution of these matters cannot be predicted with certainty, management believes, based upon information currently available, that the final outcome of these proceedings will not have a material adverse effect on our financial condition, liquidity or results of operations. 47 -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table summarizes our contractual obligations as ofJune 30, 2021 including the future non-cancellable minimum rental payments required under operating leases and the maturities and scheduled principal repayments of indebtedness and other agreements (unaudited and in thousands): Obligations (1) 2021 2022 2023 2024 2025 Thereafter Total Operating Leases$ 4,968 $ 10,266 $ 10,393 $ 8,317 $ 8,036 $ 40,872 $ 82,852 Finance Leases 1,400 3,007 3,283 3,574 3,883 27,248 42,395 Future Principal Payments of Indebtedness (2) - - 95,156 225,000 225,000 1,000,000 1,545,156 Total (3)$ 6,368 $ 13,273 $ 108,832 $ 236,891 $ 236,919 $ 1,068,120 $ 1,670,403
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(1)Contractual obligations do not include our energy power purchase agreements as QTS has the ability to sell unused capacity back to the utility provider. (2)Does not include the related debt issuance costs on the 3.875% Senior Notes, the related debt issuance costs on the term loans reflected atJune 30, 2021 , nor the letters of credit outstanding aggregating to$3.5 million as ofJune 30, 2021 under our unsecured credit facility. (3)Total obligations amount does not include contractual interest that we are required to pay on our long-term debt obligations. Off-Balance Sheet Arrangements OnFebruary 22, 2019 , we entered into an agreement with Alinda, an infrastructure investment firm, with respect to ourManassas (DC - 1) data center, as described above under "Factors That May Influence Future Results of Operations and Cash Flows." As ofJune 30, 2021 , our pro rata share of mortgage debt of the unconsolidated entity, excluding deferred financing costs, was approximately$57.3 million , all of which is subject to forward interest rate swap agreements. See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for information on the Company's interest rate swaps. Cash Flows Cash flow for the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 are summarized below (unaudited and in thousands): Six Months Ended June 30, 2021 2020 Cash flow provided by (used for): Operating activities$ 148,375 $ 133,366 Investing activities (468,645) (379,452) Financing activities 328,264 246,454 Six Months EndedJune 30, 2021 Compared to Six Months EndedJune 30, 2020 Cash flow provided by operating activities was$148.4 million for the six months endedJune 30, 2021 compared to$133.4 million for the six months endedJune 30, 2020 . There was an increase in cash operating income of$15.2 million from the prior period primarily related to our expansion of certain data centers and leasing activity, partially offset by a decrease in cash flow associated with net changes in working capital of$0.2 million primarily related to changes in rents and other receivables and deferred income. Cash flow used for investing activities increased by$89.2 million to$468.6 million for the six months endedJune 30, 2021 , compared to$379.5 million for the six months endedJune 30, 2020 . The increase was due primarily to an increase in additions to property and equipment of$75.7 million due to increased leasing activity over the past year. Cash flow provided by financing activities increased by$81.8 million to$328.3 million for the six months endedJune 30, 2021 , compared to$246.5 million for the six months endedJune 30, 2020 . The increase was primarily due to higher net equity proceeds received of$572.8 million , partially offset by lower net borrowings under our unsecured credit facility of$483.9 million . 48 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with GAAP. The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates. We have provided a summary of our significant accounting policies in Note 2 of our unaudited financial statements included elsewhere in this Form 10-Q. Inflation A significant portion of our long-term leases-leases with a term greater than three years-contain rent increases and reimbursement for certain operating costs. As a result, we believe that we are largely insulated from the effects of inflation over periods greater than three years. Leases with terms of three years or less will be replaced or renegotiated within three years and should adjust to reflect changed conditions, also mitigating the effects of inflation. Moreover, to the extent that there are material increases in utility costs, we generally reserve the right to renegotiate the rate. However, any increases in the costs of redevelopment of our properties will generally result in a higher cost of the property, which will result in increased cash requirements to redevelop our properties and increased depreciation and amortization expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these redevelopment costs to our customers in the form of higher rental rates. Distribution Policy To satisfy the requirements to qualify as a REIT, and to avoid paying tax on our income, QTS intends to continue to make regular quarterly distributions of all, or substantially all, of its REIT taxable income (excluding net capital gains) to its stockholders. The Merger Agreement restricts our ability to pay dividends on our capital stock, however, we are permitted to pay quarterly dividends on (i) our common stock with record dates consistent with historical record dates for fiscal year 2020 (or the next business day if not a business day) that do not exceed$0.50 per share per dividend and (ii) our Series A Preferred Stock of up to$0.4453125 per share per dividend and on our Series B Preferred Stock of up to$1.625 per share per dividend, in each case, with record dates consistent with historical record dates for fiscal year 2020 (or the next business day if not a business day). All distributions will be made at the discretion of our board of directors and will depend on our historical and projected results of operations, liquidity and financial condition, QTS' REIT qualification, our debt service requirements, operating expenses and capital expenditures, prohibitions and other restrictions under financing arrangements and applicable law and other factors as our board of directors may deem relevant from time to time. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs and the amount necessary to avoid the payment of tax on undistributed income. However, under some circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to borrow funds to make certain distributions. If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.The Operating Partnership also includes certain partners that are subject to a taxable income allocation, however, not entitled to receive recurring distributions. The partnership agreement does stipulate however, to the extent that taxable income is allocated to these partners that the partnership will make a distribution to these partners equal to the lesser of the actual per unit distributions made to Class A partners or an estimated amount to cover federal, state and local taxes on the allocated taxable income. No allocations of taxable income or distributions were made to these partners during the periods presented. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The primary market risk to which we believe we are exposed is interest rate risk. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control, contribute to interest rate risk. 49 -------------------------------------------------------------------------------- Table of Contents As ofJune 30, 2021 , we had interest rate swap agreements in place with an aggregate notional amount of$700 million . The forward swap agreements effectively fix the interest rate on$700 million of term loan borrowings,$225 million of swaps allocated to Term Loan A,$225 million allocated to Term Loan B and$250 million allocated to Term Loan C, through the current maturity dates of the respective term loans. As ofJune 30, 2021 , after consideration of interest rate swaps in effect, we had outstanding$345.2 million of consolidated indebtedness that bore interest at variable rates, which was comprised of the revolving portion of the unsecured credit facility as well as Term Loan D. We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 1% change in year-end interest rates. A 1% increase in interest rates would increase the interest costs on the$345.2 million of variable indebtedness outstanding as ofJune 30, 2021 by approximately$3.1 million annually. Conversely, a decrease in the LIBOR rate to 0.00% would decrease the interest costs on this$345.2 million of variable indebtedness outstanding by approximately$0.1 million annually based on the one month LIBOR rate of approximately 0.10% as ofJune 30, 2021 . InJuly 2017 , theFinancial Conduct Authority ("FCA") that regulates LIBOR announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, theFederal Reserve Board and theFederal Reserve Bank of New York organized the Alternative Reference Rates Committee ("ARRC") which identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative to USD-LIBOR in derivatives and other financial contracts. Subsequently, inNovember 2020 , theIntercontinental Exchange Benchmark Administration , the administrator of LIBOR, announced that it intends to extend the cessation date for most LIBOR tenors toJune 30, 2023 . InMarch 2021 , the administrator of LIBOR announced that the publication of LIBOR will cease for all GBP, EUR, CHF and JPY LIBOR settings and the one-week and two-month USD LIBOR settings immediately afterDecember 31, 2021 . It will stop publishing all remaining USD LIBOR settings (i.e. the overnight and the one-, three-, six- and 12-month settings) based on bank submissions immediately afterJune 30, 2023 . The Company currently has contracts consisting of the unsecured credit facility and the forward interest rate swap agreements, described above, that are indexed to LIBOR that will be discontinued afterJune 30, 2023 and is monitoring and evaluating the related risks, which may include higher interest on loans, conversion to the base rate at the option of the respective agent and amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could result, for example, if sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified. Due to the extension noted above, we currently expect that all of our contracts indexed to LIBOR will be required to be transitioned to an alternative rate byJune 30, 2023 . However, it is possible that LIBOR may be discontinued earlier. If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract. Transitioning to an alternative rate may be challenging for some instruments, as they may require negotiation with the respective counterparty. The above analyses do not consider the effect of any change in overall economic activity that could impact interest rates or expected changes associated with future indebtedness. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure. ITEM 4. Controls and Procedures Disclosure Controls and Procedures Based on an evaluation of disclosure controls and procedures for the period endedJune 30, 2021 , conducted by the Company's management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer concluded that QTS' disclosure controls and procedures are effective to ensure that information required to be disclosed by QTS in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms. 50 -------------------------------------------------------------------------------- Table of Contents Changes in Internal Control over Financial Reporting There were no changes in QTS' internal control over financial reporting during the period endedJune 30, 2021 , that have materially affected, or are reasonably likely to materially affect, QTS' internal control over financial reporting. 51
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